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U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
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(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2005
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 000-50120
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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)
(86755) 26994588
(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 May 19, 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
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
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
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
Global National Communications Corporation
Balance Sheet
March 31, 2005 and 2004
Assets
2005 2004
------------ ------------
Current Assets
Cash and Cash Equivalents US$ 924,588 US$ 1,127,798
Accounts Receivable, Net of Provision 7,452,780 3,525,902
Other Receivable, Net of Provision 3,838,840 908,016
Short Term Investment 12,077 129,831
Prepayments 405,164 1,405,195
Deferred Expenses 46,997 65,264
Inventory 2,217,101 4,232,672
------------ ------------
Total Current Assets 14,897,547 11,394,678
------------ ------------
Fixed Assets
Property, Plant and Equipment 4,649,061 4,680,874
Less: Accumulated Depreciation (1,089,163) (761,461)
------------ ------------
Fixed Assets, Net 3,559,898 3,919,413
------------ ------------
Other Assets
Loans Receivable 1,420,127 2,256,385
Intangible Assets, Net of Accumulated Amortization 11,942 6,069
Deferred Assets 59,147 76,554
------------ ------------
Total Other Assets 1,491,216 2,339,008
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Total Assets US$ 19,948,661 US$ 17,653,099
============ ============
Liabilities and Shareholders' Equity
Current Liabilities
Bank Loans US$ 5,088,216 US$ 8,387,182
Notes Payable 0 917,874
Accounts Payable 2,215,492 1,907,533
Advances from Customers 1,031,003 244,164
Other Payables 3,338,520 1,585,389
Accrued Expenses 1,001,104 43,886
------------ ------------
Total Current Liabilities 12,674,335 13,086,028
------------ ------------
Long-Term Liabilities
Long-Term Liabilities 152,987 211,687
Deferred Grant 424,293 424,293
------------ ------------
Total Long-Term Liabilities 577,280 635,980
------------ ------------
Total Liabilities 13,251,615 13,722,008
------------ ------------
Shareholders' Equity
Common Stock Par value $.00001, authorized 100,000,000
shares, issued 22,000,000 shares at 3/31/05
and 20,000,000 at 3/31/04 220 200
Paid In Capital 16,665,262 2,478,063
Reserves 527,156 298,755
Retained Earnings (Deficit) (10,495,592) 1,154,073
------------ ------------
Total Shareholders' Equity 6,697,046 3,931,091
------------ ------------
Total Liabilities and Shareholders' Equity US$ 19,948,661 US$ 17,653,099
============ ============
The accompanying notes are an integral part of these financial statements
1
Global National Communications Corporation
Statement of Operations
For the Second Quarter Ending March 31, 2005 and 2004
2005 Q2 2005 YTD 2004 Q2 2004 YTD
------------ ------------ ------------ ------------
Sales US$ 3,673,820 $ 8,045,635 US$ 2,858,487 $ 7,178,833
Cost of Sales (3,014,644) (6,637,868) (2,454,661) (5,846,405)
------------ ------------ ------------ ------------
Gross Profit 659,176 1,407,767 403,826 1,332,428
------------ ------------ ------------ ------------
Expenses
Selling and Distribution 27,494 81,619 11,251 35,105
General and Administrative 132,820 311,522 38,778 169,484
Bad Debt Recovery (666,219) (301,722) (385,889) (366,316)
Research and Development 90,580 183,255 33,213 66,341
------------ ------------ ------------ ------------
Total Expenses (Income) (415,325) 274,674 (302,647) (95,386)
------------ ------------ ------------ ------------
Operating Income 1,074,501 1,133,093 706,473 1,427,814
Finance Expense (93,199) (129,222) (70,583) (128,951)
Other Income 156 20,006 2,793 8,568
Non-Operating Income / (Expenses) (17,249) (20,220) 1,460 (7,196)
------------ ------------ ------------ ------------
Income Before Provision for Income Taxes 964,209 1,003,657 640,143 1,300,235
Provision for Income Taxes 75,787 95,087 56,235 105,742
------------ ------------ ------------ ------------
Net Income US$ 888,422 $ 908,570 US$ 583,908 $ 1,194,493
============ ============ ============ ============
Basic Earnings Per Share $ 0.040 $ 0.041 $ 0.029 $ 0.060
============ ============ ============ ============
Diluted Earnings Per Share $ 0.040 $ 0.041 $ 0.029 $ 0.060
============ ============ ============ ============
Weighted Average Common Shares Outstanding 22,000,000 22,000,000 20,000,000 20,000,000
============ ============ ============ ============
Weighted Average Common Shares Assuming Dilution 22,000,000 22,000,000 20,000,000 20,000,000
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
2
Global National Communications Corporation
Statements of Changes in Shareholders' Equity
For the Second Quarter Ending March 31, 2005 and 2004
Common Stock Retained
--------------------------- Paid in Earnings Shareholders'
Shares Amount Capital Reserves (Deficit) Equity
------------ ------------ ------------ ------------ ------------ ------------
Beginning Balance - Sept. 30, 2003 (1) 20,000,000 $ 200 $ 2,415,259 $ 189,101 ($ 40,420) $ 2,564,140
Net Income -- -- -- -- 1,194,493 1,194,493
Additions to Reserve -- -- -- 109,654 -- 109,654
Paid In Capital Contributions -- -- 62,804 -- -- 62,804
------------ ------------ ------------ ------------ ------------ ------------
Ending Balance - March 31, 2004 20,000,000 $ 200 $ 2,478,063 $ 298,755 $ 1,154,073 $ 3,931,091
============ ============ ============ ============ ============ ============
Beginning Balance - Sept. 30, 2004 (2) 20,000,000 $ 200 $ 14,623,065 $ 425,929 ($11,302,935) $ 3,746,259
Share Capital 2,000,000 20 1,999,980 -- -- 2,000,000
Net Income -- -- -- -- 908,570 908,570
Additions to Reserve -- -- -- 101,227 (101,227) 0
Paid In Capital Contributions -- -- 42,217 -- -- 42,217
------------ ------------ ------------ ------------ ------------ ------------
Ending Balance - March 31, 2005 22,000,000 $ 220 $ 16,665,262 $ 527,156 ($10,495,592) $ 6,697,046
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
3
Global National Communications Corporation
Statements of Cash Flows
For The Six Months Ending March 31, 2005 and 2004
2005 2004
----------- -----------
Cash Flows from Operating Activities
Net Income $ 908,570 $ 1,194,493
Adjustments to reconcile net income to net cash
from operating activities:
Bad Debt Expense (301,722) (366,316)
Depreciation 208,704 139,247
Changes in Assets and Liabilities:
Accounts Receivable (716,024) 188,483
Other Receivables (1,743,476) 1,683,003
Inventory 477,353 862,715
Prepayments (379,823) (1,011,123)
Deferred Expenses 94,706 (30,429)
Deferred Assets 9,771 7,328
Accounts and Other Payables 928,596 (3,691,709)
Advances from Customers 552,807 (312,700)
Accrued Expenses 936,474 (12,622)
Other Liabilities (61,323) 430,906
----------- -----------
Net Cash Flows from Operating Activities 914,613 (918,725)
----------- -----------
Cash Flows from Investing Activities
Acquisition of Property and Equipment (60,413) (2,341,599)
Cash Purchase of Short Term Investment 2 (120,773)
Increase in Loans Receivable 7,630 (1,471,361)
Investment in Intangible Assets 0 (5,538)
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Net Cash Flows from Investing Activities (52,781) (3,939,271)
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Cash Flows from Financing Activities
Repayment of Notes Payable 0 (652,174)
Increase or (Repayment) of Borrowings (2,305,005) 4,703,607
Proceeds from Share Issuance 2,000,000 0
Paid-in Capital Increase 42,217 172,458
----------- -----------
Net Cash flows from Financing Activities (262,788) 4,223,891
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Net Increase (Decrease) in Cash 599,044 (634,105)
Cash - Beginning of the period 325,545 1,761,902
----------- -----------
Cash and Cash Equivalents - End of the Quarter $ 924,588 $ 1,127,798
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 129,223 $ 128,951
=========== ===========
Income Taxes $ 19,300 $ 49,507
=========== ===========
Supplemental Disclosures of Non-Cash Investing
and Financing Activities:
Acquisition of fixed assets $ 60,413 $ 92,226
=========== ===========
The accompanying notes are an integral part of these financial statements
4
Global National Communications Corporation
Notes to Financial Statements
March 31, 2005 and 2004
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1. ORGANIZATION AND PRINCIPAL ACTIVITIES
-------------------------------------
The accompanying unaudited financial statements include all adjustments of
a normal and recurring nature which, in the opinion of the Company's
management, are necessary to present fairly the Company's financial
position as of March 31, 2005 and the results of its operations and cash
flows for the six months ended March 31, 2005 and 2004.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. These condensed
financial statements should be read in conjunction with the financial
statements and related notes contained in the Company's annual report on
Form 10-K to the Securities and Exchange Commission for the year ended
September 30, 2004.
Description of Business
-----------------------
Global National Communications Corporation (GNCC) was organized under the
laws of the British Virgin Islands. Currently, GNCC has a wholly owned
subsidiary, Shenzhen Guonuo Industrial Company Ltd. Guonuo Industrial is
located in Shezhen Hi-Tech Park, People's Republic of China (PRC) and was
incorporated in Guangdong province of the PRC.
GNCC Guonuo Industrial is a manufacturer of telecommunications devices,
digital television parts, MP3 recorders and accessories. Their major market
is in the PRC.
2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
----------------------------------------
A. PRINCIPALS OF CONSOLIDATION
The Company prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America. All
Intercompany transactions have been eliminated in consolidation.
B. CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to include cash on hand and
demand deposits with banks with an original maturity of three months or
less.
C. TRADE RECEIVABLE
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 receivable. The Company evaluates the credit risk of
its customers utilizing historical data and estimates of future
performance.
5
Global National Communications Corporation
Notes to Financial Statements
March 31, 2005 and 2004
-----------------------
D. 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 bringing 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.
E. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. The cost of repairs and
maintenance is expensed as incurred; major replacements and improvements
are capitalized. When assets are retired or disposed of, the cost and
accumulated depreciation are removed from the accounts, and any resulting
gains or losses are included in income in the year of disposition.
Depreciation is calculated on a straight-line basis over the estimated
useful life of the assets. The estimated useful lives are:
Buildings 20 Years
Machinery 5 - 10 Years
Motor vehicles 5 Years
Office equipment and other 3 - 5 Years
F. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments including cash, receivables,
accounts payable and accrued expenses and debt, approximates their fair
value at March 31, 2005 and 2004 due to the relatively short-term nature of
these instruments.
G. INTANGIBLES
Intangibles are carried at cost and are amortized on the straight-line
method over the life assigned to the intangible.
H. INCOME TAXES
Taxes are calculated in accordance with taxation principles currently
effective in the PRC. The Company accounts for income taxes using the
liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date. A valuation allowance is provided for the amount of deferred tax
assets that, based on available evidence, are not expected to be realized.
6
I. GOVERNMENT SUBSIDIES
Subsidies from the government are recognized at their fair values when
received. Usually, the government subsidies are credited to Paid-in Capital
account.
J. RELATED PARTIES
Parties are considered to be related if one party has the ability, directly
or indirectly, to control the other party or exercise significant influence
over the other party in making financial and operational decisions. Parties
are also considered to be related if they are subject to common control or
common significant influence. Related parties may be individuals or
corporate entities.
For the quarter ended on March 31, 2005 a shareholder had advanced GNCC
$500,000 in conjunction with an agreement with Shenzhen Teltone
Communications Co. Ltd. For the quarter ended March 31, 2004 there were no
related-party transactions.
K. FOREIGN CURRENCY TRANSLATION
The Company maintains its books and accounting records in Renminbi ("RMB"),
the PRC's currency, being the functional currency. Translation of amounts
from RMB in United States dollars ("US$") has been made at the exchange
rate of 1 U.S. Dollar to 8.28 RMB for the respective quarters ended March
31, 2005 and 2004:
Foreign currency transactions in RMB are reflected using the temporal
method. Under this method, all monetary items are translated into the
functional currency at the rate of exchange prevailing rate at the balance
sheet date. Non-monetary transactions are translated at historical rates.
Income and expenses are translated at the rate in effect on the transaction
dates. Transaction gains and losses, if any, are included in the
determination of net income for the period.
In translating the financial statements of the Company from its functional
currency into its reporting currency in United States dollars, balance
sheet accounts are translated using the closing exchange rate in effect at
the balance sheet date and income and expense accounts are translated using
the average exchange rate prevailing during the reporting period.
Adjustments resulting from the translation, if any, are included in
cumulative other comprehensive income (loss) in stockholder's equity.
The RMB is not readily convertible into United States dollars or other
foreign currencies. The foreign exchange rate between the United States
dollar the RMB has been stable at approximately 1RMB to US$.1205 for the
last few years. No representation is made that the RMB amounts could have
been or could be, converted into United States dollars or any other
currency at that rate or any other rate.
7
Global National Communications Corporation
Notes to Financial Statements
March 31, 2005 and 2004
-----------------------
L. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual results
when ultimately realized could differ from those estimates.
M. REVENUE RECOGNITION
The Company recognizes revenue when the significant risks and rewards of
ownership have been transferred to the customer pursuant to PRC law,
including factors such as when persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is fixed or determinable,
sales and value added tax laws have been complied with, and collectibility
is probable. The Company recognizes product sales generally at the time the
product is shipped. Concurrent with the recognition of revenue, the Company
reduces revenue for estimated product returns. Revenue is presented net of
any sales tax and value added tax.
N. EMPLOYEES' BENEFITS
Mandatory contributions are made to the Government's health, retirement
benefit and unemployment schemes at the statutory rates in force during the
period, based on gross salary payments. The cost of these payments is
charged to the statement of income in the same period as the related salary
cost.
O. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of trade accounts
receivable. The Company performs ongoing credit evaluations with respect to
the financial condition of its creditors, but does not require collateral.
In order to determine the value of the Company's accounts receivable, the
Company records a provision for doubtful accounts to cover probable credit
losses. Management reviews and adjusts this allowance periodically based on
historical experience and its evaluation of the collectibility of
outstanding accounts receivable.
P. WARRANTIES
The Company recognizes the cost of product warranties at the time expense
is incurred. Warranty costs are included in cost of sales. The Company's
warranty obligation is affected by product failure rates and material usage
and service delivery costs incurred in correcting a product failure. Should
actual product failure rates, material usage or service delivery costs
differ from the Company's estimates, the Company may be required to revise
its estimated product warranty liability. At this time, the Company has not
accrued a warranty obligation, since warranty costs to date have not been
material.
8
Global National Communications Corporation
Notes to Financial Statements
March 31, 2005 and 2004
-----------------------
Q. RECENT 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 changes the accounting for certain financial instruments with
characteristics of both liabilities and equity that, under previous
pronouncements, issuers could account for as equity. The new accounting
guidance contained in SFAS No. 150 requires that those instruments be
classified as liabilities in the balance sheet.
SFAS No. 150 affects the issuer's accounting for three types of
freestanding financial instruments. One type is mandatory redeemable
shares, which the issuing company is obligated to buy back in exchange for
cash or other assets. A second type includes put options and forward
purchase contracts, which involve instruments that do or may require the
issuer to buy back some of its shares in exchange for cash or other assets.
The third type of instruments that are liabilities under this SFAS is
obligations that can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a market index,
or varies inversely with the value of the issuers' shares. SFAS No. 150
does not apply to features embedded in a financial instrument that is not a
derivative in its entirety.
Most of the provisions of Statement 150 are consistent with the existing
definition of liabilities in FASB Concepts Statement No. 6, "Elements of
Financial Statements". The remaining provisions of this SFAS are consistent
with the FASB's proposal to revise that definition to encompass certain
obligations that a reporting entity can or must settle by issuing its own
shares. This SFAS shall be effective for financial instruments entered into
or modified after May 31, 2003 and otherwise shall be effective at the
beginning of the first interim period beginning after June 15, 2003, except
for mandatory redeemable financial instruments of a non-public entity, as
to which the effective date is for fiscal periods beginning after December
15, 2004.
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 December 31,
2006. The Company is currently evaluating the impact of SFAS 151 on its
consolidated financial statements.
9
Global National Communications Corporation
Notes to Financial Statements
March 31, 2005 and 2004
-----------------------
Q. RECENT PRONOUNCEMENTS continued:
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.
Management does not expect these recent pronouncements to have a material
impact on the Company's financial position or results of operations.
R. COMMITMENTS AND CONTINGENCIES
1. Contingent Liabilities
----------------------
As of March 31, 2005 and 2004, GNCC was not a guarantor for any
businesses.
2. Legal Proceedings
-----------------
The Company is not currently a party to any threatened or pending
legal proceedings.
3. Commitments
-----------
The Company rents offices and a manufacturing plant. The leases are
for a two and a three year term ending October and November 2005,
respectively. The lease agreements are scheduled to be renegotiated
this summer. Rent expense for the quarter ended on March 31, 2005 and
2004 was $9,142 and $11,739 respectively.
10
Global National Communications Corporation
Notes to Financial Statements
March 31, 2005 and 2004
-----------------------
S. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
GNCC faces a number of risks and challenges because its operations are in
the PRC. The Company's operations within 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. It may also be affected by anti-inflationary measures,
currency conversion remittance abroad, and rates and methods of taxation as
well as other undetermined factors.
3. SUBSEQUENT EVENTS
On April 7, 2005, Global National Communications Corp. (the Registrant")
entered into a Securities Purchase Agreement (the "Stock Purchase
Agreement") with the Purchasers listed in Schedule 1 thereto providing for
the issuance by the Registrant to the Purchasers of up to $7,000,000 8%
Fixed Price Convertible Debentures (the "Debentures"). Subject to certain
provisions described below, the Debentures are convertible, at the option
of the holder, at a conversion price of $4.00 (the "Conversion Price"). As
a condition to the closing, certain of the Registrant's shareholders
entered into a pledge agreement (the "Pledge Agreement") pursuant to which
such shareholders agreed to pledge 100,000 shares as collateral for each
$1,000,000 of the Debentures sold. In connection with the Debentures, the
Registrant shall issue warrants (the "Warrants") to purchase up to 100% of
the shares issuable upon conversion of the Debentures. The Warrants have an
exercise price of $4.50 per shares.
On April 7, 2005, the Registrant also entered into a Registration Rights
Agreement with the investors signatory thereto, which provides that on or
prior to 45 days after a closing, of which one occurred on April 7, 2005,
the Registrant shall prepare and file with the Commission a registration
statement ("Registration Statement") covering the resale of all of the
Registrable Securities (defined as the shares issuable upon conversion of
the Debentures and the shares issuable upon exercise of the Warrants).
11
Global National Communications Corporation
Notes to Financial Statements
March 31, 2005 and 2004
-----------------------
3. SUBSEQUENT EVENTS continued:
On April 7, 2005, pursuant to the Securities Purchase Agreement, the
Company sold, pursuant to Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"), and Rule 506 promulgated thereunder,
$2,205,000 aggregate amount of the Debentures and issued Warrants to
purchase up to 100% of the shares issuable upon conversion of the
Debentures. Duncan Capital LLC received commissions for serving as
placement agent in the amount of $176,400.
4. OTHER
Pursuant to a preliminary agreement, Global National Communications
Corporation (hereafter known as GNCC) intends to to acquire intellectual
property to manufacture certain models of personal handy phones (the
"Intellectual Property") from Shenzhen Teltone Communication Co. Ltd
("Seller"). The purchase offer for the Intellectual Property is 8,360,000
restricted shares of GNCC's Common Stock. An additional 6,640,000 shares
are to be delivered to the Seller if the net income for the twelve month
period commencing April 1, 2005 is at least US$5,000,000. In connection
with the issuance of the initial shares, the Shareholders have agreed to
return 5,000,000 shares of common stock for cancellation. The net dilution
from the issuance will be 3,000,000 shares. The closing has not occured as
of May 20, 2005 and will be subject to government approval.
12
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 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 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.
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.
13
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.
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; including its branded Personal Handy
System ("PHS") mobile phone product, 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.
14
Critical Accounting Policies:
- -----------------------------
The Company prepares its 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 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.
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 10% 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.
15
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 March 31, 2005 and 2004:
- -------------------------------------------
Net Sales. Net sales increased by $815,333 or 28.5% to $3,673,820 for the three
months ended March 31, 2005, as compared to $2,858,487 for the three months
ended March 31, 2004. During the three months ended March 31, 2004 and 2005,
there were no sales to related parties, and sales to individual unrelated
parties did not account for 10% or more of sales.
Sales mix by product line for the three months ended March 31, 2005 and 2004 is
summarized as follows:
Three Months Ended March 31,
---------------------------------------------
2005 2004
--------------------- ---------------------
$ % $ %
--------- --------- --------- ---------
Sales category:
Electronic products 991,932 27 628,867 22
Circuit boards 1,359,313 37 1,657,922 58
Computer parts 330,644 9 285,849 10
Mobile phones 991,931 27 0
Other products 0 0 285,849 10
--------- --------- --------- ---------
Total 3,673,820 100 2,858,487 100
========= ========= ========= =========
The three months ended March 31, 2005 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") mobile 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.
Gross Profit. Gross profit was $659,176 or 17.9% of net sales for the three
months ended March 31, 2005, as compared to gross profit of $403,826 or 14.1% of
net sales for the three months ended March 31, 2004, an increase of $255,350 or
63.2%. With net sales increasing in 2005 compared to 2004, the Company
experienced an increase in both gross profit and gross margin. This was
primarily a result of a change in the sales mix. The Company experienced a
significant increase in the sales of computer parts and mobile phones in 2005 as
compared to 2004, while MP3s were discontinued from the sales mix.
16
Selling and Distribution Expenses. Selling and distribution expenses increased
by $16,243 or 144.4% to $27,494 for the three months ended March 31, 2005, as
compared to $11,251 for the three months ended March 31, 2004. The increase in
selling and distribution expenses in 2005 as compared to 2004 was primarily as a
result of increased personnel and personnel-related expenses related to the
launch of the Company's PHS mobile phone product. The major components of
selling and distribution expenses are salesmen's compensation, travel expenses,
transportation expense and maintenance expense.
General and Administrative Expenses. General and administrative expenses
increased by $94,042 or 242.5% to $132,820 for the three months ended March 31,
2005, as compared to $38,778 for the three months ended March 31, 2004, as a
result of increased administrative personnel and personnel-related costs, in
particular associated with the launch of the Company's PHS mobile 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, was a recovery of $(666,219) or (18.1)% of
net sales for the three months ended March 31, 2005, as compared to $(385,889)
or (13.5)% of net sales for the three months ended March 31, 2004. The recovery
was an adjustment of the previous provisions. Currently, aged receivables from
12-24 months are allowed for at 5% and those older than 24 months are allowed
for at 10%. Previously, the following was allowed for: 3-6 months 15%, 6-9
months 25%, 9-12 months 50%, and anything greater than 12 months was allowed for
at 100%. The Company determined that the rates previously applied to the
outstanding receivables did not reflect the current business condition of the
Company and its customer base. 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
$90,580 for the three months ended March 31, 2005, as compared to $33,213 for
the three months ended March 31, 2004, an increase of $57,367 or 172.7%, as a
result of increased product development activities.
Depreciation and Amortization Expense. Depreciation and amortization expense
included in costs and expenses was $103,560 for the three months ended March 31,
2005, as compared to $100,594 for the three months ended March 31, 2004, as a
result of the acquisition of fixed assets in 2004 to support increased business
activities.
Income from Operations. As a result of the aforementioned factors, income from
operations was $1,074,501 for the three months ended March 31, 2005, as compared
to income from operations of $706,473 for the three months ended March 31, 2004.
Financial Expenses. Financial expenses were $93,199 for the three months ended
March 31, 2005, as compared to $70,583 for the three months ended March 31,
2004. The increase was primarily a result of an increase in interest expense,
which more than offset an increase in interest income as a result of increased
borrowings.
Other Income. Other income was $156 for the three months ended March 31, 2005,
as compared to $2,793 for the three months ended March 31, 2004.
Non-Operating Expenses. Non-operating incomes (expenses) were $(17,249) for the
three months ended March 31, 2005, as compared to $1,460 for the three months
ended March 31, 2004.
17
Income Before Provision for Income Taxes. As a result of the aforementioned
factors, income before provision for income taxes was $964,209 for the three
months ended March 31, 2005, as compared to income before provision for income
taxes of $640,143 for the three months ended March 31, 2004.
Provision for Income Taxes. The provision for income taxes, which is computed on
a per country basis, was $75,787 for the three months ended March 31, 2005, as
compared to $56,235 for the three months ended March 31, 2004.
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 March 31, 2005 and 2004, 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 $888,422
for the three months ended March 31, 2005, as compared to net income of $583,908
for the three months ended March 31, 2004.
Six Months Ended March 31, 2005 and 2004:
- -----------------------------------------
Net Sales. Net sales increased by $866,802 or 12.1% to $8,045,635 for the six
months ended March 31, 2005, as compared to $7,178,833 for the six months ended
March 31, 2004. During the six months ended March 31, 2004 and 2005, there were
no sales to related parties, and sales to individual unrelated parties did not
account for 10% or more of sales.
Sales mix by product line for the six months ended March 31, 2005 and 2004 is
summarized as follows:
Six Months Ended March 31,
---------------------------------------------
2005 2004
--------------------- ---------------------
$ % $ %
--------- --------- --------- ---------
Sales category:
Electronic products 2,413,691 30 1,220,402 17
Circuit boards 2,574,603 32 3,589,416 50
Computer parts 1,045,933 13 2,081,862 29
Mobile phones 2,011,408 25 0 0
Other products 0 0 287,153 4
--------- --------- --------- ---------
Total 8,045,635 100 7,178,833 100
========= ========= ========= =========
The six months ended March 31, 2005 was a transition for the Company. During
this quarter, the Company began to concentrate on the marketing of its branded
Personal Handy System ("PHS") mobile 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.
18
Gross Profit. Gross profit was $1,407,767 or 17.5% of net sales for the six
months ended March 31, 2005, as compared to gross profit of $1,332,428 or 18.6%
of net sales for the six months ended March 31, 2004, an increase of $75,339 or
5.7%. Although net sales increased in 2005 as compared to 2004, the Company
experienced a slight increase in gross profit and decrease in gross margin in
2005 as compared to 2004 primarily a result of a change in the sales mix. While
the company sold a high volume of mobile phones, the gross profit on them is
lower than that of other products.
Selling and Distribution Expenses. Selling and distribution expenses increased
by $46,514 or 132.5% to $81,619 for the six months ended March 31, 2005, as
compared to $35,105 for the six months ended March 31, 2004. The increase in
selling and distribution expenses in 2005 as compared to 2004 was primarily as a
result of increased personnel and personnel-related expenses related to the
launch of the Company's PHS mobile phone product. The major components of
selling and distribution expenses are salesmen's compensation, travel expenses,
transportation expense and maintenance expense.
General and Administrative Expenses. General and administrative expenses
increased by $142,038 or 83.8% to $311,522 for the six months ended March 31,
2005, as compared to $169,484 for the six months ended March 31, 2004, as a
result of increased administrative personnel and personnel-related costs, in
particular associated with the launch of the Company's PHS mobile 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, was a recovery of $(301,722) or (3.8)% of
net sales for the six months ended March 31, 2005, as compared to $(366,316) or
0.5% of net sales for the six months ended March 31, 2004. The recovery was an
adjustment of the previous provisions. Currently, aged receivables from 12-24
months are allowed for at 5% and those older than 24 months are allowed for at
10%. Previously, the following was allowed for: 3-6 months 15%, 6-9 months 25%,
9-12 months 50%, and anything greater than 12 months was allowed for at 100%.
The Company determined that the rates previously applied to the outstanding
receivables did not reflect the current business condition of the Company and
its customer base. 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
$183,255 for the six months ended March 31, 2005, as compared to $66,341 for the
six months ended March 31, 2004, an increase of $116,914 or 176.2%, as a result
of increased product development activities.
Depreciation and Amortization Expense. Depreciation and amortization expense
included in costs and expenses was $208,704 for the six months ended March 31,
2005, as compared to $139,247 for the six months ended March 31, 2004, as a
result of the acquisition of fixed assets in 2004 to support increased business
activities.
Income from Operations. As a result of the aforementioned factors, income from
operations was $1,133,093 for the six months ended March 31, 2005, as compared
to income from operations of $1,427,814 for the six months ended March 31, 2004.
Financial Expenses. Financial expenses were $129,222 for the six months ended
March 31, 2005, as compared to $128,951 for the six months ended March 31, 2004.
Other Income. Other income was $20,006 for the six months ended March 31, 2005,
as compared to $8,568 for the six months ended March 31, 2004.
Non-Operating Expenses. Non-operating expenses were $20,220 for the six months
ended March 31, 2005, as compared to $7,196 for the six months ended March 31,
2004.
19
Income Before Provision for Income Taxes. As a result of the aforementioned
factors, income before provision for income taxes was $1,003,657 for the six
months ended March 31, 2005, as compared to income before provision for income
taxes of $1,300,235 for the six months ended March 31, 2004.
Provision for Income Taxes. The provision for income taxes, which is computed on
a per country basis, was $95,087 for the six months ended March 31, 2005, as
compared to $105,742 for the six months ended March 31, 2004.
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 six months
ended March 31, 2005 and 2004, 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 $908,570
for the six months ended March 31, 2005, as compared to net income of $1,194,493
for the six months ended March 31, 2004.
Financial Condition - March 31, 2005:
- -------------------------------------
Liquidity and Capital Resources:
- --------------------------------
Operating. The Company's operations generated cash resources of $2,833,918 for
the six months ended March 31, 2005, as compared to utilizing cash resources of
$918,725 for the six months ended March 31, 2004, primarily as a result of cash
generated in 2004 to support increases to accounts receivable and inventories.
At March 31, 2005, the Company had cash and cash equivalents of $924,588, as
compared to cash and cash equivalents of $325,545 at September 30, 2004. The
Company had working capital of $303,906 at Match 31, 2005, as compared to a
working capital deficiency of $789,727 at September 30, 2004, reflecting current
ratios of 1.024:1 and 0.94:1, respectively. The improvement in working capital
during the six months ended March 31, 2005 was primarily a result of the sale of
$2,000,000 of common stock in November 2004, as described herein, sales
increasing thereby increasing cash, accounts receivables which were then offset
by a decrease in payables.
Net accounts receivable increased to $7,452,780 at March 31, 2005, as compared
to $6,736,756 at September 30, 2004, an increase of $716,024 or 10.6%, 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.
Inventories decreased to $2,217,101 at March 31, 2005, as compared to $2,694,454
at September 30, 2004, a decrease of $477,353 or 17.7%, primarily as a result of
higher inventory turnover.
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 six months ended March 31, 2005, the Company utilized
$52,780 in investing activities, the major components of which were the
acquisition of property and equipment of $60,413 offset by a decrease in loans
receivable of $7,630. During the six months ended March 31, 2004, the Company
utilized $3,939,271 in investing activities, the major components of which were
the acquisition of property and equipment of $2,341,599 and an increase in
short-term investments of $120,773, an increase in loans receivable of
$1,471,361 and an investment in intangible assets of $5,538.
20
Financing. During the six months ended March 31, 2005, the Company utilized
$2,182,094 from financing activities, consisting of the repayment of borrowings
of $2,305,005 offset by a paid in capital increase of $122,891. During the six
months ended March 31, 2004, the Company generated $4,223,891 in financing
activities, consisting of the net proceeds from borrowings of $4,051,433, and a
paid in capital increase of $172,458.
At March 31, 2005, 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.
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 March 31, 2005 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.
21
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.
Subsequent Events:
- ------------------
ENTRY INTO A MATERIAL AGREEMENT
- -------------------------------
On April 7, 2005, Global National Communications Corp. (the Registrant") entered
into a Letter of Intent with the Purchasers listed in Schedule 1 thereto
providing for the issuance by the Registrant to the Purchasers of up to
$7,000,000 8% Fixed Price Convertible Debentures (the "Debentures"). Subject to
certain provisions described below, the Debentures are convertible, at the
option of the holder, at a conversion price of $4.00 (the "Conversion Price").
If at the close of trading on the tenth trading day following the effective date
of the Registration Statement (defined below), the closing price of the
Registrant's common stock is less than $5.00 or the volume weighted average
price for the previous ten trading days is less than $5.00, the Conversion Price
will be reset to $3.50. The term of the Debentures is three years from the date
of issuance. Commencing six months from the closing the Registrant is required
to reduce the principal amount on the Debentures by 1/10th per quarter, payable
in cash or shares if the shares are: (1) covered by the Registration Statement
(defined below); and (2) the closing price for the Registrant's shares is at
least 110% of the Conversion Price for each of the five trading days prior to
the payment date. The Registrant may redeem the Debentures upon at least twenty
days prior written notice, assuming the shares issuable upon conversion of the
Debentures have been registered and the trading price of the Registrant's
shares, subject to volume limitations, exceeds 200% of the Conversion Price for
a period of ten days.
As a condition to the closing, certain of the Registrant's shareholders entered
into a pledge agreement (the "Pledge Agreement") pursuant to which such
shareholders agreed to pledge 100,000 shares as collateral for each $1,000,000
of the Debentures sold.
In connection with the Debentures, the Registrant shall issue warrants (the
"Warrants") to purchase up to 100% of the shares issuable upon conversion of the
Debentures. The Warrants have an exercise price of $4.50 per shares.
On April 7, 2005, the Registrant also entered into a Registration Rights
Agreement with the investors signatory thereto, which provides that on or prior
to 45 days after a closing, of which one occurred on April 7, 2005, the
Registrant shall prepare and file with the Commission a registration statement
("Registration Statement") covering the resale of all of the Registrable
Securities (defined as the shares issuable upon conversion of the Debentures and
the shares issuable upon exercise of the Warrants). If the registration
statement is not filed within 45 days or is, for any reason, not declared
effective within 120 days, the Registrant shall pay liquidated damages to the
investors. Such damages shall be paid in cash in an amount equal to .5% of the
aggregate amount of the Debentures purchased by the investor for the first 30
days (or part thereof) after either the filing date or effective date of the
Registration Statement, and for any subsequent 30-day period (or part thereof),
thereafter.
22
The investors have contractually agreed to restrict their ability to convert the
Debentures and exercise the warrants and receive shares of the Registrant's
common stock such that the number of shares of the Registrant held do not exceed
9.9% of the Registrant's issued and outstanding shares.
On April 7, 2005, pursuant to the Securities Purchase Agreement, the Company
sold, pursuant to Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"), and Rule 506 promulgated thereunder, $2,205,000 aggregate
amount of the Debentures and issued Warrants to purchase up to 100% of the
shares issuable upon conversion of the Debentures. Duncan Capital LLC received
commissions for serving as placement agent in the amount of $176,400.
Pursuant to an Asset Purchase Agreement dated May 18, 2005, Global National
Communications Corporation (hereafter known as GNCC) entered in an agreement to
acquire intellectual property to manufacture certain models of personal handy
phones (the "Intellectual Property") from Shenzhen Teltone Communication Co. Ltd
("Seller"). The initial purchase price for the Intellectual Property consisted
of 8,360,000 restricted shares of GNCC's Common Stock. An additional 6,640,000
shares are to be delivered to the Seller if the net income for the twelve month
period commencing April 1, 2005 is at least US$5,000,000. In connection with the
issuance of the initial shares, the Shareholders have agreed to return 5,000,000
shares of common stock for cancellation. The net dilution from the issuance will
be 3,000,000 shares.
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
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
23
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.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Unregistered Sales of Securities and Use of Proceeds.
None
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
31.2 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
32.2 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
25
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: May 19, 2005
/s/ Wang Hanqing
---------------------------------------------
Name: Wang Hanqing
Title: President, Principal Executive Officer
26