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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 June 30, 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 June 30, 2005 there were 25,000,000 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
2
Global National Communications Corporation and Subsidiary
Consolidated Balance Sheets
June 30, 2005
Assets
------
2005
-----------
Current Assets
Cash and Cash Equivalents US$ 184,911
Accounts Receivable, Net of Provision 15,313,480
Other Receivable, Net of Provision 5,046,155
Short Term Investment 12,077
Prepayments 709,973
Deferred Expenses 17,915
Inventory 3,252,612
-----------
Total Current Assets 24,537,123
Fixed Assets
Property, Plant and Equipment 3,591,696
Less: Accumulated Depreciation (821,261)
-----------
Fixed Assets, Net 2,770,435
Other Assets
Loans Receivable 1,237,237
Intangible Assets, Net of Accumulated Amortization 6,533,062
Investment in Subsidiary 0
Deferred Assets 54,262
-----------
Total Other Assets 7,824,561
-----------
Total Assets US$ 35,132,119
===========
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities
Bank Loans US$ 2,271,607
Notes Payable 0
Accounts Payable 7,196,764
Advances from Customers 1,427,224
Other Payables 6,043,336
Accrued Expenses 1,102,758
-----------
Total Current Liabilities 18,041,689
Long-Term Liabilities
Convertible Debenture Obligation 2,205,000
Long-Term Liabilities 141,363
Deferred Grants 424,293
-----------
Total Liabilities 20,812,346
Shareholders' Equity
Share Capital 250
Paid In Capital 26,147,767
Reserves 527,156
Retained Earnings (Deficit) (12,355,399)
-----------
Total Shareholders' Equity 14,319,774
-----------
Total Liabilities and Shareholders' Equity US$ 35,132,119
===========
3
Global National Communications Corporation and Subsidiary
Consolidated Statements of Operations
For The Third Quarter Ending June 30, 2005 and 2004
2005 Q3 2005 YTD 2004 Q3 2004 YTD
----------- ----------- ----------- -----------
Sales US$ 7,840,678 17,735,150 US$ 7,983,487 15,162,320
Sales Tax and Others (184) (1,060) (5,631) (8,236)
----------- ----------- ----------- -----------
Net Sales US$ 7,840,494 17,734,090 US$ 7,977,856 15,154,084
Cost of Sales 5,889,280 13,836,979 6,624,487 12,468,286
----------- ----------- ----------- -----------
Gross Profit 1,951,214 3,897,111 1,353,369 2,685,798
Expenses:
Selling and Distribution Expenses 48,074 142,326 19,691 54,796
General and Administrative Expenses 334,477 859,230 196,796 432,621
Financial Expenses 64,864 194,848 107,194 236,144
Conversion Premium Expense 468,563 468,563 0 0
Compensation Expense Stock Warrants 2,631,116 2,631,116 0 0
Bad Debt Expense 710,615 408,891 (318,650) (684,966)
----------- ----------- ----------- -----------
Total Expenses 4,257,709 4,704,974 5,030 38,595
Operating Income (2,306,495) (807,863) 1,348,339 2,647,203
Other Income 7,709 28,662 6,183 16,221
Non-Operating Expenses (56,879) (76,949) (50,035) (58,700)
----------- ----------- ----------- -----------
Income (Loss) Before Provision for Income Taxes (2,355,665) (856,150) 1,304,489 2,604,724
Provision for Income Taxes 0 95,087 97,837 203,578
----------- ----------- ----------- -----------
Net Income (Loss) US$ (2,355,665) (951,237) US$ 1,206,653 2,401,146
=========== =========== =========== ===========
4
Global National Communications Corporation and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
For The Third Quarter Ending June 30, 2005 and 2004
Common Stock
---------------------------- Paid in
Shares Amount Capital
------------ ------------ ------------
Beginning Balance - Sep 30, 2003 US$ 20,000,000 $ 200 $ 2,415,259
Net Income (Loss) -- --
Additions to Reserve -- --
Paid In Capital Contributions -- 62,803
- -------------------------------------------------------------------------------------------
Ending Balance - June 30, 2004 20,000,000 200 2,478,062
===========================================================================================
Beginning Balance - Sep 30, 2004 20,000,000 200 14,623,065
Net Income (Loss)
Share Capital 2,000,000 20 2,020,513
Additions to Reserve -- --
Capital Distribution (123,460)
Beneficial Conversion Premium on Debentures 468,563
Compensation Expense - Stock Warrants
Attached to Debentures 2,631,116
Share Capital - Teltone Agreement 8,360,000 84 6,527,970
Cancelled Shares - Teltone Agreement 5,360,000 (54)
--
- -------------------------------------------------------------------------------------------
Ending Balance - June 30, 2005 US$ 25,000,000 250 26,147,767
===========================================================================================
Retained
Earnings Shareholders'
Reserves (Deficit) Equity
------------ ------------ ------------
Beginning Balance - Sep 30, 2003 US$ $ 189,101 ($ 40,420) $ 2,564,140
Net Income (Loss) -- 2,401,146 2,401,146
Additions to Reserve 109,654 (33,313) 76,341
Paid In Capital Contributions -- -- 62,803
- ------------------------------------------------------------------------------------------
Ending Balance - June 30, 2004 298,755 2,327,413 5,104,430
==========================================================================================
Beginning Balance - Sep 30, 2004 425,929 (11,302,935) 3,746,259
Net Income (Loss) (951,237) (951,237)
Share Capital -- -- 2,020,533
Additions to Reserve 101,227 (101,227) 0
Capital Distribution (123,460)
Beneficial Conversion Premium on Debentures 468,563
Compensation Expense - Stock Warrants
Attached to Debentures 2,631,116
Share Capital - Teltone Agreement 6,528,054
Cancelled Shares - Teltone Agreement (54)
-- -- 0
- ------------------------------------------------------------------------------------------
Ending Balance - June 30, 2005 US$ 527,156 (12,355,399) 14,319,774
==========================================================================================
5
Global National Communications Corporation and Subsidiary
Statements of Cash Flows
For The Third Quarter Ending June 30, 2005 and 2004
2005 2004
----------- -----------
Cash Flows from Operating Activities
Net Income (Loss) US$ (951,237) US$ 2,401,146
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation (59,198) 186,271
Changes in Assets and Liabilities:
Accounts Receivable (8,576,724) (4,689,200)
Other Receivables (3,252,512) 1,333,333
Inventory (558,158) 3,316,208
Prepayments (684,633) (1,030,081)
Deferred Expenses 123,788 (38,264)
Deferred Assets 14,656 12,241
Accounts and Other Payables 3,493,070 2,046,509
Advances from Customers 949,027 (369,172)
Accrued Expenses 1,038,129 17,728
Other Liabilities (34,402) 424,293
----------- -----------
Net Cash Flows from Operating Activities (8,498,194) 3,611,014
Cash Flows from Investing Activities
Acquisition of Property and Equipment 996,952 (2,241,954)
Cash Purchase of Short Term Investment 0 (60,386)
Decrease (Increase) in Loans Receivable 190,520 (1,452,349)
Investment in Intangible Assets (6,521,120) (42,922)
----------- -----------
Net Cash Flows from Investing Activities (5,333,648) (3,797,611)
Cash Flows from Financing Activities
Proceeds from sale of Debentures 2,205,000 0
Repayment of Borrowings (38,544) (663,293)
Proceeds from Share Issuance 50 139,143
Paid in Capital from Share Issuance 1,897,053 0
Paid in Capital from Beneficial Conversion Premium 468,563 0
Paid in Capital from Compensation on Stock Warrants 2,631,116 0
Paid in Capital Issued for Intellectual Property 6,527,970 0
----------- -----------
Net Cash flows from Financing Activities 13,691,208 (524,150)
Net Increase (Decrease) in Cash (140,634) (710,748)
Cash - Beginning of the period 325,545 1,761,902
----------- -----------
Cash - End of the Qtr US$ 184,911 US$ 1,051,154
=========== ===========
Supplemental Cash Flow Disclosures:
----------- -----------
Interest Paid 257,978 258,620
=========== ===========
6
GLOBAL NATIONAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
(FORMERLY ZEOLITE MINING CORPORATION)
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
ORGANIZATION AND PRINCIPAL ACTIVITIES
Global National Communications Corp (GNCC). was organized under the laws of the
British Virgin Islands. Currently, GNCC has two wholly owned subsidiaries, i.e.,
Shenzhen Guonuo Industrial Company Ltd., and Shenzhen Century Teltone Company
Ltd. They are all located in Shenzhen Hi-Tech Park, PRC, and were incorporated
in Guangdong province of the PRC.
GNCC is a manufacturer of telecommunications devices, digital television parts,
MP3 recorders and accessories. Their major market is in the PRC.
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.
7
GLOBAL NATIONAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
(FORMERLY ZEOLITE MINING CORPORATION)
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 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
June 30, 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.
8
GLOBAL NATIONAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
(FORMERLY ZEOLITE MINING CORPORATION)
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
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.
I. GOVERNMENT SUBSIDIES
Subsidies from the government are recognized at their fair values when received.
Usually, the government subsidies are credited to Other Income 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 nine months ended on June 30, 2005 a shareholder had advanced the
company $500,000 in conjunction with an agreement with Shenzen Teltone
Communications Co. Ltd. For the nine month period ended June 30, 2004 there were
no related party transactions.
9
GLOBAL NATIONAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
(FORMERLY ZEOLITE MINING CORPORATION)
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
K. FOREIGN CURRENCY TRANSLATION
The Company maintains its books and accounting records in Renminbi ("RMB"), the
PRC's currency, being the functional currency. Translation of amounts from RMB
in United States dollars ("US$") has been made at the exchange rate of 1 U.S.
Dollar to 8.28 RMB for the respective quarters ended June 30, 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.
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.
10
GLOBAL NATIONAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
(FORMERLY ZEOLITE MINING CORPORATION)
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
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.
Q. COMMITMENTS AND CONTINGENCIES
(1). Contingent Liabilities
By June 30, 2005 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. Rent
expense for the quarter ended on June 30, 2005 and 2004 was $9,142 and $11,739
respectively.
R. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
GNCC 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.
11
DEBENTURES AND WARRANTS
On April 7, 2005, Global National Communications Corp. (the Registrant") entered
into a Securities Purchase Agreement with Investors 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 Registration
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 0.5% 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. 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 $2,205,000 of the Debentures and issued Warrants to purchase up to 100% of
the shares issuable upon conversion of the Debentures. As of June 30, 2005 the
company had accrued $41,160 for interest and $14,333 for liquidating damages in
conjunction with the company's failure to file its' Registration Statement. The
debentures were issued with a beneficial conversion premium of $468,563 and the
attached warrants were calculated to have a compensation value of $2,631,116.
Both of these amounts were recorded as additional paid in capital.
12
INTELLECTUAL PROPERTY PURCHASE AND CONTINGENTLY ISSUABLE SHARES
Pursuant to an Asset Purchase Agreement dated as of June 6, 2005 (the "Purchase
Agreement") between Shenzhen Century Teltone Technology Co. Ltd. ("Purchaser"),
the Registrant, Wang Hanqing, and Wu Wenbin (the "Shareholders"), on the one
hand; and Shenzhen Teltone Communication Co. Ltd. ("Seller") on the other hand,
the Registrant, through Purchaser, a wholly owned subsidiary of Registrant,
acquired from Seller intellectual property to manufacture certain models of
Seller's personal handy phones (the "Intellectual Property"). The closing (the
"Closing") occurred on June 8, 2005. The purchase price for the Intellectual
Property consisted of restricted shares of Registrant's Common Stock of which
8,360,000 shares (the "Initial Shares") were issuable at Closing and 6,640,000
shares are to be delivered to the Seller if the net income (the operating income
attributable to the Intellectual Property) for the twelve month period
commencing on April 1, 2005 is at least $5,000,000. Notwithstanding the
foregoing, the effective date of the Closing is deemed to be March 15, 2005 so
that all sales on and after March 15, 2005 (together with income and expenses
associated therewith) are for the account of Purchaser. In connection with the
issuance of the Initial Shares, the Shareholders have agreed to return to the
Registrant for cancellation 5,360,000 shares of Registrant's Common Stock, which
they had owned, so that the net dilution from the issuance of the Initial Shares
will be 3,000,000 shares.
The intellectual property intangible asset has been recorded at an amount equal
to $6,528,000. This is based on a closing stock price of $2.72 on June 8, 2005.
The intangible asset is not being amortized because it has been determined to
have an indefinite life.
In accordance with FAS 128, the 6,640,000 of contingently issuable shares have
not been included in the fully diluted earnings per share calculation.
SUBSEQUENT EVENT
The People's Bank of China, China's central bank, recently announced that with
approval from the State Council, and beginning from July 21, 2005, China will
implement a regulated, managed floating exchange rate system based on market
supply and demand and in reference to a package of currencies. Current US Dollar
exchange rate is 8.11 to Chinese RMB, a 2% drop compared with 8.28, the exchange
rate prior to July 21, 2005. This change of exchange rate will have no material
impact to the overall operation of the Company. However, since the export
revenue has accounted for 30% of the total sales, the company will monitor
closely the changes in cost and selling price in order to make strategic
decisions in a proper way and timely manner.
In translating the financial statements of the Company from its functional
currency into its reporting currency in United States dollars, balance sheet
accounts are translated using the closing exchange rate in effect at the balance
sheet date and income and expense accounts are translated using the average
exchange rate prevailing during the reporting period. Adjustments resulting from
the translation, if any, are included in cumulative other comprehensive income
(loss) in stockholder's equity.
13
GLOBAL NATIONAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
(FORMERLY ZEOLITE MINING CORPORATION)
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
The RMB is not readily convertible into United States dollars or other foreign
currencies. The foreign exchange rate between the United States dollar the RMB
has been stable at approximately 1RMB to US$.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.
14
Item 2. Management's Discussion And Analysis or Plan of Operation.
MANAGEMENT DISCUSSION AND ANALYSIS
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.
15
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 its two subsidiaries, i.e., Guonuo Shenzhen Industrial
Company Ltd. (as described below) and Shenzhen Century Teltone (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 to
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.
16
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.
Pursuant to an Asset Purchase Agreement dated as of June 6, 2005 (the "Purchase
Agreement") among Shenzhen Century Teltone Technology Co. Ltd. ("Purchaser"),
the Registrant, Wang Hanqing, and Wu Wenbin (the "Shareholders"), on the one
hand; and Shenzhen Teltone Communication Co. Ltd. ("Seller") on the other hand,
the Registrant, through Purchaser, a wholly owned subsidiary of Registrant,
acquired from Seller Seller's intellectual property to manufacture certain
models of Seller's personal handy phones (the "Intellectual Property"). The
closing (the "Closing") occurred on June 8, 2005. The purchase price for the
Intellectual Property consisted of restricted shares of Registrant's Common
Stock of which 8,360,000 shares (the "Initial Shares") were issuable at Closing
and 6,640,000 shares are to be delivered to the Seller if the net income (the
operating income attributable to the Intellectual Property) for the twelve month
period commencing on April 1, 2005 is at least US$5,000,000. Notwithstanding the
foregoing, the effective date of the Closing is deemed to be March 15, 2005 so
that all sales on and after March 15, 2005 (together with income and expenses
associated therewith) are for the account of Purchaser. In connection with the
issuance of the Initial Shares, the Shareholders have agreed to return to the
Registrant for cancellation 5,000,000 shares of Registrant's Common Stock which
they had owned so that the net dilution from the issuance of the Initial Shares
will be 3,000,000 shares.
17
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 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 valuates 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.
18
RESULTS OF OPERATION
(1) Three Months Ended June 30, 2005 and 2004:
Net Sales. Net sales decreased by $137,362 or 2% to $7,840,494 for the three
months ended June 30, 2005, as compared to $7,977,856 for the three months ended
June 30, 2004. During the three months ended June 30, 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.
Gross Profit. Gross profit was $1,951,214 or 25% of net sales for the three
months ended June 30, 2005, as compared to gross profit of $1,350,369 or 17% of
net sales for the three months ended June 30, 2004, an increase of $597,844 or
44%. The increase in both gross profit and gross margin 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. The new products from Teltone even
reached the highest gross margin of 31% in the Company.
Selling and Distribution Expenses. Selling and distribution expenses increased
by $28,384 or 144% to $48,074 for the three months ended June 30, 2005, as
compared to $19,691 for the three months ended June 30, 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 $137,681 or 70% to $334,477 for the three months ended June 30,
2005, as compared to $196,796 for the three months ended June 30, 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 $710,615 or 9% of net sales for the
three months ended June 30, 2005, as compared to a recovery of $(318,650) or
(4)% of net sales for the three months ended June 30, 2004. The recovery was an
adjustment of the previous provisions. Currently, aged receivables from 9-12
months are allowed for at 25%; 12-24 months are allowed for at 50%; and those
older than 24 months are allowed for at 100%. Previously, the following was
19
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.
Depreciation and Amortization Expense. Depreciation and amortization expense
included in costs and expenses was $120,931 for the three months ended June 30,
2005, as compared to $100,594 for the three months ended June 30, 2004, as a
result of the acquisition of fixed assets in 2004 to support increased business
activities.
Financial Expenses. Financial expenses were $64,864 for the three months ended
June 30, 2005, as compared to $107,194 for the three months ended June 30, 2004.
The decrease was primarily a result of a decrease in interest expense.
Conversion Premium Expense. Conversion premium expense was $468,563 for the
three months ended June 30, 2005, as compared to $-0- for the three months ended
June 30, 2004. This represents a one time charge to the income statement. The
amount represents a premium on $2,205,000 of debentures that were issued on
April 7, 2005.
Compensation Expense Stock Warrants. Compensation expense on stock warrants was
calculated at $2,631,116 for the three months ended June 30, 2005, as compared
to $-0- for the three months ended June 30, 2004. This represents a one time
charge to the income statement. The warrants are attached to the $2,205,000 of
debentures that were issued on April 7, 2005.
Other Income. Other income was $7,709 for the three months ended June 30, 2005,
as compared to $6,183 for the three months ended June 30, 2004.
Non-Operating Expenses. Non-operating incomes (expenses) were $(56,879) for the
three months ended June 30, 2005, as compared to $(50,035) for the three months
ended June 30, 2004. As of June 30, 2005 the company had accrued $14,333 for
liquidating damages in conjunction with the company's failure to file its'
Registration Statement. Per the agreement, the amount is calculated at .5% for
each 30 day period
Provision for Income Taxes. The provision for income taxes were zero for the
three months ended June 30, 2005, as compared to $97,837 for the three months
ended June 30, 2004. The original lines of business of GSIC had a loss which
will have not income tax in the current quarter; meanwhile the Teltone had a
profit but will have an income tax exemption for two fiscal years since its
inception till March 2007.
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.
20
Net Income. As a result of the aforementioned factors, net loss was $(2,355,665)
for the three months ended June 30, 2005, as compared to net income of
$1,206,653 for the three months ended June 30, 2004.
(2) Nine Months Ended June 30, 2005 and 2004:
Net Sales. Net sales increased by $2,580,006 or 17% to $17,734,090 for the nine
months ended June 30, 2005, as compared to $15,154,084 for the nine months ended
June 30, 2004. During the nine months ended June 30, 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.
The nine months ended June 30, 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.
Gross Profit. Gross profit was $3,897,111 or 22% of net sales for the nine
months ended June 30, 2005, as compared to gross profit of $2,685,798 or 18% of
net sales for the nine months ended June 30, 2004, an increase of $1,211,313 or
45%. The Company experienced an increase in gross profit and increase in gross
margin in 2005 as compared to 2004, it was primarily a result of a change in the
sales mix. The introduction of Teltone's high margin products had improved the
overall profitability.
Selling and Distribution Expenses. Selling and distribution expenses increased
by $87,530 or 160% to $142,326 for the nine months ended June 30, 2005, as
compared to $54,796 for the nine months ended June 30, 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 and Teltone products. 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 $426,609 or 99% to $859,230 for the nine months ended June 30,
2005, as compared to $432,621 for the nine months ended June 30, 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,
Teltone product, and audit fees. The major components of general and
administrative expenses are audit fees, management compensation, and personnel
and personnel-related costs.
21
Bad Debt Expense. Bad debt expense was $408,891 or 3% of net sales for the nine
months ended June 30, 2005, as compared to a recovery of $(684,966) or (5)% of
net sales for the nine months ended June 30, 2004. The recovery was an
adjustment of the previous provisions. Currently, aged receivables from 9-12
months are allowed for 25%, 12-24 months are allowed for at 50% and those older
than 24 months are allowed for at 100%. 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.
Depreciation and Amortization Expense. Depreciation and amortization expense
included in costs and expenses was $329,635 for the nine months ended June 30,
2005, as compared to $239,841 for the nine months ended June 30, 2004, as a
result of the acquisition of fixed assets in 2004 to support increased business
activities.
Financial Expenses. Financial expenses were $194,087 for the nine months ended
June 30, 2005, as compared to $236,144 for the nine months ended June 30, 2004.
Other Income. Other income was $28,662 for the nine months ended June 30, 2005,
as compared to $16,221 for the nine months ended June 30, 2004.
Conversion Premium Expense. Conversion premium expense was $468,563 for the nine
months ended June 30, 2005, as compared to $-0- for the three months ended June
30, 2004. This represents a one time charge to the income statement. The amount
represents a premium on $2,205,000 of debentures that were issued on April 7,
2005.
Compensation Expense Stock Warrants. Compensation expense on stock warrants was
calculated at $2,631,116 for the nine months ended June 30, 2005, as compared to
$-0- for the three months ended June 30, 2004. This represents a one time charge
to the income statement. The warrants are attached to the $2,205,000 of
debentures that were issued on April 7, 2005.
Non-Operating Expenses. Non-operating expenses were $76,949 for the nine months
ended June 30, 2005, as compared to $58,700 for the nine months ended June 30,
2004. As of June 30, 2005 the company had accrued $14,333 for liquidating
damages in conjunction with the company's failure to file its' Registration
Statement. Per the agreement, the amount is calculated at .5% for each 30 day
period
22
Provision for Income Taxes. The provision for income taxes, which is computed on
a per country basis, was $95,087 for the nine months ended June 30, 2005, as
compared to $203,578 for the nine months ended June 30, 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 nine months
ended June 30, 2005 and 2004, the SGIC subsidiary 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. However, the Teltone subsidiary will follow the
policy and continue to enjoy the tax holiday from its inception in March 2005 to
March 2007, and preferential 7.5% tax rate till March 2010.
Net Income. As a result of the aforementioned factors, net loss was $(951,137)
for the nine months ended June 30, 2005, as compared to net income of $2,401,146
for the nine months ended June 30, 2004.
FINANCIAL CONDITION
Operating - The Company's operations utilized cash resources of $8,498,194 for
the nine months ended June 30, 2005, as compared to generating cash resources of
$3,611,013 for the nine months ended June 30, 2004, primarily as a result of
cash generated in 2005 to support the increases of accounts receivable and
inventories.
The Company had working capital of $6,495,434 at June 30, 2005, as compared to a
working capital of $(402,534) at June 30, 2004, reflecting current ratios of
1.36 and .97, respectively. The improvement in working capital during the nine
months ended June 30, 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 accounts receivables which were then offset by the increases of
payables.
Investing - During the nine months ended June 30, 2005, the Company used
$5,333,648 for investing activities, the major components of which were the
disposal of property and equipment of $1,152,778, offset by the fixed asset
acquisition of $155,826. The decrease in loans receivable of $190,520 also
improved the cash flow and the investment in intangible assets used $6,521,120
of capital. During the nine months ended June 30, 2004, the Company utilized
$3,797,611 in investing activities, the major components of which were the
acquisition of property and equipment of $2,241,954 and an increase in
short-term investments of $60,386, a increase in loans receivable of $1,452,349
and an investment in intangible assets of $42,922.
Financing - During the nine months ended June 30, 2005, the Company generated
$13,691,208 from financing activities, consisting of the repayment of borrowings
of $38,544 offset by total net equity financing of $1,897,053 and paid in
capital generated from a beneficial conversion premium $468,563, compensation on
stock warrants $2,631,116 and capital issued for intellectual property
$6,527,970. During the nine months ended June 30, 2004, the Company utilized
$524,150 in financing activities, consisting of the total repayments of the
borrowings of $663,293 and a paid in capital increase of $139,143.
At June 30, 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.
23
QUANTITATIVE AND QUALITATIVE DISCLOSURE 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.
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.
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
24
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 0.5% 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.
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.
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.
25
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
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.
SUBSEQUENT EVENT
The People's Bank of China, China's central bank, recently announced that with
approval from the State Council, and beginning from July 21, 2005, China will
implement a regulated, managed floating exchange rate system based on market
supply and demand and in reference to a package of currencies. Current US Dollar
exchange rate is 8.11 to Chinese RMB, a 2% drop compared with 8.28, the exchange
rate prior to July 21, 2005. This change of exchange rate will have no material
impact to the overall operation of the Company. However, since the export
revenue has accounted for 30% of the total sales, the company will monitor
closely the changes in cost and selling price in order to make strategic
decisions in a proper way and timely manner.
26
Item 3. Controls And Procedures
(a) Evaluation of Disclosure Controls and Procedures.
------------------------------------------------
Our management evaluated, with the participation of our Chief Executive and
Financial Officer, the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this Quarterly Report on Form 10-QSB.
Based on this evaluation, our Chief Executive and Financial Officer has
concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange
Act)) are inadequate to ensure that information required to be disclosed by us
in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms. We are developing a plan to ensure that all information will be recorded,
processed, summarized and reported on a timely basis. This plan is dependent, in
part, upon reallocation of responsibilities among various personnel, possibly
hiring additional personnel and additional funding. It should also be noted that
the design of any system of controls is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
(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 April 7, 2005, the Company issued $2,205,000 of Convertible
Debentures and issued warrants to purchase up to 100% of the shares issuable
upon conversion of the Debentures. Duncon Capital LLC received $176,400 in
commissions for serving as placement agent. Pursuant to an Asset Purchase
Agreement dated as of June 6, 2005, on June 8, 2005, the Company agreed to issue
8,360,000 shares of its Common Stock to the seller (and/or its designees) of the
assets covered by such Agreement. In connection with the purchase, certain of
the Company's shareholders agreed to return to the Company for cancellation
5,360,000 shares.
The securities were issued pursuant to an exemption from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
Regulation D.
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
27
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.
Dated: August 21, 2005 GLOBAL NATIONAL COMMUNICATIONS CORP.
/s/ Ybin Chen
-------------------------------------
Name: Ybin Chen
Title: President, Principal Executive
Officer
28