<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark one)
/X/Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended June 30, 2000.
/ /Transition report under Section 13 or 15(d) of the Securities Exchange Act of
1934.
GLOBAL TELEPHONE COMMUNICATION, INC.
(Exact name of Small Business Issuer in Its Charter)
NEVADA 87-0285729
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
SUITE 1800, 10 SOUTH RIVERSIDE PLAZA, CHICAGO, IL 60606
(Address of principal executive offices) (Zip Code)
1-877-901-4824 (GTCI)
(Issuer's Telephone Number)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which
To be so Registered Each Class is to be Registered
------------------- -------------------------------
n/a n/a
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.001
(Title of Class)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: As of August 17,
2000, there were 17,938,275 shares of common stock outstanding.
<PAGE>
GLOBAL TELEPHONE COMMUNICATION, INC.
FORM 10-QSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
No. Title Page No.
<S><C>
PART I
Item 1. Financial Statements....................................................
Item 2. Management's Discussion and Analysis or Plan of Operation...............
PART II
Item 1. Legal Proceedings.......................................................
Item 2. Changes in Securities...................................................
Item 3. Defaults upon Senior Securities.........................................
Item 4. Submission of Matters to a vote of Security Holders.....................
Item 5. Other Information.......................................................
Item 6. Exhibits and Reports on Form 8-K........................................
Signatures..............................................................
</TABLE>
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
GLOBAL TELEPHONE COMMUNICATION, INC.
AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND DECEMBER 31, 1999
1
<PAGE>
GLOBAL TELEPHONE COMMUNICATION, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Current Assets
Cash $ 625,415 $ 1,485,896
Restricted cash 850,000 850,000
Notes receivable - related party, net 50,500 50,500
Inventories and deposits 74,575 2,657
------------ ------------
Total Current Assets 1,600,490 2, 389,053
------------ ------------
Fixed Assets, Net 58,092 36,825
------------ ------------
Other Assets
Goodwill 1,333,334 --
Investments 1,495 1,495
------------ ------------
1,334,829 1,495
------------ ------------
$ 2,993,411 $ 2,427,373
TOTAL ASSETS ========= ============
</TABLE>
2
<PAGE>
GLOBAL TELEPHONE COMMUNICATION, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES & STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
Current Liabilities
Accounts payable $ 198,138 $ 143,883
Accrued expenses 288,271 166,811
Notes payable 1,045,016 543,631
Shareholder payable 5 1,289
------------ ------------
Total Current Liabilities 1,531,430 855,614
------------ ------------
Long Term Debt (note 3) 250,000 --
------------ ------------
TOTAL LIABILITIES 1,781,430 855,614
------------ ------------
Commitments
Stockholders' Equity
Issued & outstanding 17,938 16,788
Additional Paid In Capital 10,626,015 8,834,665
Other Comprehensive Income (Loss) 1,506 (1,402)
Deficit accumulated during the development stage (9,433,478) (7,278,292)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 1,211,981 1,571,759
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 2,993,411 $ 2,427,373
============ ============
</TABLE>
3
<PAGE>
GLOBAL TELEPHONE COMMUNICATION, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended on
June 30, June 30, From inception
------------------------------------------------------------ March 10, 1970
through June 30,
2000 1999 2000 1999 2000
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Sales and services $ -- $ 144,404 $ -- $ 145,404 $ 4,705
Cost of sales -- (10,235) -- (10,235)
------------ ------------ ------------ ------------ ------------
GROSS PROFIT -- 134,169 -- 135,169 4,705
------------ ------------ ------------ ------------ ------------
OPERATING EXPENSES
General & administrative 1,520,624 339,473 2,752,783 571,254 6,741,284
Depreciation & amortization 135,760 29,878 271,542 30,732 2,755,804
------------ ------------ ------------ ------------ ------------
Total operating expenses 1,656,384 369,351 3,024,325 601,986 9,497,088
------------ ------------ ------------ ------------ ------------
OPERATING LOSS (1,656,384) (235,182) (3,024,325) (466,817) (9,492,383)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 29,046 4,356 36,336 4,356 43,339
Interest expenses (3,584) (3,400) (7,197) (8,912) (24,545)
------------ ------------ ------------ ------------ ------------
Total Other Income (Expense) 25,462 956 29,139 (4,556) 18,794
------------ ------------ ------------ ------------ ------------
Loss before discontinued
operations (1,630,922) (234,226) (2,995,186) (471,373) (9,473,589)
Gain from discontinued
operations -- -- -- -- (251,441)
Gain on discontinued operations -- -- -- 56,083 (548,448)
Gain on recovery of shares 840,000 -- 840,000 -- 840,000
------------ ------------ ------------ ------------ ------------
NET LOSS $ (790,922) $ (234,226) $ (2,155,186) $ (415,290) $ (9,433,478)
============ ============ ============ ============ ============
</TABLE>
4
<PAGE>
GLOBAL TELEPHONE COMMUNICATION, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Deficit
Other Accumulated
Common Stock Additional Comprehensive During the
--------------------------- Paid-in Income Development
Shares Amount Capital (Loss) Stage
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, March 10, 1970 -- $ -- $ -- $ -- $ --
-
Common stock issued for cash at
$16.00 per share during 1970 1,906 2 30,498 -- --
Common stock issued for services
rendered at $6.40 per share
during 1970 1,578 1 10,099 -- --
Common stock issued for cash
at $32.00 per share during 1971 4,075 4 130,396 -- --
Common stock issued for services
rendered at $15.52 per share during
the period of inception through 1983 11,641 12 180,581 -- --
Common stock issued for services
rendered at $6.40 per share
during 1988 2,817 3 18,027 -- --
Net loss from inception on
March 10, 1970 through
December 31, 1991 -- -- -- (369,623)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1991 22,017 22 369,601 -- (369,623)
Net loss for the year ended
December 31, 1992 -- -- -- -- (552)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1992 22,017 22 369,601 -- (370,175)
Net loss for the year ended
December 31, 1993 -- -- -- -- (100)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1993 22,017 22 369,601 -- (370,275)
Common stock issued for services
rendered at $6.40 per share on
August 1, 1994 43,750 44 279,956 -- --
Net loss for the year ended
December 31, 1994 -- -- -- (280,100)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1994 65,767 $ 66 $ 649,557 $ -- $ (650,375)
------------ ------------ ------------ ------------ ------------
</TABLE>
5
<PAGE>
GLOBAL TELEPHONE COMMUNICATION, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Continued)
<TABLE>
<CAPTION>
Deficit
Other Accumulated
Common Stock Additional Comprehensive During the
---------------------------- Paid-in Income Development
Shares Amount Capital (Loss) Stage
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 65,767 $ 66 $ 649,557 $ -- $ (650,375)
Net loss for the year ended
December 31, 1995 -- -- -- -- (4,053)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 65,767 66 649,557 -- (654,428)
Expenses paid on the Company's
behalf by a shareholder -- -- 716 -- --
Common stock issued for cash at
$0.04 per share on July 23, 1996 1,000,000 1,000 39,000 -- --
Fractional shares issued in
conjunction with a 1-for-80 reverse
stock split 33 -- -- -- --
Fractional shares issued in conjunction
with a 3-for-1 forward stock split 34 -- -- -- --
Net loss for the year ended
December 31, 1996 -- -- -- -- (347,222)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 1,065,834 1,066 689,273 -- (1,001,650)
Common stock issued to acquire
Chow's Consulting Corporation
on April 30, 1997 recorded at
predecessor cost of $0.00 90,000 90 (90) -- --
Fractional shares canceled in
conjunction with a 1-for-6
reverse stock split (41) -- -- -- --
Common stock issued for cash
at $0.01 per share 3,000,000 3,000 28,000 -- --
Net loss for the year ended
December 31, 1997 -- -- -- -- (134,071)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997 $ 4,155,793 $ 4,156 $ 717,183 $ -- $ (1,135,721)
------------ ------------ ------------ ------------ ------------
</TABLE>
6
<PAGE>
GLOBAL TELEPHONE COMMUNICATION, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Continued)
<TABLE>
<CAPTION>
Deficit
Other Accumulated
Common Stock Additional Comprehensive During the
---------------------------- Paid-in Income Development
Shares Amount Capital (Loss) Stage
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 4,155,793 $ 4,156 $ 717,183 $ -- $ (1,135,721)
Common stock issued to acquire
subsidiaries at $0.50 per share 6,950,000 6,950 3,468,050 -- --
Common stock issued for cash
at $0.50 per share 1,140,142 1,140 568,931 -- --
Net loss for the year ended
December 31, 1998 -- -- -- -- (422,625)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 12,245,935 12,246 4,754,164 -- (1,558,346)
Common stock issued to acquire
subsidiaries at $1.40 per share 600,000 600 839,400 -- --
Common stock issued for cash from $0.50
to $2.00 ($0.78 average) per share 5,483,433 5,483 4,204,017 -- --
Stock offering costs paid 6,383 6 (56,753) -- --
Rescinded acquisitions (2,000,000) (2,000) (1,998,000) -- --
Debt converted to equity at
$1.65 per share 52,524 53 86,612 -- --
Discount on options -- -- 505,625 -- --
Common stock issued for services at
$1.25 per share 400,000 400 499,600 -- --
Foreign currency translation
adjustment -- -- -- (1,402) --
Net loss for the year ended
December 31, 1999 -- -- -- -- (5,719,946)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 16,788,275 $ 16,788 $ 8,834,665 $ (1,402) $ (7,278,292)
------------ ------------ ------------ ------------ ------------
</TABLE>
7
<PAGE>
GLOBAL TELEPHONE COMMUNICATION, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Continued)
<TABLE>
<CAPTION>
Deficit
Other Accumulated
Common Stock Additional Comprehensive During the
---------------------------- Paid-in Income Development
Shares Amount Capital (Loss) Stage
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1999 16,788,275 $ 16,788 $ 8,834,665 $ (1,402) $ (7,278,292)
Common stock issued to acquire
subsidiary valued at $2.50 per
share (unaudited) 500,000 500 1,249,500 -- --
Common stock issued for cash at
$1.25 per share (unaudited) 400,000 400 499,600 -- --
Common stock issued for cash at
$1.00 per share (unaudited) 800,000 800 799,200 -- --
Foreign currency translation
adjustment (unaudited) -- -- -- (2,840) --
Net loss for the three months
ended March 31, 2000 (unaudited) -- -- -- (1,364,264)
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2000 (unaudited) 18,488,275 $ 18,488 $ 11,382,965 $ (4,242) $ (8,642,556)
Common stock
returned per Mutual
Recission Agreement (unaudited) (600,000) (600) (839,400) -- --
Common stock issued for
services at $1.65 per share (unaudited) 50,000 50 82,450 -- --
Foreign Currency
Translation (unaudited) -- -- -- 5,748 --
Net loss for the three
months ended June 30, 2000 (unaudited) -- -- -- -- (790,922)
------------ ------------ ------------ ------------ ------------
Balance June 30, 2000 (unaudited) 17,938,275 $ 17,938 $ 10,626,015 $ 1,506 $ (9,433,478)
============ ============ ============ ============ ============
</TABLE>
8
<PAGE>
GLOBAL TELEPHONE COMMUNICATION, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30, From Inception on
--------------------------- --------------------------- March 10, 1970 to
2000 1999 2000 1999 June 30,2000
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net Loss $ (790,922) $ (234,226) $ (2,155,186) $ (415,290) $ (9,433,478)
Adjustments to reconcile net loss to
net cash used by operating activities:
Gain on recovery of shares (840,000) -- (840,000) -- (840,000)
Depreciation expense 135,760 29,878 271,542 30,732 338,452
Allowance for bad debts -- -- -- 49,500
Common stock & options issued for
services and expenses paid on
behalf of the Company 82,500 -- 82,500 -- 1,577,564
Goodwill expensed -- -- -- -- 3,475,000
Foreign Currency translation
adjustment 5,748 -- 2,908 (351) 1,506
Changes in operating assets and liabilities:
Decrease (increase) in restricted cash -- -- -- -- (850,000)
(Increase) in inventories & deposits (71,132) (2,458) (71,918) (2,458) (74,575)
(Increase) in accounts receivable -- (48,599) (5) (48,599) (105,928)
(Increase) in other assets -- 81,878 -- 81,878 (180,873)
(Increase) decrease in deposits for 504 -- -- -- -- (785)
Increase (decrease) in accounts payable 158,249 (140,725) 54,254 (8,931) 200,745
Increase (decrease) in accrued expenses 120,326 -- 121,460 (8,296) 298,700
(Decrease) in shareholder payable (1,284) -- (1,284) -- (1,284)
------------ ------------ ------------ ------------ ------------
Net cash (used) by operations (1,200,755) (314,252) (2,535,729) (371,315) (5,545,456)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of subsidiary -- -- (350,000) -- (350,000)
Cash paid from discontinued operations -- -- -- -- (1,205,413)
Purchase of fixed assets (21,021) (146,952) (26,137) (146,952) (274,866)
------------ ------------ ------------ ------------ ------------
Net cash (used) by investing activities (21,021) (146,952) (376,137) (146,952) (1,830,279)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bridge loan 800,000 -- 800,000 -- 800,000
Proceeds from private loan 250,000 -- 250,000 -- 250,000
Repayment of notes payable (120,312) -- (298,615) -- (298,615)
Increase (decrease) in notes payable -- (63,899) -- 220,212 995,101
Common stock issued for cash -- 402,933 1,300,000 1,342,933 6,254,664
------------ ------------ ------------ ------------ ------------
Net Cash provided by financing activities 929,688 339,034 2,051,385 1,563,145 8,001,150
------------ ------------ ------------ ------------ ------------
</TABLE>
9
<PAGE>
GLOBAL TELEPHONE COMMUNICATION, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30, From Inception on
--------------------------- --------------------------- March 10, 1970 to
2000 1999 2000 1999 June 30, 2000
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ (292,088) $ (122,170) $ (860,481) $ 1,044,878 $ 625,415
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 917,503 1,183,438 1,485,896 16,390 --
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 625,415 $ 1,061,268 $ 625,415 $ 1,061,268 $ 625,415
============ ============ ============ ============ ============
CASH PAID FOR:
Interest $ 3,584 $ 3,400 $ 7,197 $ 8,912 $ 24,545
Income taxes $ -- $ -- $ -- $ -- $ --
NON-CASH FINANCING
ACTIVITIES:
Common stock and options issued for
services rendered and expenses paid
on behalf of the Company $ 82,500 $ -- $ 82,500 $ -- $ 1,577,564
Common stock issued for subsidiaries $ -- $ -- $ 1,250,000 $ 840,000 $ 5,565,000
Common stock rescinded for
subsidiaries $ -- $ -- $ -- $ -- $ 2,000,000
Common stock issued for debt $ -- $ -- $ -- $ -- $ 86,665
Common stock canceled due to
Mutual Recission Agreement $ (840,000) $ -- $ (840,000) $ -- $ (840,000)
</TABLE>
10
<PAGE>
GLOBAL TELEPHONE COMMUNICATION, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
June 30, 2000 and December 31, 1999
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements have been
prepared by the Company without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position of
operations and cash flows at June30, 2000 and 1999 and for all
periods presented have been made.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. It is suggested that these condensed consolidated
financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's December
31, 1999 audited consolidated financial statements. The results of
operations for periods ended June 30, 2000 and 1999 are not
necessarily indicative of the operating results for the full
years.
NOTE 2 - MATERIAL EVENTS
RECISSION OF PACIFIC ASSET INTERNATIONAL, LTD.AND CANCELATION OF
COMMON STOCK
A Mutual Rescission Agreement to rescind the acquisition of PAI
was effective on January 13, 2000, however, the Company did not
receive the signed agreement until April 2000. And thus, it could
not assume on January 13, 2000 that the acquisition was rescinded.
Although the Mutual Rescission Agreement has been signed, the
Company is awaiting the return of the 600,000 shares of common
stock. Until those shares are returned, the Company has placed a
stop on the shares and has shown PAI as a loss from discontinued
operations on its December 31, 1999 financial statements.
On June 26, 2000, the 600,000 shares that were the subject of a
Mutual Recission Agreement were legally canceled and removed from
the shareholders' list. Consequently the shares have been
cancelled and the resulting loss of $840,000 that was expensed in
the year ended December 31, 1999 has been reversed and shown as a
"gain on recovery of shares".
COMMON STOCK ISSUE
On May 11, 2000, 50,000 shares valued at $1.65 were issued for
services rendered during the 3 months ended June 30, 2000.
11
<PAGE>
GLOBAL TELEPHONE COMMUNICATION, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
June 30, 2000 and December 31, 1999
NOTE 2 - MATERIAL EVENTS (continued)
UNSECURED PROMISSORY NOTE
The Company is currently negotiating the placement of a
subordinated debt facility ("Subordinated Loan") in the principal
amount of $10,000,000 that the Company expects to close after the
Company has satisfied all applicable requirements for listing the
common stock and its common stock has been accepted for trading on
the NASDAQ bulletin board. There is no assurance that the Company
will be successful on a timely basis in meeting these
contingencies. In connection with the Subordinated Loan, the
Company will be required to deliver a 9% Subordinated Debenture
("Debenture") and a Warrant to Purchase Common stock ("Warrant").
The same lender that proposes to make the Subordinated Loan has
also extended a bridge loan facility to the Company in the
original principal amount of $800,000 (the "Bridge Loan"). The
Bridge Loan was initially evidenced by a 15% Convertible
Promissory Note (the "Convertible Note") and the Convertible Note
was subsequently converted into a $3,200,000 principal amount
subordinated loan facility ("Conversion Loan") on substantially
the same terms and conditions as the Subordinated Loan. The lender
has not advanced any amount to the Company in excess of the
original principal amount of the Bridge Loan and the unfunded
amount of the Conversion Loan is evidenced by a promissory note
from the lender to the Company. It is anticipated that the
Conversion Loan will be repaid (and the promissory note evidencing
the unfunded portion thereof will be satisfied) by conversion into
the Subordinated Loan. In connection with the Bridge Loan, the
Company delivered to the lender a five-year warrant to purchase
200,000 shares of its common stock, exercisable at $2.25 per
share.
The Debenture will be convertible into shares of common stock of
the Company (a minimum of 880,000 shares under the Conversion Loan
and a maximum of 2,500,000 shares under the Subordinated Loan) and
will be due a maximum of 30 months after the date of issuance. The
holder may convert up to a specified face amount of the Debenture
upon issuance (a minimum of $122,223 under the Conversion Loan and
a maximum of $555,556 under the Subordinated Loan) on each monthly
anniversary date thereafter (each, a "Due Date"). Any amount not
converted accumulates and may be converted thereafter. However,
the holder is prohibited from converting any amount of the
Debenture that would cause the holder's total ownership of common
stock to equal five percent or more of the total shares
outstanding. Under the Conversion Loan, the per share conversion
price will be equal to the lesser of (a) $2.50 and (b) the lowest
daily trading price of the common stock (as reported by Bloomberg)
of the twenty (20) consecutive trading days immediately preceding
submission of a notice to convert by the holder. Under the
Subordinated Loan, the per share conversion price will be equal to
the lesser of (a) $4.00 and (b) the average of the three lowest
daily trading prices of the common stock (as reported by
Bloomberg) of the twenty (20) consecutive trading days immediately
preceding submission of a notice to convert by the holder. In the
event the closing bid price of the Company's common stock is less
than a specified amount per share at any time during the five
trading days preceding a Due Date, the Company will have the right
to redeem for cash the monthly conversion amount of the Debenture
(in lieu of allowing the holder to convert such amount) at
premiums ranging from 105% to 108%. The Debenture will be secured
by a letter of credit in an initial principal amount equal to 75%
of the principal amount of the Debenture. The required amount of
the letter of credit will decrease by a specified amount for every
$1.00 of principal reduction of the Debenture, whether the
reduction occurs by conversion or redemption.
The Warrant will be exercisable for the purchase of 40,000 shares
of common stock per $100,000 in principle
12
<PAGE>
amount of the Debenture, one third of which will be exercisable at
$2.25 per share, one third of which will be exercisable at $3.75.
The Warrant will be exercisable at any time prior to the
expiration of five years from the date of issuance.
The Company will be required to register for resale all shares of
common stock issuable upon conversion of the Debenture and
exercise of the Warrant. Certain penalty provisions apply if a
registration statement covering the shares is not filed with 150
days or is not declared effective within 180 days of the date of
issuance.
GLOBAL TELEPHONE COMMUNICATION, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
June 30, 2000 and December 31, 1999
NOTE 2 - MATERIAL EVENTS (Continued)
ADDITIONAL ICE FINANCING AND SUBSEQUENT RESERVE FOR DOUBTFUL
PROMISSORY NOTES RECEIVABLE.
The Company has loaned approximately $459,000 to ICE pursuant to
an unsecured promissory note payable on July 4, 2000 bearing
interest at an annual rate of 10% to commence on July 1, 2000.
This amount has been reserved as uncollectible because ICE has no
history of being able to sell prepaid calling cards or provide
telephone services. In addition, ICE is unable to predict such
sales or services will be possible in the future or whether they
will be profitable.
NOTE 3 - LONG TERM DEBT
On June 6, 2000 the company executed a promissory note in the
amount of $250,000. The note bears interest at prime plus 0.5% per
annum. Accumulated interest and principal is repayable on May 30,
2003 and consequently the note payable has been shown as a long
term debt. In addition, the Company has issued a warrant to the
noteholder to purchase up to 500,000 shares of common stock
for an exercise price equal to the lower of $1.30 or 80% of the
5 day trailing average of the Company's common stock on the date
of exercise.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
FORWARD-LOOKING STATEMENTS-CAUTIONARY STATEMENTS
THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS CERTAIN "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SPECIFICALLY, ALL STATEMENTS OTHER
THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS REPORT, REGARDING THE
COMPANY'S FINANCIAL POSITION, BUSINESS STRATEGY AND PLANS AND OBJECTIVES OF
MANAGEMENT OF THE COMPANY FOR FUTURE OPERATIONS ARE FORWARD-LOOKING STATEMENTS.
THESE FORWARD-LOOKING STATEMENTS ARE BASED ON THE BELIEFS OF THE COMPANY'S
MANAGEMENT, AS WELL AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE
TO THE COMPANY'S MANAGEMENT. WHEN USED IN THIS REPORT, THE WORDS "ANTICIPATE,"
"BELIEVE," "COULD," "ESTIMATE," "EXPECT" AND "INTEND" AND WORDS OR PHRASES OF
SIMILAR IMPORT, AS THEY RELATE TO THE COMPANY OR THE COMPANY'S MANAGEMENT, ARE
INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT THE
CURRENT VIEW OF THE COMPANY WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO
CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS AND RELATED FACTORS INCLUDING,
WITHOUT LIMITATIONS, COMPETITIVE FACTORS, GENERAL ECONOMIC CONDITIONS, CUSTOMER
RELATIONS, RELATIONSHIPS WITH VENDORS, INTEREST RATES, CURRENCY FLUCTUATIONS,
GOVERNMENT REGULATION AND SUPERVISION, POLITICAL EVENTS, THE OPERATION OF THE
COMPANY'S NETWORKS, TRANSMISSION COSTS, PRODUCT INTRODUCTIONS AND ACCEPTANCE,
TECHNOLOGICAL CHANGE, CHANGES IN INDUSTRY PRACTICES, ONE-TIME EVENTS AND OTHER
FACTORS DESCRIBED HEREIN ("CAUTIONARY STATEMENTS"). ALTHOUGH THE COMPANY
BELIEVES THAT THE EXPECTATIONS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT
SUCH EXPECTATIONS WILL PROVE TO BE CORRECT. BASED UPON CHANGING CONDITIONS,
SHOULD ANY ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD
ANY UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY
FROM THOSE DESCRIBED HEREIN AS ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED OR
INTENDED. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTED
TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR
ENTIRETY BY THE APPLICABLE CAUTIONARY STATEMENTS.
RESULTS OF OPERATIONS
In connection with the rescission of the Pacific Asset acquisition on
January 13, 2000, the Company was required to record a loss from discontinued
operations of $840,000 on its December 31, 1999 audited financial statements due
to the failure of the shareholders of Pacific Asset to return the 600,000 shares
of common stock previously issued by the Company as consideration for the
purchase of 51% of the issued and outstanding shares of Pacific Asset. Although
the share certificates were never returned by the shareholders of Pacific Asset,
the Company legally canceled the 600,000 shares of its common stock on June 26,
2000. Accordingly, the Company has reversed the loss from discontinued
operations on its June 30, 2000 financial statements.
The Company is continuing to negotiate the placement of a subordinated
debt facility ("Subordinated Loan") in the maximum principal amount of
$10,000,000. In connection with the Subordinated Loan, the Company will be
required to deliver a 9% Subordinated Debenture ("Debenture") and a Warrant to
Purchase Common Stock ("Warrant"). The Debenture will be convertible into shares
of Common Stock of the Company at a specified conversion rate, may be redeemed
by the lender in certain circumstances and will be due a maximum of 30 months
after the date of issuance. The Debenture will be secured by a letter of credit
in an initial principal amount equal to 75% of the principal amount of the
Debenture. The required amount of the letter of credit will decrease by a
specified amount for every $1.00 of principal reduction of the Debenture,
whether the reduction occurs by conversion or redemption. The Warrant will be
exercisable for the purchase of 40,000 shares of Common Stock per $100,000 in
principal amount of the Debenture up to a maximum of 4.9% of the outstanding
shares at any point in time of the Registrant, one third of which will be
exercisable at $2.25 per share, one third of which will be exercisable at $3.00
per share, and one third of which will be exercisable at $3.75. The Warrant will
be exercisable at any time prior to the expiration of five years from the date
of issuance. The Company will be required to register for resale all shares of
Common Stock issuable upon conversion of the Debenture and exercise of the
Warrant.
The shares to be issued in connection with the Subordinated Loan are
not at a discount from the market price of the Registrant's common stock (i.e.
are not "in the money") and, accordingly, no additional expense is expected to
be required to be recorded in connection with the issuance of such shares.
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The same lender that is negotiating with the Company to provide the
Subordinated Loan has also extended a bridge loan facility to the Company in the
original principal amount of $800,000 (the "Bridge Loan"). The Bridge Loan was
initially evidenced by a 15% Convertible Promissory Note which was subsequently
converted into $3,200,000 principal amount subordinated loan facility
("Conversion Loan") on substantially the same terms and conditions as the
Subordinated Loan. During April and May 2000, the Company drew down an aggregate
of $800,000 under the Bridge Loan to fund current operations, for working
capital and to fund certain borrowing costs. Such amount is currently evidenced
by the Conversion Loan but the lender has not agreed to advance any amount to
the Company in excess of the $800,000 original principal amount of the Bridge
Loan. The unfunded principal amount of the Conversion Loan is evidenced by a
promissory note from the lender to the Company. It is anticipated that the
Conversion Loan will be repaid (and the lender's promissory note evidencing the
unfunded portion thereof will be satisfied) by conversion into the Subordinated
Loan. In connection with the closing of the Bridge Loan, the Company delivered
to the lender a five-year warrant to purchase 200,000 shares of its common
stock, exercisable at $2.25 per share. There can be no assurance that the
Registrant will be successful on a timely basis in satisfying the requirements
for closing the Subordinated Loan or that the Subordinated Loan will in fact be
closed.
On June 1, 2000, the Company appointed Anthony Sousa as Vice President
of Operations. He will assume responsibility for day to day operations of
Shenzhen Newsnet (now known as szonline.net) and will focus on the delivery and
integration of enhanced services to the existing ISP platform. He will also
direct the efforts to deploy the VoIP network and wireless solutions platform in
China and abroad.
On June 6, 2000, the Company completed a private placement pursuant to
a note and warrant purchase agreement. In connection with this transaction, the
Company issued a convertible promissory note in the maximum principal amount of
$500,000, of which an aggregate of $250,000 has been drawn down for use as
working capital and to fund current operations. The balance will become
available only in the event that the Company is required to make a deposit in
connection with a certain acquisition. The Company also delivered to the lender
a five-year warrant to purchase an aggregate of 500,000 shares of its common
stock (as such number may be adjusted in certain circumstances), exercisable at
a price equal to the lower of (i) $1.30 per share and (ii) an amount per share
equal to 80% of the five day trailing average of the Company's common stock on
the date of exercise. The shares to be issued to such lender will be at a
discount from the market price of the Registrant's common stock (I.E. are "in
the money") and, accordingly, an additional expense will be recorded in
connection with the issuance of such shares.
In the second quarter of 2000, the general and administrative expenses
were approximately $1,520,000 as compared to expenses of approximately $590,000
for the second quarter of 1999. Legal and accounting expenses totaled
approximately $298,000, payroll costs totaled approximately $165,000 , office
expenses totaled approximately $123,000, finance charges totaled approximately
$55,000, investor relations costs totaled approximately $92,000, consulting
costs totaled approximately $198,000, travel and entertainment costs totaled
approximately $100,000, rent totaled approximately $30,000 and $459,000 was
written off against an uncollectible promissory note due from International
Communication Enterprises Ltd. (ICE). The Registrant doubts the collectibility
of this note as such amounts have been written off because ICE has no history of
being able to sell prepaid calling cards or provide telephone services and the
Company is unable to predict whether such sales or services will be possible in
the future or whether they will be profitable.
LIQUIDITY AND CAPITAL RESOURCES
During the second quarter of 2000, the Registrant raised an aggregate
of $1,050,000 through bridge financing as compared to the second quarter of
1999, during which the Registrant raised approximately $403,000 through the sale
of common stock. In the year ended December 31, 1999, the Registrant raised
approximately $4,153,000 from the sale of equity securities and approximately
$545,000 from notes payable to fund current operations. The proceeds of such
financing transactions were used for working capital needs. The Registrant's
current ratio at June 30, 2000 was 1.05 compared to 2.64 at June 30, 1999.
The Registrant's operating activities used cash of approximately
$1,200,000 for the three months ended June 30,
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2000. During this period, the Registrant had an operating loss before
depreciation and amortization of approximately $1,521,000 as compared to the
second quarter of 1999, during which the Registrant had an operating loss before
depreciation and amortization of approximately $204,000. During the year ended
December 31, 1999, the Company had operating expenses of $6,019,569, resulting
in a net loss of $5,721,348.
As a result of the above activities and the Company's increased
operating costs, the Registrant experienced a decrease in cash of $292,000 for
the three months ended June 30, 2000.
BUSINESS RISK
Because of management's broad discretion with respect to the
acquisition of assets, properties or businesses, the Company may be deemed to be
a growth oriented company. Although management intends to apply substantially
all of the proceeds that it may receive through the issuance of stock or debt to
suitable acquisitions and development of acquired companies, such proceeds will
not otherwise be designated for any more specific purpose. The Company can
provide no assurance that any allocation of such proceeds will allow it to
achieve its business objectives.
The continuation and development of the Company's business is
dependent upon socio-political factors such as China's entry into the World
Trade Organization and the liberalization of foreign investment in China's
Internet sector. There are inherent risks involved in operating in China, a
region where commercial rules and regulations are still uncertain. The potential
opening of the information technology/Internet sector to foreign participation
will also mean an increase in competition from multinational telecommunications
companies in China. The degree to which these factors may affect the Company's
future operations and financial results is uncertain and will depend on the
success of the management team in executing its business plan and carrying out
an effective implementation of the core operations of the Company's joint
ventures.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There have been no changes since the Company's last report in Item
3, Legal Proceedings of Form 10-KSB for the fiscal year ended December 31, 1999.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
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SIGNATURES
In accordance with the requirements of the Exchange Act, the
Company caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GLOBAL TELEPHONE
COMMUNICATION INC.
DATE: August 17, 2000 BY:
Robert J. Andresen
President & Chief Operating Officer
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