UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
F O R M 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number:
GLOBALNET, INC.
(Exact name of registrant as specified in its charter)
Nevada (87-0635536)
(State or other jurisdiction of incorporation (IRS Employer Identification
or organization) Number)
Suite 125-D
1919 South Highland Avenue 60148
Lombard, Illinois (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (630) 652-1300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- ----
<PAGE>
As of September 30, 2000 32,352,407 shares of Registrants' Common Stock, par
value $.001, were outstanding.
2
<PAGE>
GLOBALNET, INC.
FORM 10-Q
SEPTEMBER 30, 2000
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets at September 30, 2000 and December
31, 1999.........................................................4
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2000 and 1999.........................5
Consolidated Statement of Stockholders' Equity (Deficit) for the
Nine Months Ended September 30, 2000.. ..........................6
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999......................................7
Notes to Consolidated Financial Statements.......................8-11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIOns.......................................11-18
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......18
PART II OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS..............19
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.......................19
SIGNATURE......................................................20
EXHIBIT INDEX..................................................21
3
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
<TABLE>
GlobalNet, Inc.
Consolidated Balance Sheets
<CAPTION>
Assets September 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 2,020,088 $ 304,626
Restricted cash 174,975 473,019
Accounts receivable, net 7,482,981 1,199,283
Due from related party -- 41,319
Prepaid expenses 635,451 137,427
------------ ------------
Total current assets 10,313,495 2,155,674
Property and equipment, net 8,559,103 4,449,726
Intangible assets, net 1,766,668 --
------------ ------------
Total assets $ 20,639,266 $ 6,605,400
============ ============
Liabilities and Equity (Deficit)
Current liabilities:
Accounts payable $ 8,802,299 $ 2,925,798
Salaries, wages and commissions payable 51,911 176,083
Accrued expenses 98,690 94,694
Deferred revenue 676,694 1,582,661
Term loan -- 617,039
Current portion of capital lease obligations 2,913,944 1,114,677
------------ ------------
Total current liabilities 12,543,538 6,510,952
Capital lease obligations, net of current portion 6,226,991 3,773,443
Equity (deficit):
Common stock; 100,000,000 shares authorized, $.0.001 par value;
32,352,407 shares issued and outstanding at September 30, 2000 32,352 --
Additional paid-in-capital 27,807,754 --
Accumulated deficit (11,796,369) --
Deferred compensation (14,175,000)
Members' deficit -- (3,678,995)
------------ ------------
Total equity (deficit) 1,868,737 (3,678,995)
------------ ------------
Total liabilities and equity (deficit) $ 20,639,266 $ 6,605,400
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
GlobalNet, Inc.
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Three months ended Nine months ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 23,635,285 $ 5,517,418 $ 54,404,807 $ 9,910,503
Operating expenses:
Data communications and telecommunications 21,971,455 5,546,644 52,420,851 9,425,042
Network research and development 966,248 31,712 1,842,194 57,914
Selling and marketing 317,567 14,050 620,590 112,009
General and administrative 1,412,817 264,645 3,061,162 715,548
Depreciation and amortization 749,903 376,738 1,654,061 502,640
Non-cash stock compensation 1,350,000 -- 2,025,000 --
------------ ------------ ------------ ------------
Total operating expenses 26,767,990 6,233,789 61,623,858 10,813,153
------------ ------------ ------------ ------------
Operating loss (3,132,705) (716,371) (7,219,051) (902,650)
Other income (expense):
Interest income 24,557 -- 28,917 5,000
Interest expense (384,559) (309,287) (927,240) (409,007)
------------ ------------ ------------ ------------
Total other expense (360,002) (309,287) (898,323) (404,007)
------------ ------------ ------------ ------------
Loss before income taxes (3,492,707) (1,025,658) (8,117,374) (1,306,657)
Income tax expense (benefit) -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (3,492,707) $ (1,025,658) $ (8,117,374) $ (1,306,657)
============ ============ ============ ============
Pro forma weighted-average number of shares outstanding 30,352,407 18,000,000 23,580,307 18,000,000
============ ============ ============ ============
Pro forma basic and diluted loss per share $ (0.12) $ (0.06) $ (0.34) $ (0.07)
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
GlobalNet, Inc.
Consolidated Statement of Equity (Deficit)
(Unaudited)
<CAPTION>
GlobalNet
GlobalNet, International,
Inc. Inc.
---------------------------------------------- ---------------------------------------------
Common Stock Common Stock
------------------- Additional Accumulated ------------------ Additional Accumulated
Shares Amount paid-in-capital deficit Shares Amount paid-in-capital deficit
-------- -------- --------------- ----------- ---------- ------ --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1999 -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Exchange of
members' interests
for common stock -- -- -- -- 1,800 2 -- (3,678,997)
Issuance of restricted
common stock to employees,
net of contribution by
shareholders of 3 shares -- -- -- -- 200 -- 16,200,000 --
Exchange of common
shares in connection with
merger with Rich Earth, Inc. 20,000,000 20,000 16,180,000 (3,678,995) (2,000) (2) (16,200,000) 3,678,997
Net assets of Rich Earth,
Inc. at time of merger 12,184,018 12,184 10,177,996 -- -- -- -- --
Issuance of common stock
in private placement, net 168,389 168 1,449,758 -- -- -- -- --
Amortization of
deferred compensation -- -- -- -- -- -- -- --
Net loss -- -- -- (8,117,374) -- -- -- --
Balance at
September 30, 2000 32,352,407 $ 32,352 $ 27,807,754 $(11,796,369) -- $ -- $ -- $ --
DTA Communications
Network, L.L.C.
-------------
Members' Deferred Total
deficit compensation equity (deficit)
------------- --------------- ----------------
<S> <C> <C> <C>
Balance at
December 31, 1999 $ (3,678,995) $ -- $ (3,678,995)
Exchange of
members' interests
for common stock 3,678,995 -- --
Issuance of restricted
common stock to employees,
net of contribution by
shareholders of 3 shares -- (16,200,000) --
Exchange of common
shares in connection with
merger with Rich Earth, Inc. -- -- --
Net assets of Rich Earth,
Inc. at time of merger -- -- 10,190,180
Issuance of common stock
in private placement, net -- -- 1,449,926
Amortization of
deferred compensation -- 2,025,000 --
Net loss -- -- (8,117,374)
Balance at
September 30, 2000 $ -- $(14,175,000) $ 1,868,737
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
<TABLE>
GlobalNet, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine months ended
----------------------------
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(8,117,374) $(1,306,658)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,654,061 502,640
Non-cash stock compensation expense 2,025,000 --
Changes in assets and liabilities:
Restricted cash 298,044 (64,628)
Accounts receivable (6,283,698) (1,874,911)
Due from related party 41,319 (43,392)
Prepaid expenses (498,024) (284,252)
Accounts payable 5,876,501 2,041,406
Salaries, wages and commissions payable (124,172) (32,622)
Accrued expenses 3,996 23,689
Deferred revenue (905,967) 419,793
------------- -------------
Net cash used in operating activities (6,030,314) (618,935)
------------- -------------
Cash flows from investing activities -
Purchase of property and equipment (336,919) --
------------- -------------
Net cash used in investing activities (336,919) --
------------- -------------
Cash flows from financing activities:
Proceeds from additional capital investment -- 77,412
Advances from Rich Earth, Inc. prior to merger 800,000
Cash acquired from merger with Rich Earth, Inc. 7,440,180
Net proceeds from private placement with Rich Earth, Inc. 1,272,728 --
Principal payments on capital lease obligations (813,174) (96,444)
Proceeds from term loan -- 550,357
Principal payments on term loan (617,039) --
------------- -------------
Net cash provided by financing activites 8,082,695 531,325
------------- -------------
Net increase (decrease) in cash 1,715,462 (87,610)
Cash at beginning of period 304,626 197,270
------------- -------------
Cash at end of period $ 2,020,088 $ 109,660
============= =============
Supplemental disclosure of noncash financing and investing activities:
Payment for purchase of 25% minority interest in
and certain assets of GlobalNet L.L.C. by
Rich Earth, Inc. on behalf of the Company $ 2,127,198 $ --
============= =============
Equipment acquired through capital leases $ 5,065,989 $ --
============= =============
Cancellation of notes payable to Rich Earth, Inc. in conncection with
merger with Rich Earth, Inc. $ 2,927,198 $ --
============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
7
<PAGE>
GLOBALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 1: ORGANIZATION AND DESCRIPTION OF BUSINESS
GlobalNet, Inc. ("GlobalNet" or the "Company") was formed on May 30,
2000, when GlobalNet International, Inc. ("GII") merged with a subsidiary of
Rich Earth, Inc. ("Rich Earth") pursuant to an agreement (the "Merger
Agreement") whereby 20,000,000 shares of Rich Earth common stock were exchanged
for 100% of the common stock of GII in a transaction accounted for as a reverse
acquisition of Rich Earth by GII using the purchase method of accounting. Prior
to raising approximately $2.5 million to fund an acquisition by GII in a
contemplated transaction as described herein, Rich Earth was a non-operating
public shell corporation with nominal assets. GII management now controls the
combined company after the transaction. After the closing of the merger, Rich
Earth changed its name to GlobalNet, Inc.
As a result of the reverse merger, the operating entity, GII, will
continue as the operating entity under the GlobalNet, Inc. name, and its
historical financial statements will replace those of Rich Earth.
GII was formed in March 2000, when the members of DTA Communications
Network, L.L.C. ("DTA") exchanged their members' interests in DTA for common
stock of GII, a newly formed corporation. DTA was organized in Illinois on May
22, 1996 as a limited liability company. The Company was formed to provide
international telecommunications services, including high quality voice, fax,
and other value-added applications over the Internet and other networks.
On April 20, 1999, DTA and a Texas limited liability company formed an
Illinois limited liability company, later named GlobalNet L.L.C. DTA's interest
in GlobalNet L.L.C. was 75% at December 31, 1999. GlobalNet L.L.C. was formed to
provide wholesale carrier voice and fax, value-added applications, and
third-generation application service provider (ASP) products via an
international Internet protocol-based network.
On March 6, 2000, DTA agreed to purchase and subsequently did purchase
the remaining 25% minority interest and certain assets from the minority owner
of GlobalNet L.L.C. for $2,000,000 and $127,198, respectively. The purchase of
the minority interest increased DTA's interest in GlobalNet L.L.C. to 100%.
The Company is subject to risks and uncertainties common to growing
telecommunications-based companies, including rapid technological changes, low
costs to customers of switching form carrier to carrier, failed alliances, and
pricing pressures in the international long distance market.
8
<PAGE>
NOTE 2: BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
GlobalNet, Inc. and its wholly-owned subsidiaries.
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine-month
periods ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000.
These financial statements should be read in conjunction with the
Company's historical audited consolidated financial statements and notes thereto
for the year ended December 31, 1999 and the unaudited consolidated financial
statements and notes for the three months ended March 31, 2000 included in
GlobalNet's report on Form 8-K/A dated July 28, 2000 filed with the Securities
and Exchange Commission.
NOTE 3: EQUITY TRANSACTIONS
During March, April and May 2000, GlobalNet, formerly Rich Earth, issued
approximately 1,200,000 shares of common stock for an aggregate amount of
$12,000,000 in connection with the sale of units to investors in two private
placement transactions. Each unit in the first private placement consisted of
one share and one-half share purchase warrant at a price of $10 per unit. Each
whole warrant is exercisable for one additional share of common stock of
GlobalNet for six months from the date of purchase at a price of $15 per unit.
Each unit in the second private placement consisted of one share and one share
purchase warrant at a price of $10 per unit. Each whole purchase warrant is
exercisable for one additional share of common stock of GlobalNet for six months
from the date of purchase at a price of $15 per share. In connection with the
private placements, the Company issued 310,000 warrants to the underwriters for
services performed.
On May 3, 2000, the Company adopted the "2000 Stock Option Plan", under
which the maximum aggregate number of shares that may be subject to option and
sold under the plan is 3,000,0000 shares. In May 2000, the Company granted
1,600,000 options to employees and directors, each with an exercise price of $8
per share, the estimated fair value of the common stock on the date of the
grant. The options have a term of ten years and vest over a period of three
years from the date of grant.
During May 2000, employees, consultants and directors of the Company were
granted 2,025,000 restricted shares of GlobalNet International, Inc. common
shares. The estimated aggregate fair value on the date of the grant was
approximately $16,200,000 and vests over a three year period.
9
<PAGE>
All share information has been adjusted to reflect a 10,000 to 1 exchange
in the merger of GII with a subsidiary of Rich Earth.
NOTE 4: INCOME TAXES
Prior to the conversion of DTA Communications Network, L.L.C. to
GlobalNet International, Inc., the entity operated as a limited liability
company, and accordingly, the net losses for the entity were reported in the
members' tax returns, and as such, the historical consolidated financial
statements contained no provisions or benefit and no assets or liabilities for
federal or state income taxes. Upon conversion to a C Corporation, the Company
recorded certain tax benefits. Due to the uncertainty of the realization of the
deferred tax assets, the Company established a 100% valuation allowance on the
net deferred tax assets. Accordingly, there is no income tax benefit reflected
in the Company's financial statements as of September 30, 2000 and for the three
and nine months then ended.
NOTE 5: CAPITAL STOCK
At September 30, 2000, the Company's authorized capital stock consisted
of 100,000,000 shares of common stock, $0.001 par value, of which 32,352,407
shares were issued and outstanding.
NOTE 6: CUSTOMER CONCENTRATION
Although GlobalNet has been able to significantly expand and diversify
its customer base over the last three quarters, a significant portion of
GlobalNet's revenues are still concentrated among several large customers. The
Company's largest customer represented 29% and 82% of total revenues for the
nine months ended September 30, 2000 and the year ended December 31, 1999,
respectively. The Company's three largest customers represented 69% and 96% of
total revenues for the nine months ended September 30, 2000 and the year ended
December 31, 1999, respectively. Although the Company plans to continue to
expand its customer base, it expects a significant portion of its revenue will
continue to be concentrated within a relatively small number of customers.
NOTE 7: EARNINGS PER SHARE
The pro forma weighted-average number of shares outstanding for the
three and nine months ended September 30, 2000 represent the weighted-average
number of shares of GlobalNet International, Inc. as if the exchange of common
shares in the merger with Rich Earth, Inc. was in effect as the beginning of
both periods presented.
Shares issuable from securities that could potentially dilute basic
earnings per share in the future were not included in the computation of
earnings per share because their effect was anti-dilutive. These securities
consisted of 1,600,000 stock options, 2,025,000 shares of unvested restricted
common stock, and 1,202,430 warrants at September 30, 2000.
10
<PAGE>
NOTE 8: ACQUISITION OF INTEREST IN GLOBALNET L.L.C.
As described in Note 1, on March 6, 2000, DTA agreed to purchase and
subsequently did purchase the remaining 25% minority interest and certain assets
from the minority owner of GlobalNet L.L.C. for $2,000,000 and $127,198,
respectively. The purchase of the minority interest increased DTA's interest in
GlobalNet L.L.C. to 100%. As a result, the Company recorded intangible assets of
$2,000,000, which are being amortized over an estimated useful life of five
years. Allocation of the purchase price is preliminary and may change. The final
allocation may include intangible assets such as customer lists, workforce and
goodwill.
NOTE 9: CAPITAL LEASE OBLIGATIONS
On April 19, 2000, the Company entered into a $10 million credit
facility with GE Capital to finance the lease of telecommunications network and
data transmission equipment. As of September 30, 2000, the Company had used
approximately $4.7 million of that facility.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and the related Notes to Consolidated
Financial Statements for the year ended December 31, 1999 and the Unaudited
Consolidated Financial Statements and related Notes to the Unaudited
Consolidated Financial Statements for the three months ended March 31, 2000
included in the Company's form 8-K/A filed July 28, 2000. This Quarterly Report
on Form 10-Q contains forward-looking statements made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995, which
involve risks and uncertainties. The Company's actual results could differ
significantly from the results discussed in the forward-looking statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amount of costs and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from these estimates and assumptions.
OVERVIEW
GlobalNet, Inc. ("GlobalNet" or the "Company") provides international
voice, data and Internet services over a private, managed Internet Protocol (IP)
network to international carriers and other communication service providers in
the United States and Latin America. GlobalNet's mission is to become the
premier provider of high quality, competitively priced, IP-based voice, fax, and
data services to Internet Service Providers ("ISP's"), PTT's, and other
Telecommunications Services Providers ("TSP") serving the small to medium
enterprise market ("SME's") in Latin America.
11
<PAGE>
The Company was formed in 1996 to capitalize on the growth of the
Internet Protocol as a communications transport medium for IP telephony and
other enhanced services. To date, the Company has focused primarily on
wholesaling international voice and facsimile communications services between
the United States and Latin American countries, predominately Mexico. Management
has been successful in establishing and maintaining relationships with Tier 1
and Tier 2 carriers as a result of its ability to procure consistent sources of
supply in the capacity-constrained telecommunications corridors linking Latin
America and the United States. This has been accomplished through the
development of partnerships with several Latin American telecommunications
companies. Leveraging these relationships, the Company has grown its revenues
from $792,000 in 1997 to $54.4 million for the nine months ended September 30,
2000.
In Latin America, the Company is continuing to deploy its IP network.
The strategy is to deliver high quality communications services, while providing
customers with the cost savings and global reach of the Internet. To accomplish
this the Company plans to build fifteen IP Service Centers in thirteen countries
that will serve as GlobalNet's distribution nodes for its IP-based product suite
offered to the Latin American ISPs, TSPs and SMEs.
GlobalNet has based its technology future on Internet Protocol (IP)
platforms. IP is a network-layer protocol containing addressing and control
information that enables packets to be efficiently and quickly moved through a
network. IP has become the protocol of choice on the Internet due to its
inherent flexibility and adaptability over different physical transmission media
and over different protocol layers such as ATM and Frame Relay. Recent
initiatives that address quality of service (QOS), security and core-network
switching have underscored IP's advantages and resulted in its increased
acceptance across proprietary networks. The ubiquity of IP has been facilitated
by the rapid penetration of the Internet. Additionally, IP's flexibility and
functionality allow a number of value-added applications, like VoIP, IP Fax and
Unified Messaging Service (UMS), to be layered on top of basic transport.
GlobalNet will leverage its network strengths and achieve maximum
revenue and profitability by establishing strategic alliances with qualified
in-country service providers for the deployment of the IP Service Centers. This
will be accomplished either through a joint venture relationship or acquisition.
Target companies include service providers with a proper license, an established
network, as well as, an in-house sales and support organization. GlobalNet will
focus on partners whose sales efforts concentrate on SME's, ISP's and TSP's.
This strategy will enable both GlobalNet and its partners to:
o Expand customer base
o Add network and circuit capacity
o Develop new products and services
12
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUE. Our primary source of revenue is the fees that we receive from
customers for completing calls over our network. This revenue is dependent on
the volume of voice and fax traffic carried over the network, which is measured
in minutes. We charge our customers fees per minute of traffic that are
dependent on the length and destination of the call and recognize this revenue
in the period in which the call is completed. We also derive revenue from
supplying the underlying services, including value-added applications and the
use of the Company's network to issuers of prepaid phone cards.
Net revenue for the three months ended September 30, 2000 totaled $23.6
million and was $18.1 million or 328.4% higher than net revenue for the three
months ended September 30, 1999. Net revenue increased by $7.4 million or 45.2%
from the second to the third quarter of 2000. The increase in revenue for the
three months ended September 30, 2000 was primarily due to the increase in
number of customers as well as the increase of the traffic from existing
customers.
DATA COMMUNICATIONS AND TELECOMMUNICATIONS. Data communications and
telecommunications cost is comprised primarily of termination costs, purchased
minutes, and other expenses associated with data communications and
telecommunications. Termination fees are paid to local service providers to
terminate calls received from our network. This traffic is measured in minutes,
and the per minute rates charged for terminating calls are negotiated with the
local service provider and included in our contract with our local service
provider. Our contracts with our providers typically provide us with the right
to negotiate the per minute termination fees.
Data communications and telecommunications cost for the three months
ended September 30, 2000 totaled $22.0 million and was $16.4 million higher than
the three months ended September 30, 1999. This increase resulted primarily from
a significant increase in traffic (consistent with the increased revenue
discussed above), which in turn increased the termination costs and purchased
minutes. As a percentage of net revenue, data communications and
telecommunications costs decreased from 100.5% for the three months ended
September 30, 1999 to 93.0% for the three months ended September 30, 2000 as a
result of the Company's addition of new direct routes and the increased
competitiveness of the existing routes.
The Company had a gross margin for the third quarter of 2000 of
$1,664,000 or 7.0% of net revenue, compared to the negative margin of ($515,000)
or (3.2%) of net revenue for the second quarter 2000. The margins for the second
quarter were adversely affected by the negative margins in the prepaid card
business that resulted from the elimination of the cost sharing agreement with a
third party for the prepaid card program. In July 2000, the Company restructured
its prepaid card programs, and the third party agreed to share the costs
associated with such programs. As a result, the margins for the prepaid business
experienced a significant improvement during the third quarter.
13
<PAGE>
NETWORK RESEARCH AND DEVELOPMENT. Network research and development expenses
include the expenses incurred in the development, expansion, operation and
support of the Company's global IP network. These expenses consist primarily of
the fixed monthly cost of the leased lines that comprise the Company's network,
the salary and payroll related taxes of the employees directly involved in the
development and operation of the network and the expenses incurred in the
development and support of the Company's proprietary software.
Network research and development expenses increased by approximately
$934,000, from $32,000 for the three months ended September 30, 1999 to $966,000
for the three months ended September 30, 2000. The increase in network research
and development expenses is primarily due to the increase in the personnel
needed to expand, develop and support the Company's network.
Additionally, in the third quarter of 2000, the Company completed the
development and initial deployment of "INTE-GRATE", an internally-developed
systems management software. "INTE-GRATE" is the Company's proprietary software
that integrates the data access for sales, operations and traffic analysis
functions and significantly enhances customer service. This software tracks
rapidly changing vendor costs to determine the most cost-effective routing and
permits GlobalNet to make substantial routing changes in order to take advantage
of pricing changes.
SELLING AND MARKETING. Selling and marketing expenses include the expenses
incurred in the development and promotion of the Company's image, products and
services. Selling and marketing expenses include primarily the salaries, payroll
taxes, benefits and commissions paid to the sales personnel as well as the fees
paid to investor relations firms and consultants.
Selling and marketing expenses increased from $14,000 for the three
months ended September 30, 1999 to $318,000 for the three months ended September
30, 2000. The increase in selling and marketing expenses is primarily due to the
addition of new sales and marketing personnel and the retention of an outside
investor relations firm.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses include
the expenses incurred for general corporate functions, including administration,
finance and accounting, facilities, human resources, and professional services.
General and administrative expenses of $1.4 million increased by $1.1 million
for the three months ended September 30, 2000 as compared to the corresponding
period in 1999. General and administrative expenses increased as a percentage of
net revenue from 4.8% for the three months ended September 30, 1999 to 6.0% for
the three months ended September 30, 2000, respectively.
The increase in general and administrative expenses was primarily due
to the increase in headcount and salary expense that resulted from the expansion
of the Company's global network. Additionally, professional fees (i.e.,
accounting and legal) increased significantly after the Company became public in
the second quarter of 2000.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses of
$750,000 for the three months ended September 30, 2000 were $373,000 higher than
those of the corresponding period in 1999 and decreased to 3.2% of net revenue
14
<PAGE>
for the three months ended September 30, 2000 from 6.8% of net revenue for the
three months ended September 30, 1999. The increase in depreciation expense is
due to the acquisition of additional property and equipment, while the decrease
of depreciation expense as a percentage of revenue can be attributed to the
revenue increase.
Additionally, in the third quarter of 2000, the Company recorded
amortization expense related to the goodwill recorded in the acquisition of the
25% minority interest in GlobalNet L.L.C in March 2000.
NON-CASH STOCK COMPENSATION. The non-cash stock compensation expense resulted
from the amortization of the restricted stock issued to certain employees and
directors in May 2000. The stock was issued to motivate and retain key employees
and is being expensed over the vesting period of three years.
INTEREST EXPENSE. Interest expense (net of interest income) of $360,000
increased by $51,000 for the three months ended September 30, 2000 as compared
to the corresponding period in 1999. As a percentage of revenue, interest
expense decreased from 5.6% for the three months ended September 30, 1999 to
1.5% for the three months ended September 30, 2000. The interest expense relates
to the capital leases used by the Company to finance the acquisition of new
network equipment.
In April 2000, the Company entered into a $10 million credit facility
with General Electric Capital Corporation ("GE Capital") to finance the lease of
telecommunications network and data transmission equipment. As of September 30,
2000, the Company had used approximately $4.7 million of that facility. The
Company is currently negotiating with GE Capital to increase this credit
facility. Additionally, the Company is currently negotiating other credit
facilities to finance the acquisition of additional equipment and to refinance
its current capital leases and reduce its financing costs.
INCOME TAXES. No income tax benefit was recorded for the three months ended
September 30, 2000 due to the uncertainty of the realization of deferred tax
assets.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
NET REVENUE. Net revenue increased by $44.5 million or 449.0%, from $9.9 million
for the nine months ended September 30, 1999 to $54.4 million for the nine
months ended September 30, 2000. The increase in net revenue is primarily due to
the increase in the number of customers and the increase in the traffic from
existing customers.
DATA COMMUNICATIONS AND TELECOMMUNICATIONS. Data communications and
telecommunications cost increased from $9.4 million for the nine months ended
September 30, 1999 to $52.4 million for the nine months ended September 30, 2000
primarily as a result in the increase in the traffic handled by the Company's
network.
As a percentage of net revenue, data communications and
telecommunications cost increased from 95.0% for the nine months ended September
30, 1999 to 96.3% for the nine months ended September 30, 2000. The margins for
the nine months ended September 30, 2000 were adversely affected by the negative
15
<PAGE>
margins in the prepaid card business in the second quarter of 2000 that resulted
from the elimination of the cost sharing agreement with a third party for the
prepaid card program. In July 2000, the Company restructured its prepaid card
programs, and the third party agreed to share the costs associated with such
programs.
NETWORK RESEARCH AND DEVELOPMENT. Network research and development expenses
increased from $58,000 for the nine months ended September 30, 1999 to
$1,842,000 for the nine months ended September 30, 2000. The increase is
attributed primarily to the expansion of the Company's global network and the
development of a proprietary systems management software.
SELLING AND MARKETING. Selling and marketing expenses increased from $112,000
for the nine months ended September 30, 1999 to $621,000 for the nine months
ended September 30, 2000. The increase was primarily due to the addition of new
sales personnel and the retention of an investor relations firm.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
approximately $2.3 million, from $716,000 for the nine months ended September
30, 1999 to $3,061,000 for the nine months ended September 30, 2000. As a
percentage of net revenues, general and administrative expenses decreased from
7.2% for the nine months ended September 30, 1999 to 5.6% for the nine months
ended September 30, 2000.
During the second quarter of 2000, the Company incurred significant
one-time legal and accounting fees related to the merger of GlobalNet
International, Inc. with a subsidiary of Rich Earth, Inc., which was completed
during May 2000.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses of
$1,654,000 for the nine months ended September 30, 2000 were $1,151,000 higher
than those of the corresponding period in 1999. Depreciation and amortization
expenses decreased as a percentage of net revenue from 5.1% for the nine months
ended September 30, 1999 to 3.0% for the nine months ended September 30, 2000.
The increase in depreciation expense in absolute terms is due to the
acquisition of additional property and equipment since the third quarter of
1999, while the decrease of depreciation expense as a percentage of revenues is
due to the significant increase in the Company's revenues. Additionally, the
Company recorded amortization expense related to goodwill recorded in the
acquisition of the 25% minority interest in GlobalNet L.L.C. during March 2000.
NON-CASH STOCK COMPENSATION. Non-cash stock compensation for the nine months
ended September 30, 2000 of $2,025,000 resulted from amortization of restricted
stock issued to the Company's employees and directors in May 2000.
INTEREST EXPENSE. Interest expense (net of interest income) of $898,000
increased by $494,000 for the nine months ended September 30, 2000 as compared
to the corresponding period in 1999. As a percentage of net revenue, interest
expense decreased from 4.1% for the nine months ended September 30, 1999 to 1.7%
for the nine months ended September 30, 2000. This decrease is primarily due to
the increase in revenue for that period.
16
<PAGE>
INCOME TAXES. No income tax benefit was recorded for the nine-month period ended
September 30, 2000, due to the uncertainty of the realization of deferred tax
assets.
LIQUIDITY AND CAPITAL RESOURCES
During March, April and May 2000, Rich Earth issued approximately
1,200,000 shares of common stock in connection with the sale of units to
investors in two private placement transactions resulting in net proceeds of
over $11.6 million. The Company also acquired the cash held by Rich Earth in its
merger on May 30, 2000.
On April 19, 2000, the Company entered into a $10 million credit facility
with GE Capital, to finance the lease of telecommunications network and data
transmission equipment. As of September 30, 2000, the unused portion of the GE
Capital facility amounted to approximately $5.3 million. The Company is
currently negotiating with GE Capital to increase this credit facility.
GlobalNet is currently negotiating other credit facilities to finance the
acquisition of additional equipment and to refinance its current capital leases
and reduce financing costs. Considering the Company's business plan and cash
burn rate, the Company will need to seek additional capital through the issuance
of equity securities and/or debt facilities within the next 12 months.
CASH FLOW DATA - NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
During the nine months ended September 30, 2000, net cash used in
operating activities totaled $6.0 million, as compared to net cash used in
operating activities totaling $619,000 in the corresponding period of 1999. Cash
used in operating activities in 2000 was primarily the result of net losses and
increases in accounts receivable and other current assets. The Company
experienced an increase in accounts receivable of $6.3 million as a result of
increased sales in the nine months ended September 30, 2000.
During the nine months ended September 30, 2000, net cash used in
investing activities amounted to approximately $337,000, consisting of the
purchase of miscellaneous furniture and computer equipment needed to support the
increase in headcount. The Company financed the majority of all its purchases of
telecommunications equipment through capital leases.
During the nine months ended September 30, 2000, net cash provided by
financing activities of $8.1 million consisted principally of the $9.6 million
(net of the $2.0 million used to purchase the 25% minority interest in GlobalNet
L.L.C.) of collected proceeds from the Company's private placements, net of
$813,000 and $617,000 of payments on capital leases and term loan obligations,
respectively.
RECENTLY ISSUED ACCOUNTING STANDARDS
During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (as amended by SFAS No. 137, Accounting for Derivative
17
<PAGE>
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133 and SFAS No. 138, Accounting for Certain Derivative
Instruments and Hedging Activities), which is effective for all fiscal years
beginning after June 15, 2000. SFAS No. 133 establishes a comprehensive standard
for the recognition and measurement of derivative instruments and hedging
activities. The Company does not expect the adoption of the new standard to have
a material effect on our consolidated financial position, liquidity, or results
of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements, as
amended, which summarizes the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB 101 is
effective no later that the fourth quarter for fiscal years beginning after
December 15, 1999. The Company does not expect the adoption of SAB 101 to have a
material effect on its financial statements.
Financial Accounting Standards Board Interpretation No. 44 (FIN No. 44)
Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, is effective for financial statements beginning after
July 1, 2000. The adoption of this new standard did not have a material effect
on the Company's financial statements.
"SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report includes "forward-looking statements" within the meaning of
various provisions of the Private Securities Litigation Reform Act of 1995. All
statements, other than statements of historical facts, included in this report
that address activities, events or developments that the Company expects or
anticipates will or may occur in the future, future capital expenditures
(including the amount and nature thereof), business strategy and measures to
implement strategy, including any changes to operations, goals, expansion and
growth of the Company's business and operations, plans, references to future
success and other such matters are forward-looking statements and involved a
number of risks and uncertainties. Among the factors that could cause actual
results to differ materially are the following: the availability of sufficient
capital to finance the Company's business plan on terms satisfactory to the
Company, competitive factors, changes in costs, including termination and
transmission costs, general business and economic conditions and other risk
factors described herein or from time to time in the Company's reports filed
with the Securities Exchange Commission. Consequently, all of the
forward-looking statements made in this report, which speak only as of the date
made, are qualified by these cautionary statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is that of interest rate
risk on borrowings under our financing facility, which are subject to interest
rates based on the banks' prime rate, and a change in the applicable interest
rate that would affect the rate at which we could borrow funds or finance
equipment purchases. Although all of our transactions are currently denominated
18
<PAGE>
in United States dollars, we are currently evaluating the impact of foreign
currency exchange risk on our results of operations as we continue to expand
globally.
PART II
Item 2. Changes in Securities and Use of Proceeds.
o During March, April, and May 2000, GlobalNet, formerly Rich
Earth, Inc. issued approximately 1,200,000 shares of common
stock in connection with the sale of units to accredited
investors and institutional investors in two private placement
transactions exempt from registration pursuant to Section 4
(2) of the Securities Act of 1933.
o The aggregate sale proceeds of the two private placements of
units was $12 million with net cash proceeds to the Company
after payment of placement fees of $11.6 million as of
September 30, 2000.
o Additionally, in connection with the merger of GlobalNet
International, Inc. ("GII") with and into Rich Earth, Inc.,
the shareholder of GII was issued 20,000,000 shares of common
stock of Rich Earth in a transaction exempt from registration
pursuant to Section 4 (2) of the Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit
Number Description
------ -----------
(a) 27 Financial Data Schedule
(b) Reports on Form 8 - K
o The Company filed a report on Form 8-K date June 13, 2000
to announce the merger of GlobalNet International, Inc.
with Rich Earth, Inc.
o The Company filed a report on Form 8-K/A dated July 28,
2000 to amend the June 13, 2000 Form 8-K to include
financial statements, pro forma financial information and
exhibits.
19
<PAGE>
SIGNATURE
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.
GLOBALNET, INC.
By: /s/ Pere Valles
---------------
Pere Valles
Chief Financial Officer
(on behalf of the registrant and as
Date: November 10, 2000 principal accounting officer)
------
20
