UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10 - Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 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 (I.R.S. Employer Identification
incorporation 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
----- -----
As of June 30, 2000 32,352,407 shares of Registrants' Common Stock, par value
$0.001, were outstanding.
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GLOBALNET, INC.
FORM 10-Q/A
June 30, 2000
Table of Contents
Part I Page
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Item 1 Financial Statements
Consolidated Balance Sheets at June 30, 2000 and December 31, 1999 .................... 3
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2000 and 1999 ................................................................ 4
Consolidated Statement of Stockholders' Equity (Deficit) for the Six
Months Ended June 30, 2000 ............................................................ 5
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999 ................................................................ 6
Notes to Consolidated Financial Statements ............................................ 7
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................................. 9
Item 3 Quantitative and Qualitative Disclosures About Market Risk ............................ 19
Part II
Item 2 Changes in Securities and Use of Proceeds ............................................. 19
Item 6 Exhibits and Reports on Form 8-K ...................................................... 20
Signature ............................................................................... 20
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GlobalNet, Inc.
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999
Assets
June 30, December 31,
2000 1999
----------- ------------
(Unaudited and restated)
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Current assets:
Cash ............................................................... $ 3,005,127 $ 304,626
Restricted cash .................................................... 11,560 473,019
Accounts receivable, net ........................................... 5,472,652 1,199,283
Due from related party ............................................. 1,541,329 41,319
Prepaid expenses ................................................... 280,405 137,427
------------ ------------
Total current assets ........................................ 10,311,073 2,155,674
Property and equipment, net ........................................... 8,721,054 4,449,726
Intangible assets, net ................................................ 1,866,668 ---
------------ ------------
Total assets ................................................ $ 20,898,795 $ 6,605,400
============ ============
Liabilities and Equity (Deficit)
Current liabilities:
Accounts payable ................................................... $ 5,495,956 $ 2,925,798
Salaries, wages, and commissions payable ........................... 76,450 176,083
Accrued expenses ................................................... 322,620 94,694
Deferred revenue ................................................... 1,537,044 1,582,661
Term loan .......................................................... 84,098 617,039
Current portion of capital lease obligations ....................... 2,257,716 1,114,677
------------ ------------
Total current liabilities ................................... 9,773,884 6,510,952
Capital lease obligations, net of current portion ..................... 6,972,063 3,773,443
Equity (deficit):
Common stock; 100,000,000 shares authorized, $0.001 par value;
32,352,407 shares issued and outstanding at June 30, 2000 ....... 32,352 ---
Additional paid-in-capital ......................................... 27,949,157 ---
Accumulated deficit ................................................ (8,303,661) ---
Deferred compensation .............................................. (15,525,000)
Members' deficit ................................................... --- (3,678,995)
------------ ------------
Total equity (deficit) ...................................... 4,152,848 (3,678,995)
------------ ------------
Total liabilities and equity (deficit) ...................... $ 20,898,795 $ 6,605,400
============ ============
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See accompanying notes to consolidated financial statements.
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GlobalNet, Inc.
Consolidated Statements of Operations
Three and Six Months Ended June 30, 2000 and 1999
(Unaudited)
Three months ended Six months ended
--------------------------- ----------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
(Restated) (Restated)
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Revenue .................................................... $ 16,283,132 $ 3,289,554 $ 30,769,522 $ 4,928,632
Operating expenses:
Data communications and telecommunications .............. 16,797,942 2,776,002 30,449,396 4,185,025
Network operations ...................................... 333,733 13,808 530,757 13,808
Depreciation and amortization ........................... 488,173 125,902 904,158 125,902
General and administrative .............................. 1,631,501 332,342 2,296,556 561,256
Non-cash stock compensation ............................. 675,000 --- 675,000 ---
Total operating expenses .......................... 19,926,349 3,248,054 34,855,867 4,885,991
Operating income (loss) ........................... (3,643,217) 41,500 (4,086,345) 42,641
Other income (expense):
Interest income ......................................... 4,361 --- 4,361 5,000
Interest expense ........................................ (260,235) (99,720) (542,682) (99,720)
Total other income (expense) ...................... (255,874) (99,720) (538,321) (94,720)
Income (loss) before income taxes ................. (3,899,091) (58,220) (4,624,666) (52,079)
Income tax expense (benefit) ............................ --- --- --- ---
------------- ------------- ------------- -------------
Net income (loss) ................................. $ (3,899,091) $ (58,220) $ (4,624,666) $ (52,079)
Pro forma weighted-average number of shares outstanding .... 28,178,808 18,000,000 23,422,738 18,000,000
Pro forma basic and diluted loss per share ................. (0.14) (0.00) (0.20) (0.00)
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See accompanying notes to consolidated financial statements
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GlobalNet, Inc.
Consolidated Statement of Equity (Deficit)
Six months ended June 30, 2000
(Unaudited and restated)
DTA
GlobalNet Communications
GlobalNet, International Network
Inc. Inc. LLC
----------------------------------- ------------------------------------ -------
Additional Additional Total
Common Stock paid-in- Accumulated Common Stock paid-in- Accumulated Members' Deferred equity
Shares Amount capital deficit Shares Amount capital deficit deficit Compensation (deficit)
------ ------ ------- ------- ----- ------ ------- ------- ------- ------------ ---------
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Balance at
December 31,
1999 - $ - $ - $ - $ - - $ - - $(3,678,995) - $(3,678,995)
Exchange of
members'
interests for
common stock - - - - 1,800 2 - (3,678,997) 3,678,995 - -
Issuance of
common stock,
net of
contribution by
shareholder of
3 shares - - - - 200 - 16,200,000 - - (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 - - -
Capital of Rich
Earth, Inc. at
time of merger 12,184,018 12,184 10,177,996 - - - - - - - 10,190,180
Issuance of
common stock
in private
placement,
net 168,389 168 1,591,161 - - - - - - - 1,591,329
Amortization
of deferred
compensation - - - - - - - - - 675,000 675,000
Net loss - - - (4,624,666) - - - - - - (4,624,666)
Balance at
June 30, 2000 32,352,407 $32,352 $27,949,157 $(8,303,661) $ - - $ - $ - $ - $(15,525,000)$ 4,152,848
========== ======= =========== =========== ====== ====== ========= ========== ========== =========== ===========
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See accompanying notes to consolidated financial statements.
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GlobalNet, Inc.
Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and 1999
(Unaudited)
June 30, June 30,
2000 1999
(Restated)
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Cash flows from operating activities:
Net loss ........................................................... $(4,624,666) $ (52,079)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization ................................. 904,158 125,902
Non-cash stock compensation expense ........................... 675,000 --
Changes in assets and liabilities:
Restricted cash ............................................. 461,459 --
Accounts receivable ......................................... (4,273,369) (932,876)
Due from related party ...................................... 41,319 (31,666)
Prepaid expenses ............................................ (142,978) (150,378)
Accounts payable ............................................ 2,570,158 853,016
Salaries, wages, and commissions payable .................... (99,633) (32,622)
Accrued expenses ............................................ 227,926 2,938
Deferred revenue ............................................ (45,617) --
------------ -------------
Net cash used in operating activities .................... (4,306,243) (217,765)
Cash flows from investing activities -
Purchase of furniture and equipment ................................ (173,503) --
------------ -------------
Net cash used in investing activities .................... (173,503) --
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
Principal payments on capital lease obligations .................... (526,992) --
Proceeds from term loan ............................................ -- 165,587
Principal payments on term loan .................................... (532,941) --
------------ -------------
Net cash provided by financing activities ................ 7,180,247 242,999
------------ -------------
Net increase in cash ..................................... 2,700,501 25,234
Cash at beginning of period ............................................ 304,626 197,270
Cash at end of period .................................................. $ 3,005,127 $ 222,504
=========== ===========
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 .......................... $ 4,868,651 $ --
=========== ===========
Proceeds collected by related party from common stock subscribers .. $ 1,541,329 $ --
=========== ===========
Cancellation of notes payable to Rich Earth, Inc. in connection
with merger with Rich Earth, Inc. ................................. $ 2,927,198 $ --
=========== ===========
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See accompanying notes to consolidated financial statements.
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GLOBALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and restated)
NOTE 1: ORGANIZATION AND DESCRIPTION OF BUSINESS
GlobalNet, Inc. ("GlobalNet" or the "Company") was formed on May 30,
2000, when a subsidiary of Rich Earth, Inc. ("Rich Earth") and GlobalNet
International, Inc. (GII) entered into 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. On the day of the closing of the merger, the name
of the merged entities was changed to GlobalNet, Inc.
As a result of the reverse acquisition, 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.
NOTE 2: RESTATEMENT
The Company has restated its consolidated financials statements for the
quarter ended June 30, 2000 to properly account for the issuance of restricted
stock grants to employees and directors. The Company recorded $16.2 million of
deferred compensation in the quarter ended June 30, 2000 related to the grants.
Amortization of the deferred compensation resulted in $675,000 of compensation
expense that has been recorded during the quarter ended June 30, 2000.
NOTE 3: 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 six-month
periods ended June 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.
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NOTE 4: EQUITY TRANSACTIONS
During March, April and May 2000, GlobalNet, formerly Rich Earth, Inc.,
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 3,000,000 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 generally vest over three years
from the date of grant.
During May 2000, employees and directors of the Company were granted
2,025,000 restricted shares of GlobalNet International, Inc. common shares. The
estimated aggregate fair value of the common stock on the date of the grant was
approximately $16,200,000 and vests over a three-year period.
All share information has been adjusted to reflect a 10,000 to 1
exchange in the Company's merger with Rich Earth, Inc.
NOTE 5: 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 provision 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 June 30, 2000 and for the three and
six months then ended.
NOTE 6: CAPITAL STOCK
At June 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 7: CUSTOMER CONCENTRATION
Although GlobalNet has been able to significantly expand and diversify
its customer base over the last two quarters, a significant portion of
GlobalNet's revenues are still concentrated among several large customers and
its revenues could decline as a result of the loss of any of these customers.
The Company's largest customer represented 41% and 82% of total revenues for the
six month period ended June 30, 2000 and the year ended December 31, 1999
respectively. The Company's three largest customer's represented 74% and 96% for
the six months ended June 30, 2000 and the year ended December 31, 1999
respectively. Although the Company plans to continue to expand the customer
base, it expects a significant portion of its revenue will continue to be
concentrated within a relatively small number of customers. The reduction of
purchases of services by one or more of these customers could have a material
effect on GlobalNet.
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NOTE 8: EARNINGS PER SHARE
The pro forma weighted-average number of shares outstanding for the
three and six months ended June 30, 1999 represent the weighted-average number
of shares outstanding of GlobalNet International, Inc. as if the exchange of
common shares in the merger with Rich Earth, Inc. was in effect at 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 and 1,202,430 warrants at June 30, 2000.
NOTE 9: 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 10: CAPITAL LEASE OBLIGATIONS
On April 19, 2000, the Company entered into a $10 million credit
facility to finance the lease of telecommunications network and data
transmission equipment and purchase of services. As of June 30, 2000, the
Company's lease obligation under this financing arrangement is $4.7 million.
On July 6, 2000, the Company entered into a credit facility to finance
the lease of equipment. The cost of the leased equipment to be funded under the
financing must be at least $10 million and no more than $30 million. Leases must
be funded no later than October 31, 2001. As of June 30, 2000, the Company's
lease obligation under this financing arrangement is $200,000.
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.
OVERVIEW
The Company provides international voice, data, and Internet services
over a private Internet protocol (IP) network to international carriers and
other communication service providers in the United States and Latin America.
GlobalNet's IP network, utilizing the convergence of voice and data networking,
offers customers economical pricing, global reach and an intelligent platform
that provides fast delivery of value-added services and applications. The
Company, through its facilities in the U.S. and Latin America and third party
arrangements, carries traffic to more than 240 countries. The Company was formed
in 1996 to capitalize on the growth of the Internet as a type of communications
transport medium to commercially offer 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 major customers 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
Mexican telecommunications companies. GlobalNet believes its future growth will
come from the local and long distance voice, data and internet requirements of
the Latin American small and medium sized enterprises (SMEs). The Company
intends to address this opportunity by expanding its strong partner
relationships with Latin American carriers.
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STRATEGY
The Company's objective is to become a leading provider of high
quality, competitively priced IP-based voice, fax and data services to SMEs,
Internet service providers (ISPs), independent operating companies (IOCs) and
other telecommunications service providers within Latin America. The rapid
development of the Internet, the demonopilization of the Latin American
telecommunications industry, the deployment of long-haul fiber optic capacity
and the maturation of broadband wireless technology as a means to overcome the
lack of communications infrastructure has resulted in the proliferation of
competition in Latin America. The Company is deploying, a private, managed
Internet Protocol ("IP") network interconnected to the public Internet, to
deliver high quality communications services, while providing customers with the
cost savings and global reach of the Internet. The Company's intent is to offer
customers comprehensive bundled service packages that integrate voice and data
services.
GlobalNet's strategic priorities are to:
EXPAND PRODUCT OFFERINGS WITH INTEGRATED BUNDLED SERVICES. The Company plans to
offer integrated bundled services that meet both the local and long distance
needs of small and medium sized enterprise customers domiciled in Mexico and
other Latin American countries. The Company's marketing efforts will focus on
office buildings, industrial parks, and other business centers with high
concentrations of commercial enterprises.
AUGMENT INTERNAL ORGANIC GROWTH WITH ACQUISITION OF TELECOM SERVICE PROVIDERS.
GlobalNet's strategy to expand its existing services and increase penetration of
the Mexican and other Latin American markets include partnering and/or acquiring
global telecommunications service providers and ISPs.
COMPLETED DEVELOPMENT OF THE "Z-PHONE". GlobalNet is in the process of
developing Voice-over-Internet-protocol ("VOIP") personal computer software, the
"Z-Phone" that will enable customers to place telephone calls using a personal
computer or traditional telephone utilizing the Internet. Management believes
development will be completed in the forth quarter of 2000.
GROW REVENUES FROM CHANNELS. The Company will continue to grow "VOIP"
international wholesale termination, bi-directional switched voice and fax,
pre-paid phone cards and IP hosting between the U.S., Mexico and other Latin
American countries.
EXPAND PRODUCT OFFERINGS:
GlobalNet intends to establish operations in Mexico City, Guadalajara and
Monterrey, and begin offering local exchange, national and international
telephone service, fax, Internet and virtual private networking services
specifically tailored to small and medium sized businesses, ISPs and other
data and voice communications service providers.
Management believes GlobalNet will be one of the few companies to offer a
comprehensive bundle of high quality and competitively priced telecommunications
and data services to commercial customers in Mexico, and the Company expects to
pursue opportunities to provide similar services as they expand into other Latin
American markets. GlobalNet plans to offer the following products to meet the
needs of the SME market:
o LONG DISTANCE VOICE: The Company will offer long distance voice services to
small and medium sized businesses. Customers can elect to choose GlobalNet
as their long distance carrier to complete national and international
telephone calls. In addition, 800 service, calling cards, and operator
services will be integrated into GlobalNet's product suite over time.
o LOCAL SERVICE: GlobalNet is exploring a combination of technologies to
deliver broadband local service including wireless local loop (WLL) and
fiber optic cable. These facilities may be installed by GlobalNet or leased
from other telecommunications service providers. Local access provisioning
capabilities will enable the Company to offer a greater array of enhanced
services to customers.
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o INTERNET CONNECTIVITY: GlobalNet will offer dial up and dedicated Internet
services to Customers domiciled in Mexico and other Latin American
Countries. The Company will offer a robust platform of services, including
website hosting, mirrored peering, unified messaging, VOIP, facsimilie over
Internet Protocol ("FoIP), etc.
o MANAGED DATA SERVICES: The Company will provide Mexican and Latin American
SME customers network management services on an outsourced basis. GlobalNet
intends to support Frame Relay Services ATM and Virtual Private Networking
protocols depending on the customer's needs.
o VOIP INTERNATIONAL: GlobalNet intends to provide VoIP-based international
service delivered over its backbone network. Management believes the
Company's "VOIP" network will lower the Company's cost structure enabling
it to compete favorable with incumbent international telecommunications
service providers.
o Z-PHONE: Upon completion of its proprietary Z-Phone software, the Company
will offer customers the ability to place telephone calls using the public
Internet as well as GlobalNet's private IP network. The software will
include a proprietary encryption scheme that will provide customers a
secure, private connection when using the Internet to place telephone
calls. Management believes this feature set will enable the Company to
charge customers premium rates for Z-Phone based VOIP services.
These services listed above will complement GlobalNet's current product
portfolio which is described below.
o "VOIP" INTERNATIONAL WHOLESALE TERMINATION: GlobalNet provides
international wholesale voice and fax termination to Mexico, Central and
South America. The Company operates two Lucent Excel IP gateway switches
located in New York and San Antonio. The New York switch serves as a
gateway for refile and carrier exchange traffic. The San Antonio switch
serves as the gateway to Latin America. GlobalNet's customers include over
30 Tier 1, 2, and 3 carriers. The Company's competitive advantage to these
destinations is the result of unique, bilateral relationships, which it has
cultivated with emerging carriers and PTT's in the respective countries.
High volume, active network management, and aggressive acquisition and sale
of international routes have all been key elements to the success of the
international wholesale carrier program.
o BI-DIRECTIONAL SWITCHED VOICE AND FAX: GlobalNet provides international
voice, and data services over a private IP network to international
carriers and service providers throughout Mexico and Central and South
America. GlobalNet is able to offer international carriers the ability to
route voice and fax calls over its IP backbone at reduced costs while
providing reliable, high quality service. Typically, these carrier
customers become strategic partners with GlobalNet whereby GlobalNet is
able to gain direct access to their network, thus cutting GlobalNet's cost
for international traffic termination. The result is a mutually beneficial
relationship for both parties. These partnerships also provide GlobalNet
with access to customers in the partner's home country.
o PREPAID TELEPHONE CARDS: GlobalNet is a provider of international prepaid
telephone services. Its product lines include a retail debit card and
prepaid platform service. The prepaid card targets consumer and business
customers with international calling applications between the U.S. and
Mexico as well as other Latin America countries. The ability to control
telecommunications expenses and convenience make the cards popular among
U.S. Hispanics who are traveling between the U.S., Mexico and other Latin
America countries as a tourist or expatriate. In Latin America, where
telephone density is low, prepaid telephone cards have wide appeal with
individuals who do not have a phone, making the debit card extremely
convenient. Businesses also use the card for promotional purposes as well
as for traveling employees. The collectability risk is low since customers
pay for service in advance. GlobalNet distributes its prepaid card products
through wholesale agents and distributors in the U.S., Mexico and Latin
American markets.
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o IP HOSTING: GlobalNet recently began offering IP Hosting services that
provide international carriers and other communication service providers
the ability to quickly enter into the rapidly expanding Voice-over-IP
("VOIP") market. Services such as international voice and fax enable
customers to expand existing product offerings, giving them accelerated
access to a worldwide network without capital expenditures or technologic
obsolescence risk. The customer is also provided the necessary VoIP
equipment and network access in order to originate and terminate traffic.
The Company also supports service providers so the network can be scaled
and the amount of bandwidth tailored to each customer's requirements.
GlobalNet provides customers the necessary "VOIP" equipment and network
access in order to originate and terminate traffic. Customers are charged
flat based pricing for international origination and termination and for
the equipment provided, depending on the scale and service level plan
established.
AUGMENT INTERNAL ORGANIC GROWTH:
GlobalNet is well positioned to achieve its objectives due to its understanding
of its target markets as well as its capability to quickly respond to customer
needs. The following are components of its organic strategy:
o EXPAND NETWORK FACILITIES: The Company intends to selectively expand its
U.S. and Latin American network by acquiring and building additional
switching and transmission facilities such as fiber optic and satellite
transmission capacity for the provisioning of voice, video, data and
Internet services. The Company's objectives in making these investments are
to: (i) provide capacity on GlobalNet's network to facilitate the expansion
of its voice services business; (ii) increase profitability for switched
services by reducing the amount of traffic terminated by other long
distance carriers pursuant to traffic exchange programs; and (iii) use the
expanded network as a platform to support advanced, bandwidth-intensive
data and Internet applications.
o "FIRST MILE" SOLUTION: The network connection from local wire centers to
businesses and residences from a central switching center is often referred
to as "First Mile". First Mile access facilities are sparse in Mexico and
other Latin American countries as compared to the United States. Where
economically justifiable, GlobalNet will deploy wireless technology as a
means to provide customers first mile access. The Company's wireless
solution utilizes leading-edge IP packet radio technology and provides
users with high speed fixed T1 (1.5Mbps) or (E1 (2.0 Mbps) access to the
Internet and private or corporate intranets. GlobalNet management has
experience with this technology and can deploy it quickly using tower, wall
or rooftop mounted installations. The Company believes this modular compact
system offers new and existing SME customers an opportunity to select more
enhanced services from the GlobalNet International portfolio. The Company's
experience in this technology discipline provides a vast background of
knowledge to select a fundamentally sound solution to the "first mile"
issue in developing SME markets.
o BUSINESS OPERATIONS SUPPORT SYSTEM (BOSS PLATFORM): GlobalNet Business
Operations Support Systems are scalable and facilitate the Company's
ability to deliver high qualilty customer service. System modules include:
Billing, Customer Care, Fault Isolation and Repair, Network Management, and
Network OSS Interconnection.
o MARKETPLACE AND REGULATORY KNOWLEDGE: GlobalNet's knowledge of the market
is enhanced due through its retention of Kissinger McLarty Associates. It
is expected that Kissinger McLarty Associates will facilitate the Company's
efforts to establish strategic relationships as it expands into the Latin
American market. GlobalNet management possess specific expertise in the
area of regulatory filings, registration, and the establishment and
maintenance of interconnection agreements.
o LATIN MARKETS SALES TEAM: Similar to its efforts in the US, GlobalNet has
developed programs to attract and train high quality, motivated sales
representatives that have the necessary technical skills, consultative
sales experience, and knowledge to succeed in the Mexican telecom market.
These programs include technical sales training, consultative selling
techniques, sales compensation plan development, and sales representative
recruiting.
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o CRITICAL MASS: GlobalNet's scale will allow it to support a high quality
national network and invest in leading edge systems for network management,
billing, provisioning, customer service and financial information. The
Company's internal platform will enable it to obtain investment capital,
favorable purchasing contracts and to establish strategic relationships
with key hardware, software and telecommunications service providers.
ACQUISITIONS:
GlobalNet plans to expand its market presence in major population centers in
Latin America by acquiring, or making significant investments in established,
well-regarded, switch-based competitive local exchange carriers and/or other
telecommunications service providers.
GlobalNet believes that CLECs, ISPs, Long Distance ("LD") and other service
providers, who are facing growing capital requirements and competitive pressure,
will be attracted to and benefit from the consolidation opportunity provided by
GlobalNet.
GlobalNet can offer significant benefits to its acquisition candidates and/or
partners. The GlobalNet management team is a seasoned group of professionals who
offer industry, operating, marketing, technical and financial expertise.
Acquired companies and/or partners can leverage this resource to address
critical skill gaps, peaks in resource demand, and areas requiring specialized
knowledge support. As a result overall time to market and associated launch and
operating costs can be greatly reduced. Additionally, the "best of breed"
operating methods and marketing strategies can be developed from the pool of
acquired companies. GlobalNet will offer a portfolio of products enabling the
service providers to sell additional services to its installed base of customers
thereby increasing the average revenue per customer and profit margins. These
companies can leverage their brand name, local support and personal service to
attract new customers from a newly expanded market.
PURSUE STRATEGIC ALLIANCES WITH ISPS THROUGH THE INTRODUCTION OF THE "Z-PHONE":
The Company believes there is large market demand for Internet users to have the
ability to place phone calls over the Internet through their computer.
Net2Phone, a publicly traded company offering such a service has been warmly
received by the market, trading as high as 87x (currently 28x) trailing
revenues, proving that Wall street and consumers have an appetite for such a
product. "Z-Phone", a product to be offered by GlobalNet takes this service
one-step further and encrypts the phone calls, thereby giving users secure
privacy.
GROW REVENUES FROM EXISTING CHANNELS:
The Company currently offers wholesale customers "VOIP" international long
distance termination services, bi-directional voice and fax, IP hosting and
prepaid termination services. GlobalNet plans to grow revenues by continuing to
pursue strategic alliances and joint ventures in order to 1) expand their
customer base, 2) add network capacity, 3) enter new markets and 4) develop new
products and services.
FINANCIAL RESOURCES
GlobalNet plans to finance the execution of its business plan through a
combination of equity, vendor financing and revolving credit facilities.
GlobalNet recently entered into two credit facilities with GE Capital and Galant
Capital of $10 million and $30 million, respectively, to finance capital leases
for new network equipment. As of June 30, 2000, the unused portion of those
credit facilities amounted to approximately $35.3 million. The Company plans to
use part of the proceeds from the new credit facilities to refinance $4.4
million previously borrowed under another credit facility at a substantially
higher interest rate.
GlobalNet intends to expand its current credit facilities in order to finance
the acquisition of additional network equipment. Additionally, GlobalNet is
currently negotiating with several financial institutions for a revolving line
of credit to finance future working capital requirements.
The Company also intends to seek additional capital through the issuance of
equity securities.
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RISKS
The following is a summary of some of the risk factors which may have an impact
on GlobalNet's business efforts:
o GlobalNet has a limited operating history in a new and rapidly
changing industry. GlobalNet's predecessor DTA Communications Network,
LLC commenced offering IP based network and application services in
1996. Accordingly, GlobalNet has only a limited operating history on
which an evaluation of its prospects can be made. Such prospects must
be considered in light of the substantial risks, expenses and
difficulties encountered by new entrants into the Internet based voice
service industry. In addition, GlobalNet's business is subject to
general economic conditions, which may not be favorable for business
in the future.
o GlobalNet has not been profitable and expects future losses. The
Company incurred net losses of approximately $3.3 million for its
fiscal year ended December 31, 1999 and $4.6 million for the six
months ended June 30, 2000. As of June 30, 2000, the Company had an
accumulated deficit of approximately $8.3 million. The Company expects
to continue to incur net losses for the foreseeable future. Although
revenues have grown in recent quarters, the Company cannot be certain
that it will be able to sustain or increase profitability in the
future. In addition, the Company expects that costs and expenses will
continue to increase in future periods.
o GlobalNet could be required to cut back or stop its operations if it
is unable to obtain funding. The Company will need to raise additional
capital to run its business and repay indebtedness related to
upgrading its facilities. There can be no assurances that the Company
will raise the additional capital or generate funds from operations
sufficient to meet its obligations and planed requirements.
o A market for GlobalNet's services may not develop. It is uncertain
whether a market will develop for GlobalNet's IP communication
services. The Company's ability to increase revenues from enhanced IP
communications services depends on the migration of traditional
telephone network traffic to the IP network. The Company will need to
devote substantial resources to educate end users about the benefits
of IP communications solutions in general and GlobalNet's services in
particular. If end users do not accept the Company's enhanced IP
communications services, it will not be able to increase the number of
users to generate future revenues.
o If GlobalNet fails to create and maintain strategic relationships with
international carriers, its revenues will decline. The Company's
success depends in part on its ability to maintain and develop
relationships with international carriers. The Company has been
pursing joint ventures and business opportunities with new and
emerging carriers in foreign markets. If the Company is not able to
find suitable carriers operating in attractive markets, it may not be
able to enter those markets on a cost-effective basis.
o Decreasing telecommunication rates may diminish or eliminate the
competitive pricing advantage of IP telephony communication services.
International and domestic telecommunications rates have decreased
significantly over the last few years in most of the markets in which
the Company operates, and it anticipates that rates will continue to
be reduced in all of the markets in which it does business or expects
to do business. Continued rate decreases will require GlobalNet to
lower its rates to remain competitive and will increase the gross loss
from carrier transmission services. Additionally, the Company may lose
users if rates continue to decline.
o Rapid technology change in telecommunications industry could reduce
the demand for GlobalNet's services. The telecommunications industry
is subject to rapid and significant changes in technology. The Company
expects that new services and technologies will emerge in the market
in which it competes. These new services may be superior to the
technology that the Company uses, potentially rendering its services
and technologies obsolete. In order to be successful, the Company must
adapt to rapid changes and continually improve and expand the scope of
its services by developing new services and technologies that meet
customer's needs.
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o The business is exposed to regulatory, political and other risks
associated with international business. Accordingly, the Company's
results of operations may be materially affected by international
events and fluctuations in foreign currencies, and it does not employ
foreign currency controls or other financial hedging instruments.
Additionally, the Company's business plans are subject to a variety of
government regulations, political uncertainties, and differences in
business practices which may not be favorable to its operations and
growth strategy.
o Regulatory matters could impact the Company's ability to conduct
business. Existing and future governmental regulation may
substantially affect the way in which GlobalNet conducts business.
These regulations may increase the cost of doing business or may
restrict the way in which the Company offers products and services.
There is no way to predict future regulatory frame work.
o The loss of key personnel could weaken the Company's technical and
operational expertise, delay entry into new markets and lower quality
of service. The Company's success depends on the continued efforts of
its senior management team and its technical, marketing and sales
personnel. GlobalNet believes that to be successful, it must hire and
retain qualified personnel. Competition in the recruitment of highly
qualified personnel in the telecommunications industry is intense.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
RESULTS OF OPERATIONS
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.
Revenue for the three months ended June 30, 2000 totaled $16.3 million
and were $13.0 million or 395% higher than revenue for the three months ended
June 30, 1999. The increase in revenue for the three months ended June 30, 2000
resulted primarily from increases in wholesale and prepaid phone card traffic.
Wholesale traffic is the main driver of the $13.0 million increase in revenue.
The Company had an increase of approximately $8.0 million related to wholesale
traffic compared to the second quarter of 1999 that can be attributed to an
increase in customer base as well as volumes from existing customers. The
remaining increase in revenue is attributed to prepaid card services. The
prepaid card service was initially offered in the second quarter of 1999. As
prepaid cards was a relatively new service during the second quarter of 1999,
revenues totaled only $486 thousand compared to $5.5 million during the second
quarter of 2000.
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 June 30, 2000 totaled $16.8 million and was $14.0 million higher than cost
of revenue for the three months ended June 30, 1999. The increase in cost of
revenue for the three months ended June 30, 2000 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
noted above, the number of customers nearly doubled during the first six months
of 2000.
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The Company also incurred an additional $1.5 million in costs related
to the elimination of a cost sharing agreement for the prepaid card business
with Protel of Mexico. Prior to the second quarter of 2000, the Company
maintained an agreement with Protel, to split the costs incurred in connection
with the prepaid card business on a 50/50 basis. However, during the second
quarter of 2000, the sharing agreement was eliminated, and as a result, the
Company became responsible for 100% of the costs incurred during such time. In
July 2000, the Company and Protel agreed to be partners again in the prepaid
card business and, therefore, Protel has agreed to share with the Company the
costs associated with the prepaid card program from July on. Additionally, the
prepaid card program has been restructured in order to improve its
profitability. The Company expects to see the results from this restructuring
towards the end of the third quarter.
NETWORK OPERATIONS. Network operations expenses increased from $13.8 thousand
during the three months ended June 30, 1999 to $333.7 thousand for the three
months ended June 30, 2000. As a percentage of revenue, the increase was from
.4% to 2%. The increase is attributed primarily to the increase in traffic as a
result of more customers and greater volume from existing customers.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses of
$488,173 for the three months ended June 30, 2000 were $362,271 higher than
those of the corresponding period in 1999 and decreased to 3.0% of revenue for
the three months ended June 30, 2000 from 3.8% of revenue for the three months
ended June 30, 1999. The increase in depreciation expense is due to the
acquisition of additional property and equipment since the second quarter of
1999, while the decrease of depreciation expense as a percentage of revenue can
be attributed to the revenue increase. Additionally, the Company recorded
amortization expense related to goodwill recorded in the acquisition of the 25%
minority interest in GlobalNet L.L.C during June 2000.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include salary,
payroll tax and benefit expenses, and related costs for general corporate
functions, including administration, facilities, human resources, and
professional services. General and administrative expenses of $1.6 million
increased by $1.3 million for the three months ended June 30, 2000 as compared
to the corresponding period in 1999. General and administrative expenses
remained relatively consistent as a percentage of revenue: 10% in the three
months ended June 30, 2000 from 10.1% in the corresponding period of 1999.
During the second quarter of 2000, the Company incurred one-time legal
and accounting fees related to GlobalNet's merger with Rich Earth, Inc. which
was completed during May 2000. In addition, the Company incurred costs related
to consulting in preparing its business plan. As the number of employees
increased, the costs related to facilities also increased proportionally as more
office space and equipment became necessary. The Company plans to continue
adding new employees as network traffic and revenues increase.
Remaining fluctuations in the general and administrative expenses are a
direct result of increased operations and costs to maintain those operations.
NON-CASH STOCK COMPENSATION. Stock compensation for the three months ended June
30, 2000 of $675,000 resulted from the issuance of restricted stock grants to
employees and directors of the Company in May 2000.
INTEREST EXPENSE. Interest expense of $255,874 increased by $156,154 for the
three months ended June 30, 2000 as compared to the corresponding period in
1999. As a percentage of revenue, interest expense decreased from 3% for the
three months ended June 30, 1999 to 1.6% for the three months ended June 30,
2000. The interest expense consists of capital leases and a term loan used by
the Company to finance the acquisition of new network equipment. For the three
months ended June 30, 1999, the Company incurred only one month of interest
expense related to one capital lease as the equipment was acquired during June
1999. Interest expense for the second quarter of 2000 reflect the term loan,
incurred in October 1999 and additional capital leases.
In April 2000, the Company entered into a $10 million credit facility
with GE Capital. Additionally, in July 2000, the Company entered into a $30
million credit facility with Galant Capital. Both credit facilities offer the
Company substantially better terms than its current credit facilities. The
Company plans to use its new credit facilities to refinance its current capital
leases in order to lower its financing costs. Additionally, the Company plans to
use these credit facilities (and additional credit facilities that it is
currently negotiating) to finance the acquisitions of additional network
equipment.
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INCOME TAXES. No income tax benefit was recorded for the three-month period
ended June 30, 2000, due to the uncertainty of the realization of recorded
deferred assets.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
RESULTS OF OPERATIONS
REVENUE. Revenue for the six months ended June 30, 2000 was $30.8 million, as
compared to $4.9 million for the six months ended June 30, 1999. Net revenue for
the six months ended June 30, 2000 increased by $25.8 million and 524%,
primarily resulting from increased operations. The Company experienced a
significant increase in the number of customers and amount of wholesale and
prepaid card traffic during the six months ended June 30, 2000. During the three
months ended March 31, 1999, operations consisted solely of DTA Communications
Network, L.L.C as GlobalNet L.L.C was not yet in operation. In addition, the
Company's source of revenue during the six months ended June 30, 2000 was
derived from Latin American and U.S. operations, while the six months ended June
30, 1999 included only three months of U.S. operations in addition to six months
of Latin American operations.
DATA COMMUNICATIONS AND TELECOMMUNICATIONS. Gross profit for the six months
ended June 30, 2000 was $320,126, or 1% of net revenue, as compared to $743,607
or 1.5% for the six months ended June 30, 1999. The decrease in gross profit
margin principally reflects the increased data communications and
telecommunications cost that resulted from the elimination of the profit sharing
agreement for the prepaid card business between GlobalNet, Inc. and Protel of
Mexico during the six months ended June 30, 2000. During the six months ended
June 30, 2000, the agreement to share costs on a 50/50 basis between GlobalNet,
Inc. and Protel was cancelled causing GlobalNet to incur 100% of the costs. The
elimination of the agreement resulted in $1.5 million of additional costs. As
indicated above, the Company and Protel have agreed to be partners again in the
prepaid card business and share costs on a 50/50 basis from July on.
Additionally, the prepaid card program has been restructured in order to improve
its profitability. The Company expects to see results from this restructuring
towards the end of the third quarter.
NETWORK OPERATIONS. Network operations expenses increased from $13.8 thousand
during the six months ended June 30, 1999 to $530.1 thousand for the six months
ended June 30, 2000. As a percentage of revenue, the increase was from .3% to
1.7%. The increase is attributed primarily to the increase in traffic as a
result of more customers and greater volume from existing customers.
Additionally, the Company did not incur any network operations expense during
the three months ended March 31, 1999 as this type of expense was not incurred
by the Company.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses of
$904,158 for the six months ended June 30, 2000 were $778,256 higher than those
of the corresponding period in 1999. Depreciation and amortization expenses
increased as a percentage of revenue to 2.9% in the six months ended June 30,
2000 from 2.6% in the corresponding period of 1999, principally due to newly
acquired assets since June 30, 1999.
GENERAL AND ADMINISTRATIVE. General and administrative expenses of $2.3 million
increased by $1.7 million for the six months ended June 30, 2000 as compared to
the corresponding period in 1999. General and administrative expenses decreased
as a percentage of net revenue from 11.4% to 7.5% during those periods. The
increase primarily results from increased operations where network operations,
salaries and wages expenses, and professional fees increased. Increased salary
expense was directly related to an increase in headcount as 16 more employees
were with the Company for the six months ended June 30, 2000 as compared to the
corresponding period in 1999.
Professional fees related to legal, accounting and consulting fees
increased significantly in the six months ended June 30, 2000 as compared to the
corresponding period in 1999 due to one-time accounting and legal fees
associated with the purchase of the minority interest of GlobalNet L.L.C. and
the merger between GlobalNet and Rich Earth, Inc. In addition, the Company
incurred significant consulting fees related to the creation of its business
plan during the three months ended March 31, 2000.
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NON-CASH STOCK COMPENSATION. Stock compensation for the six months ended June
30, 2000 of $675,000 resulted from the issuance of restricted stock grants to
employees and directors of the Company in May 2000.
INTEREST EXPENSE. Interest expense of $538,321 increased by $443,601 for the six
months ended June 30, 2000 as compared to the corresponding period in 1999. As a
percentage of revenue, interest expense decreased from 1.9% for the six months
ended June 30, 1999 to 1.7% for the six months ended June 30, 2000.
As discussed above, the Company has entered into credit facilities of
$10 million and $30 million with GE Capital and Galant Capital, respectively.
The Company plans to refinance the amounts borrowed under its current credit
facilities with proceeds from the new facilities in order to lower its financing
costs.
INCOME TAXES. No income tax benefit was recorded for the six-month period ended
June 30, 2000, due to the uncertainty of the realization of recorded deferred
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 $10.2 million. The Company 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 and purchase of services.
On July 6, 2000, the Company entered into a credit facility with Galant
Capital, to finance the lease of equipment. The cost of the leased equipment to
be funded under the financing has to be at lease $10 million and no more than
$30 million. Leases must be funded no later than October 31, 2001.
Based upon the current level of operations and anticipated growth, the
Company anticipates that its operating cash flow, together with available
borrowings under the various credit facilities, will be adequate to meet its
anticipated future requirements for working capital and operating expenses and
to service its debt requirements for at least the next six months. As previously
discussed, GlobalNet intends to seek additional capital through the issuance of
equity securities.
However, the Company's ability to make scheduled payments of principal,
or to pay interest on, or to refinance its indebtedness and satisfy its other
obligations will depend upon its future performance, which, to a certain extent,
will be subject to general economic, financial, competitive, business and other
factors beyond its control.
CASH FLOW DATA - SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED
JUNE 30, 1999
During the six months ended June 30, 2000, net cash used in operating
activities totaled $4.3 million, as compared to net cash used in operating
activities totaling $217,765 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 $4.3 million as a result of
increased sales in the six months ended June 30, 2000.
During the six months ended June 30, 2000, net cash used by investing
$173.5 thousand consisting of the purchase of miscellaneous furniture and
equipment needed to support the increase in headcount.
During the six months ended June 30, 2000, net cash provided by
financing activities of $7.2 million consisted principally of the $8.2 million
of collected proceeds from the Company's private placements, net of $527
thousand and $532 thousand of payments on capital lease and term loan
obligations.
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
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
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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 is currently evaluating the impact of SAB 101 on
its consolidated financial statements, but does not expect the adoption 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 Company does not expect the adoption of this new standard to
have a material effect on its 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,
including those that relate to activities, events or developments that the
Company expects or anticipates will or may occur in the future, the impact of
the Year 2000 issue, 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 and 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 credit lines, 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. 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 $10.2 million as of June 30, 2000.
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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 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.
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/ Colum Donahue
----------------------------
Colum Donahue
Chief Operating Officer
Date: September 5, 2000
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