U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT.
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 33-21443
GLOBALNET FINANCIAL.COM, INC.
-----------------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1489574
-------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
7280 W. PALMETTO PARK ROAD, SUITE 202, BOCA RATON, FL 33433
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(561) 417-8053
- --------------------------------------------------------------------------------
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMAL FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
CHECK WHETHER THE ISSUER: (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(D) OF THE EXCHANGE ACT DURING THE PAST 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
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON EQUITY AS OF AUGUST 30, 1999 WAS AS FOLLOWS: 11,209,140 SHARES OF COMMON
STOCK.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
YES ____________ NO X
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The interim financial statements required by this Item are included in
this quarterly report on Form 10-QSB immediately following the signature page
hereto.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
We believe we are taking significant steps in our quest to become the leading
provider of international online financial news and information services
designed to combine unique financial content and educational programs,
investment and analytical tools, on-line trading and other transaction
executions. Through our alliance with Freeserve plc (NASDAQ: FREE / LS: FRE) the
United Kingdom's largest Internet service provider (ISP), UK-iNvest.com is the
exclusive provider of investment information within Freeserve's Money channel,
featuring interviews and commentary with leading investment managers and
analysts about stocks, funds and market trends. GlobalNet's wholly-owned
subsidiary, MicroCap1000.com, focuses on companies with a market capitalization
of under $500 million and is a leading source for information on the microcap
sector featuring original daily articles an a real-time index.
On July 12, 1999, we announced a joint venture agreement with First Marathon
Inc., a leading Canadian investment firm, to jointly develop an online trading
business for Canada and a premiere financial website, Canada-iNvest.com, in
Canada. In conjunction with the joint venture, First Marathon has made a $2.5
million strategic equity investment in GlobalNet Financial. The investment by
First Marathon follows strategic investments by Freeserve Limited, which made a
$15.0 million strategic investment in GlobalNet on May 13, 1999 and a $5.0
million strategic investment on May 25, 1999 from an Italian Consortium
consisting of The De Agostini Holding Group, Banca Commerciale Italiana and
Investitori Associati. GlobalNet's Italia-iNvest.com is under development.
GlobalNet is continuing its worldwide expansion of international investor
oriented financial sites.
We have also attracted a variety of noteworthy strategic technology partners
such as Telescan (Nasdaq: TSCN), an industry leader in providing Internet
services and innovative solutions for online technology and data retrieval
tools. GlobalNet owns 545,000 shares of Telescan. GlobalNet's licensing
agreement with NexTrade provides the company with royalty free, worldwide rights
to NexTrade's proprietary modular Electronic Direct Access Trading System
(E-DAT) for real-time online trading.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements which
represents the Company's expectation or beliefs, including statements regarding,
among other things, (i) the Company's growth strategy or potential, (ii)
anticipated trends in the Company's businesses, (iii) the Company's ability to
compete with its competitors and (iv) the Company's profitability and projected
financial condition. Any statements contained in this Prospectus that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, words such as "may," "will," "expect," "plan,"
"believe," "anticipate," "intent," "estimate" or "continue," the negative
statements are based upon management's beliefs at the time they are made as well
as assumptions made by management based upon information available to it. The
current assumptions regarding the Company's operations, performance, development
and results of its business include (i) the accuracy of estimates of anticipated
increases in the Company's expenses due to implementation of the Company's
business plan, (ii) the ability to attract subscribers and investor relations
clients to its web site, (iii) the maintenance of market conditions affecting
the Company's services, and (iv) appropriate regulatory approvals for certain
corporate actions. Forward-looking statements are inherently
2
<PAGE>
subject to various risks and uncertainties, including those described above, as
well as potential changes in economic or regulatory conditions that are largely
beyond the Company's control. Should one or more of these risks materialize or
changes occur, or should management's assumptions prove to be incorrect, the
Company's actual results may materially vary from those anticipated or
projected.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 TO
THREE MONTHS ENDED JUNE, 1998
REVENUES
Consulting fees decreased by $185,647 to $0 for the three months ended June 30,
1999 from $185,647 for the comparable period a year earlier. The decrease is the
result of the company's shift away from investment banking activities.
Advertising revenues from the Company's websites increased by $48,318 to $48,318
for the three months ended June 30, 1999 from $0 for the comparable period a
year earlier. Private placement fees increased by $15,911 to $387,482 from
$371,571 for the period one year earlier. Despite the Company's lack of focus on
investment banking, it closed a transaction in the second quarter of 1999 for
which the work was completed in late 1998.
Revenues generated in the first quarter of 1999 resulted from the mark to
market of ICG's portfolio of securities generating revenue of $973,249 for the
quarter ending June 30, 1999 compared to a loss of ($34,355) during the same
period in 1998. This was primarily the result of the increase in value of one of
the company's portfolio positions, Common Stock of Worlds, Inc. Interest income
increased by $126,920 to $132,366 as compared to $5,446 during the same quarter
in 1998.
OPERATING EXPENSES
Commission expense increased by 163,528 to 179,450 for the three months ended
June 30, 1999 from $15,922 for the comparable period in 1988. General and
administrative expenses increased by $1,387,069 to $1,979,014 for the three
months ended June 30, 1999 compared to $591,945 during the same period in 1998.
The dramatic increase is the result of the shift in the Company's business focus
and a significant increase in the number of Company employees as well as an
increase in the number of corporate employees. Non-cash compensation expense
increased to $1,383,696 during the three month period ending June 30, 1999
compared to $0 during the three months period ending June 30, 1998 which was
primarily the result of hiring a financial PR firm. The Company has utilized
stock and warrants to compensate some of its advisors and consultants. Most
significantly the Company issued on a one-time basis restricted shares subject
to lock-up provisions for investor relations services of $767,288. Depreciation
expenses increased by $191,228 to $206,259 during the three months ended June
30, 1999 compared to $15,031 during the same period in 1998. Amortization of
licensing fees increased from $0 during the three months period ended June 30,
1998 to $962,258 during the same period in 1999. In connection with the
Company's licensing agreements with Telescan Inc. and Freeserve the Company
issued equity securities and is amortizing the value of such securities over the
terms of the agreements.
The Company's total operating expenses increased by $4,813,999, to $5,477,695 as
compared to $663,966 during the comparable quarter in 1998. This increase was
due to the shift in business focus and the start-up costs for the Company's U.S.
website (www.microcap1000.com) and the Company's U.K. website (www.ukinvest.com)
and subsequent website development fees.
NET LOSS
The Company's net loss for the three months ended June 30, 1999 increased by
$3,033,635 from a net loss of ($135,657) for the three months ended June 30,
1998 to a net loss of ($3,169,292) for the three months ended June 30, 1999.
This increase was due to the shift in business focus and the start-up costs for
the
3
<PAGE>
Company's U.S. website (www.microcap1000.com) and U.K. website
(www.ukinvest.com) and subsequent web development expenses.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 TO
SIX MONTHS ENDED JUNE, 1998
REVENUES
Consulting fees decreased by $185,647 to $0 for the six months ended June 30,
1999 from $185,647 for the comparable period a year earlier. The decrease is the
result of the company's shift away from investment banking activities.
Advertising revenues from the Company's websites increased by $68,335 to $68,335
for the six months ended June 30, 1999 from $0 for the comparable period a year
earlier. Private placement fees decreased by $411,163 to $387,482 from $798,645
for the period one year earlier. Despite the Company's lack of focus on
investment banking, it closed a transaction in the second quarter of 1999 for
which the work was completed in late 1998.
Revenues generated in the first six months of 1999 resulted from the mark to
market of ICG's portfolio of securities generating revenue of $1,167,780 for the
same period a year earlier compared to a loss of ($234,674). This was primarily
the result of the increase in value of one of the company's portfolio positions,
Common Stock of Worlds, Inc. Interest income increased by $132,090 to $143,777
as compared to $11,687 during the same six months ended in 1998.
OPERATING EXPENSES
Commission expense increased by $163,528 to $179,450 for the six months ended
June 30, 1999 from $15,922 for the comparable period. General and administrative
expenses increased by $2,000,320 to $3,152,308 for the six months ended June 30,
1999 compared to $1,151,988 for the same period in 1998. The dramatic increase
is the result of the shift in the Company's business focus and a significant
increase in the number of Company employees as well as an increase in the number
of corporate employees. Non-cash compensation expense increased to $1,592,669
during the six month period ended June 30 compared to $0 during the same period
in 1998 which was primarily the result of hiring a financial PR firm. The
Company has utilized stock and warrants to compensate some of its advisors and
consultants. Most significantly the Company issued on a one-time basis
restricted shares subject to lock-up provisions for investor relations services
of $920,746. Depreciation increased by $313,579 to $343,644 during the six month
period ending June 30, 1999 compared to $30,065 during the six month period
ending June 30, 1998. Amortization of licensing fees increased to $1,336,160
during the six month period ending June 30, 1998 compared to $0 during the same
period in 1998. In connection with the Company's licensing agreements with
Telescan Inc. and Freeserve the Company issued equity securities and is
amortizing the value of such securities over the terms of the agreements.
The Company's total operating expenses increased by $6,265,933, to $7,524,977 as
compared to $1,259,044 during the comparable period in 1998. This increase was
due to the shift in business focus and the start-up costs for the Company's U.S.
website (www.microcap1000.com) and the Company's U.K. website (www.ukinvest.com)
and subsequent website development fees.
NET LOSS
The Company's net loss for the six months ended June 30, 1999 increased by
$5,312,154 from a net loss of ($445,449) for the six months ended June 30, 1998
to a net loss of ($5,757,603) for the six months ended June 30, 1999. This
increase was due to the shift in business focus and the start-up costs for the
Company's U.S. website (www.microcap1000.com) and U.K. website
(www.ukinvest.com) and subsequent web development expenses.
4
<PAGE>
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs and other
business systems being written using two digits rather than four to represent
the year. Many of the Company's time-sensitive applications and business systems
and our vendors may recognize a date using "00" as the year 1900 rather than the
Year 2000, which could result in system failure or disruption of operations. An
assessment of the Year 2000 exposure has been made by the Company and the plans
to resolve the related issues are being implemented. The Company believes it
will be able to achieve Year 2000 compliance in a timely manner. The Company
also believes that it will satisfactorily resolve all significant Year 2000
problems and that the related costs will not be material. Estimates of Year 2000
related costs are based on numerous assumptions, including the continued
availability of certain resources, the ability to correct all relevant
applications and third party remediation plans. There is no guarantee that the
estimates will be achieved and actual costs could differ materially from those
anticipated.
LIQUIDITY AND CAPITAL RESOURCES
The implementation of the business plan is capital intensive as a
result of the costs incurred in launching financial oriented sites in new
countries. In order to reduce these costs, the company seeks to partner with and
receive investments from strategic investors. To this end, in May 1999, the
Company received an investment of approximately $15.0 million from its UK
partner Freeserve, Ltd. and $5.0 million from an Italian Investment Consortium
we are in discussions with to launch a financially oriented site in Italy.
On March 31, 1999 we acquired 545,000 shares of Common Stock of
Telescan, Inc. ("Telescan") which was received through a share exchange
agreement with Telescan, which at March 31, 1999 was valued at $9,333,125.
On June 25, 1999 First Marathon acquired 208,334 shares of the
Company's common stock for $2,500,000. In addition, the company granted to First
Marathon an option to invest up to $5.0 million in the company's common stock at
the lower of the current market price of $21.00 per share through September 30,
1999 and a warrant to purchase 275,000 shares of the company's common stock at
an exercise price or $17.25 per share through December 15, 2001. If First
Marathon exercises the option the Company shall also grant to First Marathon a
30-month warrant to purchase up to 333,333 shares of the Company's common stock
at an exercise price of $30.00 per share.
Capital has been provided by the investments made by the initial
stockholder group and through private placements of our securities. During 1998,
we raised net proceeds of approximately $2,904,000 in a private placement of
3,784,734 shares. In February 1999, we raised net proceeds of approximately
$2,575,400 in a private placement of 429,234 shares. In April 1999, we raised
net proceeds of approximately $5,000,000 in a private placement of 416,667
shares. In May 1999 we received $14,765,338 from Freeserve, Ltd. which
represented the purchase of 1,063,779 shares of common stock at $12.00 per share
and the exercise of a warrant for 333,333 shares of common stock at $6.00 per
share. In May, 1999 we raised an additional $897,000 in a private placement of
74,750 shares of Common Stock. In June, 1999 we raised an additional $500,000 in
a private placement of 41,667 shares of common stock. The proceeds are being
held for additional investment in MicroCap1000 and UK-iNvest as well as to fund
additional websites we anticipate launching as well as for future working
capital.
VARIABILITY OF RESULTS
We anticipate that our future financial results will vary dramatically. This is
the result of the start-up and uncertain nature of MicroCap1000 and UK-iNvest as
well as the other web sites we anticipate launching.
5
<PAGE>
PART II
OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
On October 12, 1997, all of the Company's 4,001,334 shares of Series A
Preferred Stock and 1,080,000 shares of Series B Preferred Stock automatically
converted on a one-for-one basis into shares of the Company's Class B Common
Stock. Pursuant to the terms of the Certificates of Designation of such
preferred stock, the former holders thereof are entitled to 5% per share annual
cumulative dividends prior to payment of dividends on any other class of capital
stock of the Company. The cumulative dividends on such preferred stock have
accrued from October 12, 1996 through October 12, 1997 and were due and payable
on a quarterly basis commencing December 31, 1996 and on October 24, 1997, ten
business days after the conversion thereof. The aggregate amount of such
arrearage owed by the Company to the former holders of such preferred stock is
$38,154 as of October 12, 1997 and as of the date hereof.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter for
which this report was filed.
6
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GLOBALNET FINANCIAL.COM, INC.
Date: August 20, 1999 By: /s/ Ronald B. Koenig
---------------------
Ronald B. Koenig
Chairman
Dated:August 20, 1999 By: /s/ Michael S. Jacobs
---------------------
Michael S. Jacobs
Senior Vice President
(Chief Accounting Officer)
7
<PAGE>
GLOBALNET FINANCIAL.COM, INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
A S S E T S
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
(UNAUDITED)
<S> <C> <C>
Assets:
Cash and cash equivalents 22,844,090 1,941,774
Restricted cash 105,110 104,664
Accounts Receivable 29,471
Due from broker 156,422 44,930
Securities owned at market value 1,561,768 552,719
Securities not readily marketable, at fair value 13,368,618 132,492
Prepaid Expenses 1,417,006 61,438
---------- ---------
TOTAL CURRENT ASSETS 39,482,484 2,838,017
Furniture, fixtures, equipment, and leasehold improvements 621,387 290,113
Licensing and promotion agreements 401,254 354,726
Goodwill 73,818
Other Assets 7,138 22,154
---------- ---------
TOTAL ASSETS 40,586,081 3,505,010
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses 178,539 607,656
Dividends payable - preferred stockholders 38,154 38,154
Dividends payable - common stockholders 572,625
Deferred revenue 21,950 5,000
---------- ---------
Total Liabilities 238,643 1,223,435
Stockholders' equity:
Preferred Stock - $.001 par value; 20,000,000 shares
authorized, none outstanding
Class B Common Stock - $.001 par value; 25,000,000
authorized, none outstanding
Common Stock - $.001 par value, 100,000,000
shares authorized; 11,011,023 issued; 7,389,650 issued
as of 3/31/99 and 12/31/98, respectively 11,014 7,390
Additional Paid in Capital 55,500,502 8,889,810
Accumulated Deficit (8,183,651) (6,298,122)
Unearned compensatory and licensing costs (7,064,427) (276,253)
Accumulated other comprehensive loss 114,000 (11,250)
Treasury Stock (15,000 Shares) (30,000) (30,000)
---------- ---------
Total stockholders' equity 40,347,438 2,281,575
T O T A L 40,586,081 3,505,010
========== =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-1
<PAGE>
GLOBALNET FINANCIAL.COM, INC.
Condensed Consolidated
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
------------------------------ ------------------------------
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Consulting fees 185,647 237,937
Advertising and MC1000 revenue 48,318 68,335
Private placement fees 387,482 371,571 387,482 798,645
Net realized and unrealized gain(loss) on marketable 973,249 (34,355) 1,167,780 (234,674)
Interest income 132,336 5,446 143,777 11,687
----------- ----------- ----------- -----------
Total revenue $ 1,541,385 $ 528,309 $ 1,767,374 $ 813,595
Operating expenses
Commission 179,450 15,922 179,450 15,922
General and administrative 1,979,014 591,945 3,152,308 1,151,988
Non-cash compensatory expenses 1,383,696 1,592,669
Non-recurring, non-cash compensatory expense 767,288 920,746
Depreciation 206,259 15,031 343,644 30,065
Amoritzation of Licensing Fees 962,258 1,336,160
Equity in loss of unconsolidated affiliate 41,068 61,069
----------- ----------- ----------- -----------
Total operating expenses 5,477,965 663,966 7,524,977 1,259,044
Net loss (3,936,580) (135,657) (5,757,603) (445,449)
=========== =========== =========== ===========
Basic and diluted loss per share $ (0.443) $ (0.030) (0.648) $ (0.12)
=========== =========== =========== ===========
Weighted average common shares outstanding 8,887,443 3,851,603 8,887,443 3,486,749
basic and diluted ----------- ----------- ----------- -----------
</TABLE>
GLOBALNET FINANCIAL.COM, INC.
Consolidated Statement of
Comprehensive Loss
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Net Loss (3,936,580) (135,657) (5,757,603) (445,449)
Other Comprehensive Income:
Unrealized gain on available for sale securities 973,249 1,167,780
---------- ---------- ---------- ----------
Comprehensive Loss (2,963,331) (135,657) (4,589,823) (445,449)
========== ========== ========== ==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-2
<PAGE>
GLOBALNET FINANCIAL.COM, INC.
CONSOLIDATED STATEMENT
OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss (5,757,603) (445,499)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 343,644 29,783
Realized Gain (312,999) 65,000
Compensation to consultants paid with stock and options 3,849,575 0
Change in appreciation/unrealized depreciation of securities (854,781) 47,174
Changes in:
Accounts receivable (12,839) 0
Due from broker (111,492) 193,189
Refundable deposits/short term investments (125,000)
Prepaid expenses and other assets (1,700,058) 2,000
Accounts payable and accrued expenses (674,562) (103,073)
Deferred revenues (5,000) (20,192)
---------- ---------
Net cash (used in) operating activities (5,236,115) (356,618)
Cash flows from investing activities:
Proceeds from sale of securities 431,799 0
Investment in restricted cash (447)
Investment in Securities (180,000) (2,285,368)
Purchase of furniture, fixtures and equipment (357,131) (220,200)
Advances to unconsolidated affiliate (200,000)
Acquisition of Capital Growth Europe net of $47,723 cash acquired 6,473
Net cash (used in) investing activities (99,306) (2,705,568)
Cash flows from financing activities:
Proceeds from the issuance of common stock 26,237,737 957,948
Dividends paid 0
Purchase of treasury stock (30,000)
---------- ---------
Net cash provided by (used in) financing activities 26,237,737 927,948
Net increase (decrease) in cash and cash equivalents 20,902,316 (342,728)
Cash and cash equivalents at beginning of period 1,941,774 3,060,255
Cash and cash equivalents at end of period 22,844,090 2,717,527
---------- ---------
</TABLE>
Noncash Transactions: See Note 9 with respect to settlement of certain
obligations by issuance of securities and share exchange trasnaction with
Telescan, Inc.
SEE NOTES TO FINANCIAL STATEMENTS
F-3
<PAGE>
GLOBALNET FINANCIAL.COM, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(Unaudited)
(1) FINANCIAL STATEMENT PRESENTATION
The unaudited financial statements of GlobalNet Financial.com, Inc. (the
"Company" or "GLBN") have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC") and, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the results of operations for the interim
periods presented. Certain information and footnote disclosures normally
included in financial statements, prepared in accordance with generally accepted
accounting principles, have been condensed or omitted pursuant to such rules and
regulations. However, management believes that the disclosures are adequate to
make the information presented not misleading. The results for the interim
periods are not necessarily indicative of the results of the full fiscal year.
(2) THE CORPORATION
GlobalNet Financial.com, Inc. (the "Company" or "GLBN") formerly Microcap
Financial Services.com, Inc., prior to that Capital Growth Holdings, Ltd. and
prior to that Galt Financial Corporation, was incorporated in the State of
Colorado on June 15, 1987. On March 14, 1997, GLBN, an inactive company,
acquired 100% of the outstanding capital stock of International Capital Growth,
Ltd. ("ICG") (a company formed in February 1996), a Delaware corporation and
member of the National Association of Securities Dealers, Inc. The acquisition
was consummated through an exchange of shares that resulted in the former ICG
shareholders receiving control of GLBN the transaction has been treated as a
recapitalization. In connection therewith, ICG's historic capital accounts were
retroactively adjusted to reflect the equivalent number of shares issued by GLBN
in the transaction while ICG's historical accumulated deficit was carried
forward. In 1997, after the recapitalization, a Colorado corporation, was merged
into a Delaware corporation, Capital Growth Holdings, Ltd. The consolidated
financial statements include the accounts of the Company and its wholly owned
subsidiary, ICG and the wholly owned subsidiary of ICG, Microcap1000.Com Ltd.
("MCAP 1000"). All significant intercompany transactions and balances have been
eliminated.
(3) NATURE OF BUSINESS
The Company and its subsidiaries have three reportable segments. The Company
operates a broker/dealer and an internet web-site. The Company generates
revenues by acting as a placement agent in private financings and as a financial
consultant to various companies. The Company's wholly owned subsidiary, MCAP
1000 provides comprehensive, internet-based electronic publishing of unique
content on the MicroCap sector, generated by analysts and money managers
("MC1000 Gurus"); internet investor access for public companies; and broadcasts
over the internet through video-streamed netcasts of various financial programs.
The Company also maintains their proprietary MicroCap1000 Index, a real-time
index following the stock performance of 1000 companies with market
capitalizations of between $25 million and $500 million.
F-4
<PAGE>
Information with respect to reportable segments follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
-----------------------------------------------------------------
Corporate Broker/Dealer Internet Total
---------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues from external customers 0 387,482 68,325 455,877
Interest revenue 138,654 2,953 2,193 143,777
Depreciation and amortization 10,067 194,139 343,844
Segment (loss) income (4,579,816) 1,148,715 (2,326,502) (5,757,603)
SIGNIFICANT NONCASH ITEMS:
Unrealized gain of securities 3,986,075 1,094,811 0 5,080,886
Compensation paid with securities 1,229,854 0 362,815 1,592,669
Segment assets 37,105,582 3,108,939 371,561 40,586,081
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
-----------------------------------------------------------------
CORPORATE BROKER/DEALER INTERNET TOTAL
---------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues from external customers 0 387,482 48,108 435,800
Interest revenue 128,178 2,011 2,147 132,336
Depreciation and amortization
Segment (loss) income (4,127,330) 1,079,837 (889,087) (3,936,580)
SIGNIFICANT NONCASH ITEMS:
Unrealized gain of securities 3,986,075 900,280 0 4,886,355
Compensation paid with securities 1,383,696 0 0 1,383,696
Segment assets 37,105,582 3,108,939 371,560 40,586,081
</TABLE>
(3) VALUATION OF SECURITIES
Securities held by GLBN are classified as available-for-sale and are recorded at
their market value. Unrealized gains and losses on securities held by GLBN are
recorded as other comprehensive income.
Unrealized gains and losses on securities held by ICG, a registered
broker/dealer, are recognized as operating income or loss in the statement of
operations. Securities owned, which are listed on a national securities
exchange, are valued at their last reported sales price. Securities which trade
over-the-counter are valued at the "bid" price. Securities which do not have a
readily ascertainable market value are valued at their estimated fair value as
determined by the management. Management considers fair value to be cost unless
the value has deteriorated or where later investments have been concluded by a
significant outside investor, then the investment is valued at the last per
share sales price paid unless circumstances dictate a lower valuation.
The values of securities owned by the Company can change substantially because
of volatility in the price of each security, changes in the business prospects
of the issuer of the securities, specific events influencing the operations of
the issuer of the securities, and various other circumstances outside the
security issuer's control. Accordingly, the value of the securities could
decline so that a loss would be required to be recognized for the total carrying
amount of such securities.
Included in securities owned at market value is the Common Stock of Worlds, Inc.
and Telescan, Inc. The carrying amount of the investment in Worlds, Inc. at June
30, 1999 was $1,363,494 and the carrying amount of the investment in Telescan,
Inc. at June 30, 1999 was $13,254,400. Both Worlds, Inc. and Telescan, Inc. are
subject to the reporting requirements of the U.S. Securities and Exchange
Commission.
(4) DIVIDEND
In March 1997, the Board of Directors declared annual dividends of $.225 per
share of Common Stock, for the calendar years ended 1997 and 1998, accruing as
of January 1, 1997 payable commencing June 30, 1997 and on a quarterly basis
thereafter. The dividend will be paid after payment of any dividends due on all
classes of stock with priority over Common Stock (currently Series A and B
preferred stock), subject to any operating restrictions. In addition, the Board
of Directors
F-5
<PAGE>
determined that any dividend declared on Class B Common Stock will be subject to
a $.20 per share limitation on annual dividends in 1998. On June 30, 1999, the
Company made the $.05625 per share Common Stock dividend payment due for the
periods June 30, 1998, September 30, 1998 and December 31, 1998.
The former holders of Series A and B preferred stock were entitled to a
preferential cumulative dividend equal to $38,154 in the aggregate, which
accrued from October 12, 1996 through October 21, 1997.
(5) REVENUE RECOGNITION
Consulting fees and private placement fees are recorded when earned. In
addition, the Company earns fees in the form of securities. These securities are
valued at market on the date they are earned. Security transactions are recorded
on a trade date basis. Advertising revenue is recorded over the term of the
advertising agreement.
(6) NET CAPITAL REQUIREMENTS
ICG is subject to the Securities and Exchange Commission Uniform Net Capital
Rule (Rule 15c3-1), which requires the maintenance of minimum net capital and
requires that the ratio of aggregate indebtedness to net capital, both as
defined, be at least the greater of 6 2/3 of aggregate indebtedness or $5,000.
At June 30, 1999, ICG had net capital of $1,176,543 which was $1,164,604 in
excess of its required net capital.
(7) EXEMPTION FROM RULE 15C3-3
ICG is exempt from the reserve requirement of the Securities and Exchange
Commission's Rule 15c3-3 pursuant to Section 15c3-3(k)(2)(ii).
(8) COMMITMENTS
The Company has issued a letter of credit in the amount of $100,000 to secure
future rent payments and leasehold improvements at the London office of Capital
Growth Europe. The letter of credit is secured by a money market account.
(9) STOCKHOLDER EQUITY TRANSACTIONS DURING THE SIX MONTHS ENDED
JUNE 30, 1999
On January 7, 1999, the Company issued 275,000 shares of Common Stock in lieu of
payment of $308,000 for services rendered by a consultant during the year ended
December 31, 1998.
On January 27, 1999, the Company entered into a content supply agreement. Upon
execution of the agreement, the Company granted 2,000,000 warrants to purchase
Common Stock at an exercise price of $1.00 per warrant for a term of three years
and paid $207,250. The Company valued these warrants at approximately
$4,007,000.
On February 9, 1999, the Company granted 840,000 options to purchase Common
Stock to a consultant. The consultant will receive an additional 840,000 options
throughout the term of the agreement. The Company valued these warrants at
approximately $921,000.
On March 23, 1999 the Company entered into an agreement with a consultant to
provide investor and public relation services. In connection therewith, the
Company granted 150,000 shares of Common Stock which were valued at their fair
value of $1.40 per share.
The fair market value of Common Stock, options and warrants issued in connection
with the above agreements will be recorded as expense over the term of the
related agreements.
The Company sold 2,575,400 shares of Common Stock in February 1999 in a series
of private placements yielding net proceeds of approximately $2,575,400.
On March 29, 1999, the company issued 120,000 shares in lieu of a discount for
certain services provided by a consultant. The transaction was recorded at
$40,000 representing the amount of the discount.
On March 31, 1999, the Company entered into a stock exchange agreement with
Telescan, Inc. ("TSCN"). The agreement provides for the exchange of 5,176,161
unregistered shares of the Company's Common Stock, for 520,000 unregistered
shares of TSCN's Common Stock. In addition, the Company entered into a stock
option agreement with TSCN. The agreement provides TSCN a one year option to
increase its ownership in the Company to 19.9% by acquiring additional shares at
a purchase price of $3.75. In consideration thereof, the Company received 25,000
shares of TSCN Common Stock. The option is exercisable through March 30, 2000.
In the event that there is a change in control as defined, the Company is
required to redeem the option for cash in an amount equal to the number of
unexercised options multiplied by the difference between the exercise price and
consideration received by the Company's stockholders in connection with the
change in control.
Also, the Company entered into a service agreement with TSCN. TSCN will provide
information and design services to the Company's internet sites for a term of
two years. The agreement provides for the issuance of 1,577,491 (included in
5,176,161 above) shares of the Company's Common Stock to TSCN for these services
as they are provided.
The Company recorded the transaction with TSCN at $17.125 per share, the fair
value of the stock received on the date of the exchange. The fair value was then
allocated to the services to be provided, the option and securities issued.
In April 1999 the Company granted 75,000 shares of Common Stock to a consultant
to provide financial and investor services for one year. The company valued
these shares at $1,237,500 representing the fair value at the date of grant
which will be charged to expense over the term of the agreement.
On May 14, 1999, the Company sold 74,750 shares of Common Stock in a private
placement resulting in net proceeds of approximately $897,500.
In April 1999 the Company raised proceeds of $5,000,000 in a private placement
of 416,667 shares.
On April 13, 1999, the Company acquired all of the outstanding shares of CGE for
approximately $43,000 and 4,167 unregistered shares of the Company's Common
Stock.
In May 1999 the Company received $14,765,338 from Freeserve, Ltd. which
represented the purchase of 1,138,779 shares of Common Stock at $12.00 per share
and the exercise of a warrant for 333,334 shares of Common Stock at $6.00 per
share. (See Note 9). In addition, the Company granted Freeserve, Ltd. an option
to increase its ownership to 19.9% of the fully diluted number of shares of
Common Stock outstanding. The option is exercisable at $13.50 per share and
expires on October 2001.
During May and June of 1999 the Company granted 170,834 options to purchase
common stock to various consultants. The Company valued these options at
approximately $1,563,000, which will be recorded as expense within twelve months
of the execution of the related agreements.
The Company sold 41,667 shares of common stock on June 22, 1999 in a private
placement yielding net proceeds of approximately $500,000.
On June 25, 1999 the Company entered into a joint venture agreement with First
Marathon Inc. ("First Marathon"). The agreement provides for the Company and
First Marathon to form a holding Company through which they will establish a
registered securities dealer to conduct on-line trading of securities and create
and operate a website providing financial
F-6
<PAGE>
news, analysis, and other financial products. On June 25, 1999 First Marathon
acquired 208,334 shares of the Company's common stock for $2,500,000. In
addition, the company granted to First Marathon an option to invest up to $5.0
million in the company's common stock at the lower of the current market price
or $21.00 per share through September 30, 1999 and a warrant to purchase 275,000
shares of the company's common stock at an exercise price of $17.25 per share
through December 15, 2001. If First Marathon exercises the option the Company
shall also grant to First Marathon a 30-month warrant to purchase up to 333,333
shares of the Company's common stock at an exercise price of $30.00 per share.
In connection with the First Marathon agreement the company issued a warrant to
purchase 31,250 shares of the company's common stock at an exercise price of
$12.00.
On June 25, 1999 the Company entered into a license agreement for the use of
electronic trading software. The agreement provides for the payment of $1.0
million and the issuance of 166,667 shares of the Company's common stock upon
delivery of the software to the Company.
On July 15, 1999 the Company entered into an agreement to invest $1.5 million to
acquire a 33.33% equity interest in Matchbook F/X L.L.C. Matchbook F/X will be
equally owned by GlobalNet, NexTrade, one of nine Electronic Communications
Networks (`ECN") and the first and only ECN to offer 24 hour trading through
participating broker/dealers, and Valhalla Forex, a dealing operation focused on
the spot Foreign Exchange markets.
(10) SUBSEQUENT EVENTS
On July 30, 1999 the Company entered into an agreement to acquire a 20% equity
interest in Strateji a Turkish Corporation. The agreement provides for the
issuance of 3,200,000 shares of Strateji common stock to the Company in exchange
for a warrant to purchase 83,334 shares of the Company's common stock at an
exercise price of $16.50 per share and 3,000,000 shares of Atlantic Caspian
common stock. In addition the Company was granted an option to increase its
ownership to 50% of Strateji's equitable value. The option is exercisable at two
times the initial public offering price of Strateji's common stock and expires
eighteen months from the date of Strateji's initial public offering.
In July of 1999 the Company entered into an agreement to acquire a 50% equity
interest in Valhalla Securities Inc. ("Valhalla"). The agreement provides for
Valhalla to deliver to the Company, shares of its common stock equal to 50% of
its fully diluted number of shares of its common stock outstanding. In addition
Valhalla must change its corporate name to some derivative of GlobalNet, and the
Company, the existing Valhalla principles, and any other Valhalla entity must
contribute $500,000 to Valhalla's equity.
On August 6, 1999, the company invested $200,000 in GRO Corporation in exchange
for approximately 5% of the Company. GRO provides online trading utilizing
sophisticated technology for frequent traders.
(11) LITIGATION
On April 1, 1999, ICG was served with a complaint, in which it was named as a
co-defendant to a lawsuit alleging damages of $990,000 plus interest and
punitive damages, with respect to certain investments made by the plaintiffs in
a company called Waste Systems International, Inc. ("WSI"), for which ICG acted
as a financial consultant and placement agent in connection with a private
offering. The plaintiffs allege that the defendants made numerous fraudulent and
negligent misrepresentations to the plaintiffs, that the plaintiffs invested in
WSI based on those fraudulent and negligent misrepresentations and that the
misrepresentations were the direct and proximate cause of injuries suffered by
the plaintiffs. Management believes that the claims against ICG are without
merit and is vigorously opposing those claims, however, the outcome is presently
undeterminable. In the opinion of management any potential liability with
respect to this litigation will not materially affect the Company's financial
position or results of operations.
(12) REVERSE STOCK SPLIT
On June 17, 1999 the Company's Board of Directors authorized a one-for-six
reverse common stock split effective July 2, 1999. For all shareholders on
record as of the close of business on such date. All share and per share amounts
in the accompanying consolidated financial statement have been restated to give
effect to the common stock split.
F-7
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 22,644,090
<SECURITIES> 14,930,387
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 39,482,484
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 40,586,081
<CURRENT-LIABILITIES> 238,643
<BONDS> 0
0
0
<COMMON> 11,014
<OTHER-SE> 40,336,424
<TOTAL-LIABILITY-AND-EQUITY> 40,586,081
<SALES> 0
<TOTAL-REVENUES> 1,541,385
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,936,580)
<EPS-BASIC> 0
<EPS-DILUTED> (0.443)
</TABLE>
