SCHEDULE 14C
(RULE 14C-101)
Information Statement Pursuant to Section 14(c) of the Securities Exchange Act
of 1934
Check the appropriate box:
[ ] Preliminary Information Statement
[X] Definitive Information Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14c-5(d)(2))
iDIAL NETWORKS, INC.
(Name of Registrant As Specified In Its Charter)
Payment of Filing Fee (Check the Appropriate Box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which the transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials
[ ] check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount previously paid:
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(4) Date Filed:
iDIAL NETWORKS, INC.
2204 Timberloch Place, Suite 225
The Woodlands, Texas 77380
INFORMATION STATEMENT
PURSUANT TO SECTION 14
OF THE SECURITIES EXCHANGE ACT OF 1934
AND REGULATION 14C AND SCHEDULE 14C THEREUNDER
WE ARE NOT ASKING YOU FOR A PROXY
AND YOU ARE NOT REQUESTED TO SEND US A PROXY
The Woodlands, Texas
October 7, 2003
This information statement has been mailed on or about October 7, 2003 to
the stockholders of record on September 30, 2003 (the "Record Date") of iDial
Networks, Inc., a Nevada corporation (the "Company") in connection with certain
actions to be taken by the written consent by the majority of stockholders of
the Company, dated as of August 11, 2003. The actions to be taken pursuant to
the written consent shall be taken on or about October 27, 2003, 20 days after
the mailing of this information statement. THIS IS NOT A NOTICE OF A SPECIAL
MEETING OF STOCKHOLDERS AND NO STOCKHOLDER MEETING WILL BE HELD TO CONSIDER ANY
MATTER WHICH WILL BE DESCRIBED HEREIN.
By Order of the Board of Directors,
/s/ Mark T. Wood
----------------
Chairman of the Board and Chief Executive Officer
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NOTICE OF ACTION TO BE TAKEN PURSUANT THE WRITTEN CONSENT OF MAJORITY
STOCKHOLDERS IN LIEU OF A SPECIAL MEETING OF THE STOCKHOLDERS, DATED AUGUST 11,
2003
To Our Stockholders:
NOTICE IS HEREBY GIVEN that the following action will be taken pursuant to
the written consent of a majority of stockholders dated August 11, 2003, in lieu
of a special meeting of the stockholders. Such action will be taken on or about
October 27, 2003:
1. To consider and vote upon a proposal to amend the Company's Articles of
Incorporation to increase the number of authorized shares of Common Stock, par
value $.005 per share (the "Common Stock"), of the Company from 500,000,000
shares to 1,000,000,000 shares; and
2. To consider and vote upon a proposal to effect a one-for-one hundred
fifty reverse stock split of the Company's common stock.
OUTSTANDING SHARES AND VOTING RIGHTS
As of the Record Date, the Company's authorized capitalization consisted of
499,991,064 shares of Common Stock, of which 499,991,064 shares were issued and
outstanding as of the Record Date. Holders of Common Stock of the Company have
no preemptive rights to acquire or subscribe to any of the additional shares of
Common Stock.
Each share of Common Stock entitles its holder to one vote on each matter
submitted to the stockholders. However, because stockholders holding at least a
majority of the voting rights of all outstanding shares of capital stock as of
August 11, 2003 have voted in favor of the foregoing proposals by resolution
dated August 11, 2003; and having sufficient voting power to approve such
proposals through their ownership of capital stock, no other stockholder
consents will be solicited in connection with this Information Statement.
Pursuant to Rule 14c-2 under the Securities Exchange Act of 1934, as
amended, the proposals will not be adopted until a date at least 20 days after
the date on which this Information Statement has been mailed to the
stockholders. The Company anticipates that the actions contemplated herein will
be effected on or about the close of business on October 27, 2003.
The Company has asked brokers and other custodians, nominees and
fiduciaries to forward this Information Statement to the beneficial owners of
the Common Stock held of record by such persons and will reimburse such persons
for out-of-pocket expenses incurred in forwarding such material.
This Information Statement will serve as written notice to stockholders
pursuant to Section 78.370 of the Nevada General Corporation Law.
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AMENDMENT TO THE CERTIFICATE OF INCORPORATION
On August 11, 2003, the majority stockholders of the Company approved an
amendment to the Company's Certificate of Incorporation, as amended, to replace
Article IV in its entirety, which will result in an increase to the number of
authorized shares of Common Stock. The Company's Certificate of Incorporation,
as amended, currently authorizes for issuance 530,000,000 shares consisting of
500,000,000 of common stock and 30,000,000 shares of preferred stock. The
approval of this amendment to the Certificate of Incorporation will increase the
Company's authorized shares of common stock to 1,030,000,000. The Company
currently has authorized (i) common stock of 500,000,000 shares and
approximately 500,000,000 shares of Common Stock are issued and outstanding as
of the Record Date and (ii) authorized preferred stock of 30,000,000 and 100,000
shares of Series A and Series B preferred stock outstanding. The Board believes
that the increase in authorized common shares would provide the Company greater
flexibility with respect to the Company's capital structure for such purposes as
additional equity financing and stock based acquisitions. In addition, the
increase in the authorized common stock will provide the Company with the needed
capital to enter into the GlobalNet, Inc. acquisition and the related financing
described below.
Article IV of the Company's Certificate of Incorporation currently is as
follows:
"The Corporation is authorized to issue two classes of stock.
One class of stock shall be Common Stock, par value $0.005. The second
class of stock shall be Preferred Stock, par value $0.005. The
Preferred Stock, or any series thereof, shall have such designations,
preferences and relative, participating, optional or other special
rights and qualifications, limitations or restrictions thereof as shall
be expressed in the resolution or resolutions providing for the issue
of such stock adopted by the board of directors and may be made
dependent upon facts ascertainable outside such resolution or
resolutions of the board of directors, provided that the matter in
which such facts shall operate upon such designations, preferences,
rights and qualifications; limitations or restrictions of such class or
series of stock is clearly and expressly set forth in the resolution or
resolutions providing for the issuance of such stock by the board of
directors.
The total number of shares of stock of each class which the Corporation
shall have authority to issue and the par value of each share of each class of
stock are as follows:
Class Par Value Authorized Shares Total
----------------- ----------------- ----------------- -----------------
Common $0.005 500,000,000 $2,500,000
Preferred $0.005 30,000,000 $150,000
----------------- -----------------
Totals: 530,000,000 $2,650,000"
Upon approval of the amendment to increase the Company's authorized shares
of common stock from 500,000,000 to 1,000,000,000, the Company Certificate of
Incorporation will be as follows:
"FOURTH: The Corporation is authorized to issue two classes of
stock. One class of stock shall be Common Stock, par value $0.005. The
second class of stock shall be Preferred Stock, par value $0.005. The
Preferred Stock, or any series thereof, shall have such designations,
preferences and relative, participating, optional or other special
rights and qualifications, limitations or restrictions thereof as shall
be expressed in the resolution or resolutions providing for the issue
of such stock adopted by the board of directors and may be made
dependent upon facts ascertainable outside such resolution or
resolutions of the board of directors, provided that the matter in
which such facts shall operate upon such designations, preferences,
rights and qualifications; limitations or restrictions of such class or
series of stock is clearly and expressly set forth in the resolution or
resolutions providing for the issuance of such stock by the board of
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directors.
The total number of shares of stock of each class which the Corporation
shall have authority to issue and the par value of each share of each class of
stock are as follows:
Class Par Value Authorized Shares Total
----------------- ----------------- ----------------- -----------------
Common $0.005 1,000,000,000 $5,000,000
Preferred $0.005 30,000,000 $150,000
----------------- -----------------
Totals: 1,030,000,000 $5,150,000"
INCREASE IN AUTHORIZED COMMON STOCK
The terms of the additional shares of Common Stock will be identical to
those of the currently outstanding shares of Common Stock. However, because
holders of Common Stock have no preemptive rights to purchase or subscribe for
any unissued stock of the Company, the issuance of additional shares of Common
Stock will reduce the current stockholders' percentage ownership interest in the
total outstanding shares of Common Stock. This amendment and the creation of
additional shares of authorized common stock will not alter the current number
of issued shares. The relative rights and limitations of the shares of Common
Stock will remain unchanged under this amendment.
As of the Record Date, a total of 499,991,064 shares of the Company's
currently authorized 500,000,000 shares of Common Stock are issued and
outstanding. The increase in the number of authorized but unissued shares of
Common Stock would enable the Company, without further stockholder approval, to
issue shares from time to time as may be required for proper business purposes,
such as raising additional capital for ongoing operations, business and asset
acquisitions, stock splits and dividends, present and future employee benefit
programs and other corporate purposes.
The proposed increase in the authorized number of shares of Common Stock
could have a number of effects on the Company's stockholders depending upon the
exact nature and circumstances of any actual issuances of authorized but
unissued shares. The increase could have an anti-takeover effect, in that
additional shares could be issued (within the limits imposed by applicable law)
in one or more transactions that could make a change in control or takeover of
the Company more difficult. For example, additional shares could be issued by
the Company so as to dilute the stock ownership or voting rights of persons
seeking to obtain control of the Company. Similarly, the issuance of additional
shares to certain persons allied with the Company's management could have the
effect of making it more difficult to remove the Company's current management by
diluting the stock ownership or voting rights of persons seeking to cause such
removal. Except as further discussed herein, the Board of Directors is not aware
of any attempt, or contemplated attempt, to acquire control of the Company, and
this proposal is not being presented with the intent that it be utilized as a
type of anti- takeover device.
Except for the following, there are currently no plans, arrangements,
commitments or understandings for the issuance of the additional shares of
Common Stock which are proposed to be authorized:
o In February 2003, we entered into a Securities Purchase Agreement
with three accredited investors for the sale of (i) $750,000 in
convertible debentures and (ii) warrants to purchase 2,225,000
shares of our common stock. The debentures bear interest at 12%,
mature two years from the date of issuance and are convertible
into our common stock, at a rate of $.0016 per share; however, if
at any time the market price of our common stock is below $.0016,
then the conversion price will be equal to the lesser of (i)
$.0016, or (ii) the average of the lowest 3 intra-day trading
prices during the 20 trading days immediately prior to the
conversion date discounted by 60%. As of September 15, 2003,
$498,297.40 of note principal had been converted into
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167,461,789 shares of common stock.
o In May 2003, we entered into a Securities Purchase Agreement with
four accredited investors for the sale of (i) convertible
debentures at the investors election of up to $3,000,000 and (ii)
warrants to purchase 1,500,000 shares of common stock. In May
2003 and June 2003, the Company issued $250,000 in convertible
debentures for an aggregate of $500,000. The debentures bear
interest at 12%, mature two years from the date of issuance, and
are convertible into our common stock, at a rate of $.0016 per
share; however, if at any time the market price of our common
stock is below $.0016, then the conversion price will be equal to
the lesser of (i) $.0016, or (ii) the average of the lowest 3
intra-day trading prices during the 20 trading days immediately
prior to the conversion date discounted by 60%. As of September
15, 2003, no note principal had been converted into common stock.
o In August 2003, we entered into a Securities Purchase Agreement
with five accredited investors for the sale of $1,750,000 in
convertible debentures. The debentures bear interest at 12%,
mature two years from the date of issuance, and are convertible
into our common stock, at a rate of $.0016 per share; however, if
at any time the market price of our common stock is below $.0016,
then the conversion price will be equal to the lesser of (i)
$.0016, or (ii) the average of the lowest 3 intra-day trading
prices during the 20 trading days immediately prior to the
conversion date discounted by 60%. At the market price of $.05 as
of September 15, 2003, the convertible debenture is convertible
into approximately 1,093,750,000 shares of common stock. As of
September, 2003, no portion of this note has been converted.
o In August 2003, we entered into an Assignment and Assumption of
Stock Purchase Agreement, as described, pursuant to which the
Company is obligated to issue up to 2,392,221,188 shares of
common stock, on a pre-reverse split basis, to Growth Enterprise
Fund, S.A., whereby the Company acquired all of the issued and
outstanding common stock of GlobalNet, Inc.
Stockholders do not have any preemptive or similar rights to subscribe for
or purchase any additional shares of Common Stock that may be issued in the
future, and therefore, future issuances of Common Stock may, depending on the
circumstances, have a dilutive effect on the earnings per share, voting power
and other interests of the existing stockholders.
CHANGE IN CONTROL: THE GLOBALNET ACQUISITION
On May 20, 2003, Growth Enterprise Fund, S.A. ("GEF"), a Panamanian
corporation, and GlobalNet Systems, Inc. ("GNSI"), a wholly-owned subsidiary of
GEF and a Florida corporation, entered into a Stock Purchase Agreement (the
"Stock Purchase Agreement") with The Titan Corporation ("Titan"), a Delaware
corporation, and its wholly-owned subsidiary, GlobalNet, Inc. ("GlobalNet"), a
Nevada corporation, whereby GNSI agreed to acquire 100% of the issued and
outstanding common stock of GlobalNet from Titan in exchange for the assumption
of certain liabilities of Titan (the "assumed liabilities"), and certain cash
payment totaling approximately $1,100,000.
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Subsequently, on August 21, 2003, the Company entered into an Assignment
and Assumption of Stock Purchase Agreement by and between the Company, GEF, GNSI
and Titan (the "Assignment"), whereby GNSI transferred all of its rights and
obligations under the Stock Purchase Agreement, including the right to receive
all of the issued and outstanding common stock of GlobalNet, to the Company (the
"Acquisition"). On August 21, 2003, amendments were made to the Stock Purchase
Agreement to reflect certain payments made by GlobalNet after the date of the
Stock Purchase Agreement. In connection with the Stock Purchase Agreement and
the Assignment, promissory notes and accrued interest payable in the aggregate
amount of approximately $15.6 million payable by GlobalNet to Titan were
assigned to the Company (the "GlobalNet Notes"). As consideration for the
Acquisition which was completed on August 21, 2003, the Company and GEF engaged
in the following transactions with Titan:
o the Company issued a $1,500,000 principal amount promissory note to
Titan (the "Titan Note");
o the Company paid $1,500,000 to Titan; and
o GEF paid $500,000 to Titan.
In connection with the Assignment, on August 21, 2003, the Company entered
into a Purchase Agreement with GEF whereby the Company issued to GEF a $500,000
principal amount promissory note, 100,000 shares of the Company' Series A
Preferred Stock, 100,000 shares of Series B Preferred Stock and 60% of the
company's outstanding common stock(2,310,841,329 shares as of August 21, 2003;
provided, however, in the event that Company does not payoff all of its
outstanding secured convertible debentures purchased by an aggregate of five
accredited investors purchased pursuant to the Securities Purchase Agreement
dated February 2003, May 2003 and August 2003 prior to the expiration of 60 days
from the date of this Agreement, then the Company will be required to issue
2,392,221,188 additional shares), which such issuance is subject to the Company
filing its Certificate of Amendment to its Certificate of Incorporation. In
connection with the Acquisition, the Company pledged 100% of the stock of
GlobalNet and the GlobalNet Notes to Titan as collateral to secure payment of
the assumed liabilities and the Titan Note.
The shares of Series A Preferred Stock carry limited voting rights, have a
stated value of $106 per share and pay cumulative dividends at the rate of $5.30
per share per annum (5% of the stated value). Commencing on December 31, 2003,
the Company is required to pay $118,910 of the Series A Preferred Stock on the
first business day of each month, which such payment shall be for accrued but
unpaid dividends, and to the extent of any excess over such accrued but unpaid
dividends, redemption of shares of Series A Preferred Stock. At the option of
the holder, the Company must redeem additional shares of the Series A Preferred
Stock from the Company's Free Cash Balance, as defined in the Series A Preferred
Stock Certificate of Designation. In addition, if the Company fails to make
dividend payments on the Series A Preferred Stock, the Series A Preferred Stock
is convertible into the Company's common stock at the option of the holder.
The shares of Series B Preferred Stock have no limited voting rights, have
a stated value of $50 per share and pay cumulative dividends at the rate of
$2.50 per share per annum (5% of the stated value). Commencing on December 31,
2003, the Company is required to pay $56,090 of the Series B Preferred Stock on
the first business day of each month, which such payment shall be for accrued
but unpaid dividends, and to the extent of any excess over such accrued but
unpaid dividends, redemption of shares of Series B Preferred Stock. At the
option of the holder, the Company must redeem additional shares of the Series B
Preferred Stock from the Company's Free Cash Balance, as defined in the Series B
Preferred Stock Certificate of Designation.
The shares of common stock and preferred stock issued, or to be issued, in
connection with the acquisition of GlobalNet were not registered under the
Securities Act of 1933, as amended (the "Act") and were issued in the reliance
upon the exemption from registration provided by section 4(2) of the Act, on the
basis that the acquisition is a transaction not involving a public offering. All
certificates evidencing these securities bear a customary form of investment
legend and may not be sold, pledged, hypothecated or otherwise transferred
unless first registered under the Act or pursuant to an available exemption from
such registration requirements.
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In connection with the Acquisition, the Company pledged 100% of the stock
of GlobalNet and the GlobalNet Notes to Titan as collateral to secure payment of
the assumed liabilities and the Titan Note. As a condition to the Acquisition,
the Company's director prior to the transaction is required to appoint Robert
Thorell and David Halpern as members of the Board of Directors.
In order to fund the costs of the Acquisition, on August 21, 2003, the
Company entered into a Securities Purchase Agreement with unrelated investors,
in which the investors provided funding in the amount of $1,750,000. In exchange
for such investment, the investors received convertible debentures.
The debentures issued pursuant to the August 2003 Securities Purchase
Agreement bear interest at 12% per year, mature two years from the date of
issuance, and are convertible into our common stock, at a rate of $.0016 per
share; however, if at any time the market price of our common stock is below
$.0016, then the conversion price will be equal to the lesser of (i) $.0016, or
(ii) the average of the lowest 3 intra-day trading prices during the 20 trading
days immediately prior to the conversion date discounted by 60%.
Further, in connection with the acquisition of GlobalNet, several
stockholders of the Company were required to restructure their existing debt,
including agreeing to a fixed conversion price for each shareholders'
convertible debenture.
This section and the section below entitled "The GlobalNet Acquisition
Agreement" describe aspects of the GlobalNet Acquisition that we consider
important, including the GlobalNet Acquisition Agreement, which is attached as
Appendix A to this information statement. While we believe that this section
covers the material terms of the GlobalNet Acquisition, it may not contain all
of the information that is important to you.
DESCRIPTION OF GLOBALNET, INC.
Business Overview
GlobalNet, Inc. ("GlobalNet") provides international voice, data, fax and
Internet services on a wholesale basis over a private IP network to
international carriers and other communication service providers in the United
States and internationally. GlobalNet's state-of-the-art IP network, utilizing
the convergence of voice and data networking, offers customers economical
pricing, global reach and an intelligent platform that guarantees fast delivery
of value-added services and applications. GlobalNet 's principal focus is
providing service from the U.S. to Latin America, with 75% of its traffic
terminating in Mexico. However, it has established relationships with affiliates
worldwide, giving it the ability to carry traffic to more than 240 countries.
GlobalNet is one of the top 10 U.S. service providers of outbound traffic
to Latin America and counts among its customers more than 30 Tier 1 and Tier 2
carriers as well as a host of other well known global service providers and
major international telecommunications providers organizations. Management has
been successful in establishing and maintaining relationships with these
customers as a result of its ability to provide consistent, cost effective and
high quality service 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, including Protel, Marcatel, Bestel and Alestra. Leveraging these
relationships and the global reach of the Internet, GlobalNet has grown its
revenues from $792,000 in 1997 to approximately $100 million in 2002.
GlobalNet History
GlobalNet International was formed in 1996 to capitalize on the growth of
the Internet Protocol as a communications transport medium for IP Telephony and
other enhanced services. To date, GlobalNet has focused primarily on wholesaling
international voice and facsimile communications services between the United
States and Latin American countries, predominately Mexico.
GlobalNet was formed on May 30, 2000 as a result of a "reverse merger"
transaction, whereby GlobalNet International, Inc. merged with and into a
subsidiary of Rich Earth, Inc. pursuant to an agreement and plan of merger,
whereby 20,000,000 shares of Rich Earth common stock were issued in exchange for
100% of the common stock of GlobalNet International in a transaction accounted
for as a reverse acquisition of Rich Earth by GlobalNet
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international. Prior to the reverse merger, Rich Earth was a non-operating
public shell corporation with nominal assets. Following the reverse merger, the
management of GlobalNet International controlled the merged company and the
principal stockholders of GlobalNet International became principal stockholders
of the merged company. Following the closing of the reverse merger, Rich Earth
changed its name to GlobalNet, Inc. As a result of the reverse merger
transaction, GlobalNet International continued as an operating entity and as a
wholly-owned subsidiary of GlobalNet, Inc., and the historical financial
statements of GlobalNet, Inc. replaced those of Rich Earth.
On March 21, 2002, GlobalNet merged with a subsidiary of The Titan
Corporation (Titan). In the merger, a wholly owned subsidiary of Titan merged
into GlobalNet and all of GlobalNet's outstanding common shares and certain
stock options and warrants were converted into Titan common shares, options and
warrants, plus cash in lieu of fractional shares.
INTERNATIONAL TELECOMMUNICATIONS SERVICES INDUSTRY BACKGROUND
International Telecom Services Market
The international telecommunications industry is undergoing a period of
fundamental change that is expected to continue to result in significant growth
in international telecommunications traffic and revenues. Numerous factors are
driving the growth in demand for international telecommunications products and
services. Those factors include:
o The globalization of the world's economies;
o The worldwide trend toward deregulation of the telecommunications
sector;
o Declining prices and a wider selection of products and services driven
by greater competition resulting from deregulation;
o Increased telephone accessibility resulting from technological
advances and greater investment in telecommunications infrastructure,
including deployment of wireless networks;
o Increased international business and leisure travel; and
o Growth of packetized transmission of voice and data information.
By eroding the traditional monopolies held by major international
telecommunications providers, deregulation is affording U.S.-based providers the
opportunity to negotiate more favorable agreements with both the traditional
administrations and emerging foreign providers. In addition, deregulation in
certain foreign countries is enabling U.S.-based providers to establish local
switching and transmission facilities to terminate their own traffic and carry
international long distance traffic originating in those countries.
Deregulation, privatization, the expansion of the resale market and other trends
influencing the international telecommunications market are resulting in
decreased termination costs, a proliferation of routing options and increased
competition. Advances in technology have created multiple ways for carriers to
provide customer access to their networks and services.
Overall, these changes have resulted in a trend towards bypassing traditional
international long distance operating agreements as international long distance
companies seek to operate more efficiently. In markets that have not deregulated
or are in the process of implementing deregulation, international long distance
carriers have used advances in technology to develop innovative alternative
methods to meet customer demand.
Recent legislation and the World Trade Organization agreement among numerous
countries are expected to lead to increased liberalization of the majority of
the world's telecommunication markets. Specifically, the WTO Agreement has
created a framework under which 69 countries committed to liberalize their
telecommunications laws to permit increased competition and, in most cases,
foreign ownership in their telecommunications markets, beginning in 1998.
Latin American Telecom Services Market
The vast majority of Latin America has yet to develop adequate communications
infrastructure, making Latin America an attractive and growing market for
telecommunications service providers. Currently, countries such as Mexico and
Brazil bear exceptionally low telephone densities for countries with
progressively rising standards of
8
living, at 14% and 19%, respectively. Mexico, GlobalNet's primary market, has
seen line penetration increase 9% annually from 1996 to 2002. According to the
Telecommunications Industry Association, the Latin American telecommunications
market (excluding Mexico) is projected to grow from $62.0 billion in 2000 to
$128.1 billion in 2004, representing a compounded annual growth rate of 19.9%.
GlobalNet believes that Latin American traffic, including traffic between the
United States and Latin America, will continue to grow faster than the
international telecommunications market as a result of:
o Underlying economic growth within Latin America;
o Growth of regional trade as a result of free trade initiatives such as
NAFTA, Mercosur and the Andean Pact;
o Deregulation and privatization of telecommunications carriers in the
region;
o Projected regional increases in telephone density; and
o Increasing demand for bandwidth-intensive applications.
As a rule, Latin American countries have historically suffered from extremely
low telephone density, and the markets have been subject to characteristically
inefficient, poor-quality service, as well as the unavailability of new and
innovative systems and services. In addition, the Latin American markets in
which GlobalNet offers services, or in which GlobalNet seeks to compete, are
generally characterized by a lack of fiber optic cable capacity. Existing
satellite-based capacity offers limited capability to meet the increasing demand
for bandwidth-intensive applications in GlobalNet 's targeted countries.
GlobalNet believes that there is a growing demand for high-quality
telecommunications services and applications such as data and VoIP throughout
Latin America.
Mexican Telecommunications Market
Mexico's communications services market, estimated at $13.7 billion in 2000, is
among the largest in Latin America, ranking second only to Brazil. According to
Pyramid Research, Mexico's communications services revenues are projected to
grow at a compounded annual growth rate of 12.4% to $30.1 billion by year-end
2005. Pyramid estimates that 88% of international long distance cross-border
traffic calls originating in Mexico terminate in the U.S. Total international
long distance outbound traffic is estimated to increase from 1.68 billion
minutes in 2000 to 2.82 billion minutes in 2004.
The VoIP Services Market
According to TeleGeography, international long distance traffic is expected to
grow from 132.7 billion minutes in 2000 to 248.7 billion minutes in 2004, a CAGR
of 17%. The continuing rise of international voice traffic has been propelled by
two broader trends: liberalization of international markets and growth of mobile
telephony. International VoIP traffic, in particular, is growing very rapidly.
Approximately 6% of international voice call volume travels over the Internet
instead of traditional telephone networks. VoIP traffic tripled in 2000,
increasing from 1.6 billion minutes in 1999 to 5.3 billion minutes in 2000, and
is estimated to have reached 9.6 billion minutes in 2001. Approximately 32% of
international VoIP traffic in 2000 was bound for Latin America and the biggest
route for international VoIP traffic is the U.S. to Mexico, accounting for
approximately 12% of transnational VoIP traffic.
BUSINESS
Business Overview
GlobalNet provides international voice, data, fax and Internet services on a
wholesale basis over a private IP network to international carriers and other
communication service providers in the United States and internationally.
GlobalNet's state-of-the-art IP network, utilizing the convergence of voice and
data networking, offers customers economical pricing, global reach and an
intelligent platform that guarantees fast delivery of value-added services and
applications. GlobalNet's principal focus is providing service from the U.S. to
Latin America, with 75% of its traffic
9
terminating in Mexico. However, it has established relationships with affiliates
worldwide, giving it the ability to carry traffic to more than 240 countries.
GlobalNet is one of the top 10 U.S. service providers of outbound traffic to
Latin America and counts among its customers more than 30 Tier 1 and Tier 2
carriers as well as a host of other well known global service providers and
major international telecommunications providers organizations including AT&T,
MCI/WorldCom, Qwest, Global Crossing, IDT, Tricom, Telecom New Zealand,
Broadwing and ITXC. Management has been successful in establishing and
maintaining relationships with these customers as a result of its ability to
provide consistent, cost effective and high quality service 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, including Protel, Marcatel, Bestel
and Alestra.
Services
GlobalNet provides the following services to its carrier customers:
International Wholesale Termination. GlobalNet provides international wholesale
voice and fax termination to Mexico, Central and South America. GlobalNet
operates two Lucent Excel IP gateway switches. 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 competitive advantage to these
destinations is the result of unique, bilateral relationships, which it has
cultivated with emerging carriers and major international telecommunications
providers in the respective countries. GlobalNet competes in other worldwide
destinations through aggressively managed carrier traffic exchange agreements.
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. By offering additional high quality
VoIP routes to Latin America, GlobalNet will continue to grow the wholesale
carrier program by executing new interconnection agreements with domestic U.S.
and international carriers.
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 international voice
and fax calls over its IP backbone to the United States and worldwide at reduced
costs while providing reliable, high quality service via new technology. Many
carrier customers have become strategic partners of GlobalNet, allowing
GlobalNet to gain access to its partners' networks, which cut its costs for
international traffic termination.
Business and Growth Strategy
Expand Network Facilities. GlobalNet intends to continue expanding its U.S. and
Latin American network by acquiring and building additional switching facilities
for the provisioning of voice, video, data and Internet services. GlobalNet also
intends to deploy local and long distance facilities where appropriate and the
investment is justified. GlobalNet's objectives in making these investments are
to: (i) provide "on-net" capacity to allow growth in its voice services
business; (ii) increase profitability for switched services by reducing the
amount of traffic terminated by other long distance carriers pursuant to resale
arrangements; and (iii) use the expanded network as a platform to support
advanced, bandwidth intensive data and Internet applications.
Expand Sales to Existing Customers. GlobalNet plans to expand sales to its
existing customer base through more targeted and aggressive marketing of its
services, by leveraging the efficiencies generated from growing network traffic
to provide more competitive pricing on existing routes and by expanding its
network to additional destinations to obtain greater volume of traffic from
existing customers.
Expand GlobalNet Network to Other Latin American Countries. GlobalNet plans to
expand its network to additional Latin American territories, including Brazil,
Argentina, Chile, Colombia, Peru, Uruguay, Guatemala, El Salvador and Puerto
Rico and is currently in discussions with a number of in-country carriers to
establish interconnection agreements and expand its presence into these markets.
GlobalNet believes that by building more routes to support "on-net" traffic, it
will be able to acquire a greater portion of the traffic to these Latin American
destinations while providing more competitive pricing and increasing margins for
these routes.
10
Network Description
The GlobalNet network is a combination of (i) IP-based VPNs with service level
agreements to assure the highest levels of performance, (ii) the public Internet
that expands geographic coverage beyond the reach of private networks and (iii)
fixed cost point-to-point fiber optic facilities for domestic and international
private line transport. GlobalNet is expanding its international connection
points with the establishment of additional contracts with international
carriers. GlobalNet has also internally developed a VoIP interoperabitity
gateway that enables communications between VoIP networks without causing
deterioration in call quality. The deployment of these IP gateway devices are
facilitating quicker customer connections on a global basis.
GlobalNet currently manages its own telecommunications network and utilizes the
transmission capacity of several carriers. GlobalNet is increasing the
percentage of traffic it carries on its network or "on-net", enabling it to
increase margins and profitability while ensuring quality. In addition,
GlobalNet's use of multiple carriers increases cost efficiencies by establishing
additional routing capability and enables GlobalNet to obtain sufficient
capacity to support rapid growth. GlobalNet's IP network currently serves more
than 19 countries with over 250 points of presence.
GlobalNet's present network uses the Internet, fixed cost point-to-point fiber
optic facilities and other international private line capacity for physical
transport. GlobalNet is expanding its network by installing additional IP
transmission and switching equipment in its targeted U.S. and Latin American
markets to provide more cost efficiencies and savings by routing an increasing
portion of traffic "on-net."
GlobalNet owns and operates two Lucent Excel Exchange Plus IP gateway switches
with a total capability of 28,800 Dynamic Server Object (DSO) ports. The New
York switch serves as a gateway for refile and carrier exchange traffic and the
San Antonio switch serves as the gateway to Central and South America and can
provide prepaid calling card services. Lucent's MaxTNT and Cisco 5350 VoIP
gateways are also used between the GlobalNet switches and international
destinations in the network, providing GlobalNet with a scaleable solution that
allows the transport of voice, data and Internet traffic as well as QoS
assurances. The GlobalNet network also includes backbone connections and routing
and gateway equipment in Miami, FL, McAllen, TX, and Reynosa, Monterey and
Mexico City, Mexico.
Customers
A significant portion of GlobalNet's revenues are concentrated among a few large
customers. For the years ended December 31, 2001 and December 31, 2002,
GlobalNet's largest customer represented 62% and 63% of total revenue, while the
three largest customers represented 76% and 77% of total revenue, respectively.
Further, for the six month period ended June 28, 2003, the largest four
customers represent 80% of the total revenue, while the largest customer
represented 50% of the total revenue.The loss of any of the foregoing customers
would have a significant adverse impact on GlobalNet.
Sales and Marketing
GlobalNet employs its own salesforce along with outside agents to generate
customer leads. GlobalNet's internal salesforce consists of two full-time
account executives responsible for business development activities and the
management of existing accounts. Compensation for Account executives is
comprised of a nominal salary and performance-based commissions. GlobalNet also
employs outside agents to generate leads.
GlobalNet's sales process begins with the introduction of GlobalNet's services
to a potential client and is followed by contract negotiations (i.e., payment
terms, security deposit, dispute process, etc.) and a discussion of the types of
interconnection options available (i.e., TDM (Time Division Multiplexing) or
Public IP). GlobalNet then offers the customer route rates and allows the
customer to test those routes. GlobalNet's ongoing services to its customers
include account maintenance which involves updating route rates on a regular
basis and assuring quality of service.
Technology
11
Network Management and Information Systems
GlobalNet's network management and information systems enable it to:
o Economically and efficiently route traffic over the GlobalNet network
and the networks of other carriers;
o Offer reliable services with high call completion rates and voice
quality; and
o Manage an advanced voice and data multi-service IP platform.
These systems, particularly their ability to provide flexible, high quality
service to international destinations, provide GlobalNet with a competitive
advantage relative to many other providers of telecommunications services.
GlobalNet monitors its network and initiates changes to the overall switch
network and traffic routing where appropriate using SS7 and ISDN signaling to
optimize routing and minimize costs. Because a substantial portion of the
traffic carried terminates internationally and completions vary by carrier,
GlobalNet monitors the completion efficiencies of its suppliers.
GlobalNet's proprietary systems management software, known as INTE-GRATE,
seamlessly integrates data access for sales, operations and traffic analysis
functions and significantly enhances customer service. The INTE-GRATE system
features a central data source that eliminates duplicate entry of information
and provides GlobalNet personnel with readily accessible, real-time data to meet
customer needs. Additionally, INTE-GRATE tracks rapidly changing vendor costs to
determine the most cost-effective routing, and loads the new information into
the network with minimal manual intervention. The system permits GlobalNet to
make substantial routing changes in order to take advantage of pricing changes.
GlobalNet has also deployed an advanced suite of applications to monitor faults
and availability of services throughout its VoIP network. These network
applications provide real-time, proactive monitoring of faults throughout the
GlobalNet infrastructure, allowing network engineers and operations personnel to
address potential problems before they cause disruptions in service. In
addition, the system provides GlobalNet with the capability of generating
detailed network performance analysis reports that assist in determining which
services and customers could potentially be affected by problems on the network.
Competition
The international telecommunications market is highly competitive. The principal
competitive factors include price, quality of service, network capacity,
geographic coverage, reliability of the network and customer service.
Competition comes from:
- - global carriers such as AT&T, MCI WorldCom, Telefonica and Telmex that operate
large legacy networks; and
- - newer IP-based providers such as ITXC, iBasis, and Deltathree that utilize the
Internet to transport traffic.
GlobalNet is currently taking and will continue to take steps to respond to the
competitive pressures being placed on its IP-based network services as a result
of the recent innovations in the transport of voice and data over the Internet.
GlobalNet's future consolidated operating results and financial condition are
substantially dependent on its ability to continue to develop improvements to
its IP-based network in order to maintain functional advantages over competing
service providers.
Licenses
GlobalNet believes it has all material licenses required to perform its services
and that GlobalNet's ability to conduct business will not be limited by
licensing requirements. GlobalNet holds an FCC Section 214 long distance
license, allowing GlobalNet to provide facilities-based long distance
telecommunication services and to resell long distance services in the United
States. In addition, GlobalNet relies on local partners' in-country licenses for
termination
12
services outside the United States.
Government Regulations
The regulatory treatment of Internet telephony varies widely from country to
country. Most countries have not yet addressed Internet telephony with
legislation. To date, the U.S. Congress has adopted legislation that regulates
certain aspects of the Internet including Internet spamming, database privacy,
gambling, pornography, Internet fraud, privacy and digital signatures. However,
GlobalNet believes that the services it provides over the Internet are not
currently regulated in the United States. The Federal Communications Commission
is examining various initiatives, which may affect the provision of Internet
telephony and its regulatory status.
Suppliers
GlobalNet's key suppliers are Mexican carriers that terminate traffic in Mexico.
These carriers include Protel, Marcatel, Alestra, Bestel, Novatel, Avantel,
NetServices, AGC and BasicNet. Other suppliers and affiliates outside Mexico
include Bridgeport, Corisat, DNS, Premium Poland, EADS Multicoms, GNT, Passport
IVN, SMFT and Vinculum. GIobaINet does not depend upon any single supplier.
Because GlobalNet has multiple sources of supply, there have not been
difficulties in obtaining adequate sources of supply and adequate alternatives
to satisfy customers.
Employees
As of July 18, 2002, GlobalNet employed 22 people of which 13 are located in
GlobalNet 's corporate offices in Lombard, Illinois, 3 in Marietta, Georgia, 5
in San Antonio, Texas, and 1 in Garden City, New York.
GlobalNet has 3 employees in engineering, 8 employees in operations, 2 employees
in sales and marketing and 9 employees in general and administrative positions.
Legal Proceedings
GlobalNet is from time to time subject to litigation incidental to its business.
GlobalNet believes that the results of the following asserted and potential
litigation and other potential legal proceedings will not have a material
adverse effect on its business, financial condition, results of operations, or
liquidity.
The XEX Consulting Company, Inc. - In November 2001, an action was filed against
GlobalNet and others by XEX Consulting Company, Inc. (XEX). The Complaint
alleged, among other things, that the defendants engaged in a fraudulent scheme
of manipulating the market for GlobalNet common stock and failed to disclose
certain matters. The plaintiff seeks compensatory damages in the amount of $3
million together with punitive damages. On June 25, 2003, GlobalNet and XEX
reached a settlement agreement, whereby XEX agreed to voluntarily dismiss its
complaint against GlobalNet without prejudice in exchange for no monetary
consideration.
Wholesale Telecom Corporation - In October 2001, GlobalNet filed a complaint
against Wholesale Telecom Corporation (WTC) in the Circuit Court of the 11th
Judicial Circuit for Dade County (Florida) seeking to recover $536,579 (plus
interest since October 23, 2000) of past-due unpaid amounts for telecom services
provided by GlobalNet. In June 2002, WTC filed a counterclaim alleging
violations of the Communications Act and fraud, and seeking punitive damages in
excess of $1 million. The counterclaim alleges that GlobalNet has "knowingly
issued fraudulent invoices". GlobalNet believes that it has good and meritorious
defenses against the counterclaim.
Manuel Dreyfus - On February 25, 2003, Manuel Dreyfus filed a complaint against
GlobalNet and its former President. The complaint seeks to recover $40,000 of
expenses that the plaintiff claims to have incurred on behalf of Global Telekom
Ventures, Inc. (GTV), a company owned by GlobalNet's former President, in 1998
and 1999. GlobalNet has never had an equity interest and/or a commercial
relationship with GTV. The plaintiff also alleges that he had an oral
13
one-year employment agreement with GlobalNet and that he was verbally granted
100,000 shares of GlobalNet's common stock. The plaintiff alleges that GlobalNet
was in breach of this oral employment agreement when he was terminated in
November 2000 and that he is owed 100,000 shares of GlobalNet's common stock.
GlobalNet believes that it has good and meritorious defenses against the
complaint and has filed a motion to dismiss.
Interwest Transfer Co., Inc. - Interwest Transfer Co., Inc. (Interwest) was the
transfer agent of Rich Earth, Inc. (Rich Earth), a publicly traded shell company
acquired by GlobalNet in a "reverse merger" transaction in May 2000. Interwest
is currently a defendant in the litigation between two former shareholders of
Rich Earth over the ownership of a stock certificate. Under the transfer agent
agreement between Interwest and Rich Earth, GlobalNet (as the successor company
of Rich Earth) is indemnifying Interwest from any potential loss (and legal
expenses) that could arise from such litigation. GlobalNet believes that the
resolution of this litigation will not have a material adverse effect.
Star Telecommunications, Inc. - On May 15, 2003, an action was commenced in the
United States Bankruptcy Court for the District of Delaware against GlobalNet by
the Liquidating Trustee of the Star Creditors' Liquidating Trust (Star
Creditors' Liquidating Trust). The complaint alleges that GlobalNet received
preferential payments of $754,548 from Star Telecommunications, Inc. (Star)
within the 90 days prior to Star's Chapter 11 bankruptcy filing on March 13,
2001 and seeks the refund of these payments. On September 9, 2003, GlobalNet
accepted a proposal from Star Creditors' Liquidating Trust to settle this matter
for $15,000 in exchange for a mutual release.
Taxes
As of December 31, 2002, GlobalNet has Federal net operating loss carryforwards
("NOLs") of $31.8 million. Such losses are available to offset future taxable
income and expire from 2020 to 2022. There are annual limitations on the amount
of carryforwards that can be utilized in the event of a change in control.
Properties
GlobalNet's principal executive office is located in Lombard, Illinois, where it
leases approximately 6,700 square feet at a cost of $9,668 per month. The lease
expires on February 28, 2004.
GlobalNet's operations department and international gateway for Latin America
are located in San Antonio, Texas, where GlobalNet leases approximately 6,100
square feet of office space. The monthly lease payments amount to $4,945 per
month and the lease expires on April 30, 2005.
GlobalNet also leases space in Garden City, New York, in accordance with a
co-location agreement with MCI Worldcom Network Services, Inc., where it has its
international gateway for the rest of the world. Monthly payments under the
co-location agreement are $11,700 per month and the lease expires on September
19, 2002.
GlobalNet believes its facilities are sufficient to meet its current and
reasonably anticipated future requirements or that additional or substitute
space will be available on commercially reasonable terms.
Risks Relating to Our Current Financing Arrangements:
There are a large number of shares underlying our convertible debentures and
warrants that may be available for future sale and the sale of these shares may
depress the market price of our common stock.
As of September 16, 2003, we had 499,991,064 shares of common stock issued and
outstanding and convertible debentures in the aggregate principal amount of
$2,501,702.60 outstanding that may be converted into an estimated 1,563,500,000
shares of common stock at current market prices, outstanding warrants to
purchase 3,750,000 shares of common stock. Furthermore, there are currently
outstanding no options to purchase shares of our common stock. In addition, the
number of shares of common stock issuable upon conversion of the outstanding
convertible debentures and exercise of the reset option may increase if the
market price of our stock declines. All of the shares,
14
including all of the shares issuable upon conversion of the debentures, exercise
of the reset option and upon exercise of our warrants, may be sold without
restriction. The sale of these shares may adversely affect the market price of
our common stock.
The conversion price feature of our convertible debentures could require us to
issue a substantially greater number of shares, which will cause dilution to our
existing stockholders.
The conversion price of the Company's convertible debentures is $.0016,
however, in the event that the Company's market price of its common stock is
below $.0016, then the convertible debentures are convertible into common stock
at a 60% discount. Therefore, in the event that the Company's market price is
below $.0016, the Company's obligation to issue shares upon conversion of its
convertible debentures is essentially limitless. The following is an example of
the amount of shares of the Company's common stock that are issuable after the
market price of our common stock has declined to a level below $.0016, upon
conversion of all of its convertible debentures in the amount of $2,501,702.60
(excluding accrued interest and penalties), based on market prices 25%, 50% and
75% below the price of $.0016:
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 60% Issuable Stock*
- ------ ----- ------ -------- ------
25% $.0012 $.0009 2,779,669,555 41.43%
50% $.0008 $.0004 6,254,256,500 61.41%
75% $.0004 $.0002 12,508,513,000 76.09%
* Percentage based on 3,929,527,215 shares of common stock outstanding of which
499,991,064 are currently outstanding and 3,429,536,151 are required to be
issued pursuant to various contractual arrangements upon increasing the
Company's authorized common stock.
As illustrated, in the event that the Company's market price is below
$.0016, the number of shares of common stock issuable upon conversion of our
convertible debentures will increase if the market price of our stock declines,
which will cause dilution to our existing stockholders. In the event that the
market price of our shares substantially decreases below the current market
price, we may not have an adequate number of shares of common stock to support
the conversion of all of our convertible debentures. We will be in default under
the convertible debentures if we are not able to fully satisfy the conversion
due to the unavailability of shares of common stock.
The adjustable conversion price feature of our convertible debentures may
encourage investors to make short sales in our common stock, which could have a
depressive effect on the price of our common stock.
In the event that our market price is below $.0016, the convertible
debentures are convertible into shares of our common stock at a 60% discount to
the trading price of the common stock prior to the conversion. The significant
downward pressure on the price of the common stock as the selling stockholder
converts and sells material amounts of common stock could encourage short sales
by investors. This could place further downward pressure on the price of the
common stock. The selling stockholder could sell common stock into the market in
anticipation of covering the short sale by converting their securities, which
could cause the further downward pressure on the stock price. In addition, not
only the sale of shares issued upon conversion or exercise of debentures,
warrants and options, but also the mere perception that these sales could occur,
may adversely affect the market price of the common stock.
The issuance of shares upon conversion of the convertible debentures and
exercise of outstanding warrants may cause immediate and substantial dilution to
our existing stockholders.
15
The issuance of shares upon conversion of the convertible debentures and
exercise of warrants may result in substantial dilution to the interests of
other stockholders since the selling stockholders may ultimately convert and
sell the full amount issuable on conversion. Although the selling stockholders
may not convert their convertible debentures and/or exercise their warrants if
such conversion or exercise would cause them to own more than 4.99%, this
restriction does not prevent the selling stockholders from converting and/or
exercising some of their holdings and then converting the rest of their
holdings. In this way, the selling stockholders could sell more than this limit
while never holding more than this limit. There is no upper limit on the number
of shares that may be issued which will have the effect of further diluting the
proportionate equity interest and voting power of holders of our common stock,
including investors in this offering.
In the event that our stock price declines, the shares of common stock allocated
for conversion of the convertible debentures may not be adequate If the shares
we have allocated are not adequate and we are required to file an additional
registration statement, we may incur substantial costs in connection therewith.
Based on our current market price and the potential decrease in our market
price as a result of the issuance of shares upon conversion of the convertible
debentures, we have made a good faith estimate as to the amount of shares of
common stock that we are required to register and allocate for conversion of the
convertible debentures. In the event that our stock price decreases, the shares
of common stock we have allocated for conversion of the convertible debentures
and intend to register may not be adequate. If the shares we have allocated to
the registration statement are not adequate and we are required to file an
additional registration statement, we may incur substantial costs in connection
with the preparation and filing of such registration statement.
If we are required for any reason to repay our outstanding convertible
debentures, we would be required to deplete our working capital, if available,
or raise additional funds. Our failure to repay the convertible debentures, if
required, could result in legal action against us, which could require the sale
of substantial assets.
Since February 2003, we have sold of an aggregate of $3,000,000 principal
amount of convertible debentures. The convertible debentures are due and
payable, with 12% interest, two-years from the date of issuance, unless sooner
converted into shares of our common stock. In addition, any event of default
such as our failure to repay the principal or interest when due, our failure to
issue shares of common stock upon conversion by the holder, our failure to
timely file a registration statement or have such registration statement
declared effective, breach of any covenant, representation or warranty in the
related Securities Purchase Agreements, the assignment or appointment of a
receiver to control a substantial part of our property or business, the filing
of a money judgment, writ or similar process against our company in excess of
$50,000, the commencement of a bankruptcy, insolvency, reorganization or
liquidation proceeding against our company or the delisting of our common stock
could require the early repayment of the convertible debentures, including a
default interest rate of 15% on the outstanding principal balance of the
debentures if the default is not cured with the specified grace period. We
anticipate that the full amount of the convertible debentures, together with
accrued interest, will be converted into shares of our common stock, in
accordance with the terms of the convertible debentures. If we are required to
repay the convertible debentures, we would be required to use our limited
working capital and raise additional funds. If we were unable to repay the
debentures when required, the debenture holders could commence legal action
against us and foreclose on all of our assets to recover the amounts due. Any
such action would require us to curtail or cease operations.
Risks Relating to Our Business:
Fluctuations In Our Quarterly Results Of Operations That Result From Various
Factors Inherent In Our Business May Cause The Market Price Of Our Common Stock
To Fall.
Our revenue and results of operations have been volatile and may continue
to fluctuate significantly from quarter to quarter in the future due to a number
of factors, many of which are not in our control, including, among
16
others:
- the amount of traffic we are able to sell to our customers, and their
decisions on whether to route traffic over our network;
- pricing pressure in the international long distance market;
- the percentage of traffic that we are able to carry over the Internet,
or over our dedicated international private circuit lines, rather than
over the more costly traditional public-switched telephone network;
- loss of arbitrage opportunities resulting from declines in
international settlement rates or tariffs;
- our ability to negotiate changes in the termination fees charged by
our local providers when our margins deteriorate;
- capital expenditures required to expand or upgrade our network;
- changes in call volume among the countries to which we complete calls;
- technical difficulties or failures of our network systems or
third-party delays in expansion or provisioning system problems; and
- our ability to offer value-added services that are appealing to the
market.
Because of these factors, you should not rely on quarter-to-quarter
comparisons of our results of operations as an indication of our future
performance. It is possible that, in future periods, our results of operations
will be significantly lower than the estimates of public market analysts and
investors. Such a discrepancy could cause the price of our common stock to
decline significantly.
If The Internet Does Not Continue To Grow As A Medium For Voice And Fax
Communications, Our Business Will Suffer.
The technology that allows voice and fax communications over the Internet,
and the delivery of other value-added services, is still in its early stages of
development. Historically, the sound quality of calls placed over the Internet
was poor. As the Internet telephony industry has grown, sound quality has
improved, but the technology requires further refinement. Additionally, as a
result of the Internet's capacity constraints, callers could experience delays,
errors in transmissions or other interruptions in service. Transmitting
telephone calls over the Internet must also be accepted as an alternative to
traditional voice and fax service by communications service providers. Because
the Internet telephony market is new and evolving, predicting the size of this
market and its growth rate is difficult. If our market fails to develop, then we
will be unable to grow our customer base and our results of operations will be
adversely affected.
If The Internet Infrastructure Is Not Adequately Maintained, We May Be Unable To
Maintain The Quality Of Our Services And Provide Them In A Timely And Consistent
Manner.
Our future success will depend upon the maintenance of the Internet
infrastructure, including a reliable network backbone with the necessary speed,
data capacity and security for providing reliability and timely Internet access
and services. To the extent that the Internet continues to experience increased
numbers of users, frequency of use or bandwidth requirements, the Internet may
become congested and be unable to support the demands placed on it and its
performance or reliability may decline thereby impairing our ability to complete
calls using the Internet at consistently high quality. The Internet has
experienced a variety of outages and other delays as a result of failures of
portions of its infrastructure or otherwise. Any future outages or delays could
adversely affect our ability to complete calls. Moreover, critical issues
concerning the commercial use of the Internet, including security, cost, ease of
use and access, intellectual property ownership and other legal liability
issues, remain unresolved and could materially and adversely affect both the
growth of Internet usage generally and our business in particular.
We Cannot Be Certain That Our Ability To Provide Our Communications Services
Using The Internet Will Not Be Adversely Affected By Computer Vandalism.
17
Recently, computer vandals have caused certain leading Internet sites to
shut down temporarily and have materially affected the performance of the
Internet during key business hours by bombarding targeted sites with numerous
false requests for data. While we do not operate any websites like those
recently affected, we do rely on the Internet to deliver our international
communications services. If the overall performance of the Internet is seriously
downgraded by such website attacks or other acts of computer vandalism, our
ability to deliver our communication services over the Internet could be
adversely impacted, which could cause us to have to increase the amount of
traffic we have to carry over alternative networks, including the more costly
public-switched telephone network. In addition, traditional business
interruption insurance may not cover losses we could incur because of any such
disruption of the Internet. While some insurers are beginning to offer insurance
products purporting to cover these losses, we do not have any of this insurance
at this time.
International Governmental Regulation And Legal Uncertainties Could Limit Our
Ability To Provide Our Services Or Make Them More Expensive.
The regulatory treatment of Internet telephony outside of the United States
varies widely from country to country. A number of countries currently prohibit
or limit competition in the provision of traditional voice telephony services.
Some countries prohibit, limit or regulate how companies provide Internet
telephony. Some countries have indicated they will evaluate proposed Internet
telephony service on a case-by-case basis and determine whether to regulate it
as a voice service or as another telecommunications service, and in doing so
potentially imposing settlement rates on Internet telephony providers. Finally,
many countries have not yet addressed Internet telephony in their legislation or
regulations. Increased regulation of the Internet and/or Internet telephony
providers, or the prohibition of Internet telephony in one or more countries,
could limit our ability to provide our services or make them more expensive.
In addition, as we make our services available in foreign countries, and as
we work to enable sales by our customers to end-users in foreign countries, such
countries may claim that we are required to qualify to do business in that
particular country, that we are otherwise subject to regulation, including
requirements to obtain authorization, or that we are prohibited in all cases
from conducting our business in that foreign country. Our failure to qualify as
a foreign corporation in a jurisdiction in which we are required to do so or to
comply with foreign laws and regulations could seriously restrict our ability to
provide services in such jurisdiction, or limit our ability to enforce contacts
in that jurisdiction. Our customers also currently are, or in the future may
become, subject to these same requirements. We cannot assure you that our
customers are currently in compliance with any such requirements or that they
will be able to continue to comply with any such requirements. The failure of
our customers to comply with applicable laws and regulations could prevent us
from being able to conduct business with them. Additionally, it is possible that
laws may be applied by the United States and/or other countries to transport
services provided over the Internet, including laws governing:
- sales and other taxes;
- user privacy;
- pricing controls;
- characteristics and quality of products and services;
- consumer protection;
- cross-border commerce, including laws that would impose tariffs,
duties and other import restrictions;
- copyright, trademark and patent infringement; and
- claims based on the nature and content of Internet materials,
including defamation, negligence and the failure to meet necessary
obligations.
If foreign governments or other bodies begin to regulate or prohibit Internet
telephony, this regulation could have a material adverse effect on our ability
to attain or maintain profitability.
Our Operations In Mexico And Latin American Countries May Be Less Profitable
Than We Have
18
Anticipated.
GlobalNet's Latin American strategy is founded on the deregulation of
countries in the region. This deregulation may not occur or could be delayed in
each of the targeted counties.
Operations in each of the targeted countries will be less profitable or
prevented completely if there is non-performance or malfeasance on the part of
any of the partners in the targeted countries, as GlobalNet's business plan
relies on cooperation from local partnerships.
There are additional economic risks in operating in Latin American
countries. Changes in a targeted country's national or local economy could
adversely impact our business. In addition, exchange rate changes in each of
these countries could also negatively affect GlobalNet.
Political unrest or civil war is a possibility and could adversely affect
GlobalNet.
Inherent in the strategy of selecting highly profitable emerging markets to
conduct business is that these markets attract other companies seeking
deregulation, and may result in markets with increased competition. These
increased competition may result in reduced profitability for GlobalNet.
The Telecommunications Industry Is Subject To Domestic Governmental Regulation
And Legal Uncertainties Could Limit Our Ability To Provide Our Services Or Make
Them More Expensive.
While the Federal Communications Commission has tentatively decided that
information service providers, including Internet telephony providers, are not
telecommunications carriers for regulatory purposes, various companies have
challenged that decision. Congress is dissatisfied with the conclusions of the
FCC and the FCC could impose greater or lesser regulation on our industry. The
FCC is currently considering, for example, whether to impose surcharges or other
regulations upon certain providers of Internet telephony, primarily those that,
unlike us, provide Internet telephony services to end-users located within the
United States.
Aspects of our operations may be, or become, subject to state or federal
regulations governing universal service funding, disclosure of confidential
communications, copyright and excise taxes. We cannot assure you that government
agencies will not increasingly regulate Internet-related services. Increased
regulation of the Internet may slow its growth. This regulation may also
negatively impact the cost of doing business over the Internet and materially
adversely affect our ability to attain or maintain profitability.
The Company generates a large portion of its revenues from a few large customers
and, in the event that the Company should lose any one these customers, its
revenues would be negatively impacted.
A significant portion of GlobalNet's revenues are concentrated among a few large
customers. For the years ended December 31, 2001 and December 31, 2002,
GlobalNet's largest customer represented 62% and 63% of total revenue, while the
three largest customers represented 77% and 82% of total revenue, respectively.
Further, for the six month period ended June 28, 2003, the largest four
customers represent 80% of the total revenue, while the largest customer
represented 50% of the total revenue.The loss of any of the foregoing customers
would have a significant adverse impact on GlobalNet.
19
The Company may pursue strategic acquisitions and investments that could have an
adverse impact on its business if they are unsuccessful.
The Company has made a large acquisition and will continue to evaluate other
acquisition opportunities that could provide us with additional product or
service offerings or additional industry expertise as they arise. Acquisitions
could result in difficulties assimilating acquired operations and products, and
result in the diversion of capital and management's attention away from other
business issues and opportunities. Integration of acquired companies may result
in problems related to integration of technology and management teams. The
Company may not successfully integrate operations, personnel or products that we
have acquired or may acquire in the future, including the GlobalNet acquisition.
If the Company fails to successfully integrate acquisitions, its business could
be materially harmed. In addition, the Company's acquisition may not be
successful in achieving its desired strategic objectives, which would also cause
its business to suffer. These transactions may result in the diversion of
capital and management's attention away from other business issues and
opportunities. In addition, the Company has made strategic venture investments
in other companies that provide products and services that are complementary to
the Company. If these investments are unsuccessful, this could have an adverse
impact on its results of operations and financial position.
ONE FOR 150 REVERSE STOCK SPLIT
On August 11, 2003, the majority stockholders of the Company approved a
Reverse Stock Split pursuant to which each one hundred fifty currently
outstanding shares of Common Stock (the "Old Shares") would be automatically
converted into one share of Common Stock (the "New Shares"). The one for one
hundred fifty reverse Stock Split is being effectuated by reducing the number of
issued and outstanding shares at the ratio of 150 to 1. Accordingly, as a result
of the Reverse Stock Split, with the increase in the authorized common stock,
the Company will have approximately 3,333,274 authorized but unissued shares,
which shares may be issued in connection with acquisitions or subsequent
financings. There can be no assurance that the Company will be successful in
making any such acquisitions or obtaining any such financings. In addition, the
Reverse Stock Split has potentially dilutive effects on each of the
shareholders. Each of the shareholders may be diluted to the extent that any of
the authorized but unissued shares are subsequently issued.
The Reverse Stock Split will not alter any shareholder's percentage
interest in the Company's equity, except to the extent that the Reverse Stock
Split results in any of the Company's shareholders owning a fractional share.
All fractional shares shall be rounded up to the next whole number of shares.
The principal effects of the Reverse Stock Split will be that the number of
shares of Common Stock issued and outstanding will be reduced from approximately
499,991,064 to approximately 3,333,274.
In addition, commencing with the effective date of the Reverse Stock Split,
all outstanding options entitling the holders thereof to purchase shares of the
Company's common stock will entitle such holders to receive, upon exercise of
their options, 1/150 of the number of shares of the Company's common stock which
such holders may purchase upon exercise of their options. In addition,
commencing on the effective date of the Reverse Stock Split, the exercise price
of all outstanding options will be increased by a multiple of 150.
The Company believes that the Federal income tax consequences of the reverse
stock split to holders of Common Stock will be as follows:
(i) Except as explained in (v) below, no income gain or loss will be recognized
by a shareholder on the surrender of the current shares or receipt of the
certificate representing new post-split shares.
(ii) Except as explained in (v) below, the tax basis of the New Shares will
equal the tax basis of the Old Shares exchanged therefore.
20
(iii) Except as explained in (v) below, the holding period of the New Shares
will include the holding period of the Old Shares if such Old Shares were held
as capital assets.
(iv) The conversion of the Old Shares into the new shares will produce no
taxable income or gain or loss to the Company.
(v) The Federal income tax treatment of the receipt of the additional fractional
interest by a shareholder is not clear and may result in tax liability not
material in amount in view of the low value of such fractional interest.
The Company's opinion is not binding upon the Internal Revenue Service or the
courts, and there can be no assurance that the Internal Revenue Service or the
courts will accept the positions expressed above.
THE ABOVE REFERENCED IS A BRIEF SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON THE PARTICIPANTS AND THE COMPANY WITH RESPECT TO THE REVERSE STOCK SPLIT.
THIS SUMMARY DOES NOT PURPORT TO BE COMPLETE AND DOES NOT ADDRESS THE FEDERAL
INCOME TAX CONSEQUENCES TO TAXPAYERS WITH SPECIAL TAX STATUS. IN ADDITION, THIS
SUMMARY DOES NOT DISCUSS THE PROVISIONS OF THE INCOME TAX LAWS OF ANY
MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE PARTICIPANT MAY RESIDE, AND
DOES NOT DISCUSS ESTATE, GIFT OR OTHER TAX CONSEQUENCES OTHER THAN INCOME TAX
CONSEQUENCES. THE COMPANY ADVISES EACH PARTICIPANT TO CONSULT HIS OR HER OWN TAX
ADVISOR REGARDING THE TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT AND FOR
REFERENCE TO APPLICABLE PROVISIONS OF THE CODE.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
21
The following table sets forth certain information regarding beneficial
ownership of our common stock as of September 16, 2003
o by each person who is known by us to beneficially own more than
5% of our common stock;
o by each of our officers and directors; and
o by all of our officers and directors as a group.
Name and Address of Number of Percentage of
Beneficial Owner Number of Shares Owned(1) Class (2)
- ---------------- ---------------------- ----------------------
Mark T. Wood, CEO and 817,982,000(3) 20.82%
Chairman of the Board
2204 Timberloch Place, Ste. 225
The Woodlands, TX 77380
Thomas G. Seifert, CFO and Secretary 31,598,704 0.80%
10800 E. Bethany, Ste. 380
Denver, CO 80014
Growth Enterprise Fund, S.A. 2,357,716,329(4) 60.00%
Sea Orchard
Elms Avenue - Poole
Dorsett BH14 8EE
United Kingdom
All Directors and Officers Total 849,580,704 21.62%
* Unless otherwise indicated, the address of each of the persons or entities
listed in the table is c/o iDial Networks, Inc., 2204 Timberloch Place, Suite
225, The Woodlands, TX 77380
** Less than 1%.
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of September 16, 2003 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person.
(2) Percentage based on 3,929,527,215 shares of common stock outstanding of
which 499,991,064 are currently outstanding and 3,429,536,151 are required to be
issued pursuant to various contractual arrangements upon increasing the
Company's authorized common stock.
(3) Includes 159,245,750 shares of common stock currently outstanding and
658,736,250 shares of common stock issuable upon conversion of the convertible
debenture in the amount of $1,053,978 held by Mr. Wood.
(4) The Company, pursuant to the Securities Purchase Agreement entered with
Growth Enterprise Fund, S.A., is required to issue it 2,357,716,329 shares of
common stock upon increasing its authorized shares of common stock.
ADDITIONAL INFORMATION
22
The Company's annual report on Form 10-KSB/A for the fiscal year ended
December 31, 2002 and quarterly report on Form 10-QSB for the quarter ended June
30, 2003 are being delivered to you with this Information Statement. The Company
will furnish a copy of any exhibit thereto or other information upon request by
a stockholder to Mark T. Wood, Chairman and Chief Executive Officer, iDial
Networks, Inc., 2204 Timberloch Pl, Suite 225, The Woodlands, Texas 77380; (281)
465-3100.
EXHIBIT INDEX
Exhibit A Certificate of Amendment to the Certificate of Incorporation
Exhibit B Financial Statements of GlobalNet, Inc.
1. Audited Financial Statements of GlobalNet, Inc. for the
years ended December 31, 2002 and December 31, 2001
2. Unaudited Financial Statements of GlobalNet, Inc. for
the six month period ended June 30, 2003
Exhibit C Proforma Financial Information
By Order of the Board of Directors,
/s/ Mark T. Wood
------------------
Mark T. Wood
Chairman of the Board and Chief
Executive Officer
The Woodlands, Texas
October 7, 2003
EXHIBIT A
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
IDIAL NETWORKS, INC.
IDial Networks, Inc., (the "Corporation") a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Nevada, DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation, in lieu of meeting
by consent, adopted the following resolution:
"RESOLVED that the Board of Directors hereby declares it advisable and in
the best interest of the Corporation that Article FOUR of the Certificate of
Incorporation be amended to read as follows:
RESOLVED that the Board of Directors hereby declares it advisable and in
the best interest of the Corporation that Article IV of the Certificate of
Incorporation be superceded and replaced as follows:
Capital Stock. The Corporation is authorized to issue two
classes of stock. One class of stock shall be Common Stock, par value
$0.005. The second class of stock shall be Preferred Stock, par value
$0.005. The Preferred Stock, or any series thereof, shall have such
designations, preferences and relative, participating, optional or
other special rights and qualifications, limitations or restrictions
thereof as shall be expressed in the resolution or resolutions
providing for the issue of such stock adopted by the board of directors
and may be made dependent upon facts ascertainable outside such
resolution or resolutions of the board of directors, provided that the
matter in which such facts shall operate upon such designations,
preferences, rights and qualifications; limitations or restrictions of
such class or series of stock is clearly and expressly set forth in the
resolution or resolutions providing for the issuance of such stock by
the board of directors.
The total number of shares of stock of each class which the Corporation
shall have authority to issue and the par value of each share of each
class of stock are as follows:
Class Par Value Authorized Shares Total
Common $0.005 1,000,000,000 $5,000,000
Preferred $0.005 30,000,000 150,000
------------ ------------
Totals: 1,030,000,000 $5,150,000
A-1
Reverse. Upon effectiveness of a one-for-one hundred fifty
reverse stock split of the Corporation's Common Stock, all issued and
outstanding shares, as of the effective date, shall be consolidated to
the extent that the issued and outstanding shares of Common Stock shall
be reduced from 499,991,064 prior to the reverse split to 3,333,274
following the reverse stock split. All fractional shares shall be
rounded up to the next whole number of shares."
RESOLVED, that the appropriate corporate officers be, and each
of them with full authority to act without the others hereby is,
authorized and directed for and on behalf of the Corporation to take or
cause to be taken any and all actions, to execute and deliver any and
all certificates, instructions, requests, or other instruments, and to
do any and all things which, in any such officer's judgment, may be
necessary or desirable to effect each of the foregoing resolutions and
to carry out the purposes thereof, the taking of any such actions, the
execution and delivery of any such certificates, instructions,
requests, or instruments, or the doing of any such things to be
conclusive evidence of their necessity or desirability."
SECOND: That the aforesaid amendment has been consented to and
authorized by the holders of a majority of the issued and outstanding stock
entitled to vote by written consent given in accordance with the provisions of
Section 78.320 of the General Corporation Law of the State of Nevada.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed this __ day of ______ 2003.
By: Mark T. Wood
------------------
Name: Mark T. Wood
Title: Chief Executive Officer
A-2
Exhibit B(1)
GLOBALNET, INC. AND SUBSIDIARY
Consolidated Financial Statements
December 31, 2002 and 2001
(With Independent Auditors' Report Thereon)
Independent Auditors' Report
The Board of Directors
The Titan Corporation:
We have audited the accompanying consolidated balance sheets of GlobalNet, Inc.
and subsidiary (Company or Successor), a wholly owned subsidiary of The Titan
Corporation, as of December 31, 2002, and of GlobalNet, Inc. and subsidiary
(Company or Predecessor) as of December 31, 2001, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the periods
from March 22, 2002 to December 31, 2002 (Successor period), and from January 1,
2002 to March 21, 2002 and for each of the years in the two-year period ended
December 31, 2001 (Predecessor periods). These consolidated financial statements
are the responsibility of the Companies' management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the aforementioned Successor consolidated financial statements
present fairly, in all material respects, the financial position of GlobalNet,
Inc. and subsidiary, a wholly owned subsidiary of The Titan Corporation, as of
December 31, 2002, and the results of their operations and their cash flows for
the Successor period, in conformity with accounting principles generally
accepted in the United States of America. Further, in our opinion, the
aforementioned Predecessor consolidated financial statements present fairly, in
all material respects, the financial position of GlobalNet, Inc. and subsidiary
as of December 31, 2001, and the results of their operations and their cash
flows for the Predecessor periods, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in note 3 to the consolidated financial statements, effective March
21, 2002, The Titan Corporation acquired all of the outstanding stock of
GlobalNet, Inc. and subsidiary in a business combination accounted for as a
purchase. As a result of the acquisition, the consolidated financial information
for the period after the acquisition is presented on a different cost basis than
that for the periods before the acquisition and, therefore, is not comparable.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 15 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in note 15. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
KPMG LLP
May 30, 2003
B-2
GLOBALNET, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2002 and 2001
December 31, December 31,
2002 2001
Assets (Successor) (Predecessor)
------------------- -------------------
Current assets:
Cash $ 981,296 1,641,278
Accounts receivable, net of allowance for doubtful 4,551,574 3,261,938
accounts of $2,318,159 and $2,256,483, respectively
Prepaid expenses and other current assets 376,415 90,529
Carrier deposits 578,072 480,633
------------------- -------------------
Total current assets 6,487,357 5,474,378
Property and equipment, net 3,317,141 9,882,730
Intangible assets, net -- 1,266,668
Other assets -- 1,263,818
------------------- -------------------
Total assets $ 9,804,498 17,887,594
=================== ===================
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 4,513,930 9,662,885
Due to MCI 9,856,797 7,082,482
Accrued expenses 868,694 918,487
Payable to Parent, net of receivable 1,761,991 --
Restructuring reserve 526,822 --
Deferred revenue 103,595 28,187
Current portion of capital lease obligations 5,321,454 4,499,821
Note payable to Parent 10,854,601 --
------------------- -------------------
Total current liabilities 33,807,884 22,191,862
Capital lease obligations, net of current portion 2,277,372 6,730,956
Convertible note -- 2,180,553
Stockholders' deficit:
Common stock; 25,000 shares authorized, no par value; 1,000 shares issued
and outstanding at December 31, 2002 and 100,000,000 shares authorized,
$0.001 par value; 32,379,374
shares issued and outstanding at December 31, 2001 -- 32,379
Additional paid-in-capital 31,001,282 25,477,950
Accumulated deficit (57,282,040) (33,407,982)
Deferred compensation -- (5,318,124)
------------------- -------------------
Total stockholders' deficit (26,280,758) (13,215,777)
------------------- -------------------
Total liabilities and stockholders' deficit $ 9,804,498 17,887,594
=================== ===================
See accompanying notes to consolidated financial statements.
B-3
GLOBALNET, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Period from March 22, 2002 through December 31, 2002 (Successor period),
period from January 1, 2002 through March 21, 2002 and years ended
December 31, 2001 and 2000 (Predecessor periods)
Successor
period Predecessor periods
-------------- ----------------------------------------------
March 22, 2002 January 1,
through 2002 through
December 31, March 21,
2002 2002 2001 2000
-------------- ------------- -------------- --------------
Revenue $ 79,241,463 19,735,591 76,987,474 78,090,535
Operating expenses:
Data communications and telecommunications 72,560,190 18,237,365 70,343,236 74,330,916
Network research and development (exclusive of
$0, $643,929, $493,514 and $266,667 for the period
from March 22, 2002 through December 31, 2002, the
period from January 1, 2002 through March 21, 2002,
and the years ended December 31, 2001 and December 31,
2000, respectively, reported below as
noncash stock compensation) 3,529,187 1,473,871 6,048,027 3,151,171
Selling and marketing 491,433 184,066 502,021 1,051,814
General and administrative (exclusive of $0,
$4,674,195, $3,607,814, and $2,233,713 for the period
from March 22, 2002 through December 31, 2002, the
period from January 1, 2002 through March 21, 2002,
and the years ended December 31, 2001 and December
31, 2000, respectively, reported below as
noncash stock compensation) 1,499,012 2,844,182 4,784,971 4,318,335
Restructuring charges 1,113,112 -- -- --
Fixed asset write-off 4,145,564 -- -- --
Goodwill write-off 50,300,000 -- -- --
Corporate allocations 8,883 -- -- --
Bad debt expense (recovery) (100,000) 826,057 1,892,483 482,007
Depreciation and amortization 1,750,288 1,376,283 5,138,029 2,902,905
Noncash stock compensation -- 5,318,124 4,101,328 2,500,380
-------------- ------------- -------------- -------------
Total operating expenses 135,297,669 30,259,948 92,810,095 88,737,528
-------------- ------------- -------------- --------------
Operating loss (56,056,206) (10,524,357) (15,822,621) (10,646,993)
Interest on note payable to Parent (507,782) (46,819) -- --
Interest expense, net (718,052) (250,846) (1,426,532) (1,299,452)
Noncash financing cost -- (1,284,651) (487,063) --
-------------- ------------- -------------- --------------
Loss before income taxes (57,282,040) (12,106,673) (17,736,216) (11,946,445)
Income taxes -- -- -- 327
-------------- ------------- -------------- --------------
Net loss $(57,282,040) (12,106,673) (17,736,216) (11,946,772)
============== ============= ============== ==============
See accompanying notes to consolidated financial statements.
B-4
GLOBALNET, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Deficit
Period from March 22, 2002 through
December 31, 2002 (Successor period), period from January
1, 2002 through March 21, 2002 and years ended December
31, 2001 and 2000 (Predecessor periods)
GlobalNet, Inc.
--------------------------------------------------------
Common Stock Additional Treasury Stock
------------------ paid-in Accumulated ---------------
Shares Amount capital deficit Shares Amount
------------ ------------ ------------ ------------- ------------ ------------
Balance at December 31, 1999 -- $ -- -- -- -- $ --
Exchange of members'
interests for common stock -- -- -- --
Contribution by shareholders -- -- -- -- -- --
Issuance of restricted
stock, net of contribution by
shareholders -- -- -- -- -- --
Exchange of common
shares in connection with merger
with Rich Earth, Inc. 19,875,000 19,875 16,180,002 (3,678,997) $125,000 125
Capital of Rich Earth,
Inc. at time of merger -- 10,997 10,179,183 -- -- --
Issuance of common stock
from private
placement, net 168,389 168 1,449,758 -- -- --
Forfeiture of restricted
stock by employees upon
termination (650,000) (650) (5,200,000) -- 650,000 650
Issuance of restricted
stock from treasury 775,000 775 581,250 -- (775,000) (775)
Issuance of options
and warrants
to nonemployees -- -- 267,097 -- -- --
Amortization of deferred
compansation -- -- -- -- -- --
Net loss -- -- -- (11,946,772) -- --
------------ ------------ ------------ ------------- ------------ ------------
B-5
Balance at December 31,
2000 20,168,389 31,165 23,457,290 (15,625,769) -- --
Issuance of shares for
services rendered 148,496 149 66,131 -- -- --
Issuance of common stock
in February
private placement, net 700,000 700 614,569 -- -- --
Issuance of warrants to
advisors -- -- 97,919 -- -- --
Draw on equity line 365,428 365 111,924 -- -- --
Incentive warrant
discount related to
April private placement -- -- 301,751 -- -- --
Costs related to April
private palcement -- -- 146,157 -- -- --
Beneficial conversion
feature:
April private placement -- -- 728,926 -- -- --
Deemed dividend related to
April private placement -- -- 45,997 (45,997) -- --
Amortization of deferred
compansation -- -- (92,714) -- -- --
Net loss -- -- -- (17,736,216) -- --
------------ ------------ ----------- ------------- ------------ ------------
Balance at December 31,
2001 21,382,313 32,379 25,477,950 (33,407,982) -- --
Conversion of convertible
note 4,888,263 4,889 2,196,497 -- -- --
Issuance of shares for
legal settlement l350,000 350 227,150 -- -- --
Amortization of deferred
compansation -- -- -- -- -- --
Net loss for period -- -- -- (12,106,673) -- --
------------ ------------ ----------- ------------- ------------ ------------
Balance at March 21,
2002 26,620,576 37,618 27,901,597 (45,514,655) -- --
Cancellation of shares
outstanding (26,619,576) (37,618) 37,618 -- -- --
Net effect of purchase
accounting adjustments -- -- 3,062,067 45,514,655 -- --
Net loss for period -- -- -- (57,282,040) -- --
------------ ------------ ----------- ------------- ------------ ------------
Balance at December 31,
2002 1,000 $ -- 31,001,282 (57,282,040) -- --
============ ============ =========== ============= ============ ============
See accompanying notes to consolidated financial statements.
B-6
GLOBALNET, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Deficit
Period from March 22, 2002 through
December 31, 2002 (Successor period), period from January
1, 2002 through March 21, 2002 and years ended December
31, 2001 and 2000 (Predecessor periods)
DTA
Communications
GlobalNet International, Inc. Network, LLC
-------------------------------------------------------- -----------------
Common Stock Additional Treasury Stock
------------------ paid-in Accumulated ----------------- Members' Deferred Total
Shares Amount capital deficit Shares Amount deficit compensation deficit
----------- ----------- ------------- ------------ ----------- ----------- ----------- ----------- -----------
Balance at December
31, 1999 -- -- -- -- -- $ -- (3,678,995) -- (3,678,995)
Exchange of members'
interests for
common stock 2,000 2 -- (3,678,997) 3,678,995 -- --
Contribution by
shareholders (215) -- -- -- 215 -- -- -- --
Issuance of
restricted
stock, net of
contribution by
shareholders 203 -- 16,200,000 -- (203) -- -- (16,200,000) --
Exchange of common
shares in connection
with merger with
Rich Earth, Inc. (1,988) (2) (16,200,000) 3,678,997 (12) -- -- -- --
Capital of Rich Earth,
Inc. at time of
merger -- -- -- -- -- -- -- -- 10,190,180
Issuance of common
stock
from private
placement, net -- -- -- -- -- -- -- -- 1,449,926
Forfeiture of
restricted
stock by employees
upon termination -- -- -- -- -- -- -- 4,450,000 (750,000)
Issuance of
restricted
stock from treasury -- -- -- -- -- -- -- (581,250) --
Issuance of options
and warrants
to nonemployees -- -- -- -- -- -- -- (58,388) 208,709
Amortization of
deferred
compansation -- -- -- -- -- -- -- 3,041,671 3,041,671
Net loss -- -- -- -- -- -- -- -- (11,946,772)
----------- ----------- ------------- ------------ ----------- ----------- ------------ ----------- -----------
B-7
Balance at December
31, 2000 -- -- -- -- -- -- -- (9,347,967) (11,485,281)
Issuance of shares
for
services rendered -- -- -- -- -- -- -- -- 66,280
Issuance of common
stock in February
private placement,
net -- -- -- -- -- -- -- -- 615,269
Issuance of warrants
to advisors -- -- -- -- -- -- -- (97,919) --
Draw on equity line -- -- -- -- -- -- -- -- 112,289
Incentive warrant
discount related to
April private
placement -- -- -- -- -- -- -- -- 301,751
Costs related to
April private
palcement -- -- -- -- -- -- -- -- 146,157
Beneficial conversion
feature:
April private
placement -- -- -- -- -- -- -- -- 728,926
Deemed dividend
related to
April private
placement -- -- -- -- -- -- -- -- --
Amortization of
deferred
compansation -- -- -- -- -- -- -- 4,127,762 4,035,048
Net loss -- -- -- -- -- -- -- -- (17,736,216)
----------- ----------- ------------- ------------ ----------- ----------- ----------- ----------- ------------
Balance at December
31, 2001 -- -- -- -- -- -- -- (5,318,124) (13,215,777)
Conversion of
convertible note -- -- -- -- -- -- -- -- 2,201,386
Issuance of shares
for legal settlement -- -- -- -- -- -- -- -- 227,500
Amortization of
deferred
compansation -- -- -- -- -- -- -- 5,318,124 5,318,124
Net loss for period -- -- -- -- -- -- -- -- (12,106,673)
----------- ----------- ------------- ------------ ----------- ----------- ----------- ----------- -----------
Balance at March 21, -- -- -- -- -- -- -- -- (17,575,440)
2002
Cancellation of
shares outstanding -- -- -- -- -- -- -- -- --
Net effect of
purchase accounting
adjustments -- -- -- -- -- -- -- -- 48,576,722
Net loss for period -- -- -- -- -- -- -- -- (57,282,040)
----------- ----------- ------------- ------------ ----------- ----------- ----------- ----------- ------------
Balance at December
31, 2002 -- -- -- -- -- -- -- -- (26,280,758)
=========== =========== ============= ============ =========== =========== =========== =========== ============
B-8
GLOBALNET, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Period from March 22, 2002 through December 31, 2002 (Successor period), period
from January 1, 2002 through March 21, 2002 and years ended December 31,
2001 and 2000 (Predecessor periods)
Successor
period Predecessor periods
------------- --------------------------------------------
March 22, 2002 January 1,
through 2002 through
December 31, March 21,
2002 2002 2001 2000
------------- ------------- ------------- -------------
Cash flows from operating activities:
Net loss $(57,282,040) (12,106,673) (17,736,216) (11,946,772)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,750,288 1,376,283 5,138,029 2,902,905
Provision for (recovery of) doubtful accounts (100,000) 826,057 1,892,483 482,007
Noncash stock compensation -- 5,318,124 4,101,328 2,500,380
Noncash financing costs -- 1,284,651 730,609 --
Restructuring charges 1,113,112 -- -- --
Goodwill write-off 50,300,000 -- -- --
Fixed asset write-off 4,145,564
Loss from disposal of equipment -- -- 95,079 --
Changes in assets and liabilities:
Restricted cash -- -- 157,872 315,147
Accounts receivable (1,364,550) (651,143) (104,300) (4,332,845)
Due from related party -- -- -- 41,319
Interest on Parent loan 507,782 46,819 -- --
Prepaid expenses and other current assets (232,853) (53,033) 60,952 (136,562)
Carrier deposits (755,449) 658,010 (358,125) --
Accounts payable (2,397,837) (2,751,119) 5,674,744 8,144,825
Due to MCI 622,440 2,151,875 -- --
Restructuring reserve (586,290) -- -- --
Payable to Parent, net of receivable 1,761,991 -- -- --
Salaries and wages payable -- -- -- (176,083)
Deferred revenue 8,882 66,526 28,187 (1,582,661)
Accrued expenses (1,472,138) 1,649,845 486,625 (67,819)
------------- ------------- ------------- ------------
Net cash provided by (used in) operating activities (3,981,098) (2,183,778) 167,267 (3,856,159)
------------- ------------- ------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (36,074) (1,127,081) (824,631) (675,724)
------------- ------------- ------------- -------------
Net cash used in investing activities (36,074) (1,127,081) (824,631) (675,724)
------------- ------------- ------------- -------------
Cash flows from financing activities:
Proceeds from note payable with Rich Earth, Inc. -- -- -- 800,000
Proceeds from merger with Rich Earth, Inc. -- -- -- 7,262,982
Proceeds from private placements -- -- -- 1,449,926
Proceeds from parent loan 7,300,000 3,000,000 -- --
Proceeds from vendor financing -- 1,087,322 -- --
Proceeds from March private placement of common stock, net -- -- 615,269 --
Proceeds from equity line, net -- -- 112,289 --
Proceeds from convertible note, net -- -- 1,512,911 --
Repayments of principal on term loan -- -- -- (617,039)
Principal payments on capital lease obligations (3,829,721) (889,552) (2,487,286) (2,123,153)
------------- ------------- ------------- -------------
Net cash (used in) provided by financing
activities 3,470,279 3,197,770 (246,817) 6,772,716
------------- ------------- ------------- -------------
Net increase (decrease) in cash (546,893) (113,089) (904,181) 2,240,833
Cash at beginning of period 1,528,189 1,641,278 2,545,459 304,626
------------- ------------- ------------- -------------
Cash at end of period $ 981,296 1,528,189 1,641,278 2,545,459
============= ============= ============= =============
Supplemental disclosure of noncash financing and investing
activity:
Payment for purchase of 25% minority interest in and
certain
assets of GlobalNet, L.L.C. by Rich Earth, Inc.
on behalf of Company $ -- -- -- 2,127,198
Cancellation of notes payable to Rich Earth, Inc. in
connection
with merger with Rich Earth, Inc. -- -- -- 2,927,198
Cash paid for interest 686,931 282,134 1,013,341 1,434,000
Conversion of convertible note into equity -- 2,201,386 -- --
Equipment acquired under capital leases -- -- 3,852,428 7,355,704
Value of equipment refinanced under capital lease -- -- 2,879,491 --
Common stock issued for legal settlement -- 227,500 -- --
See accompanying notes to consolidated financial statements.
B-9
(1) Nature of Organization and Business
GlobalNet, Inc. (GlobalNet or the Company) provides global
telecommunications, including high quality voice, fax, and other
value-added applications on a wholesale basis over a managed Internet
Protocol network to international carriers and other communication service
providers in the United States and internationally.
GlobalNet was formed on May 30, 2000, when GlobalNet International, Inc.
(GII) merged with a subsidiary of Rich Earth, Inc. (Rich Earth) pursuant to
an agreement (the Merger Agreement) whereby 20,000,000 shares of Rich Earth
common stock were exchanged for 100% of the common stock of GII in a
transaction accounted for as a reverse acquisition (Merger) 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 nonoperating public shell
corporation with nominal assets. GII management controlled the combined
company after the transaction. After the closing of the merger, Rich Earth
changed its name to GlobalNet, Inc.
The merger is considered by the Company to be a capital transaction in
substance, rather than a business combination. That is, the merger is
equivalent to the issuance of stock by the Company for the net monetary
assets of Rich Earth, accompanied by a recapitalization. The accounting is
identical to that resulting from a reverse acquisition, except that no
goodwill or other intangible was recorded.
As a result of the reverse merger, the operating entity, GII, continues as
the operating entity under the GlobalNet, Inc. name, and its historical
financial statements replaced 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 C-corporation (Reorganization). DTA was
organized in Illinois on May 22, 1996 as a limited liability company. 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 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% and was accounted for under the purchase method of
accounting.
On March 21, 2002, GlobalNet, Inc. merged with a subsidiary of The Titan
Corporation (Titan or Parent). In the merger, a wholly owned subsidiary of
Parent merged into GlobalNet and all of GlobalNet's outstanding common
shares and certain outstanding stock options and warrants were converted
into Parent common shares, options and warrants, plus cash in lieu of
fractional shares. The merger had an aggregate equity transaction value of
approximately $31.0 million. The transaction was accounted for as a
purchase. The excess of the purchase price of $31.0 million over the
estimated fair market value of the net liabilities acquired of
approximately $19.3 million was approximately $50.3 million, which was
allocated to goodwill. After the merger, Parent reduced the number of
shares of common stock outstanding in GlobalNet from 37,617,637 shares to
1,000 shares. As a result of the merger, the consolidated financial
information for the period after the merger (Successor period) is presented
on a different cost basis than that for the periods before the merger
(Predecessor periods) and, therefore, is not comparable.
The Company is subject to risks and uncertainties common to growing
telecommunications-based companies, including rapid technological changes,
low costs to customers of switching from carrier to carrier, failed
alliances, and pricing pressures in the international long distance market.
B-10
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements for all periods presented
include the accounts of GlobalNet, Inc. and its wholly owned
subsidiary, GlobalNet International, Inc. All intercompany accounts
and balances have been eliminated in consolidation.
Issuance of Members' Interests by Subsidiary
Prior to the Merger Agreement, the Company accounted for issuances of
members' interests by its subsidiary as equity transactions, thereby
recording the amount in excess of the parent's carrying value to
members' equity.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements, and
the reported amounts of revenue and expenses during the reporting
period. Actual results may differ from those estimates.
Fair Value of Financial Instruments
Financial instruments consist principally of accounts receivable,
carrier deposits, accrued expenses, accounts payable, notes payable,
and capital leases. The estimated fair values of these instruments
approximates their carrying values.
Goodwill
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill
and Other Intangible Assets, which establishes financial accounting
and reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, Intangible Assets. Under SFAS No. 142,
goodwill and indefinite-lived intangible assets are no longer
amortized but are reviewed at least annually for impairment. Separable
intangible assets that have finite useful lives will continue to be
amortized over their useful lives. SFAS No. 142 requires that goodwill
be tested for impairment at the reporting unit level at adoption and
at least annually thereafter, utilizing a two step methodology. The
initial step requires the Company to assess whether indications of
impairment exist. If indications of impairment are determined to
exist, the second step of measuring impairment is performed, wherein
the fair value of the relevant reporting unit is compared to the
carrying value, including goodwill, of such unit. If the fair value
exceeds the carrying value, no impairment loss is recognized. However,
if the carrying value of the reporting unit exceeds its fair value,
the goodwill of the reporting unit is impaired.
B-11
Accounting for the Impairment of Long-lived Assets
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, and the accounting and reporting provisions of Accounting
Principles Board (APB) Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions, for the disposal of a segment of a business (as
previously defined in that Opinion). The provisions of SFAS No. 144
are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company adopted SFAS No. 144 on
January 1, 2002.
Revenue Recognition
The Company's revenue consists of the sale of wholesale carrier voice
and fax, via an international network. Revenue is recognized as
services are rendered. In order to mitigate risk of loss, several
customers prepay for their services, in which case revenue is deferred
and is recognized as minutes are utilized.
Until October 2000, the Company also derived revenue from supplying
underlying services, including value-added applications and the use of
the Company's network, to issuers of prepaid phone cards. Those
issuers prepaid for some or all of the services provided. Payments
received in advance for such services were recorded as deferred
revenue and were recognized as the prepaid phone cards were used.
Sometimes, these cards expired without being fully used as they had
lives of up to three months after the first use. The unused value was
referred to as breakage and was recorded as revenue at the date of
expiration. Subsequent to October 2000, prepaid phone service was
insignificant.
Research and Development Expenses
The Company charges research and development expenses incurred in the
development, expansion, operation, and support of the Company's global
Internet Protocol network to network research and development as
incurred.
Stock-based Compensation
The Company has elected to adopt the disclosure only provisions of
SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly,
the Company will continue to account for its stock-based compensation
plans under the provisions of APB No. 25. The Company also follows the
disclosure requirements of SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which amends SFAS No. 123.
B-12
GLOBALNET, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
As allowed by SFAS No. 123, the Company has elected to continue to
apply the intrinsic value-based method of accounting described in APB
No. 25 and has adopted the disclosure only provisions of SFAS No. 123.
Compensation cost, if any, is measured as the excess of the quoted
market price of the Company's stock on the date of grant over the
exercise price of the grant. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value
at the grant dates for awards under those plans consistent with the
method of SFAS No. 123, the Company's results of operations would have
been reduced to the pro forma amounts indicated below:
Successor
period Predecessor periods
---------------- ----------------------------------------------------
March 22, January 1, Year Year
2002 through 2002 through ended ended
December 31, March 21, December 31, December 31,
2002 2002 2001 2000
---------------- ---------------- ---------------- ----------------
Net loss, as reported $ (57,282,040) (12,106,673) (17,736,216) (11,946,772)
Less - stock based employee
compensation cost included
in net loss as reported -- 5,310,627 3,976,016 2,291,671
Plus - stock based employee
compensation cost that
would have been included
in net loss if fair value
method would have been
applied to all awards gratned -- (5,419,421) (6,547,371) (4,251,344)
---------------- ---------------- ---------------- ----------------
Net loss, pro forma $ (57,282,040) (12,215,467) (20,307,571) (13,906,445)
================ ================ ================ ================
Derivatives
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, (SFAS 133) which was later amended by Statement No. 137,
Accounting for Derivative Instruments and Hedging Activities -
Deferral of the effective date of FASB Statement No. 133 and by
Statement No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an Amendment of FASB Statement No. 133
(collectively, the Standard). The Standard requires companies to
record derivative instruments on the balance sheet as assets or
liabilities measured at fair value. The accounting treatment of gains
and losses resulting from changes in the value of derivatives depends
on the use of the derivatives and whether they qualify for hedge
accounting. The Standard was required to be adopted for financial
statements issued for the fiscal year ending December 31, 2002. As the
Company does not currently engage in derivatives or hedging
transactions, there was no impact to the Company's results of
operations, financial position, or cash flows upon the adoption of
SFAS 133.
B-13
GLOBALNET, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
Income Taxes
Subsequent to the Reorganization, the Company accounts for income
taxes in accordance with the provisions of Statement of Financial
Accounting Standards No. 109 (Statement 109), Accounting for Income
Taxes. Under the asset and liability method of Statement 109, deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to the difference between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. Under Statement 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Prior to the Reorganization, the Company operated in the form of a
limited liability company and accordingly, the Company's income tax
liabilities were the responsibility of its members.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, Reporting Comprehensive Income. The Company does not
have any components of comprehensive income (loss) other than its
reported net loss.
(3) Merger with a Subsidiary of The Titan Corporation
On March 21, 2002, GlobalNet, Inc. merged with a subsidiary of The Titan
Corporation (Titan or Parent). In the merger, a wholly owned subsidiary of
Parent merged into GlobalNet and all of GlobalNet's outstanding common
shares and certain outstanding stock options and warrants were converted
into Parent common shares, options, and warrants, plus cash in lieu of
fractional shares.
On the date of the merger, Parent issued approximately 1,452,800 shares of
common stock for all the common stock of GlobalNet at an aggregate value of
$28.6 million, based on $19.67 per Parent share, the average market price
for the 20 consecutive trading day period ended March 15, 2002, the date on
which the formula for consideration became fixed, and assumed stock options
and warrants representing approximately 77,900 shares of Parent common
stock at an aggregate fair value of $0.8 million, based on an exchange
ratio of 0.03853 shares of Parent common stock for each share of GlobalNet
common stock. The transaction was accounted for as a purchase. The excess
of the purchase price of $31.0 million over the estimated fair market value
of the net liabilities acquired of approximately $19.3 million was
approximately $50.3 million. In April 2002, Parent obtained an independent
valuation completed by independent valuation specialists Bearing Point
(formerly KPMG Consulting, Inc.) to assist in its purchase price allocation
of the GlobalNet acquisition. The independent valuation was used by Parent
to allocate $50.3 million to goodwill and $0 to intangible assets as of
March 21, 2002. The $50.3 million allocated to goodwill includes $633,000
of unamortized goodwill recorded in connection with the acquisition of the
remaining 25% minority interest in GlobalNet, L.L.C. in March 2000 and the
reclassification to goodwill of an additional $633,000 of unamortized
intangible assets recorded in connection with that acquisition.
B-14
GLOBALNET, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
On July 11, 2002, Parent made the decision to exit its telecommunications
business and to sell GlobalNet. Parent has determined that there has been
an impairment of the carrying value of GlobalNet's goodwill of
approximately $50.3 million in accordance with SFAS No. 142. The
measurement of this impairment was evident based upon estimates of fair
value, as determined by recent offers received by Parent from potential
buyers, compared to the carrying value of the asset.
In accordance with Staff Accounting Bulletins No. 54 and No. 73, the
Company has "pushed down" to its stand-alone consolidated financial
statements the purchase accounting adjustments and the subsequent write-off
of goodwill recorded by Parent. As a result, the consolidated financial
information for the period after the merger is presented on a different
cost basis than that for the periods before the merger and, therefore, is
not comparable.
(4) Restructuring Charges
Included in the period from March 22, 2002 through December 31, 2002
(Successor period) is a $1.1 million restructuring charge. Approximately
$0.3 million of the restructuring charge is related to the severance
payment for certain employees terminated in July 2002 as part of a
restructuring plan to reduce headcount and operating expenses.
Approximately $0.7 million of the restructuring charge is related to lease
agreements for circuits that the Company discontinued in July 2002 as a
result of the Company's strategy to consolidate traffic in certain
facilities in order to realize synergies and reduce operating costs. The
charge represents the future payments for the remaining terms of those
lease agreements.
Approximately $52 thousand of the restructuring charge corresponds to the
cost of closing the Company's office in Marietta, Georgia. The charge
includes the future lease payments for the remaining term of the lease
agreement and the moving expenses.
The remaining $0.1 million of the restructuring charge is related to the
Company's headquarters in Lombard, Illinois. The Company recorded a charge
of 50% of the lease cost of its offices in Lombard for the remaining term
of the lease agreement as a result of the current underutilization of the
office space.
B-15
GLOBALNET, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
The components of the restructuring charge and the expenses applied against
the reserve for the period from March 22, 2002 through December 31, 2002
were as follows:
Charges
recorded
from March 22,
2002 Costs Ending
through applied balance
December 31, against December 31,
2002 reserve 2002
------------------- ------------------- -------------------
Severance payments $ 278,609 278,609 --
Unused circuit leases 681,311 239,378 441,933
Closing costs of Marietta office 52,000 38,446 13,554
Under utilization cost of Lombard office 101,192 29,857 71,335
------------------- ------------------- -------------------
$ 1,113,112 586,290 526,822
=================== =================== ===================
(5) Income Taxes
No provision for U.S. Federal and state income taxes was recorded prior to
March 2000, as such liability was the responsibility of the members of DTA,
rather than of the Company. As a result of the change from an LLC to a
C-corporation, the Company recorded an initial net deferred income tax
asset of $5,825,052 to reflect the establishment of deferred tax assets and
liabilities. However, due to the lack of certainty of recovery, a full
valuation allowance was recorded against the initial and subsequent net
deferred income taxes.
The Company has Federal net operating loss carryforwards approximating
$31,836,000, for the year ended December 31, 2002. Such losses are
available to offset future taxable income and expire from 2020 to 2022. In
addition, if certain substantial changes in the Company's ownership are
deemed to have occurred, there would be an annual limitation on the amount
of carryforwards which could be utilized.
B-16
GLOBALNET, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
The provision for income taxes consists of the following:
Successor
period
------------------ Predecessor periods
March 22, 2002 --------------------------------------------------------
through January 1,
December 31, 2002 through December 31, December 31,
2002 March 21, 2002 2001 2000
------------------ ----------------- ------------------ -----------------
Current taxes:
Federal $ -- -- -- --
State -- -- -- 327
------------------ ----------------- ------------------ -----------------
Total -- -- -- 327
------------------ ----------------- ------------------ -----------------
Deferred taxes:
Federal -- -- -- --
State -- -- -- --
------------------ ----------------- ------------------ -----------------
Total -- -- -- --
------------------ ----------------- ------------------ -----------------
Provision for
income taxes $ -- -- -- 327
================== ================= ================== =================
The total tax provision differs from the amount computed by applying the
Federal income tax rate of 35% to the loss before income taxes for the
following reasons:
Successor
period
------------------
March 22, 2002 Predecessor periods
--------------------------------------------------------
through January 1,
December 31, 2002 through December 31, December 31,
2002 March 21, 2002 2001 2000
------------------ ----------------- ------------------ -----------------
Expected income tax benefit at
Federal income tax rate $ (20,048,714) (4,237,336) (6,207,676) (4,181,256)
Increase (decrease) in taxes resulting from
prior year federal provision in
return permanent adjustments -- -- 913,266 --
Increase (decrease) in taxes resulting from
state income tax benefit, net of
federal impact (899,734) (190,160) (829,958) (699,259)
Meals and entertainment 5,206 1,736 8,107 7,508
Deferred income and expense recognized
on LLC tax return -- -- -- (1,056,718)
Nondeductible write-down of goodwill 17,605,000 -- -- 105,000
Nondeductible stock compensation -- 1,738,698 -- --
Change in valuation allowance 3,338,242 2,687,062 6,116,261 5,825,052
------------------ ----------------- ------------------ -----------------
$ -- -- -- 327
================== ================= ================== =================
B-17
GLOBALNET, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
Deferred tax assets (liabilities) are comprised of the following:
December 31, December 31,
2002 2001
------------------- -------------------
Deferred tax assets:
Accrued restructuring charge $ 224,717 --
Fixed assets 1,288,087 --
Noncash stock compensation expense -- 2,820,230
Bad debt reserves 988,814 963,963
Professional fees related to merger 1,475,630 660,910
Deferred income 44,189 12,042
Accrued legal fees 156,757 156,994
Goodwill amortization 208,536 208,852
Continuing operations NOL carryforward 13,603,440 7,158,921
------------------- -------------------
Total deferred tax assets 17,990,170 11,981,912
Valuation allowance (17,966,617) (11,941,313)
------------------- -------------------
Deferred tax liabilities:
Fixed assets -- (39,023)
Federal impact of state NOL carryforward (23,553) (1,576)
------------------- -------------------
Total deferred tax liabilities (23,553) (40,599)
------------------- -------------------
Net deferred income taxes $ -- --
=================== ===================
The net change in the total valuation allowance for the years ended
December 31, 2002 and 2001 was an increase of $6,025,304 and $6,116,261,
respectively. In assessing the realizability of deferred tax assets, the
Company considers whether it is more likely than not that some portion or
all of the deferred tax assets will be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable
income during the period in which these temporary differences become
deductible. This assessment was performed considering the scheduled
reversal of deferred tax liabilities, projected future taxable income, and
tax planning strategies. Due to the Company's operating losses, there is
uncertainty surrounding whether the Company will ultimately realize its
deferred tax assets. Accordingly, these assets have been fully reserved.
B-18
GLOBALNET, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(6) Property and Equipment
Property and equipment consists of the following:
December 31,
-----------------------------------------
2002 2001
(Successor) (Predecessor)
------------------- -------------------
Leasehold improvements $ 20,181 40,362
Network equipment under capital leases 7,567,767 16,475,696
Furniture and equipment 837,649 1,501,642
------------------- -------------------
8,425,597 18,017,700
Less accumulated depreciation and amortization 5,108,456 8,134,970
------------------- -------------------
Property and equipment, net $ 3,317,141 9,882,730
=================== ===================
Property and equipment are stated at cost. Equipment held under capital
leases is stated at the lower of fair value of the asset or the net present
value of the minimum lease payments at the inception of the lease.
Depreciation expense is calculated using the straight-line method over the
estimated useful lives of the assets which range from three to five years.
In July 2002, it became uncertain whether the Company would be able to
recover the carrying value of its property and equipment as a result of
Parent's decision to exit the telecommunications business on July 11, 2002
and the current depressed market values for telecommunications assets. As a
result, the Company determined that its property and equipment were
impaired and recorded a $4,145,564 write-off, which represented 50% of the
net book value of those assets as of June 29, 2002. Depreciation for the
periods March 22, 2002 through December 31, 2002 and January 1, 2002
through March 21, 2002, and the years ended December 31, 2001, and 2000 was
$1,750,288, $1,331,657, $4,738,029, and $2,569,573, respectively.
Accumulated depreciation of assets recorded under capital leases was
$4,654,638 and $7,616,491 at December 31, 2002 and 2001, respectively.
(7) Intangible Assets
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. As a
result, the Company recorded intangible assets of $2,000,000, which were
being amortized over useful lives of five years. The purchase price was
allocated $1,000,000 to acquired customer base and $1,000,000 to goodwill.
The Company recorded $44,624, $400,000 and $333,332 of intangible asset
amortization for the period January 1, 2002 through March 21, 2002, and for
the years ended December 31, 2001 and 2000, respectively.
As discussed in note 3, on March 21, 2002, the Company was acquired by
Parent, and all intangible assets were revalued in purchase accounting. As
a result, the Company recorded $50.3 million of goodwill.
B-19
GLOBALNET, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(8) MCI Payment Agreement
On February 27, 2002, the Company entered into an agreement with MCI
WorldCom Network Services, Inc. (MCI) to refinance a $6,083,414 balance of
past due payables (Payment Agreement). Pursuant to the Payment Agreement,
the Company makes monthly payments to MCI with a final balloon payment of
$3,633,414 due on March 31, 2003. See note 15.
In connection with the refinancing of the past due payables, the Company
made an annual revenue commitment to MCI of $22,000,000 for the year ended
December 31, 2002. The services purchased by the Company from MCI during
the year ended December 31, 2002 exceeded the amount of the revenue
commitment and were under the Company's usual and customary terms with MCI.
(9) Leases and Commitments
The Company leases various office facilities, cars, and equipment under
operating leases with remaining terms of up to 3.5 years. Rent expense
under operating leases was $299,289, $101,076, $563,749, and $315,658 for
the periods March 22, 2002 through December 31, 2002, January 1, 2002
through March 21, 2002, and the years ended December 31, 2001, and 2000,
respectively.
In April 2001, the Company entered into an agreement with Cisco Systems
Capital Corporation (Cisco Capital) to finance the purchase of Cisco
equipment through 36-month capital leases with interest rates ranging from
4.5% to 5.2% and secured by all equipment related to the lease. The lease
agreement contains certain covenants. At December 31, 2002, the Company
utilized $4,514,158 under this credit facility, and the Company recorded a
lease obligation of $3,351,821. At December 31, 2002, the Company does not
have any additional availability under this credit facility.
In April 2000, the Company entered into a $10,000,000 credit facility to be
used for capital lease obligations with General Electric Capital
Corporation (GE Capital). The Company entered into 36-month leases with
interest rates of 13.2% and secured by all equipment related to the lease.
At December 31, 2002, the outstanding balance under this credit facility
was $2,620,809.
In October 1999, the Company entered into certain capital leases for
network equipment with PrinVest Financial Corp. (PrinVest). The total
amount financed was approximately $5,268,000. On May 10, 2001, the Company
refinanced these lease with another lender, ending an existing dispute with
PrinVest. The outstanding balance under these leases on the date of the
refinancing amounted to $2,730,000. After the refinancing, the interest
cost on the leases decreased to 11.8% from 22.0%, and the term was extended
to 36 months from the 18 months remaining under the original lease. The
Company paid a $100,000 refinancing fee in connection with the refinancing
of these leases, which was expensed as interest during the year ended
December 31, 2001. At December 31, 2002, the outstanding balance for this
lease was $1,566,017.
B-20
GLOBALNET, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
Future minimum lease payments under capital leases and noncancelable
operating lease at December 31, 2002 are as follows:
Operating Capital
------------------- -------------------
2003 $ 214,764 5,748,647
2004 95,721 2,323,730
2005 23,133 6,378
2006 -- --
2007 and thereafter -- --
------------------- -------------------
Total future minimum lease payments $ 333,618 8,078,755
===================
Less amount representing interest (rates ranging
from 4.5% to 16.9%) 479,929
-------------------
Net present value of minimum lease payments 7,598,826
Less current portion 5,321,454
-------------------
Long-term portion, net of current portion $ 2,277,372
===================
(10) Related Parties
On January 6, 2002, GlobalNet and Parent entered into a secured note
purchase agreement that was subsequently amended on August 30, 2002.
Pursuant to this agreement, GlobalNet's outstanding debt was $10,300,000 at
December 31, 2002. The loan is payable on demand and bears interest at 8%
per annum. Accrued interest in connection with the loan amounted to
$554,601 at December 31, 2002. Interest expense for the Successor period
and January 1, 2002 through March 21, 2002 was $507,782 and $46,819,
respectively.
Parent paid on behalf of the Company $1,972,390 of the Company's expenses
for the year ended December 31, 2002. The expenses paid by Parent on behalf
of the Company included $1,564,489 of the Company's payroll, $261,709 of
legal expenses, $8,883 of corporate allocations, and $137,309 of
miscellaneous expenses. The Company recorded these expenses as a payable to
Parent Company, which amounted to $1,972,390 at December 31, 2002.
GlobalNet provides long-distance termination services in the United States
to TTN Guatemala, a former subsidiary of Parent. The total amount invoiced
by the Company to TTN Guatemala for these services amounted to $117,269 and
$0 for the periods March 22, 2002 through December 31, 2002 and January 1,
2002 through March 21, 2002, respectively.
The Company paid $46,847 in 2001 to a law firm for legal services provided
by a partner who was a director of the Company until October 29, 2001.
B-21
GLOBALNET, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(11) Stockholders' Equity and Convertible Note
Equity Transactions
Reverse Merger
On May 30, 2000, GlobalNet, Inc. was formed when GlobalNet
International, Inc. (GII) merged with a subsidiary of Rich Earth, Inc.
(Rich Earth) in a transaction accounted for as a reverse acquisition
of Rich Earth by GII using the purchase method of accounting pursuant
to an agreement (the Merger Agreement) whereby 20,000,000 shares of
Rich Earth common stock were exchanged for 100% of the common stock of
GlobalNet International, Inc. At the time of the Merger, Rich Earth
had 9,960,000 common shares issued and outstanding.
2000 Private Placements
During the period from March 2000 through July 2000, 1,205,450 shares
of common stock were issued in connection with two private placement
transactions. The first private placement transaction sold 600,000
units at $10 per unit and resulted in the issuance of 600,000 common
shares and grant of warrants to purchase an additional 300,000 shares
of common stock at $15 per share. The second private placement
transaction sold 605,450 units at $10 per unit and resulted in the
issuance of 605,450 shares of common stock and the grant of warrants
to purchase an additional 605,450 shares of common stock at $15 per
share. Net proceeds of both private placements were $11,640,106.
2001 Private Placements and Equity Transactions
On March 21, 2001, the Company completed a private placement of
700,000 shares of common stock at $1.00 per share. The Company
received net proceeds at the closing in the amount of $615,269, after
deducting offering costs of $85,000. In addition, the Company issued
warrants to purchase 75,000 shares of common stock at $1.20 to various
entities assisting in the private placement. The Company filed a
registration statement on Form S-3 to register the shares sold in the
placement and the warrants granted to the placement agents. This
registration statement was declared effective by the Securities and
Exchange Commission on July 9, 2001.
On April 9, 2001 (Closing Date), the Company entered into a securities
purchase agreement (Agreement) whereby the Company issued a $2,000,000
convertible note (Note) and the purchaser agreed to purchase from time
to time, subject to certain conditions, through April 9, 2002, up to
$4,000,000 of the Company's common stock. The number of shares to be
purchased and the price are to be determined based upon the Company's
average current trading volume and stock price as defined in the
Agreement. In addition, the purchaser has agreed not to acquire,
through conversion of the Note, exercise of warrants, or purchase of
equity, more than an aggregate of 9.9% of the Company's common stock
as of any respective conversion, exercise, or purchase date. On the
Closing Date, the purchaser made an initial purchase of 365,428 shares
of the Company's common stock for an aggregate of $250,000. The
Company received net proceeds at the closing in the amount of
$2,140,976, after deducting related expenses. In addition, the Company
paid offering costs of approximately $516,000 and issued warrants to
purchase 333,333 shares of the Company's common stock at $0.89 per
share and 225,000 shares of the Company's common stock at $0.85 per
share. These warrants were valued at $172,000, of which $146,000 was
allocated to the Note and $26,000 was allocated to equity.
B-22
GLOBALNET, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
The Note has a maturity date of April 9, 2004 and does not bear
interest unless the Company is in default of delivering conversion
shares to the purchaser, or fails to repay the Note by the maturity
date, in which case the Note bears interest at a rate of 8% per annum
calculated from April 9, 2001. The Company also has the right to
redeem the Note at redemption prices ranging from 112.5% to 140% of
the principal amount of the Note, depending upon the time the Note is
redeemed.
In addition, the Company issued an incentive warrant to the purchaser
representing the right to purchase 877,026 shares of the Company's
common stock for $1.0262 per share. On the Closing Date, the Company
also entered into a registration rights agreement with the purchaser
whereby the Company is required to file a registration statement on
behalf of the purchaser with respect to the shares purchased by it,
the shares that may result from the conversion of the Note, and the
warrant shares. The Company filed a registration statement on Form S-3
(Registration Statement) which was declared effective by the
Securities and Exchange Commission on July 9, 2001.
The Company also issued a protective warrant to the purchaser which
only became exercisable on the effective date of the Registration
Statement. Under the terms of the protective warrant, if the price of
the Company's common stock as computed on the effective date of the
Registration Statement was lower than the purchase price of the common
stock on the Closing Date, the protective warrant became exercisable
for a certain number of shares as defined in the Agreement. In
accordance with the terms of the protective warrant, at the time the
initial Registration Statement was declared effective, the protective
warrant became exercisable for 24,405 shares of GlobalNet's common
stock.
As a result of the aforementioned transactions, the Company recorded
approximately $729,000 of debt discount related to the Note's
beneficial conversion feature, approximately $302,000 of debt discount
related to the incentive warrants issued, approximately $97,000 of
debt discount related to the investor fees for the Note, and
approximately $536,000 of debt issuance costs. Each of these items was
being amortized over the term of the Note. Unamortized balances
aggregating $1,263,818 were reflected as other assets in the
accompanying consolidated balance sheet as of December 31, 2001.
2002 Conversion of the Note
In January and February 2002, Crescent International, Ltd. (Crescent),
the purchaser of the Note, delivered three conversion notices for the
conversion of the $2,000,000 Note into 4,888,263 shares of Company
common stock at an average conversion price of $0.41 per share. The
conversion notices were accepted by the Company in accordance with the
terms of the convertible note and the corresponding shares of the
Company common stock were delivered to Crescent.
As a result of the full conversion of the Note into Company common
stock, the Company expensed the remaining unamortized balance of
$1,263,818 related to debt discount related to the Note's beneficial
conversion feature, the debt discount related to the incentive
warrants issued, the debt discount related to investor fees, and the
debt issuance costs.
B-23
GLOBALNET, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
Stock-based Compensation
Restricted Common Stock
On May 15, 2000, the Company's board of directors authorized the
issuance of 2,150,000 shares of restricted common stock to employees,
directors, and consultants. Shares aggregating 2,025,000 were granted
on May 15, 2000 at an estimated fair value of $16,200,000, which were
being amortized over the vesting period of three years.
During the fourth quarter of 2000, three employees that were granted a
total of 650,000 shares of restricted common stock with an estimated
fair value of $5,200,000 were terminated resulting in the forfeiture
of the shares. All amounts recorded as stock-based compensation during
2000 related to these 650,000 shares were reversed in the period of
forfeiture.
On December 28, 2000, the Company issued 775,000 shares of restricted
common stock to employees at an estimated fair value of $581,250,
which were being amortized over the vesting period.
On March 21, 2002, all the 2,150,000 shares of restricted common stock
vested as a result of the change of control that resulted from the
merger of GlobalNet with a wholly owned subsidiary of Parent. As a
result of the vesting of restricted common stock, the Company expensed
the remaining deferred stock compensation balance of $4,707,012 in the
period January 1, 2002 through March 21, 2002 related to the issuance
of restricted common stock.
The Company recorded $5,310,627 and $3,976,016 of stock-based
compensation for the period from January 1, 2002 through March 21,
2002 and for the year ended December 31, 2001, respectively, related
to issuances of restricted common stock. At December 31, 2002, there
were no restricted common shares outstanding.
2001 Stock Incentive Plan
On October 29, 2001, the Company's shareholders adopted the "2001
Stock Plan," (the 2001 Plan) in the annual stockholders' meeting.
Under the 2001 Plan, the maximum aggregate number of shares that may
be subject to option and sold is 6,000,000 shares. Under the terms of
the 2001 Plan, options vest based on the vesting period as determined
by the plan administrator.
On October 29, 2001, the Company granted 25,000 options to each of its
three non-employee Directors as compensation for being members of the
Board. The options have an exercise price of $0.46 per share and a
term of 10 years.
2000 Stock Incentive Plan
On May 3, 2000, the Company's board of directors adopted the "2000
Stock Plan," (the 2000 Plan). The maximum aggregate number of shares
that may be subject to option and sold under the 2000 Plan is
3,000,000 shares. Under the terms of the 2000 Plan, options vest based
on the vesting period as determined by the plan administrator.
B-24
GLOBALNET, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
The Company granted 1,590,000 and 226,000 options to employees and
directors under the 2000 Plan on May 15, 2000 and December 28, 2000,
respectively. All of these options granted had a term of 5 years from
the date of vesting and vested 33% on May 15, 2001, 33% on May 15,
2002, and the remainder on May 15, 2003. A total of 430,000 and
360,000 options were canceled during 2001 and 2000, respectively.
On September 14, 2000, each of the seven non-employee Directors was
granted 100,000 options. These options vest on the second anniversary
of the grant date and expire on the 10th anniversary of the grant
date. A total of 400,000 options were canceled in 2001 as a result of
the resignation or non-reelection of four Directors.
During 2000, the Company granted 45,000 options to consultants for
services provided. Options for 35,000 shares of common stock were
immediately vested, while the remaining 10,000 options vest over a
period of three years.
On July 1, 2001, the Company granted 10,000 options to an employee
under the 2000 Plan. Options have a term of 5 years from date of
vesting and vest 66% on May 15, 2002 and 34% on May 15, 2003.
The Stock Incentive Plan was canceled on March 21, 2002 when GlobalNet
merged into a wholly owned subsidiary of Parent. The 1,595,000 options
that were out of the money on March 21, 2002 were forfeited. The
261,000 options that were in the money on March 21, 2002 were
exchanged for Parent options based on an exchange ratio of 0.03853
shares of Parent common stock for each share of GlobalNet common
stock.
B-25
GLOBALNET, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
Stock option activity is as follows:
Weighted
Weighted average
average fair value
Number exercise on grant
of shares price date
------------------ ------------------ -------------------
Outstanding, December 31, 1999 -- $ --
Granted 2,561,000 9.51 $ 5.40
Forfeited (360,000) 7.80
------------------ ------------------
Outstanding, December 31, 2000 2,201,000 9.83
Granted 85,000 0.51 4.32
Forfeited (430,000) 14.94
------------------ ------------------
Outstanding, December 31, 2001 1,856,000 8.22
Granted -- --
Converted into Parent options (261,000) 0.67
Forfeited (1,595,000) 9.46
------------------ ------------------
Outstanding, March 21, 2002 -- $ --
================== ==================
There was no option activity during the period March 22, 2002 through
December 31, 2002 and there were no options outstanding as of December
31, 2002.
The Company elected to follow APB No. 25 and related interpretations
in accounting for its stock options. See note 2 for a calculation of
the Company's pro-forma net loss under the fair value method pursuant
to SFAS No. 123. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model using
the following weighted average assumptions: zero dividend yield;
expected lives of 3.7 years in 2001 and 3.6 years in 2000; expected
volatility of 65% in 2001 and 66% in 2000; and a risk free interest
rate of 6.30% in 2001 and 6.40% in 2000.
(12) Credit and Business Concentrations
SFAS No. 105, Disclosure of Information About Financial Instruments With
Off-Balance Sheet Risk, requires disclosure of any significant off-balance
sheet and credit risk concentrations. The Company has no significant
off-balance sheet concentrations such as foreign exchange contracts, option
contracts, or other foreign hedging arrangements. The Company maintains the
majority of its cash in one financial institution.
A significant portion of the Company's revenue is concentrated among a few
large customers. The largest customer represented 64% and 54% of total
revenue for the periods March 22, 2002 through December 31, 2002 and
January 1, 2002 through March 21, 2002, respectively. The next three
largest customers represented 16% and 31% of total revenue for the periods
March 22, 2002 through December 31, 2002 and January 1, 2002 through March
21, 2002, respectively. The three largest customers represented 77% and 60%
of total revenue in 2001 and 2000, respectively. Accounts receivable from
the largest three customers were approximately $3,494,260 and $2,141,288 at
December 31, 2002 and 2001, respectively.
B-26
GLOBALNET, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
GlobalNet's primary customer, Global Crossing Ltd. (Global Crossing), filed
for protection under Chapter 11 of the United States Bankruptcy code in
January 2002. As of the date of petition, Global Crossing maintained an
outstanding balance due to the Company of $705,000, which has been included
in the allowance for doubtful accounts at December 31, 2002. Subsequent to
the bankruptcy filing, Global Crossing has resumed business with GlobalNet
on substantially similar terms and for similar volumes as prior to the
filing.
The Company currently uses one primary wholesale carrier voice and fax
telecommunication services provider. Amounts due to this supplier were
$9,856,797 at December 31, 2002, net of the Company's receivable from the
supplier of $40,504. An unfavorable change in this supplier's payment terms
or a change in primary supplier could have an adverse effect on the
Company's business and liquidity.
(13) Geographic and Business Segment Information
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes standards for
reporting information regarding operating segments in annual financial
statements and requires select information for those segments to be
presented in interim financial reports issued to stockholders. SFAS No. 131
also establishes standards for related disclosures about products and
services and geographic areas. Operating segments are identified as
components of an enterprise about which separate discrete financial
information is available for evaluation by the chief operating decision
maker, or decision-making group, in deciding how to allocate resources and
assess performance. The Company's chief decision-maker, as defined under
SFAS No. 131 is the Chief Executive Officer. To date, the Company has
viewed its operations and manages its business as one operating segment -
telecommunication services.
Data relating to the Company's operations by geographic area is set forth
below:
United States Mexico Other Total
----------------- ----------------- ----------------- -----------------
January 1, 2002 through
March 21, 2002
Revenues $ -- 16,122,004 3,613,587 19,735,591
March 22, 2002 through
December 31, 2002
Revenues -- 65,572,311 13,669,152 79,241,463
2002:
Identifiable assets 3,317,141 -- -- 3,317,141
2001:
Revenues -- 66,386,097 10,601,377 76,987,474
Identifiable assets 9,882,730 -- -- 9,882,730
2000:
Revenues -- 37,312,408 40,778,127 78,090,535
Identifiable assets 10,038,779 -- -- 10,038,779
B-27
GLOBALNET, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
The Company's revenues are primarily generated by providing
telecommunication services to Mexico and other Latin America countries on
behalf of the Company's customers. However, all of the tangible assets of
the Company are located in the United States.
(14) Litigation
The Company is from time to time subject to litigation incidental to its
business. The Company believes that the results of the following asserted
and potential litigation and other potential legal proceedings will not
have a material adverse effect on its business, financial condition,
results of operations, or liquidity of the Company.
The XEX Consulting Company, Inc. - In November 2001, an action was filed
against the Company and others by XEX Consulting Company, Inc. (XEX). The
Complaint alleges, among other things, that the defendants engaged in a
fraudulent scheme of manipulating the market for GlobalNet common stock and
failed to disclose certain matters. The plaintiff seeks compensatory
damages in the amount of $3 million together with punitive damages. The
Company believes that it has meritorious defenses to this action which it
intends to assert vigorously.
Wholesale Telecom Corporation - In October 2001, GlobalNet filed a
complaint against Wholesale Telecom Corporation (WTC) in the Circuit Court
of the 11th Judicial Circuit for Dade County (Florida) seeking to recover
$536,578.66 (plus interest since October 23, 2000) of past-due unpaid
amounts for telecom services provided by GlobalNet. In June 2002, WTC filed
a counterclaim alleging violations of the Communications Act and fraud, and
seeking punitive damages in excess of $1 million. The counterclaim alleges
that the Company has "knowingly issued fraudulent invoices." GlobalNet
believes that it has good and meritorious defenses against the
counterclaim.
Manuel Dreyfus - On February 25, 2003, Manuel Dreyfus filed a complaint
against GlobalNet and its former President. The complaint seeks to recover
$40,000 of expenses that the plaintiff claims to have incurred on behalf of
Global Telekom Ventures, Inc. (GTV), a company owned by the Company's
former President, in 1998 and 1999. GlobalNet has never had an equity
interest and/or a commercial relationship with GTV. The plaintiff also
alleges that he had an oral one-year employment agreement with GlobalNet
and that he was verbally granted 100,000 shares of GlobalNet's common
stock. The plaintiff alleges that GlobalNet was in breach of this oral
employment agreement when he was terminated in November 2000 and that he is
owed 100,000 shares of GlobalNet's common stock. The Company believes that
it has good and meritorious defenses against this complaint.
Interwest Transfer Co., Inc. - Interwest Transfer Co., Inc. (Interwest) was
the transfer agent of Rich Earth, Inc. (Rich Earth), a publicly traded
shell company acquired by GlobalNet in a "reverse merger" transaction in
May 2000. Interwest is currently a defendant in the litigation between two
former shareholders of Rich Earth over the ownership of a stock
certificate. Under the transfer agent agreement between Interwest and Rich
Earth, GlobalNet (as the successor company of Rich Earth) is indemnifying
Interwest from any potential loss (and legal expenses) that could arise
from such litigation. The Company believes that the resolution of this
litigation will not have a material adverse effect on the Company.
B-28
GLOBALNET, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
Star Telecommunications, Inc. - On May 15, 2003, an action was commenced in
the United States Bankruptcy Court for the District of Delaware against
GlobalNet by the Liquidating Trustee of the Star Creditors' Liquidating
Trust. The complaint alleges that GlobalNet received preferential payments
of $754,548 from Star Telecommunications, Inc. (Star) within the 90 days
prior to Star's Chapter 11 bankruptcy filing on March 13, 2001 and seeks
the refund of these payments. The Company believes that the payments were
in the ordinary course of business and in accordance with the credit terms
and, therefore, believes it has good and meritorious defenses against this
complaint.
(15) Management's Plans and Intentions for Continuing Operations
The Company has negative working capital at December 31, 2002 and has
experienced negative operating cash flows as well as significant operating
losses since its inception in 1996. Additionally, on July 11, 2002, Parent
made the decision to exit its telecommunications business and to sell
GlobalNet. This raises substantial doubt about the Company's ability to
continue as a going concern.
Management is exploring different alternatives to address its short-term
and long-term financing needs. Such alternatives range from cutting
operating expenses in order to enhance the internal generation of cash
flows to potentially selling the Company to a third party. See note 16 for
further details on a pending transaction. There can be no assurances,
however, that the Company will be successful in implementing any of these
alternatives.
(16) Subsequent Events
On February 6, 2003, Parent loaned the Company $1,500,000 for working
capital purposes, of which $500,000 was repaid to Parent on May 30, 2003.
On March 28, 2003, the Company wire-transferred $2,500,000 to Parent to
partially fund the balloon payment due on March 31, 2003 pursuant to a
Payment Agreement with MCI. On March 31, 2003, Parent paid, on behalf of
the Company, the outstanding balance of $3,633,414 under the Payment
Agreement with MCI. This resulted in an increase of $1,133,414 in the
intercompany loan balance due to Parent, which amounted to $13,363,819 as
of May 30, 2003.
On April 15, 2003, GlobalNet International, Inc., a wholly owned subsidiary
of GlobalNet, Inc., was converted to a single member Delaware limited
liability company, GlobalNet International, L.L.C., in which GlobalNet,
Inc. is the sole member.
On May 20, 2003, Parent entered into a Stock Purchase Agreement with
GlobalNet Systems, Inc. (GlobalNet Systems), a Florida corporation and a
wholly owned subsidiary of Growth Enterprise Fund, a Panama corporation.
Pursuant to the Stock Purchase Agreement, GlobalNet Systems agreed to
purchase from Parent all the Company's outstanding common stock and to
obtain releases from GlobalNet's creditors for certain guarantees issued by
Parent for certain GlobalNet's obligations. The only remaining condition to
the closing of the purchase is the delivery of audited financial statements
of GlobalNet to the buyer.
(17) Events (Unaudited) Subsequent to the Date of the Independent Auditor's
Report
On August 25, 2003, iDial Networks, Inc. (iDial) consummated the purchase
of all the outstanding common stock of GlobalNet from Titan. Prior to that,
on May 20, 2003, Titan had entered into a Stock Purchase Agreement with
GlobalNet Systems, Inc. (GlobalNet Systems), a Florida corporation and a
wholly owned subsidiary of Growth Enterprise Fund (GEF), a Panamanian
corporation. On August 21, 2003, iDial entered into an Assignment and
Assumption of the Stock Purchase Agreement with GEF, GlobalNet Systems and
Titan (the Assignment), whereby GlobalNet Systems transferred all its
rights and obligations under the Stock Purchase Agreement, including the
right to receive all the outstanding common stock of GlobalNet, to iDial.
In connection with the Stock Purchase Agreement and the Assignment,
promissory notes and accrued interest payable in the aggregate amount of
approximately $15.6 million payable by GlobalNet to Titan were assigned
to iDial.
B-29
Exhibit B (2) GLOBALNET, INC. AND SUBSIDIARY
Consolidated Balance Sheets
At June 28, 2003 (unaudited) and December 31, 2002
Assets June 28, 2003 December 31, 2002
(unaudited)
------------------- ---------------------
Current assets:
Cash $ 4,534,423 $ 981,296
Accounts receivable, net of allowance for doubtful 3,597,797 4,551,574
accounts of $2,270,449 and $2,318,159, respectively
Prepaid expenses and other current assets 292,822 376,415
Carrier deposits 572,139 578,072
------------------ ---------------------
Total current assets 8,997,181 6,487,357
Property and equipment, net 2,915,544 3,317,141
------------------ ---------------------
Total assets $ 11,912,725 $ 9,804,498
================== =====================
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 3,269,813 $ 4,513,930
Due to MCI 14,740,633 9,856,797
Accrued expenses 602,415 868,694
Payable to Parent, net of receivable 3,161,258 1,761,991
Restructuring reserve 305,588 526,822
Deferred revenue 63,571 103,595
Current portion of capital lease obligations 3,997,638 5,321,454
Note payable to Parent 12,326,332 10,854,601
------------------ ---------------------
Total current liabilities 38,467,248 33,807,884
Capital lease obligations, net of current portion 756,134 2,277,372
Commitments and contingencies -- --
Stockholders' deficit:
Common stock; 25,000 shares authorized, no par value; 1,000
shares issued and outstanding
Additional paid-in-capital 31,001,282 31,001,282
Accumulated deficit (58,311,940) (57,282,040)
------------------ -----------------
Total stockholders' deficit (27,310,658) (26,280,758)
------------------ -----------------
Total liabilities and stockholders' deficit $ 11,912,725 $ 9,804,498
================== =================
See accompanying notes to consolidated financial statements.
B-30
GLOBALNET, INC. AND SUBSIDIARY
Consolidated Statements of Operations (unaudited)
For the Six Months Ended June 28, 2003 and June 29, 2002
------------------ -----------------
Six months
Six months ended ended June 29,
June 28, 2003 2002
------------------ -----------------
Revenue $ 54,022,229 $ 47,930,447
Operating expenses:
Data communications and telecommunications 50,238,410 43,805,572
Network research and development (exclusive of $0 for the six months ended
June 28, 2003, and $643,929 for the six months ended June 29, 2002
reported below as noncash
stock compensation) 1,892,422 3,148,810
Selling and marketing 219,091 413,641
General and administrative (exclusive of $0 for the six months
ended June 28, 2003, and $4,674,195 for the six months ended
June 29, 2002 reported below as noncash stock compensation) 1,146,490 3,429,278
Restructuring charges 987 --
Corporate allocations 4,440 3,540
Bad debt expense -- 726,057
Depreciation and amortization 777,818 2,244,097
Noncash stock compensation -- 5,318,124
------------------ -----------------
Total operating expenses 54,279,658 59,089,119
------------------ -----------------
Operating loss (257,429) (11,158,672)
Interest on note payable to Parent (471,731) (142,666)
Interest expense, net (300,739) (544,648)
Noncash financing cost -- (1,284,651)
------------------ -----------------
Loss before income taxes (1,029,899) (13,130,637)
Income taxes -- --
------------------ -----------------
Net loss $ (1,029,899) $ (13,130,637)
================== =================
See accompanying notes to consolidated financial statements.
B-31
GLOBALNET, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (unaudited)
For the Six Months Ended June 28, 2003 and June 29, 2002
Six months ended Six months ended
June 28, 2003 June 29, 2002
---------------- ----------------
Cash flows from operating activities:
Net loss $ (1,029,899) $ (13,130,637)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 777,818 2,244,097
Provision for doubtful accounts (47,710) 726,057
Noncash stock compensation -- 5,318,124
Noncash financing costs -- 1,284,651
Changes in assets and liabilities:
Accounts receivable 1,001,487 467,578
Due from related party -- (182,609)
Interest on Parent loan 471,731 142,666
Prepaid expenses and other current assets 83,593 (99,175)
Carrier deposits 5,933 53,673
Accounts payable (1,244,117) (5,853,468)
Due to MCI 4,883,836 4,407,734
Restructuring reserve (221,234) --
Payable to Parent, net of receivable 1,399,267 284,879
Salaries and wages payable -- --
Deferred revenue (40,024) 657,043
Accrued expenses (266,279) (93,844)
---------------- ----------------
Net cash provided by (used in) operating activities 5,774,403 (3,773,231)
---------------- ----------------
Cash flows from investing activities -
purchase of property and equipment (376,221) (1,098,458)
---------------- ----------------
Net cash used in investing activities (376,221) (1,098,458)
---------------- ----------------
Cash flows from financing activities:
Proceeds from parent loan 1,000,000 5,900,000
Proceeds from vendor financing -- 1,087,322
Principal payments on capital lease obligations (2,845,055) (2,015,220)
---------------- ----------------
Net cash (used in) provided by financing activi (1,845,055) 4,972,102
---------------- ----------------
Net increase (decrease) in cash 3,553,127 100,413
Cash at beginning of period 981,296 1,641,278
---------------- ----------------
Cash at end of period $ 4,534,423 $ 1,741,691
================ ================
Supplemental disclosure of noncash financing and investing activity:
Payment for purchase of 25% minority interest in and certain
assets of GlobalNet, L.L.C. by Rich Earth, Inc.
on behalf of Company $ -- $ --
Cash paid for interest 283,276 544,706
Conversion of convertible note into equity -- 2,201,386
Equipment acquired under capital leases -- 1,087,322
Common stock issued for legal settlement $ -- $ 227,500
See accompanying notes to consolidated financial statements.
B-32
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 28, 2003
(1) Organization and Description of Business
GlobalNet, Inc. (GlobalNet or the Company) provides global telecommunications,
including high quality voice, fax, and other value-added applications over an
international network.
GlobalNet was formed on May 30, 2000, when GlobalNet International, Inc. (GII)
merged with a subsidiary of Rich Earth, Inc. (Rich Earth) pursuant to an
agreement (the Merger Agreement) whereby 20,000,000 shares of Rich Earth common
stock were exchanged for 100% of the common stock of GII in a transaction
accounted for as a reverse acquisition (Merger) 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 controlled the combined company after the transaction. After the
closing of the merger, Rich Earth changed its name to GlobalNet, Inc. As a
result of the reverse merger, the operating entity, GII, continues as the
operating entity under the GlobalNet, Inc. name, and its historical financial
statements replaced 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 C-corporation (Reorganization). DTA was organized in Illinois on
May 22, 1996 as a limited liability company. 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
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% and was
accounted for under the purchase method of accounting.
On March 21, 2002, GlobalNet, Inc. merged with a subsidiary of The Titan
Corporation (Titan or Parent). In the merger, a wholly owned subsidiary of
Parent merged into GlobalNet and all of GlobalNet's outstanding common shares
and certain outstanding stock options and warrants were converted into Parent
common shares, options and warrants, plus cash in lieu of fractional shares. The
merger had an aggregate equity transaction value of approximately $31.0 million.
The transaction was accounted for as a
B-33
purchase. The excess of the purchase price of $31.0 million over the estimated
fair market value of the net liabilities acquired of approximately $19.3 million
was approximately $50.3 million, which was allocated to goodwill. After the
merger, Parent reduced the number of shares of common stock outstanding in
GlobalNet from 37,617,637 shares to 1,000 shares and converted GII into a single
member Delaware limited liability company, GlobalNet International, L.L.C., in
which GlobalNet is the sole member.
On July 11, 2002, Titan made the decision to exit its telecommunications
business and to sell GlobalNet. At that time, Titan determined that there had
been an impairment of the carrying value of GlobalNet's goodwill of
approximately $50.3 million in accordance with SFAS No. 142. The measurement of
this impairment was evident based upon estimates of fair value, as determined by
recent offers received by Titan from potential buyers, compared to the carrying
value of the asset. In accordance with Staff Accounting Bulletin No. 54 and No.
73, the Company has "pushed down" to its stand-alone consolidated financial
statements the purchase accounting adjustments and the subsequent write-off of
goodwill recorded by Parent. As a result, the consolidated financial information
for the period after the merger is presented on a different cost basis than that
for the periods before the merger and, therefore, is not comparable.
As described in Note 10, on August 25, 2003, iDial Networks, Inc. acquired all
the outstanding common stock of GlobalNet from Titan.
The Company is subject to risks and uncertainties common to growing
telecommunications-based companies, including rapid technological changes, low
costs to customers of switching from carrier to carrier, failed alliances, and
pricing pressures in the international long distance market.
(2) Basis of Financial Statement Preparation
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 the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements and should be read in conjunction with
the Notes to Consolidated Financial Statements contained in the Company's
audited financial statements as of and for the year ended December 31, 2002.
The accompanying financial information includes all normal recurring adjustments
which are considered necessary by the Company's management for a fair
presentation of the financial position, results of operations and cash flows for
the periods presented. However, these results are not necessarily indicative of
results for a full fiscal year.
The presentation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and
B-34
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(3) Restructuring Charges
The Company recorded a restructuring charge of $1,113,112 for the year ended
December 31, 2002, which was increased by $987 for the six months ended June 28,
2003. Approximately $279,000 of the restructuring charge is related to the
severance payment for certain employees terminated in July 2002 as part of a
restructuring plan to reduce headcount and operating expenses.
Approximately $673,000 of the restructuring charge is related to lease
agreements for circuits that the Company discontinued in July 2002 as a result
of the Company's strategy to consolidate traffic in certain facilities in order
to realize synergies and reduce operating costs. The charge represents the
future payments for the remaining terms of those lease agreements.
Approximately $61,000 of the restructuring charge corresponds to the cost of
closing the Company's office in Marietta, Georgia. The charge includes the
future lease payments for the remaining term of the lease agreement and the
moving expenses.
The remaining $101,000 of the restructuring charge is related to the Company's
headquarters in Lombard, Illinois. The Company recorded a charge of 50% of the
lease cost of its offices in Lombard for the remaining term of the lease
agreement as a result of the current underutilization of the office space.
The table below shows the expenses applied against the restructuring reserve for
the six months ended June 28, 2003:
Balance of Balance of
Restructuring Expenses Restrucuring
Reserve applied Reserve
Decemeber 31, against June 28,
2002 reserve 2003
----------------- ----------------- ----------------
Severance payments $ - $ - $ -
Unused circuit leases 441,933 (178,785) 263,148
Closing costs of Marietta office 13,554 (11,991) 1,563
Underutilization cost of Lombard office 71,335 (30,458) 40,877
------------------ ----------------- ----------------
$ 526,822 $ (221,234) $ 305,588
================== ================= ================
B-35
4) MCI Payment Agreement
On February 27, 2002, the Company entered into an agreement with MCI WorldCom
Network Services, Inc. (MCI) to refinance a $6,083,414 balance of past due
payables (Payment Agreement). On March 31, 2003, the Company made the final
balloon payment of $3,633,414 under the Payment Agreement.
As described in Note (10), on July 15, 2003, GlobalNet entered into a $4,870,593
promissory note payable to MCI.
(5) Related Parties
On January 6, 2002, GlobalNet and Titan entered into a secured note purchase
agreement that was subsequently amended on August 30, 2002. Pursuant to this
agreement, GlobalNet's outstanding debt at June 28, 2003 was $12,326,332,
including accrued interest at 8% per annum of $1,026,332. Interest expense for
the six months ended June 28, 2003 was $471,731.
The intercompany payable balance (net of receivable) with Titan increased from
$1,761,991 at December 31, 2002 to $3,161,258 at June 28, 2003 as a result of
expenses paid by Titan on behalf of the Company and additional funding provided
by Titan to the Company.
GlobalNet provides long-distance termination services in the United States to
TTN Guatemala, a former subsidiary of Titan. The total amount invoiced by the
Company to TTN Guatemala for these services amounted to $74,436 for the six
months ended June 28, 2003.
(6) Credit and Business Concentrations
SFAS No. 105, Disclosure of Information About Financial Instruments With
Off-Balance Sheet Risk, requires disclosure of any significant off-balance sheet
and credit risk concentrations. The Company has no significant off-balance-sheet
concentrations such as foreign exchange contracts, option contracts or other
foreign hedging arrangements. The Company maintains the majority of its cash in
one financial institution.
A significant portion of the Company's revenue is concentrated among a few large
customers. The largest customer represented 50% and 63% of total revenue for the
six months ended June 28, 2003 and June 29, 2002, respectively. The next three
largest customers represented 30% and 22% of total revenue for the six months
ended June 28, 2003 and June 29, 2002, respectively. Accounts receivable from
the largest three customers at June 28, 2003 were approximately $2,811,902, net
of a reserve for uncollectible accounts of approximately $705,000.
GlobalNet's primary customer, Global Crossing Ltd. (Global Crossing), filed for
protection under Chapter 11 of the United States Bankruptcy code in January
2002. As of the date of petition, Global Crossing maintained an outstanding
balance due to the Company of $705,000, which has been included in the allowance
for doubtful accounts at December 31, 2002. Subsequent to the bankruptcy filing,
Global Crossing has resumed business with GlobalNet on substantially similar
terms and for similar volumes as prior to the filing.
The Company currently uses one primary wholesale carrier voice and fax
telecommunication services provider. Amounts due to this supplier were
$14,740,633 at June 28, 2003 and the Company's receivable from the supplier
amounted to $50,337. An unfavorable change in this supplier's payment terms or a
change in primary supplier could have an adverse effect on the Company's
business and liquidity.
B-36
(7) Geographic and Business Segment Information
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes standards for reporting
information regarding operating segments in annual financial statements and
requires select information for those segments to be presented in interim
financial reports issued to stockholders. SFAS No. 131 also establishes
standards for related disclosures about products and services and geographic
areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision-making group, in deciding how to
allocate resources and assess performance. The Company's chief decision-maker,
as defined under SFAS No. 131 is the Chief Executive Officer. To date, the
Company has viewed its operations and manages its business as one operating
segment - telecommunication services.
Data relating to the Company's operations by geographic area is set forth below:
United States Mexico Other Total
----------------- ----------------- ----------------- -----------------
Six Months Ended June 28, 2003
Revenues $ -- 40,225,552 13,796,677 $ 54,022,229
Six Months Ended June 29, 2002
Revenues -- 40,016,903 7,913,544 47,930,447
At June 28, 2003
Identifiable assets $ 2,915,544 -- -- $ 2,915,544
At December 31, 2002
Identifiable assets $ 3,317,141 -- -- $ 3,317,141
The Company's revenues are primarily generated by providing telecommunication
services to Mexico and other Latin America countries on behalf of the Company's
customers. However, all of the tangible assets of the Company are located in the
United States.
B-37
(8) Litigation
The Company is from time to time subject to litigation incidental to its
business. The Company believes that the results of the following asserted and
potential litigation and other potential legal proceedings will not have a
material adverse effect on its business, financial condition, results of
operations, or liquidity of the Company.
The XEX Consulting Company, Inc. - In November 2001, an action was filed against
the Company and others by XEX Consulting Company, Inc. (XEX). The Complaint
alleged, among other things, that the defendants engaged in a fraudulent scheme
of manipulating the market for GlobalNet common stock and failed to disclose
certain matters. The plaintiff seeks compensatory damages in the amount of $3
million together with punitive damages. On June 25, 2003, the Company and XEX
reached a settlement agreement, whereby XEX agreed to voluntarily dismiss its
complaint against the Company without prejudice in exchange for no monetary
consideration.
Wholesale Telecom Corporation - In October 2001, GlobalNet filed a complaint
against Wholesale Telecom Corporation (WTC) in the Circuit Court of the 11th
Judicial Circuit for Dade County (Florida) seeking to recover $536,579 (plus
interest since October 23, 2000) of past-due unpaid amounts for telecom services
provided by GlobalNet. In June 2002, WTC filed a counterclaim alleging
violations of the Communications Act and fraud, and seeking punitive damages in
excess of $1 million. The counterclaim alleges that the Company has "knowingly
issued fraudulent invoices". GlobalNet believes that it has good and meritorious
defenses against the counterclaim.
Manuel Dreyfus - On February 25, 2003, Manuel Dreyfus filed a complaint against
GlobalNet and its former President. The complaint seeks to recover $40,000 of
expenses that the plaintiff claims to have incurred on behalf of Global Telekom
Ventures, Inc. (GTV), a company owned by the Company's former President, in 1998
and 1999. GlobalNet has never had an equity interest and/or a commercial
relationship with GTV. The plaintiff also alleges that he had an oral one-year
employment agreement with GlobalNet and that he was verbally granted 100,000
shares of GlobalNet's common stock. The plaintiff alleges that GlobalNet was in
breach of this oral employment agreement when he was terminated in November 2000
and that he is owed 100,000 shares of GlobalNet's common stock. GlobalNet
believes that it has good and meritorious defenses against the complaint and has
filed a motion to dismiss.
Interwest Transfer Co., Inc. - Interwest Transfer Co., Inc. (Interwest) was the
transfer agent of Rich Earth, Inc. (Rich Earth), a publicly traded shell company
acquired by GlobalNet in a "reverse merger" transaction in May 2000. Interwest
is currently a defendant in the litigation between two former shareholders of
Rich Earth over the ownership of a stock certificate. Under the transfer agent
agreement between Interwest
B-38
and Rich Earth, GlobalNet (as the successor company of Rich Earth) is
indemnifying Interwest from any potential loss (and legal expenses) that could
arise from such litigation. The Company believes that the resolution of this
litigation will not have a material adverse effect on the Company.
Star Telecommunications, Inc. - On May 15, 2003, an action was commenced in the
United States Bankruptcy Court for the District of Delaware against GlobalNet by
the Liquidating Trustee of the Star Creditors' Liquidating Trust (Star
Creditors' Liquidating Trust). The complaint alleges that GlobalNet received
preferential payments of $754,548 from Star Telecommunications, Inc. (Star)
within the 90 days prior to Star's Chapter 11 bankruptcy filing on March 13,
2001 and seeks the refund of these payments. On September 9, 2003, GlobalNet
accepted a proposal from Star Creditors' Liquidating Trust to settle this matter
for $15,000 in exchange for a mutual release.
(9) Management's Plans and Intentions for Continuing Operations
The Company has negative working capital at June 28, 2003 and has experienced
negative operating cash flows as well as continuing net losses for the six
months ended June 28, 2003 and the year ended December 31, 2002. Additionally,
the Company has experienced significant operating losses since its inception in
1996.
Management's focus has been on reducing operating expenses and increasing
revenues from existing customers in order to enhance the internal generation of
cash flows. As a result of these efforts, the Company has been able to maintain
a positive EBITDA for the six months ended June 28, 2003. Management is also
exploring different alternatives to address its short-term and long-term
financing needs, including raising equity and debt financings. There can be no
assurances, however, that the Company will be successful in implementing any of
these alternatives.
Management continues to believe that the Company is well suited to take
advantage of the current market opportunities. The Company will continue to
aggressively pursue business in higher-margin geographic regions and monitor
costs.
(10) Subsequent Events
On August 25, 2003, iDial Networks, Inc. (iDial) consummated the purchase of all
the outstanding common stock of GlobalNet from Titan. Prior to that, on May 20,
2003, Titan had entered into a Stock Purchase Agreement with GlobalNet Systems,
Inc. (GlobalNet Systems), a Florida corporation and a wholly owned subsidiary of
Growth Enterprise Fund (GEF), a Panamanian corporation. On August 21, 2003,
iDial entered into an Assignment and Assumption of the Stock Purchase Agreement
with GEF, GlobalNet Systems and Titan (the Assignment), whereby GlobalNet
Systems transferred all its rights and obligations under the Stock Purchase
Agreement, including the right to receive all the outstanding common stock of
GlobalNet, to iDial.
B-39
In connection with the Stock Purchase Agreement and the Assignment, promissory
notes and accrued interest payable in the aggregate amount of approximately
$15.6 million payable by GlobalNet to Titan were assigned to iDial.
On July 15, 2003, GlobalNet entered into a two-year promissory note with MCI
WorldCom Network Services, Inc. (MCI) to refinance an open payable balance to
MCI of approximately $4,870,593 (the Note). The Note bears interest at 6% per
annum and has 23 monthly payments of $220,000 and a final payment of $114,906
which is due on June 30, 2005. In connection with the Note, the Company entered
into a Security Agreement with MCI, whereby GlobalNet pledged all its assets as
collateral for all the obligations and indebtedness of the Company with MCI.
On August 27, 2003, GlobalNet made a $60 million revenue commitment to MCI for a
period of two years commencing September 1, 2003 (the Revenue Commitment). The
Revenue Commitment contains a price protection mechanism that allows GlobalNet
to terminate the Revenue Commitment by paying off the outstanding balance of the
Note in the event that MCI's sell rates to the Company become less competitive
than the sell rates available from other telecom providers.
B-40
EXHIBIT C
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Introduction
The following unaudited pro forma condensed consolidated financial information
gives effect to the acquisition of GlobalNet, Inc. (GlobalNet) by iDial
Networks, Inc. (iDial) with GlobalNet identified as the accounting acquiror
under the purchase method of accounting in accordance with SFAS No. 141. These
pro forma condensed statements are presented for illustrative purposes only. The
pro forma adjustments are based upon available information and assumptions that
we believe are reasonable. The pro forma condensed consolidated financial
statements do not purport to represent what the consolidated results of
operations or financial position of GlobalNet would actually have been if the
acquisition of GlobalNet by iDial had in fact occurred on the dates that we
refer to below, nor do they purport to project the results of operations or
financial position of GlobalNet for any future period or as of any date,
respectively.
Under the purchase method of accounting, tangible and identifiable intangible
assets acquired and liabilities assumed are recorded at their estimated fair
market values. The excess of the purchase price, including estimated fees and
expenses related to the acquisition, over the net assets acquired is classified
as goodwill on the accompanying unaudited pro forma condensed consolidated
balance sheet. The Company is in the process of obtaining an independent
valuation for purposes of determining the fair value and related purchase price
allocation of the acquisition. The valuation may have a material effect on the
purchase price allocation and recoverability of the resulting assets reflected
above for pro forma presentation purposes.
The unaudited pro forma condensed consolidated balance sheet as of June 30,
2003, was prepared by combining the historical balance sheet at June 28, 2003
for GlobalNet with the historical balance sheet at June 30, 2003, for iDial
giving effect to the acquisition as though it had been completed on June 30,
2003.
The unaudited pro forma condensed consolidated statements of operations for the
periods presented were prepared by combining GlobalNet's statements of
operations for the six months ended June 28, 2003 and the year ended December
31, 2002 with iDial statements of operations for the same periods, giving effect
to the acquisition as though it had occurred on January 1, 2002. These unaudited
pro forma condensed consolidated financial statements do not give effect to any
restructuring costs or to any potential cost savings or other operating
efficiencies that could result from the merger.
C-1
iDial Networks, Inc.
Unaudited Pro Forma Combined Balance Sheet
As of June 30, 2003
Pro Forma Pro Forma
GlobalNet[1] iDial [2] Total Adjustments Ref. Combined
----------- ----------- ---------- ----------- ----------- -----------
Assets
Current assets:
Cash $ 4,534,423 104,725 4,639,148 70,000 [5] [9] 4,709,148
Accounts receivable, net 3,597,797 191,909 3,789,706 - 3,789,706
Prepaid expenses and other current assets 292,822 163,958 456,780 - 456,780
Carrier deposits 572,139 29,658 601,797 - 601,797
------------- ----------- ----------- ------------ -------------
Total current assets 8,997,181 490,249 9,487,430 70,000 9,557,430
Property and equipment, net 2,915,544 573,866 3,489,410 - 3,489,410
Deposit on Letter of Intent - 331,300 331,300 - 331,300
Intangible assets, net - 64,500 64,500 - 64,500
Goodwill - - - 35,046,990 [7] 35,046,990
Other assets - 82,914 82,914 180,000 [9] 262,914
Note receivable from GlobalNet - - - - [6] [8]
------------- ----------- ----------- ------------ -------------
Total assets $ 11,912,725 1,542,829 13,455,554 35,296,990 48,752,544
============= =========== =========== ============ =============
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 3,269,813 1,202,305 4,472,118 - 4,472,118
Due to MCI 14,740,633 - 14,740,633 - 14,740,633
Accrued expenses 602,415 806,367 1,408,783 - 1,408,783
Payable to related parties, net of receivable 3,161,258 169,424 3,330,682 (3,161,258) [8] 169,424
Restructuring reserve 305,588 - 305,588 - 305,588
Deferred revenue 63,571 108,788 172,360 - 172,360
Current portion of notes payable - 154,914 154,914 - 154,914
Current portion of capital lease obligations 3,997,638 1,568 3,999,206 - 3,999,206
Note payable to Parent 12,326,332 - 12,326,332 (12,326,332) [8] -
Note payable to Growth - - - 500,000 [5] 500,000
New note payable to Titan - - - 1,500,000 [5] 1,500,000
Current portion of mandatorily redeemable
preferred stock - - - 1,225,000 [6] 1,225,000
------------- ----------- ----------- ------------ -------------
Total current liabilities 38,467,248 2,443,367 40,910,615 (12,262,590) 28,648,025
Capital lease obligations, net of current portion 756,134 - 756,134 - 756,134
Note payable, less current portion - 3,094 3,094 - 3,094
Note payable - stockholders, net of discount - 1,416,751 1,416,751 (1,416,751) [9] [10] -
Mandatorily redeemable preferred stock - - - 14,375,000 [6] 14,375,000
Stockholders' deficit:
Common stock - 1,340,936 1,340,936 24,261,830 [3] 25,602,766
Additional paid-in-capital 31,001,282 19,352,160 50,353,442 (12,673,979)[3] [4] [7] 37,679,464
Accumulated deficit (58,311,940)(23,013,479) (81,325,419) 23,013,479 [4] (58,311,940)
Deferred compensation - - - - -
------------- ----------- ----------- ------------ -------------
Total stockholders' deficit (27,310,658) (2,320,383) (29,631,041) 34,601,331 4,970,290
----------- ----------- ---------- ----------- -----------
Total liabilities and stockholders'
deficit $ 11,912,725 1,542,829 13,455,554 35,296,990 48,752,544
============= =========== =========== ============ =============
C-2
iDial Networks, Inc.
Unaudited Pro Forma Combined Statement of Operations
For the Six Months Ended June 30, 2003
GlobalNet [1] iDial [2] Total Pro Forma Ref. Pro Forma
Adjustments Combined
-------------- ------------ ---------- --------------- --------------
Revenue ......................................$ 54,022,229 3,359,192 57,381,421 -- 57,381,421
Operating expenses:
Data communications and
telecommunications ..... 50,238,410 2,165,089 52,403,499 -- 52,403,499
Network operations ....................... 1,892,422 50,260 1,942,682 -- 1,942,682
Selling and marketing .................... 219,091 1,091,405 1,310,496 -- 1,310,496
General and administrative ............... 1,146,490 1,214,527 2,361,017 -- 2,361,017
Restructuring charges .................... 987 -- 987 -- 987
Corporate allocations .................... 4,440 -- 4,440 -- 4,440
Bad debt expense ......................... -- 8,486 8,486 -- 8,486
Depreciation and amortization ............ 777,818 204,230 982,048 -- 982,048
-------------- ------------ ---------- --------------- --------------
Total operating expenses ........... 54,279,658 4,733,997 59,013,655 -- 59,013,655
-------------- ------------ ---------- --------------- --------------
Operating loss ............... (257,429) (1,374,805) (1,632,234) -- (1,632,234)
Interest on note payable to Parent ........... (471,731) -- (471,731) -- (471,731)
Interest expense, net ........................ (300,739) (617,182) (917,921) (105,000) [14] (1,022,921)
Gain (loss) from sale of assets .............. -- (26,182) (26,182) -- (26,182)
Noncash financing cost ....................... -- -- -- (643,333) [12][13] (643,333)
-------------- ------------ ---------- --------------- --------------
Loss from continuing operations .... (1,029,899) (2,018,169) (3,048,068) (748,333) (3,796,401)
Gain (loss) from discontinued operations ..... -- -- -- -- --
Income taxes ................................. -- -- -- -- --
-------------- ------------ ---------- --------------- --------------
Net loss .....................$ (1,029,899) (2,018,169) (3,048,068) (748,333) (3,796,401)
Preferred stock dividend ..................... -- -- -- (359,375) [11] (359,375)
-------------- ------------ ---------- --------------- --------------
Net loss applicable to common shares (1,029,899) (2,018,169) (3,048,068) (1,107,708) (4,155,776)
============== ============ =========== =============== ==============
Weighted average shares outstanding .......... 162,382,488 162,382,488 4,852,366,088 5,014,748,576
Loss per share ............... (0.01) (0.02) (0.00) (0.00)
============== ============ =========== =============== ==============
Supplemental presentation of loss per
share given effect a 150 to 1 reverse
stock split:
Weighted average shares outstanding .......... 1,082,550 1,082,550 32,349,107 33,431,657
Loss per share ............... (1.86) (2.82) (0.03) (0.12)
============== ============ =========== =============== ==============
C-3
iDial Networks, Inc.
Unaudited Pro Forma Combined Statement of Operations
For the Year Ended December 31, 2002
GlobalNet [1] iDial [2] Total Pro Forma Ref. Pro Forma
Adjustment Combined
---------------- ------------ ------------ -------------- ---------- --------------
Revenue $ 98,977,054 11,575,276 110,552,330 - 110,552,330
Operating expenses:
Data communications and
telecommunications 90,797,555 7,613,256 98,410,811 - 98,410,811
Network operations 5,003,058 174,635 5,177,693 - 5,177,693
Selling and marketing 675,499 2,222,509 2,898,008 - 2,898,008
General and administrative 4,343,194 2,731,516 7,074,710 - 7,074,710
Restructuring charges 1,113,112 - 1,113,112 - 1,113,112
Fixed asset write-off 4,145,564 - 4,145,564 - 4,145,564
Goodwill write-off 50,300,000 - 50,300,000 - 50,300,000
Corporate allocations 8,883 - 8,883 - 8,883
Bad debt expense 726,057 22,679 748,736 - 748,736
Depreciation and amortization 3,126,571 346,274 3,472,845 - 3,472,845
Noncash stock compensation 5,318,124 - 5,318,124 - 5,318,124
---------------- ------------ ------------ -------------- --------------
Total operating expenses 165,557,617 13,110,869 178,668,486 - 178,668,486
---------------- ------------ ------------ -------------- --------------
Operating loss (66,580,563) (1,535,593) (68,116,156) - (68,116,156)
Interest on note payable to Parent (554,601) - (554,601) - (554,601)
Interest expense, net (968,898) (543,662) (1,512,560) (210,000) [14] (1,722,560)
Gain from sale of assets - 1,816 1,816 - 1,816
Gain from settlement of vendor contract - 1,169,589 1,169,589 - 1,169,589
Gain on extinguishment of liabilities, net - 387,734 387,734 - 387,734
Noncash financing cost (1,284,651) - (1,284,651) (2,703,418) [12] [13] (3,988,069)
---------------- ------------ ------------ -------------- --------------
Loss from continuing operations (69,388,713) (520,116) (69,908,829) (2,913,418) (72,822,247)
Gain (loss) from discontinued operations - (1,175,441) (1,175,441) - (1,175,441)
Income taxes - - - - -
---------------- ------------ ------------ -------------- --------------
Net loss $ (69,388,713) (1,695,557) (71,084,270) (2,913,418) (73,997,688)
Preferred stock dividend - - - (718,750) [11] (718,750)
---------------- ------------ ------------ -------------- --------------
Net loss applicable to common shares (69,388,713) (1,695,557) (71,084,270) (3,632,168) (74,716,438)
================ ============ ============ ============== ==============
Weighted average shares outstanding 94,893,522 94,893,522 4,852,366,088 4,947,259,610
Loss per share (0.02) (0.75) (0.00) (0.02)
================ ============ ============ ============== ==============
Supplemental presentation of loss
per share given effect a 150 to 1
reverse stock split:
Weighted average shares outstanding 632,623 632,623 32,349,107 32,981,731
Loss per share (2.68) (112.36) (0.11) (2.27)
================ ============ ============ ============== ==============
C-4
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
[1] The historical financial statements of GlobalNet. for the year ended
December 31, 2002 are derived from audited consolidated financial statements and
for the six months ended June 30, 2003 are derived from unaudited condensed
consolidated financial statements of GlobalNet, all of which are presented
elsewhere in this information statement.
[2] The historical financial statements of iDial for the year ended December 31,
2002 are derived from audited consolidated financial statements and for the six
months ended June 30, 2003 are derived from unaudited condensed consolidated
financial statements which have been previously filed on its Forms 10-KSB and
10-QSB with the Securities and Exchange Commission, respectively. Certain
reclassifications were made to iDial's condensed consolidated financial
statements to conform them to the presentation of GlobalNet's financial
statements.
[3] To record the value of the 4,703,062,516 shares of iDial's common stock that
will be issued to Growth Enterprises Fund (GEF) in connection with the
Assignment and Assumption of the Stock Purchase Agreement to iDial and the
149,303,572 shares of iDial's common stock that will be issued as a finder's
fee. The value of the common stock to be issued in connection with the
transaction amounts to $29,114,000 using the closing price of $0.006 per share
on August 21, 2003.
[4] To reclassify iDial's accumulated deficit of $23,013,000 to additional
paid-in-capital.
[5] To record the cash payment to Titan of $1,500,000, the new promissory note
payable to Titan of $1,500,000 and the promissory note payable to GEF of
$500,000. iDial made this payment and assumed these liabilities in connection
with the Assignment and Assumption of the Stock Purchase Agreement.
[6] To record the 100,000 shares of Series A Preferred Stock with a stated value
of $106 per share and the 100,000 shares of Series B Preferred Stock with a
stated value of $50 per share issued to GEF in connection with the assignment to
iDial of a promissory note of $15,488,000 payable by GlobalNet. Commencing on
December 31, 2003, iDial is required to pay $118,910 of the Series A Preferred
Stock and $56,090 of the Series B Preferred Stock on the first business day of
each month. Accordingly, $1,225,000 representing seven monthly payments of the
Series A and Series B Preferred Stock have been classified in current
liabilities.
[7] The acquisition of GlobalNet by iDial has been reflected under the purchase
method of accounting in accordance with SFAS No. 141, with GlobalNet identified
as the accounting acquiror. The shareholder of GlobalNet prior to the
acquisition, will beneficially own 60% of the voting interest in iDial after the
transaction and as a result of the change in control of iDial, the transaction
has been accounted for as a reverse acquisition of iDial by GlobalNet. The
purchase price consideration was based upon the value of the assets received
from iDial which have more readily determinable fair values.
C-5
The purchase price consideration was determined as follows:
Shares to be issued to GEF $ 28,218,375
Shares to be issued as a finder's fee 895,821
Preferred stock to be issued to GEF 15,600,000
--------------------
$ 44,714,197
--------------------
The allocation of the purchase price was as follows:
Current assets $ 490,249
Note receivable from GlobalNet 15,487,590
Property and equipment, net 573,866
Other assets and intangibles 478,714
Goodwill 35,046,990
Current liabilities (2,443,367)
Long-term debt (1,419,845)
Payment to Titan (1,500,000)
New note payable to Titan (1,500,000)
Note payable to GEF (500,000)
--------------------
$ 44,714,197
--------------------
The Company is in the process of obtaining an independent valuation for purposes
of determining the fair value and related purchase price allocation of the
acquisition. The valuation may have a material effect on the purchase price
allocation and recoverability of the resulting assets reflected above for pro
forma presentation purposes.
[8] To eliminate GlobalNet's note payable to Parent and the payable to related
parties balances totaling $15,488,000 against iDial's note receivable from
GlobalNet in the same amount.
[9] To record the $1,750,000 convertible note payable to the investors and the
$180,000 of debt issuance cost related to the note. The convertible note was
issued to finance the payment to Titan in connection with the transaction.
[10] To record the additional debt discount of $1,416,751 for the convertible
notes issued to shareholders and consultants and the debt discount of $1,750,000
for the convertible note payable to the investors as described in Note [9]
above.
[11] To record the 5% dividend on the Series A and Series B Preferred Stock
issued to GEF.
[12] To amortize the additional debt discount for the $1,416,751 convertible
note and the debt discount for the $1,750,000 convertible note. The debt
discount for the $1,416,751 note was fully amortized in 2002 because this note
was immediately convertible into iDial's shares of common stock. The debt
discount for the $1,750,000 note was amortized over a period of 18 months as a
result of the restrictions on the ability of the holders to convert the note
which limits the note holder's ownership of iDial's outstanding common stock to
less than 5%. It is estimated that as a result of such limitations the note will
be converted over a period of 18 months.
[13] To amortize the debt issuance cost described in Note [8] over 18 months.
[14] To accrue 12% interest per annum on the $1,750,000 convertible note
described in Note [9] above.
C-6