The silent treatment
Florida's been providing me with a lot of interesting reading lately. Last week, the first bit was a letter sent to me by a lawyer for GlobeTel (AMEX: GTE ) . In it, he tells me that GlobeTel "in order to protects [sic] its interests and those of its shareholders, will no longer continue to communicate with you."
"Accordingly," it continues, "this will constitute a formal request that you immediately cease-and-desist from any further communications or inquiries . GOVERN YOURSELF ACCORDINGLY."
That's a pretty ironic request, given that GlobeTel CEO Tim Huff has previously complained that I didn't try hard enough to talk to him. The real problem, of course, is that I ask hard questions, unlike some of the GlobeTel PR regurgitators and apologists out there in the press. That's because it's my job to look out for investors, and I think GlobeTel is one of the worst investment ideas out there.
But after reading GlobeTel's latest annual report, it's easy to see why the company would want to instill an official silent treatment. In past conversations, CEO Tim Huff seemed more comfortable talking about his plans for the future, or the important foreign government men involved in the company's far-flung business deals. He showed little interest in explaining the firm's financial woes, or its long list of past ventures that failed to live up to the original promises, such as the very strange Australian deal. Investors should pay close attention to that, and GOVERN THEMSELVES ACCORDINGLY.
The ugliest thing in Florida
The raw numbers alone ought to be enough to frighten investors. For 2005, this now two-buck-and-change stock lost $0.43 per share, or $32 million dollars. That's 2.5 times greater than 2004's net loss of $13 million, even though revenues increased 179%, to $81.1 million. Of course, losing money like that is an easy task when you only take in a gross profit of $413,679 on that $81 million. To put that into context, $413,679 was less than half of GlobeTel's travel budget for the year.
The reason the bottom line didn't look even worse on a per-share basis was that shareholders saw their stake watered down by a whopping 50% increase in diluted shares. The share count is skyrocketing, of course, because GlobeTel keeps this money-losing strategy rolling by selling shares and other instruments like convertible debt -- to the tune of $15 million last year.
The cash burned by operations was $12.6 million in 2005, and management makes its dependence on financing perfectly clear, for those who take the time to comb through the 10-K. Refer to page 34, where it says ". additional cash will still be needed to support operations . [i]f we are unable to obtain the necessary funding, the company may have to modify its business plan, reduce or discontinue some of its operations or seek a buyer for all or part of its assets to continue as a going concern through 2006."
But while outside shareholders are left with the risk and double the pain on the bottom line, officers and directors are doing just fine, thanks. Their compensation rose 85% last year to a combined $12 million, or 15% of sales, much of it in stock. By the way, many of them have been planning to sell that stock over the past few months. I find that odd. If I held a large chunk of shares in a company that was about to bust open a $600 million Russian WiMax deal, I'd hang onto all of them. I'd buy more whenever I could. In other words, I'd GOVERN MYSELF ACCORDINGLY.
Leader in wireless?
Believing in the GlobeTel story requires you to believe that a tiny, money-losing Florida firm can somehow leapfrog the big boys in telecommunications. Tim Huff told me on the phone that the reason his firm would beat established equipment and service providers like Nokia (NYSE: NOK ) , Motorola (NYSE: MOT ) , Vimpelcom (NYSE: VIP ) , and Mobile Telesys (NYSE: MBT ) is because of the superiority of its technology -- specifically, its "radios." If that's true (and more than one telecom analyst has written to me to express major doubts), then GlobeTel must have one of the most efficient R&D machines in the world. According to the 10-K, total R&D for the year was just more than $2.3 million, and 99% of that sum went to the blimps.
The trail of tears
GlobeTel's big splash in December was for its Russian WiMax deal, the one that was supposed to deliver them hundreds of millions of dollars by now, but which has mostly produced press releases. This came as no surprise to me, because I've taken the time to read GlobeTel's past filings, and I know that delays and cancellations are par for the GlobeTel course.
Investors who wish to double-check GlobeTel's past record on hot-sounding deals should begin with page six of the annual report, where they will find many entries that look like this. "In February, 2005, we signed a Letter of Intent (LOI) with Banco Azteca, the fifth largest financial Institution in Mexico . However, based on the business terms presented, the company has decided not to move forward with this deal." In all, of the 10 deals listed on pages six and seven alone, six were cancelled outright, and the rest were rescheduled or otherwise delayed.
More interested in the deals promoted in 2005? Direct your gaze to the pages beginning with 50, and you'll see the updates on more recently announced projects like the July 7 Daly Dumas joint venture agreement, the July 14 Colombian blimp deal, the July 7 RapidMoney deal, the Aug. 1 German wireless deal, the Oct. 6 Global Crossing (Nasdaq: GLBC ) deal, the Oct. 12 University of Stuttgart Deal, the Dec. 31 Russian WiMax deal, and the Nov. 9 Indian financial services deal -- none of which has yet yielded any transactions "that would require recording or disclosure in the Company's financial statements related to this agreement." If you think "the money must be on the way," I suggest you go back to page six and read again.
Reconsider all those deals, consider what was said about them at the time, and look at what has happened since. Then, GOVERN YOURSELF ACCORDINGLY.
Chamber of oddities
If you 're unmoved by large losses and unfulfilled deals, consider some of the other odd tidbits to be found in the 10-K. One of my favorites is the page 42-43 description of the "milestone" payments made to acquire GlobeTel's "HotZone" wireless technology.
"Initially, since the milestones to be achieved for the second and third years of the contract were undefined and it is unknown whether or not such milestones, even if defined, will be achieved, the Company had not recorded the additional consideration . Subsequently, as of Dec. 31, 2005, the Company and HotZone agreed that any and all milestones, previously undefined, were in fact achieved."
So, the non-existent milestones were judged fulfilled, and the company recorded further payments of $5 million worth of stock. (While you're on page 43, you might want to review the deal that brought Huff to GlobeTel: a "consulting" deal involving his previous company, Global VoIP and "Charterhouse," a Nevis, then Malaysian, company for a GlobeTel buildout of five networks. The payment to GlobeTel was to be 64 million (later 86 million) shares of an unlisted Australian company, one that ended up being liquidated a year and a half later, causing GlobeTel to write off the entire amount. Instead of being "directly compensated" for this (to my mind, wildly unsuccessful) deal, Tim Huff became an officer and director of GlobeTel.
Another interesting deal is the cash and stock payment to ISG Jet, a company owned by GlobeTel's executive vice president, one Steven King, for "executive air travel services." ISG Jet is owned by King's holding company INV Group (according to Florida records, formerly InvestorSource Group) and has, according to the record here, filed planned sales of more than $2.8 million worth of GlobeTel stock since June of 2005.
And while we're on the subject of insider sales, one of those questions that GlobeTel doesn't seem to want to answer is whether CEO Tim Huff is a 40% investor in an outfit called Infinity Capital Partners, as he is described in a 2002 registration statement. By virtue of the convertible note originally ascribed to Infinity, and later, it seems, ascribed to an unnamed "entity" 40% owned by Tim Huff, it looks like we're talking about the same "entity." (It appears most recently page 48 of the latest 10-K.)
I find this interesting because one Infinity Capital Partners has been filing planned share sales this past year. If Huff is still an investor in this Infinity, I'd like to know how he squares those sales with his claims to me that he has "not sold" shares. Since GlobeTel is giving me the silent treatment, maybe investors will ask for some clarification, consider the answer, and GOVERN THEMSELVES ACCORDINGLY.
Foolish bottom line
GlobeTel is a great company to watch if you want to learn about complicated (often unfulfilled) business deals, group investor psychology, and money-burning penny stocks. If you're looking for a foreign telecom player that can produce little things like earnings and cash -- you know, the stuff that makes an investment ultimately pay off -- I suggest you look elsewhere. As for GlobeTel, read the filings, look at the director turnover (page 70) in 2005, look at the recent insider selling, consider how management is rewarding itself richly while outside shareholders bear the brunt of the huge losses and dilutive financing arrangements, and GOVERN YOURSELF ACCORDINGLY.
At the time of publication, Seth Jayson had no positions in any company mentioned here. View his stock holdings and Fool profile here. Fool rules are here.