SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number
March 31, 2000 1-10210
eGLOBE, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3486421
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
1250 24TH STREET, NW, SUITE 725, WASHINGTON, DC 20037
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(Address of principal executive offices)
Registrant's telephone number, including area code: (202) 822-8981
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
The number of shares outstanding of each of the registrant's classes of common
stock, as of May 12, 2000 is 87,792,569 shares, all of one class of $.001 par
value Common Stock.
eGLOBE, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
PAGE
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PART I
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 3, 4
Consolidated Statements of Operations for the three months ended 5
March 31, 2000 and 1999
Consolidated Statements of Comprehensive Income (Loss) for the 6
three months ended March 31, 2000 and 1999
Consolidated Statements of Cash Flows for the three months ended 7
March 31, 2000 and 1999
Notes to Consolidated Financial Statements 8-28
Supplemental Disclosures of Cash Flow Information 29-33
Item 7 Management's Discussion and Analysis of Financial Condition and 33
Results of Operations
Item 7A Quantitative and Qualitative Disclosure About Market Risk 33
PART II
Item 1 Legal Proceedings 33
Item 2 Changes in Securities 34
Item 3 Defaults Upon Senior Securities 34
Item 4 Submission of Matters to a Vote of Security Holders 34
Item 5 Other Information 34
Item 6 Exhibits and Reports on Form 8-K 34
Signatures 36
2
eGLOBE, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 (UNAUDITED) AND DECEMBER 31, 1999
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MARCH 31, 2000 DECEMBER 31,
(UNAUDITED) 1999
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ASSETS (NOTE 6)
Current:
Cash and cash equivalents $ 1,329,000 $ 2,659,000
Restricted cash 158,000 158,000
Restricted short-term investments 3,042,000 1,492,000
Accounts receivable, less
allowance of $4,001,000 and
$3,206,000 for doubtful accounts 21,071,000 15,142,000
Other receivables 1,291,000 1,406,000
Prepaid expenses 1,502,000 1,584,000
Other current assets 429,000 639,000
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TOTAL CURRENT ASSETS 28,822,000 23,080,000
PROPERTY AND EQUIPMENT,
net of accumulated depreciation and
amortization of $27,525,000 and
$24,351,000 40,740,000 42,078,000
GOODWILL, net of accumulated amortization
of $2,513,000 and $1,572,000 (Note 4) 22,987,000 24,904,000
OTHER INTANGIBLE ASSETS,
net of accumulated amortization
of $8,401,000 and $6,466,000 (Note 4) 20,130,000 21,674,000
OTHER:
Deposits 1,696,000 1,659,000
Other assets 220,000 400,000
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TOTAL OTHER ASSETS 1,916,000 2,059,000
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TOTAL ASSETS $114,595,000 $113,795,000
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See accompanying summary of accounting policies and notes to consolidated
financial statements.
3
eGLOBE, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 (UNAUDITED) AND DECEMBER 31, 1999
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MARCH 31, 2000 DECEMBER 31,
(UNAUDITED) 1999
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LIABILITIES, MINORITY INTEREST, REDEEMABLE
STOCK AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable (Note 11) $ 40,708,000 $ 41,558,000
Accrued expenses 12,835,000 10,992,000
Income taxes payable 560,000 560,000
Notes payable and current maturities of long-
term debt (Note 5) 6,767,000 7,868,000
Notes payable and current maturities of long-
term debt-related parties (Note 6) 4,836,000 4,676,000
Deferred revenue 1,383,000 1,331,000
Other liabilities 1,639,000 797,000
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TOTAL CURRENT LIABILITIES 68,728,000 67,782,000
ACCOUNTS PAYABLE - LONG-TERM (NOTE 11) -- 1,000,000
LONG-TERM DEBT, NET OF CURRENT MATURITIES (NOTE 5) 4,054,000 5,194,000
LONG-TERM DEBT - RELATED PARTIES, NET OF CURRENT
MATURITIES (NOTE 6) 8,927,000 8,301,000
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TOTAL LIABILITIES 81,709,000 82,277,000
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COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 2,710,000 2,800,000
REDEEMABLE STOCK (NOTES 7 AND 9) 22,970,000 700,000
STOCKHOLDERS' EQUITY :
Preferred stock, all series, $.001 par value,
10,000,000 and 5,000,000 shares
authorized, 266,101 and 1,927,791 shares outstanding 1,000 2,000
Common stock, $.001 par value, 200,000,000
shares authorized, 85,754,179 and 69,580,604
shares outstanding 86,000 70,000
Stock to be issued 2,624,000 2,624,000
Notes receivable (Note 7) (1,369,000) (1,210,000)
Additional paid-in capital 113,931,000 106,718,000
Accumulated deficit (108,855,000) (80,682,000)
Accumulated other comprehensive income 788,000 496,000
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TOTAL STOCKHOLDERS' EQUITY 7,206,000 28,018,000
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TOTAL LIABILITIES, MINORITY INTEREST, REDEEMABLE
STOCK AND STOCKHOLDERS' EQUITY $114,595,000 $113,795,000
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See accompanying summary of accounting policies and notes to consolidated
financial statements.
4
eGLOBE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED) AND 1999
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THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
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REVENUE (NOTES 2 AND 10) $ 35,087,000 $ 44,192,000
COST OF REVENUE 32,419,000 42,075,000
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GROSS PROFIT 2,668,000 2,117,000
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COSTS AND EXPENSES:
Selling, general and administrative, exclusive of $5.9 million, $1.4 15,477,000 6,146,000
million and $0.9 million reported below of deferred compensation
related to stock options and acquisitions
Deferred compensation related to stock
options (Note 7) 5,895,000 --
Deferred compensation related to
acquisitions (Note 4) 1,438,000 919,000
Depreciation and amortization 3,208,000 1,392,000
Amortization of goodwill and other
intangible assets 2,876,000 555,000
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TOTAL COSTS AND EXPENSES 28,894,000 9,012,000
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LOSS FROM OPERATIONS (26,226,000) (6,895,000)
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OTHER INCOME (EXPENSE):
Interest expense (2,019,000) (869,000)
Interest income 88,000 240,000
Other expense, net (16,000) (8,000)
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TOTAL OTHER EXPENSE (1,947,000) (637,000)
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NET LOSS (28,173,000) (7,532,000)
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PREFERRED STOCK DIVIDENDS (NOTES 7 AND 9) (10,224,000) (3,712,000)
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NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(38,397,000) $(11,244,000)
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NET LOSS PER SHARE (BASIC AND DILUTED) (NOTE 8) $ (0.47) $ (0.19)
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See accompanying summary of accounting policies and notes to consolidated
financial statements.
5
eGLOBE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)AND 1999
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THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
NET LOSS $(28,173,000) $ (7,532,000)
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS 292,000 91,000
COMPREHENSIVE NET LOSS $(27,881,000) $ (7,441,000)
See accompanying summary of accounting policies and notes to consolidated
financial statements.
6
eGLOBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
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THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net loss $ (28,173,000) $ (7,532,000)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Depreciation and amortization 6,084,000 1,947,000
Provision for bad debts 1,072,000 199,000
Non-cash interest expense -- 202,000
Minority interest in loss (37,000) --
Issuance of options and warrants 1,594,000 19,000
Deferred compensation costs related to acquisitions 1,438,000 919,000
Deferred compensation costs related to stock options 5,895,000 --
Amortization of warrant value for services 451,000 --
Amortization of debt discounts 831,000 304,000
Changes in operating assets and liabilities (net of changes
from acquisitions):
Accounts receivable (7,001,000) (1,559,000)
Other receivables 115,000 (736,000)
Prepaid expenses (369,000) (759,000)
Other current assets 210,000 (754,000)
Other assets 244,000 618,000
Accounts payable (1,850,000) 10,281,000
Income taxes payable -- (147,000)
Accrued expenses 1,359,000 (3,108,000)
Deferred revenue 52,000 (533,000)
Other liabilities 842,000 669,000
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CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (17,243,000) 1,096,000
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INVESTING ACTIVITIES:
Purchases of property and equipment (356,000) (189,000)
Purchase of intangibles (137,000) --
Net sales (purchases) of restricted short-term investments (1,550,000) 3,706,000
Advances to non-affiliate, subsequently acquired -- (503,000)
Acquisition of Telekey, net of cash acquired -- (95,000)
Increase in restricted cash -- (1,000)
Deposits (37,000) (36,000)
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CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (2,080,000) 2,882,000
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FINANCING ACTIVITIES:
Proceeds from notes payable (Note 5) -- 50,000
Proceeds from notes payable-related party (Note 6) 685,000 200,000
Proceeds from issuance of preferred stock 19,525,000 8,000,000
Stock issuance costs (1,114,000) (321,000)
Proceeds from exercise of warrants (Note 7) 755,000 --
Proceeds from exercise of options (Note 7) 1,613,000 --
Deferred financing and acquisition costs -- (40,000)
Payments on capital leases (598,000) (160,000)
Payments on notes payable (Note 5) (2,145,000) --
Payments on notes payable - related party (Note 6) (728,000) (141,000)
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CASH PROVIDED BY FINANCING ACTIVITIES 17,993,000 7,588,000
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NET INCREASE (DECREASE) IN CASH (1,330,000) 11,566,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,659,000 4,031,000
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,329,000 $ 15,597,000
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See Note 12 for Supplemental Information to Consolidated Statements of Cash
Flows.
See accompanying summary of accounting policies and notes to consolidated
financial statements.
7
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
eGlobe, Inc. and its wholly-owned subsidiaries and controlling interest in an
LLC ("the Company") and have been prepared in accordance with United States
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been included consisting only of normal recurring accruals.
Operating results for the three month period ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000.
The consolidated financial statements of the Company for the three months ended
March 31, 2000 and 1999 have been restated to give retroactive effect to the
merger with Trans Global Communications, Inc. ("Trans Global") effective March
23, 2000, which has been accounted for using the pooling of interests method of
accounting. As a result, the financial position, results of operations and cash
flows are presented as if the combining companies had been consolidated for all
periods presented. Trans Global is a leading provider of international voice and
data services to carriers in several markets around the world.
It is suggested that these consolidated financial statements be read in
conjunction with the supplemental consolidated financial statements and notes
thereto included in the Company's Current Report on Form 8-K filed with the
Securities & Exchange Commission on May 22, 2000. See Note 2 for further
information.
The Company completed the following acquisitions in 1999 that were accounted for
under the purchase method of accounting. In February 1999, the Company completed
the acquisition of Telekey, Inc. ("Telekey"), a provider of card-based
telecommunications services. In June 1999, the Company, through its newly formed
subsidiary, Vogo Networks, LLC ("Vogo"), purchased substantially all of the
assets and assumed certain liabilities of Connectsoft Communications Corporation
and Connectsoft Holdings, Corp. (collectively "Connectsoft"), which developed
and continues to enhance a server based communication system that integrates
various forms of messaging, Internet and web content, personal services, and
provides telephone access to Internet content (including email and e-commerce
functions). In July 1999, the Company completed the acquisition of Swiftcall
Equipment and Services (USA) Inc., ("Swiftcall"), a telecommunications company,
and certain network operating equipment held by an affiliate of Swiftcall.
Effective August 1, 1999, the Company assumed operational control of Highpoint
International Telecom, Inc. and certain assets and operations of Highpoint
Carrier Services, Inc. and Vitacom, Inc. (collectively "Highpoint"). The three
entities were majority owned subsidiaries of Highpoint Telecommunications Inc.
("HGP"), a publicly traded company on the Canadian Venture Exchange. On October
14, 1999, substantially all of the operating assets of Highpoint were
transferred to iGlobe, Inc. ("iGlobe"), a newly formed subsidiary of HGP, and
the Company concurrently acquired all of the issued and outstanding common stock
of iGlobe. iGlobe possesses an infrastructure supplying Internet Protocol ("IP")
services, particularly voice over IP, throughout Latin America. In September
1999, the Company, acting through a newly formed subsidiary, acquired control of
Oasis Reservations Services, Inc. ("ORS"), a Miami based transaction support
services and call center to the travel industry, from its sole stockholder,
Outsourced Automated Services and Integrated Solutions, Inc. ("Oasis"). The
Company and Oasis formed eGlobe/Oasis Reservations LLC ("LLC") which is
responsible for conducting ORS' operations.
8
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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The Company manages and controls the LLC. In December 1999, the Company
completed the acquisition of Coast International, Inc. ("Coast"), a provider of
enhanced long-distance interactive voice and internet services. See Notes 4, 5,
6 and 7 for further discussion.
In December 1998, the Company acquired IDX International, Inc. ("IDX"), a
supplier of IP transmission services, principally to telecommunications
carriers, in 14 countries. Also, in December 1998, the Company acquired UCI Tele
Network, Ltd. ("UCI"), a development stage calling card business, with contracts
to provide calling card services in Cyprus and Greece. These acquisitions were
also accounted for under the purchase accounting method.
NOTE 2 - MERGER WITH TRANS GLOBAL
Pursuant to an Agreement and Plan of Merger entered into on December 16, 1999,
and effective March 23, 2000, a wholly-owned subsidiary of eGlobe merged with
and into Trans Global, with Trans Global continuing as the surviving corporation
and becoming a wholly-owned subsidiary of eGlobe (the "Merger"). The Merger has
been accounted for as a pooling of interests. The Merger provided for the
issuance of 40,000,000 shares of eGlobe common stock in exchange for all of the
outstanding common stock of Trans Global. In addition, eGlobe issued 2,000,000
shares of its common stock into escrow to cover its potential indemnification
obligations under the Merger agreement.
Revenue, net loss, net loss attributable to common stockholders, and net loss
per share of eGlobe and Trans Global as consolidated for the periods presented
are as follows:
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
REVENUE:
eGlobe $ 13,757,000 $ 8,385,000
Trans Global 23,476,000 35,807,000
Elimination of intercompany revenue (2,146,000) --
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eGlobe, consolidated $ 35,087,000 $ 44,192,000
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NET LOSS:
eGlobe $(26,332,000) $ (7,502,000)
Trans Global (1,841,000) (30,000)
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eGlobe, consolidated $(28,173,000) $ (7,532,000)
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NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS:
eGlobe $(36,556,000) $(11,214,000)
Trans Global (1,841,000) (30,000)
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eGlobe, consolidated $(38,397,000) $(11,244,000)
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NET LOSS PER SHARE (BASIC AND DILUTED)
As previously reported $ -- $ (0.63)
eGlobe, consolidated $ (0.47) $ (0.19)
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9
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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NOTE 3 - MANAGEMENT'S PLAN
As of March 31, 2000, the Company had a net working capital deficiency of $39.9
million. This net working capital deficiency resulted principally from a loss
from operations of $26.2 million (including deferred compensation, depreciation,
amortization and other non-cash charges which totaled $16.8 million for the
three months ended March 31, 2000). Also contributing to the working capital
deficiency were $6.8 million in notes payable and current maturities of
long-term debt, $4.8 million in notes payable and current maturities of
long-term debt due to related parties, and $57.1 million in accounts payable,
accrued expenses, other liabilities and deferred revenue. Accounts payable
includes approximately $12.0 million of payables which are being renegotiated
with AT&T and MCI Worldcom. The current maturities of $6.8 million consists of
$3.8 million primarily related to acquisition/merger debt and $3.0 million
related to capital lease payments due over the one year period ending March 31,
2001. The current maturities of $4.8 million due to related parties, net of
unamortized discount of $2.9 million, consists of a $1.0 million note due to a
stockholder on April 18, 2000, term payments of $0.6 million, net of unamortized
discount of $2.9 million, due to EXTL Investors, the Company's third largest
stockholder, and notes payable of $3.2 million due to an affiliate of EXTL
Investors.
On an operating level, the Company is continuing to try to negotiate certain
contract and payment terms with an Enhanced Services customer that has a
significant outstanding balance due to the Company. The Company has recorded
significant reserves to cover this outstanding balance. The Company has not been
able to work out a resolution with this customer. The Company may have to take a
more aggressive course of action to resolve this matter and is considering all
alternatives at this time.
Thus far in 2000, the Company has met its cash requirements from (1) proceeds
from the exercise of options and warrants of $2.4 million, primarily as a result
of the improvement in the Company's stock price during the month of January 2000
and as sustained through the end of the first quarter, (2) proceeds of $0.5
million from the sale of Series N Convertible Preferred Stock ("Series N
Preferred"), (3) proceeds of $15.0 million from the sale of Series P Convertible
Preferred Stock ("Series P Preferred") and (4) proceeds of $4.0 million from the
sale of Series Q Convertible Preferred Stock ("Series Q Preferred"). These
capital transactions are discussed in Notes 7 and 9.
If the Company meets its projections for reaching breakeven on an operating cash
basis during the third quarter of 2000, the Company will still have additional
capital requirements through March 2001 of up to $20.0 million. The Company will
need to fund pre-existing liabilities and note payable obligations and the
purchase of capital equipment.
The Company will receive $6.0 million in proceeds from the sale of additional
shares of Series Q Preferred Stock immediately upon the effectiveness of the
registration of the common stock underlying this preferred stock. The Company
anticipates that the additional capital needed will come from a combination of
financings that could consist of debt, private equity, a public follow-on
offering, or a line of credit facility during the twelve-month period from April
2000 through March 2001. There is the possibility that the amount of financing
required could be diminished by secured equipment-based financings.
In addition to the firm commitment discussed previously, the Company is
proceeding with other financing opportunities, which have not been finalized.
The Company has a variety of opportunities in both the debt and equity markets
to raise the necessary funds, which it needs to achieve its growth plan through
the end of the quarter ended March 31, 2001.
10
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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The Company anticipates that increased sales in the international market with
higher margins will reduce its net working capital deficiency and contribute to
its funding requirements through the first quarter of 2001. As a result, the
projected funding requirements discussed above could be reduced should this
occur.
There is a risk that the Company will not reach breakeven on a cash basis
(excluding non-cash charges) as projected and will continue to incur operating
losses. If this occurs and should the Company be unsuccessful in its efforts to
raise additional funds to cover such losses, then the Company's growth plans
would be sharply curtailed and its business would be adversely affected.
On December 14, 1999, Trans Global entered into a letter agreement with AT&T,
Trans Global's largest supplier, regarding the payment of various past due 1999
switch and circuit costs. Pursuant to that agreement, Trans Global agreed to pay
AT&T approximately $13.8 million in consecutive monthly installments at 9%
interest through January 1, 2001. The payable is secured by certain assets of
Trans Global. As of March 31, 2000, the remaining balance due to AT&T was $10.5
million. Trans Global, as of May 22, 2000, has not paid $2.5 million of
scheduled payments that were due in April and May 2000. In addition,
approximately $2.7 million of payables for current usage are in arrears. Trans
Global is currently in discussions with AT&T regarding alternative arrangements
for settlement of the outstanding obligations, and believes that conclusion of
an arrangement that is not materially adverse to the immediate or long-term
future operations of the Company, is likely. There can be no assurance that
Trans Global will be able to satisfactorily resolve this matter. Should this not
be resolved and should AT&T take action to take possession of the assets held as
security, Trans Global believes that business will not be adversely impacted.
There is no guarantee that Trans Global and therefore the Company will not have
its operations affected adversely should a satisfactory resolution between the
parties not be reached.
The Company is obligated under certain conditions to redeem the shares of Series
P Preferred Stock and Series Q Preferred Stock. See Note 9 for further
discussion.
NOTE 4 - ACQUISITIONS
As discussed previously, the Company acquired IDX and UCI in December 1998 and
Telekey, Connectsoft, Swiftcall, iGlobe, ORS and Coast in 1999. The results of
operations of the acquired businesses are included in the consolidated financial
statements from the date of acquisition. These acquisitions were accounted for
using the purchase method of accounting. In addition, there are certain
contingent purchase elements in some of these acquisitions.
IDX AND UCI
The Company may issue additional purchase consideration if IDX and UCI meet
certain defined performance objectives. The Company is currently renegotiating
UCI's original agreement and timing of the performance measurement. The Company
will determine the final goodwill amounts when the contingent purchase elements
are resolved and the contingent purchase consideration is issued. Goodwill may
materially increase when these contingencies are resolved.
11
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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At the acquisition date, the stockholders of IDX originally received preferred
stock and warrants which were ultimately convertible into common stock subject
to IDX meeting certain performance objectives. These stockholders in turn
granted preferred stock and warrants, each of which were convertible into a
maximum of 240,000 shares of the Company's common stock, to certain employees.
The stock grants were performance based and were adjusted each reporting period
(but not less than zero) for the changes in the stock price until the shares
and/or warrants (if and when) issued were converted into common stock. The
increase in market price for the three months ended March 31, 1999 of the
underlying common stock granted by the IDX stockholders to certain employees
resulted in a charge to income of $0.3 million. In December 1999, the IDX
stockholders agreed not to issue preferred stock and warrants to the employees
or other parties. In exchange, the Company agreed to issue eGlobe options to
these employees and others related to IDX. The options have an exercise price of
$1.20 and a three year term. The options vested 75% at March 31, 2000 and the
other 25% will vest on an accelerated basis if IDX meets its earn out or in
three years if it does not. These options were granted subsequent to December
31, 1999. The increase in market price for the three months ended March 31, 2000
of the underlying common stock granted by the IDX stockholders to certain
employees resulted in a charge to income of $1.3 million. See Note 7 for further
discussion.
TELEKEY
As part of the purchase consideration, stockholders of Telekey received
1,010,000 shares of Series F Preferred Stock which were converted into common
stock on January 3, 2000. In addition, under the original purchase agreement,
the stockholders were to receive at least 505,000 and up to an additional
1,010,000 shares of Series F Preferred Stock two years from the date of closing
subject to Telekey meeting certain revenue and EBITDA objectives. The value of
$979,000 for the minimum 505,000 shares of Series F Preferred Stock to be issued
was included in the purchase consideration. These stockholders in turn agreed to
grant upon conversion of the Series F Preferred Stock a total of 240,000 shares
of the Company's common stock to certain Telekey employees. Of this total,
60,000 shares were to be issued only if Telekey met certain performance
objectives. As of March 31, 2000 and 1999, the value of the underlying
non-contingent 180,000 shares of common stock granted by the Telekey
stockholders to certain employees resulted in a charge to income of $0.1 million
and $0.6 million, respectively. The stock grants were performance based and were
to be adjusted each reporting period (but not less than zero) for the changes in
the stock price until the shares were issued to the employees. As the Telekey
stockholders converted their shares of Series F Preferred Stock on January 3,
2000, no additional compensation expense will be recorded for the non-contingent
shares after this date.
In February 2000, the Company reached a preliminary agreement with the former
stockholders of Telekey to restructure certain terms of the original purchase
agreement. Such restructuring, which is subject to completion of the final
negotiation documentation, includes an acceleration of the original earn-out
provisions as well as the termination dates of certain employment agreements.
The final purchase amount will be determined when these negotiations are
completed. Goodwill may materially increase when this contingency is resolved.
The original acquisition agreement was restructured on May 24, 1999. This
agreement allowed the Company to integrate the Telekey operations, (prior to
this time, Telekey's operations had to be kept separate in order to determine
whether the earn-out criteria would be met) to improve the synergies and
technological advancements realized from the merger and to allow for a change to
the general management team of Telekey.
12
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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iGLOBE
The initial preliminary purchase price allocation reflected in the consolidated
financial statements as of December 31, 1999 included goodwill of $1.8 million
and acquired intangibles of $2.4 million related to a customer base, licenses
and operating agreements, a sales agreement and an assembled workforce. In March
2000, based on further management review, $0.7 million and $0.3 million were
reclassified from goodwill to intangibles and fixed assets, respectively. The
consolidated financial statements of the Company as of March 31, 2000 reflect
the final allocation of the purchase price based on the completion of the
management review.
ORS
The LLC was funded by contributions effected by the members under a contribution
agreement. Oasis contributed all the outstanding shares of ORS valued at
approximately $2.3 million and the Company contributed 1.5 million shares of its
common stock valued at $3.0 million on the date of issuance and three warrants
to purchase additional shares of its common stock to the LLC. The warrants are
exercisable at a price equal to $.001 per share for the shares of common stock
as discussed below:
(a) Under the first warrant, shares equal to the (i) difference between $3.0
million and the value of the Company's 1.5 million share contribution on the
date that the shares of common stock (including the shares underlying the
warrants) contributed to the LLC are registered with the SEC if the value of the
1.5 million shares on that date is less than $3.0 million; and (ii) shares equal
to $100,000 of the Company's common stock for each 30-day period beyond 90 days
following the date of contribution that the shares of the Company's common stock
(including the shares underlying the warrants) contributed to the LLC remain
unregistered (as of March 31, 2000, shares equal to $300,000 are issuable upon
registration under the warrant);
(b) 204,909 shares, valued at approximately $2.0 million, are issuable under the
second warrant based on ORS meeting certain defined performance objectives;
(c) Under the third warrant, shares based upon (1) ORS achieving certain revenue
and EBITDA targets, and (2) the Company's share price at the date of
registration of the shares for this transaction. Under certain circumstances,
these shares may be equal to the greater of (A) 50% of the incremental revenue
for the Second Measurement Period (as defined in the agreements) over $9.0
million or (B) four times the incremental Adjusted EBITDA (as defined in the
agreements) for the Second Measurement Period over $1.0 million provided,
however, that such number of shares shall not exceed the greater of; (i)
1,000,000 shares of the Company's common stock or (ii) the number of shares of
the Company's common stock determined by dividing $8.0 million by the Second
Measurement Period Date Market Value (as defined in the agreements); and
provided further, that if the basis for issuance of such shares is incremental
revenue over $9.0 million then EBITDA for the Second Measurement Period must be
at least $1.0 million for the revenue between $9.0 million and $12.0 million or
at least $1.5 million for revenue above $12.0 million. In addition, the LLC may
receive 0.5 million shares of the Company's common stock if the revenue for the
Second Measurement Period is equal to or greater than $37.0 million and the
Adjusted EBITDA for the Second Measurement Period is equal to or greater than
$5.0 million. The measurement periods for determining the number of shares
issuable under the third warrant have not yet expired. Depending upon the
number, if any, of shares issuable under the third warrant, the purchase amount
and goodwill may increase.
13
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
On May 12, 2000, Oasis exercised its option under the LLC's operating agreement
to exchange its interest in the LLC and receive the shares of common stock and
warrants contributed to the LLC by the Company. This exchange will be completed
shortly, at which time the Company will become the sole member of the LLC.
COAST
The consolidated financial statements of the Company as of March 31, 2000
reflect the final allocation of the purchase price based on management's review
and final third party appraisals. The purchase price allocation resulted in
goodwill of $14.3 million and intangibles of $3.2 million related to the value
of certain distribution networks, certain long distance infrastructure,
internally developed software and assembled and trained workforce.
NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBT
At March 31, 2000 and December 31, 1999, notes payable and long-term debt
consisted of the following:
(UNAUDITED)
MARCH 31, DECEMBER 31,
2000 1999
------------------ ---------------
8% unsecured promissory note for acquisition of UCI (1) $ 500,000 $ 500,000
8% mortgage note, payable monthly, including interest through March 2010, with
an April 2010 balloon payment; secured by deed of trust on the related land
and building 297,000 299,000
Promissory note of Telekey payable to a telecommunication
company (2) 379,000 454,000
Promissory note due to seller of iGlobe (3) 1,129,000 1,831,000
Promissory note due to seller of ORS (4) 389,000 451,000
Promissory note secured by certain equipment (5) 2,474,000 2,720,000
Certain promissory notes to an investor and for certain
acquisitions, repaid in January and February 2000 -- 1,057,000
Capitalized lease obligations (6) 5,653,000 5,750,000
------------------ ---------------
Total 10,821,000 13,062,000
Less current maturities 6,767,000 7,868,000
------------------ ---------------
Total notes payable and long-term debt $ 4,054,000 $ 5,194,000
------------------ ---------------
14
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
(1) In connection with the UCI acquisition, the Company issued a $0.5 million
unsecured promissory note with 8% interest payable monthly due no later than
September 30, 2000.
(2) Telekey has an outstanding promissory note issued in the original amount of
$454,000 bearing interest, payable quarterly at 10% with principal due on
December 31, 2000. The note is secured by certain assets of the previous
stockholders of Telekey.
(3) In connection with the acquisition of iGlobe, HGP financed working capital
for iGlobe through the closing date for which the Company issued an unsecured
note payable for approximately $1.8 million which was subject to adjustment. The
outstanding balance bears interest at 15% per annum. As of March 31, 2000, the
Company has repaid $713,000 of the note and will pay the remaining balance on or
before June 1, 2000 (See Notes 4 and 11).
(4) The note payable to Oasis bears interest at 7% and principal and interest
are due in six equal quarterly installments beginning November 30, 1999. The
Company guaranteed ORS' obligations under this loan and granted the seller a
security interest in its ownership interest in the LLC.
(5) Effective June 11, 1999, Trans Global entered into a financing agreement for
a total of $3.3 million secured by certain switch hardware and software. The
note is payable in 36 consecutive monthly installments of approximately $105,000
(principal and interest) at a fixed interest rate of 8.88%.
(6) The Company is committed under various capital leases for certain property
and equipment. These leases are for terms of 18 months to 36 months and bear
interest ranging from 8.5% to 28.0%. Accumulated depreciation on equipment held
under capital leases was $1,606,000 and $1,395,000 at March 31, 2000 and
December 31, 1999, respectively.
NOTE 6 - NOTES PAYABLE AND LONG-TERM DEBT - RELATED PARTIES
As of March 31, 2000 and December 31, 1999, notes payable and long-term debt
with related parties consisted of the following:
(UNAUDITED)
MARCH 31, DECEMBER 31,
2000 1999
------------------------ --------------
Accounts receivable revolving credit note (1) $ 1,743,000 $ 1,058,000
Secured notes, net of unamortized discount of
$6,415,000 and $7,128,000 (1) 7,790,000 7,806,000
Promissory note of Coast (2) 3,000,000 3,000,000
Promissory note of Coast (2) 250,000 250,000
Promissory note payable to a stockholder, net of
unamortized discount of $20,000 and
$137,000 (3) 980,000 863,000
------------------------ --------------
Total, net of unamortized discount of $ 6,435,000 and
$7,265,000 13,763,000 12,977,000
Less current maturities, net of unamortized discount of
$2,871,000 and $2,988,000 4,836,000 4,676,000
------------------------ --------------
Total long-term debt, net of unamortized discount
of $3,564,000 and $4,277,000 $ 8,927,000 $ 8,301,000
------------------------ --------------
15
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
(1) In April 1999, the Company entered into a loan and note purchase agreement
with EXTL Investors ("EXTL"), which together with its affiliates was the
Company's largest stockholder at the time. Under the terms of this Loan and Note
Purchase Agreement ("Agreement"), in April 1999, the Company initially received
an unsecured loan of $7.0 million bearing interest at 8%. As additional
consideration, EXTL received 500,000 warrants valued at approximately $2.9
million.
Under the Agreement, in July 1999, EXTL purchased $20.0 million of 5% Secured
Notes ("Notes") following approval by the Company's stockholders. The initial
$7.0 million note was repaid from the proceeds of the Notes along with accrued
interest. As additional consideration for the Notes, EXTL was granted warrants
vesting over two years expiring in three years, to purchase 5,000,000 shares of
the Company's common stock at an exercise price of $1.00 per share. The value
assigned such warrants of approximately $10.7 million was recorded as a discount
to the Notes and is being amortized over the term of the Notes as additional
interest expense.
Principal and interest on the Notes are payable over three years in monthly
installments commencing August 1, 1999 with a balloon payment for the remaining
balance due on the earlier to occur of (i) June 30, 2002, or (ii) the date of
closing of an offering ("Qualified Offering") by the Company of debt or equity
securities, in a single transaction or series of related transactions, from
which the Company receives net proceeds of $100.0 million or more.
Alternatively, the Company may elect to pay up to 50% of the original principal
amount of the Notes in shares of the Company's common stock, at its option, if:
(i) the closing price of the Company's common stock is $8.00 or more per share
for more than 15 consecutive trading days; (ii) the Company completes a public
offering of equity securities at a price of at least $5.00 per share and with
proceeds of at least $30.0 million; or (iii) the Company completes an offering
of securities with proceeds in excess of $100.0 million.
Also, under the Agreement, EXTL agreed to make advances to the Company under a
5% Accounts Receivable Revolving Credit Note ("Revolver") for an amount up to
the lesser of (1) 50% of eligible receivables (as defined) or (2) the aggregate
amount of principal that has been repaid to date ($1,794,000 as of March 31,
2000). Interest payments are due monthly with the unpaid principal and interest
on the Revolver due on the earliest to occur of (i) June 30, 2002, or (ii) the
date of closing of a Qualified Offering as defined above.
In August 1999, the Company and EXTL agreed to exchange $4.0 million of the
Notes for 40 shares of Series J Cumulative Convertible Preferred Stock ("Series
J Preferred"). The excess of the fair value of the Series J Preferred Stock of
$4.0 million over the carrying value of the Notes (net of the unamortized
discount of approximately $1.9 million) of $2.1 million was recorded as an
extraordinary loss on early retirement of debt. As a result of this agreement,
the $4.0 million is not subject to redraw under the Revolver.
These Notes and Revolver are secured by substantially all of the Company's
existing unencumbered operating assets and the Company's accounts receivables
although the Company can pursue certain additional permitted financing,
including equipment and facilities financing, for certain capital expenditures.
The Agreement contains certain debt covenants and restrictions by and on the
Company, as defined. The Company was in arrears on a scheduled principal payment
under this debt facility as of March 31, 2000 for which it received a waiver
from EXTL through January 1, 2001. Subsequent to March 31, 2000, the Company and
EXTL agreed to revise the installment schedule to allow for future payment of
the principal payments then in arrears. Following this revision, the Company was
in arrears on the first scheduled principal and interest payment. The Company
received a waiver from EXTL through April 1, 2001. The Company was also
technically in default under the Notes as of March 31, 2000 due to the Company's
assumption of the Coast notes, as discussed in footnote (2) below. However, in
April 2000, the Agreement was amended and EXTL consented to the Company's (1)
assumption of the Coast notes payable, (2) guarantee of these Coast notes and
(3) the granting of a security interest in the assets currently securing the
Notes as well as the Coast assets to the Coast noteholder.
16
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
(2) As of March 31, 2000, Coast had two outstanding unsecured promissory notes
with an affiliate of EXTL for $3.0 million and $250,000, bearing interest at an
11% rate. Interest on both notes is payable monthly with the principal due July
1, 2000 and November 29, 2000, respectively. In April 2000, the agreement was
amended and the noteholder consented to (1) waive any events of default that may
have occurred as result of the Coast merger, (2) permit Coast to guarantee the
EXTL Notes and Revolver and to secure such guarantee, and (3) revise the debt
covenants to be consistent with those in the EXTL Notes. The Company agreed to
guarantee these notes and granted a security interest in the assets securing the
EXTL Notes as well as the Coast assets to the Coast noteholder.
(3) At March 31, 2000, the Company had an outstanding 14% unsecured $1.0 million
note with an existing stockholder. On April 17, 2000, the lender exchanged this
$1.0 million note for 543,270 shares of common stock and the lender was granted
warrants to purchase 180,000 shares of common stock.
NOTE 7 - STOCKHOLDERS' EQUITY
PREFERRED STOCK
The following is a summary of the Company's series of Preferred Stock and the
amounts authorized and outstanding as of March 31, 2000 and December 31, 1999.
See Note 9 for a discussion of redeemable preferred stock.
8% Series D Cumulative Convertible Preferred Stock, 0 and 125 shares authorized,
0 and 35 shares, respectively, issued and outstanding ($3.5 million aggregate
liquidation preference) (converted in January 2000 into 2,537,500 shares of
common stock, including payment of dividends) (Series eliminated in February
2000).
8% Series E Cumulative Convertible Redeemable Preferred Stock, 125 shares
authorized, 0 and 50 shares, respectively, issued and outstanding (converted on
January 31, 2000 into 2,352,941 shares of common stock).
Series F Convertible Preferred Stock, 2,020,000 shares authorized, 0 and
1,010,000 shares, respectively, issued and outstanding (converted on January 3,
2000 into 1,209,584 shares of common stock.) (See Note 4).
Series H Convertible Preferred Stock, 0 and 500,000 shares authorized, 0 and
500,000 shares, respectively, issued and outstanding (converted on January 31,
2000 into 3,262,500 shares of common stock) (Series eliminated in February
2000).
Series I Convertible Optional Redemption Preferred Stock, 400,000 shares
authorized, 250,000 and 400,000 shares, respectively, issued and outstanding
(150,000 shares plus the 8% premium converted on February 14, 2000 into 166,304
shares of common stock).
5% Series J Cumulative Convertible Preferred Stock, 40 shares authorized, 0 and
40 shares, respectively, issued and outstanding ($4.0 million aggregate
liquidation preference) (converted on January 31, 2000 into 2,564,102 shares of
common stock).
5% Series K Cumulative Convertible Preferred Stock, 0 and 30 shares authorized,
0 and 30 shares, respectively, issued and outstanding ($3.0 million aggregate
liquidation preference) (converted on January 31, 2000 into 1,923,077 shares of
common stock) (Series eliminated in February 2000).
20% Series M Convertible Preferred Stock, 1 share authorized, 1 and 1 share,
respectively, issued and outstanding ($9.0 million aggregate liquidation
preference) (exchanged on April 17, 2000 for 3,773,584 shares of common stock)
(See Note 11).
17
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
8% Series N Cumulative Convertible Preferred Stock, 0 and 20,000 shares
authorized, 0 and 1,535 shares, respectively, issued and outstanding ($1.5
million liquidation preference) (converted during January 2000 into 530,656
shares of common stock) (Series eliminated in February 2000).
Series O Convertible Preferred Stock, 16,100 shares authorized, 16,100 and
16,100 shares, respectively, issued and outstanding ($16.0 million aggregate
liquidation preference) (converted on April 30, 2000 into 3,220,000 shares of
common stock).
Following is a detailed discussion of each series of preferred stock outstanding
at March 31, 2000.
SERIES I CONVERTIBLE PREFERRED STOCK
On February 14, 2000, 150,000 shares of the Series I Preferred Stock plus the 8%
accrued premium automatically converted into 166,304 shares of common stock
pursuant to the terms of the stock agreement.
The Company has an option to redeem the remaining 250,000 shares of Series I
Preferred Stock prior to July 17, 2000 at a price of $10.00 per share plus 8% of
the value of Series I Preferred Stock per annum from December 2, 1998 through
the date of redemption for cash, common stock or a combination of the two. Any
Series I Preferred Stock not redeemed by July 17, 2000 as discussed above
automatically converts into common stock based on a conversion price of $10.00
per share plus 8% per annum of the value of the Series I Preferred Stock from
December 2, 1998 through the date of conversion divided by the greater of the
average closing price of common stock over the 15 days immediately prior to
conversion or $2.00 up to a maximum (considering the shares issued in February
2000) of 2.4 million shares of common stock. The Company made a written election
in August 1999 to pay the 8% premium in shares of common stock upon redemption
or conversion.
SERIES M CONVERTIBLE PREFERRED STOCK
The share of Series M Preferred Stock carried an annual cumulative dividend of
20% which would accrue and be payable annually or at conversion in cash or
shares of common stock, at the option of the Company. The above market dividend
resulted in a premium of $643,000 which was being amortized as a deemed
preferred stock dividend over the one year period from the issuance date. The
Series M Preferred Stock was convertible, at the option of the holder, one year
after the issue date at a conversion price of $2.385. The Company recorded a
dividend on the Series M Preferred Stock of approximately $1.4 million for the
beneficial conversion feature based on the excess of the common stock closing
price on the effective date of the acquisition over the conversion price. The
dividend was being amortized as a deemed preferred dividend over the one year
period from the date of issuance.
Subsequent to March 31, 2000, the one share of Series M Preferred Stock was
exchanged for 3,773,584 shares of common stock. See Note 11 for further
discussion.
SERIES N CUMULATIVE CONVERTIBLE PREFERRED STOCK
During January 2000, the shares of Series N Preferred Stock outstanding at
December 31, 1999 were converted into 375,262 shares of common stock.
In January 2000, the Company sold an additional 525 shares of Series N Preferred
Stock and warrants to purchase 42,457 shares of common stock for proceeds of
$0.5 million. These shares of Series N Preferred Stock were converted, at the
holders' option, into 155,394 shares of the Company's common stock at conversion
prices between $3.37 to $3.51. The warrants are exercisable one year from
issuance and expire three years from issuance with an exercise price of $7.50
per share. In addition, the holders may elect to make a cashless exercise. The
values of the warrants totaling $157,000 were recorded as dividends at the
issuance dates because the Series N Preferred Stock was immediately convertible.
18
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
In February 2000, the Company issued warrants to a certain Series N Preferred
stockholder to purchase 200,000 shares of the Company's common stock at a price
per share equal to $7.50. The warrants are exercisable in whole or in part at
any time beginning on the date that is one year after the date of issuance until
the third anniversary of the date of issuance. These warrants were issued due to
a delay in registering shares of the Company's common stock, accordingly, the
value of these warrants of $1.6 million was included in selling, general and
administrative expenses for the three months ended March 31, 2000.
SERIES O CONVERTIBLE PREFERRED STOCK
In December 1999, the Company issued 16,100 shares of Series O Preferred Stock
in connection with the acquisition of Coast. See Note 4 for further discussion.
The estimated value of the Series O Preferred Stock of $13.4 million was based
upon a third party appraisal. The Series O Preferred Stock carries an annual
dividend of 10% and all dividends that would accrue through November 30, 2001 on
each share of Series O Preferred Stock are payable in full upon conversion of
such shares. The final appraisal included a present value of $2.5 million for
dividends through November 30, 2001. The difference between the undiscounted
value of the dividends and $2.5 million is being accrued as a dividend over the
period from the issuance date to the date that the Series O Preferred Stock can
first be converted by the holder.
The shares of Series O Preferred Stock have a liquidation value of $16.1 million
and are convertible, at the holder's option, into a maximum 3,220,000 shares of
common stock at any time after the later of (a) one year after the date of
issuance and (b) the date the Company has received stockholder approval for such
conversion (received March 23, 2000) and the applicable Hart-Scott-Rodino
waiting period has expired or terminated (the "Clearance Date"), at a conversion
price equal to $5.00. The shares of Series O Preferred Stock automatically
convert into shares of common stock, on the occurrence of certain events
including the first date as of which the last reported sales price of the
Company's common stock on Nasdaq is $6.00 or more for any 15 consecutive trading
days during any period in which Series O Preferred Stock is outstanding.
On January 26, 2000, the closing sales price of the Company's common stock was
$6.00 or more for 15 consecutive trading days and accordingly, on the Clearance
Date, April 30, 2000, the outstanding Series O Preferred Stock converted into
3,220,000 shares of common stock.
The following table lists preferred dividends by preferred stock series for the
three months ended March 31, 2000 and 1999.
Preferred Stock Series For the Three Months For the Three Months
Ended Ended
March 31, 2000 March 31, 1999
- --------------------------- ------------------------- --------------------------
C $ -- $ 2,215,000
D -- 1,497,000
E 33,000 --
G -- --
I 277,000 --
J 17,000 --
K 13,000 --
M 634,000 --
N 571,000 --
O 185,000 --
P 6,635,000 --
Q 1,859,000 --
- --------------------------- ------------------------- --------------------------
Total $ 10,224,000 $ 3,712,000
=========================== ========================= ==========================
19
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
COMMON STOCK
During the three months ended March 31, 2000, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock, Series H Preferred Stock, 150,000
shares of the Series I Preferred Stock plus the 8% premium, Series J Preferred
Stock, Series K Preferred Stock and Series N Preferred Stock converted into
shares of common stock. See above discussion.
Upon the execution of the Coast merger agreement, one of the Coast stockholders
signed an employment agreement with the Company. Under a side letter to the
employment agreement, the Company was obligated to repurchase the 247,213 shares
of common stock issued to this employee in the Coast acquisition for $700,000
under certain conditions. Accordingly, the redemption value of $700,000 for
these shares was reflected as Redeemable Stock at December 31, 1999. In January
2000, this employee waived the redemption feature. As a result, this amount was
reclassified to Stockholders' Equity as of March 31, 2000.
In December 1999, the Company entered into a promissory note with a bank, as
amended on February 1, 2000, for a principal amount of $14.0 million. In
connection with the note agreement, a security and pledge agreement was signed
whereby the Company assigned all of its rights to 4,961,000 shares of eGlobe
common stock to the lender. However, the lender failed to fund the note on a
timely basis and in March 2000, the Company advised the lender that they were
terminating the agreement and demanded the lender return eGlobe's stock
certificates. Such shares of common stock are included in the outstanding shares
at March 31, 2000 at par value. The lender returned the certificates on April
17, 2000.
In the three months ended March 31, 2000, the Company received proceeds of
approximately $1.6 million from the exercise of options to acquire 659,480
shares of common stock.
In the three months ended March 31, 2000, the Company received proceeds of
approximately $0.8 million from the exercise of warrants to acquire 500,000
shares of common stock. In addition, there was a cashless exercise of warrants
to purchase 306,667 shares of common stock for which 184,218 shares were issued.
The Company loaned certain of its executive officers money in connection with
their exercise of non-qualified stock options in December 1999. These options
were not granted under the Employee Stock Option and Appreciation Rights Plan
(the "Employee Plan") discussed below. The notes receivable of $1,210,000 are
full recourse promissory notes bearing interest at 6% and are collateralized by
the 430,128 shares of stock issued upon exercise of the stock options. Interest
is payable quarterly in arrears and principal is due the earlier of (a) for
$177,000 of the notes December 16, 2003 and for $1,033,000 of the notes December
16, 2004 or (b) the date that is 90 days after the date that the employee's
employment terminates, unless such termination occurs other than "for cause" (as
defined). The employees also agreed to promptly redeem the outstanding note
balances upon the sale of the underlying stock. The notes receivable are shown
in the consolidated balance sheet as a reduction to stockholders' equity.
On January 1, 2000, the Company loaned an executive of the Company money in
connection with the executive's purchase of 36,000 shares of common stock. The
note receivable of $159,000 is a full recourse promissory note bearing interest
at 8% and is collateralized by the 36,000 shares of stock issued. Interest in
arrears and principal are due the earlier of (a) January 1, 2004 or (b) the date
that is 90 days after the date that the employee's employment terminates, unless
such termination occurs other than "for cause" (as defined).
OPTIONS
As of December 31, 1999, options outstanding under the Employee Plan exceeded
the shares available for grant by 1,995,468 shares. The Board of Directors
granted these options to certain executive officers and directors subject to
stockholder approval of the increase in the number of shares available under the
Employee Plan. The stockholders approved the increase of the number of shares
available under the Employee Plan from 3,250,000 to 7,000,000 shares on
20
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
March 23, 2000. During the period from January 1, 2000 through March 23, 2000,
an additional 567,070 options were granted that exceeded the shares available
under the Employee Plan. This amount excludes the 532,163 options granted to
certain IDX employees and others as discussed below. The excess of the market
price of $9.94 on March 23, 2000 (stockholder approval date) and the option
exercise price for these options was $15.2 million and is being recorded as
compensation expense over the vesting period of the options. For the three
months ended March 31, 2000, $4.2 million has been recorded as compensation
expense.
As discussed in Note 4, the Company granted 532,163 options on January 7, 2000
to certain IDX employees and others. These options exceeded the shares available
for grant under the Employee Plan. The excess of (1) the excess of the market
price of the Company's common stock on March 23, 2000 over the exercise price of
the options granted to current IDX employees over (2) the carrying value as of
March 23, 2000 of the original grants to these employees, was $1.2 million. This
amount is being recorded as compensation expense over the vesting period of the
options and $0.6 million was recorded for the three months ended March 31, 2000.
The 244,673 options granted to non-employees were valued using the Black Scholes
option pricing model. The $1.1 million excess value of the fair value of these
options over the carrying value of the original grants was also recorded as
compensation expense for the three months ended March 31, 2000.
NOTE 8 - EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are calculated in accordance with SFAS No. 128,
"Earnings Per Share". The net loss of $38.4 million and $11.2 million
attributable to common stockholders for the three months ended March 31, 2000
and 1999 includes preferred stock dividends of $10.2 million and $3.7 million,
respectively. The weighted average shares outstanding for calculating basic
earnings (loss) per share were 81,337,248 and 57,873,564 for the three months
ended March 31, 2000 and 1999, respectively. Common stock options and warrants
of 13,836,653 and 413,889 for the three months ended March 31, 2000 and 1999,
respectively, were not included in diluted earnings (loss) per share as the
effect was antidilutive due to the Company recording a loss in the periods
presented. Contingent warrants of 1,087,500 were not included in diluted
earnings (loss) per share for the three months ended March 31, 2000 as
conditions for inclusion had not been met.
In addition, convertible preferred stock, stock to be issued and convertible
debt convertible into 11.0 million and 9.1 million shares of common stock for
the three months ended March 31, 2000 and 1999, respectively, were not included
in diluted earnings (loss) per share due to the losses for the respective
periods.
The shares of common stock and the contingent warrants held by the LLC and the
2,000,000 shares of common stock held in escrow to cover eGlobe's potential
indemnification obligations under the Trans Global merger agreement, are not
included in the computation of basic and diluted loss per share.
NOTE 9 - REDEEMABLE CONVERTIBLE PREFERRED STOCK
The following is a detailed discussion of each series of redeemable convertible
preferred stock issued during the quarter ended March 31, 2000 and outstanding
as of March 31, 2000:
Series P Convertible Preferred Stock, 15,000 shares authorized, 15,000 shares
issued and outstanding ($15.0 million plus 5% per annum aggregate liquidation
preference).
Series Q Convertible Preferred Stock, 10,000 shares authorized, 4,000 shares
issued and outstanding ($4.0 million plus 5% per annum aggregate liquidation
preference).
21
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
SERIES P CONVERTIBLE PREFERRED STOCK
On January 27, 2000, the Company issued 15,000 shares of Series P Convertible
Preferred Stock ("Series P Preferred Stock") and warrants to purchase 375,000
shares of common stock with an exercise price of $12.04 per share for proceeds
of $15.0 million to RGC International Investors, LDC ("RGC"). The shares of
Series P Preferred Stock carry an effective annual yield of 5% (payable in kind
at the time of conversion) and are convertible, at the holder's option, into
shares of common stock. The shares of Series P Preferred Stock will
automatically be converted into shares of common stock on January 26, 2003,
subject to delay for specified events. The conversion price for the Series P
Preferred Stock was $12.04 until April 26, 2000, and thereafter is equal to the
lesser of: (i) the average closing price of the Company's common stock on Nasdaq
for any five consecutive trading days during the 22 trading days prior to
conversion, or (ii) $12.04. The Company can force a conversion of the Series P
Preferred Stock on any trading day following a period in which the closing bid
price of the Company's common stock has been greater than $24.08 for a period of
at least 35 trading days after the earlier of (1) the first anniversary of the
date the common stock issuable upon conversion of the Series P Preferred Stock
and warrants are registered for resale, or (2) the completion of a firm
commitment underwritten public offering with gross proceeds to the Company of at
least $45.0 million provided that shares issuable upon conversion and warrants
have been registered for resale for at least 45 days.
The shares of Series P Preferred Stock are convertible into a maximum of
5,151,871 shares of common stock. This maximum share amount is subject to
increase if the average closing bid prices of the Company's common stock for the
20 trading days ending on the later of June 30, 2000 and the 60th calendar day
after the common stock issuable upon conversion of the Series P Preferred Stock
and warrants is registered is less than $9.375, provided that under no
circumstances will the Series P Preferred Stock be convertible into more than
7,157,063 shares of the Company's common stock. In addition, no holder may
convert the Series P Preferred Stock or exercise the warrants it owns for any
shares of common stock that would cause it to own following such conversion or
exercise in excess of 4.9% of the shares of the Company's common stock then
outstanding.
Except in the event of a firm commitment underwritten public offering of
eGlobe's securities, the issuance of securities in connection with a merger,
acquisition or purchase of assets or a sale of up $15.0 million of common stock
to a specified investor, the Company may not obtain any additional equity
financing without the Series P Preferred holder's consent for a period of 120
days following the date the common stock issuable upon conversion of the Series
P Preferred Stock and warrants is registered for resale. The holder also has a
right of first offer to provide any additional equity financing that the Company
needs until the first anniversary of such registration.
The Company may be required to redeem the Series P Preferred Stock in the
following circumstances:
(a) if the Company fails to perform specified obligations under the securities
purchase agreement or related agreements;
(b) if the Company or any of its subsidiaries make an assignment for the benefit
of creditors or becomes involved in bankruptcy, insolvency, reorganization or
liquidation proceedings;
(c) if the Company merges out of existence without the surviving company
assuming the obligations relating to the Series P Preferred Stock;
(d) if the Company's common stock is no longer listed on the Nasdaq National
Market, the Nasdaq SmallCap Market, the NYSE or the AMEX;
(e) if the Series P Preferred Stock is no longer convertible into common stock
because it would result in an aggregate issuance of more than 5,151,871 shares
of common stock, as such number may be adjusted, and the Company has not waived
such limit or obtained stockholder approval of a higher limit; or
(f) if the Series P Preferred Stock is no longer convertible into common stock
because it would result in an aggregate issuance of more than 7,157,063 shares
of the Company's common stock and the Company has not obtained stockholder
approval of a higher limit.
22
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
If the Series P Preferred Stock is redeemed under situations (a), (b), (c) or
(d) above, the redemption value is equal to the greater of (a) 120% multiplied
by the sum of (i) the stated value ($1,000 per share), (ii) 5% per annum and
(iii) any penalties in arrears (as defined in the agreement) or (b) the sum of
(i) the stated value plus (ii) 5% per annum, divided by the then effective
conversion rate (as defined above) multiplied by the highest closing price for
the common stock during the period from the date of the first occurrence of the
mandatory redemption event until one day prior to the mandatory redemption date.
If the Series P Preferred Stock is redeemed under situation (e) or (f) above,
the redemption value is equal to $1,000 per share multiplied by 5% per annum.
The warrants valued at $2.6 million are exercisable from the date of issuance
and expire five years from issuance. The exercise price is $12.04 per share.
The Series P Preferred Stock has been recorded at the maximum redemption value
of $18.2 million as of March 31, 2000. The difference of $6.7 million between
this redemption value and the fair value at issuance, including offering costs
of $0.9 million and the warrant value of $2.6 million, was recorded as a
dividend because the Series P Preferred Stock is redeemable upon the occurrence
of any of the above events.
SERIES Q CONVERTIBLE PREFERRED STOCK
On March 15, 2000, the Company issued 4,000 shares of Series Q Convertible
Preferred Stock ("Series Q Preferred Stock") and warrants to purchase 100,000
shares of eGlobe common stock with an exercise price per share equal to $12.04,
subject to adjustment for issuances of shares of common stock below market
price, for proceeds of $4.0 million to RGC.
The Series Q Preferred Stock agreement also provides that the Company may issue
up to 6,000 additional shares of Series Q Preferred Stock and warrants to
purchase an additional 150,000 shares of common stock to RGC for an additional
$6.0 million at a second closing to be completed no later than July 15, 2000.
The primary condition to the second closing is the effectiveness of a
registration statement registering the resale of common stock underlying the
Series Q Preferred Stock and the warrants and the Series P Preferred Stock and
warrants issued in January 2000 to RGC (see above discussion "Series P
Convertible Preferred Stock").
The shares of Series Q Preferred Stock carry an effective annual yield of 5%
(payable in kind at the time of conversion) and are convertible, at the holder's
option, into shares of common stock. The shares of Series Q Preferred Stock will
automatically be converted into shares of common stock on March 15, 2003,
subject to delay for specified events. The conversion price for the Series Q
Preferred Stock was $12.04 until April 26, 2000, and thereafter was equal to the
lesser of: (i) the average closing price of the Company's common stock on Nasdaq
for any five consecutive trading days during the 22-trading days prior to
conversion, or (ii) $12.04.
The Company can force a conversion of the Series Q Preferred Stock on any
trading day following a period in which the closing bid price of the Company's
common stock has been greater than $24.08 for a period of at least 35 trading
days after the earlier of (1) the first anniversary of the date the common stock
issuable upon conversion of the Series Q Preferred Stock and warrants is
registered for resale, or (2) the completion of a firm commitment underwritten
public offering with gross proceeds to the Company of at least $45.0 million
provided that shares issuable upon conversion and warrants have been registered
for resale for at least 45 days.
23
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
The Series Q Preferred Stock is convertible into a maximum of 3,434,581 shares
of common stock. This maximum share amount is subject to increase if the average
closing bid prices of the Company's common stock for the 20 trading days ending
on the later of June 30, 2000 and the 60th calendar day after the common stock
issuable upon conversion of the Series Q Preferred Stock and warrants is
registered is less than $9.375, provided that under no circumstances will the
Series Q Preferred Stock be converted into more than 7,157,063 shares of common
stock (the maximum share amount will increase to 9,365,463 shares of the
Company's common stock if the Company receives written guidance from Nasdaq that
the issuance of the Series Q Preferred Stock and the warrants will not be
integrated with the issuances of the Series P Preferred Stock and related
warrants). In addition, no holder may convert the Series Q Preferred Stock or
exercise the warrants it owns for any shares of common stock that would cause it
to own following such conversion or exercise in excess of 4.9% of the shares of
the Company's common stock then outstanding.
The Company may be required to redeem the Series Q Preferred Stock in the
following circumstances:
(a) if the Company fails to perform specified obligations under the securities
purchase agreement or related agreements;
(b) if the Company or any of its subsidiaries makes an assignment for the
benefit of creditors or become involved in bankruptcy, insolvency,
reorganization or liquidation proceedings;
(c) if the Company's common stock is no longer listed on the Nasdaq National
Market, the Nasdaq SmallCap Market, the NYSE or the AMEX;
(d) if the Series Q Preferred Stock is no longer convertible into common stock
because it would result in an aggregate issuance of more than 3,434,581 shares
of common stock, as such number may be adjusted, and the Company has not waived
such limit or obtained stockholder approval of a higher limit; or
(e) if the Series Q Preferred Stock is no longer convertible into common stock
because it would result in an aggregate issuance of more than 7,157,063 shares
of the Company's common stock (the maximum share amount will increase to
9,365,463 shares of common stock if the Company receives written guidance from
Nasdaq that the issuance of the Series Q Preferred Stock and the warrants will
not be integrated with the issuances of the Series P Preferred Stock and related
warrants) and the Company has not obtained stockholder approval of a higher
limit.
If the Series Q Preferred Stock is redeemed under situations (a), (b) or (c)
above, the redemption value is equal to the greater of (a) 120% multiplied by
the sum of (i) the stated value ($1,000 per share), (ii) 5% per annum and (iii)
any penalties in arrears (as defined in the agreement) or (b) the sum of (i) the
stated value plus (ii) 5% per annum, divided by the then effective conversion
rate (as defined above) multiplied by the highest closing price for the common
stock during the period from the date of the first occurrence of the mandatory
redemption event until one day prior to the mandatory redemption date.
If the Series Q Preferred Stock is redeemed under situations (d) or (e) above,
the redemption value is equal to $1,000 per share multiplied by 5% per annum.
The warrants valued at $0.8 million are exercisable from the date of issuance
and expire five years from issuance. The exercise price is $12.04 per share.
24
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
The Series Q Preferred Stock has been recorded at the maximum redemption value
of $4.8 million as of March 31, 2000. The difference of $1.8 million between
this redemption value and the fair value at issuance, including offering costs
of $0.2 million and the warrant value of $0.8 million, was recorded as a
dividend because the Series Q Preferred Stock is redeemable upon the occurrence
of any of the above events.
The amounts related to each series of redeemable convertible preferred stock
included in redeemable stock consists of the following:
March 31, 2000 (unaudited) December 31, 1999
---------------------------- --------------------------
Series P Convertible Preferred Stock $ 18,160,000 $ --
Series Q Convertible Preferred Stock $ 4,810,000 $ --
---------------------------- --------------------------
Total $ 22,970,000 $ --
============================ ==========================
NOTE 10 - OPERATING SEGMENT INFORMATION
The Company has four operating reporting segments consisting of Enhanced
Services, Network Services, Customer Care and Retail Services. The Company's
basis for determining the segments relates to the type of services each segment
provides. Enhanced Services includes the unified messaging services, telephone
portal services, interactive voice and data services and the card services.
Network Services includes low-cost transmission services, voice services
(CyberCall and CyberFax) and several other additional services including billing
and report generation designed exclusively to support CyberCall and CyberFax.
Customer Care Services includes the state-of-art call center, which was part of
the Company's acquisition of ORS. Retail Services primarily includes a small
North American retail center. Segment results reviewed by the Company decision
makers do not include general and administrative expenses, interest,
depreciation and amortization and other miscellaneous income and expense items.
All material intercompany transactions have been eliminated in consolidation.
The following unaudited table presents operating segment information:
ENHANCED NETWORK CUSTOMER RETAIL
SERVICES SERVICES CARE SERVICES TOTAL
--------------------------------------------------------------------------
FOR THE THREE
MONTHS ENDING
MARCH 31, 2000
--------------
REVENUE $ 3,535,000 $ 32,115,000 $ 1,366,000 $ 1,797,000 $ 38,813,000
INTER-SEGMENT -- (3,572,000) (154,000) -- (3,726,000)
--------------------------------------------------------------------------
TOTAL REVENUE $ 3,535,000 $ 28,543,000 $ 1,212,000 $ 1,797,000 $ 35,087,000
GROSS PROFIT $ 635,000 $ 1,028,000 $ 100,000 $ 905,000 $ 2,668,000
TOTAL ASSETS $ 51,528,000 $ 41,960,000 $ 3,741,000 $ 17,366,000 $114,595,000
FOR THE THREE
MONTHS ENDING
MARCH 31, 1999
--------------
REVENUE $ 6,415,000 $ 37,742,000 $ -- $ 119,000 $ 44,276,000
INTER-SEGMENT -- (84,000) -- -- (84,000)
--------------------------------------------------------------------------
TOTAL REVENUE $ 6,415,000 $ 37,658,000 $ -- $ 119,000 $ 44,192,000
GROSS PROFIT (LOSS) $ 638,000 $ 1,565,000 $ -- $ (86,000) $ 2,117,000
TOTAL ASSETS $ 30,216,000 $ 49,253,000 $ -- $ 796,000 $ 80,265,000
25
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
NOTE 11 - SUBSEQUENT EVENTS
EXCHANGE OF SERIES M PREFERRED STOCK
The Company and HGP entered into a renegotiation agreement dated April 17, 2000
which is summarized as follows:
(1) The one share of Series M Preferred Stock was exchanged for 3,773,584 shares
of common stock and HGP waived all rights to accrued Series M dividends. The
difference between the fair value of the common stock issued and the carrying
value of the Series M Preferred Stock of $5.5 million (net of any unamortized
premium or discount) will be recorded as a dividend in the second quarter. The
dividend amount will be reflected in the Company's statement of operations for
the six months ended June 30, 2000 as an increase in the net loss attributable
to common stockholders.
HGP has agreed in the event it wishes to sell all or part of eGlobe's common
stock, it will notify eGlobe ("Revelant Date") at least 30 days prior to the
sale. eGlobe shall have the right, by notice to the HGP, to repurchase or place
with a third party the stock proposed to be sold at a price equal to (i) 20%
less than the average closing price of eGlobe's common stock over the ten
trading days prior to the Revelant Date, if such average is $8 or less; (ii) 15%
less than the average closing price of eGlobe's common stock over the ten
trading days prior to the Revelant Date, if such price is $8.00 or more but less
than $14.00; and (iii) 10% less than the average closing price of eGlobe's
common stock over the ten trading days prior to the Revelant Date, if such
average price is $14.00 or more. If eGlobe does not exercise its repurchase
rights, HGP is free to sell the stock, provided it agrees to use reasonable
efforts to avoid events significantly and adversely affecting the market price
of eGlobe's common stock. This repurchase agreement expires October 31, 2000;
(2) The Company agreed to file a registration statement to register the
3,773,584 shares of common stock prior to May 31, 2000. If the registration
statement is not filed by May 31, 2000, the Company agreed to pay a penalty of
$40,000 for each 30 day period that such registration statement has not been
filed. If the registration statement is not filed on or before September 1,
2000, then the Company shall pay HGP an additional penalty of $250,000; and
(3) The Company agreed to pay the amounts in arrears under the note owed in
connection with the acquisition (see Note 5) prior to June 1, 2000.
SECURED ACCOUNT PAYABLE
As of March 31, 2000, Trans Global has a secured accounts payable with AT&T
Corp. ("AT&T") for approximately $10.5 million. The agreement is collateralized
by certain fixed assets of Trans Global. On April 2, 2000, Trans Global was in
arrears on its scheduled payments to AT&T and is currently in negotiations with
AT&T to restructure this payable. See Note 3 for further discussion.
26
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
NOTE 12 - SUPPLEMENTAL INFORMATION TO CONSOLIDATED STATEMENTS OF CASH FLOWS AND
NON-CASH INVESTING AND FINANCING ACTIVITIES
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
(UNAUDITED) (UNAUDITED)
---------------- -------------
Cash paid during the period for:
Interest $ 1,189,000 $ 90,000
Income taxes $ 78,000 $ 212,000
Non-cash investing and financing
activities:
Equipment acquired under
capital lease obligations $ 502,000 $ 349,000
Unamortized debt discount
related to warrants $ 6,435,000 $ 273,000
Common stock issued as
repayment of debt -- $ 1,023,000
Common stock to be issued for payment
of debt -- $ 200,000
Preferred stock dividends $ 10,224,000 $ 3,712,000
Acquisition, net of cash acquired (Note 4):
TELEKEY
Working capital deficit, other than
cash acquired -- $(1,284,000)
Property and equipment -- $ 481,000
Intangible assets -- $ 2,975,000
Purchase price in excess of the net -- $ 2,025,000
Acquired debt -- $(1,016,000)
Notes payable issued in acquisition -- $ (150,000)
Issuance of Series F Convertible
Preferred Stock -- $ (1,000)
Additional paid-in capital -- $(1,956,000)
Stock to be issued -- $ (979,000)
---------------- -------------
Net cash used to acquire Telekey -- $ 95,000
---------------- -------------
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature are
intended to be, and are hereby identified as, "forward-looking statements" for
purposes of the safe harbor provided by the Private Securities Litigation Reform
Act of 1995. Forward-looking statements may be identified by words including
"believes," "anticipates," "expects" and similar expressions. The Company
cautions readers that forward-looking statements, including without limitation,
those relating to the Company's business operations, business plan, revenues,
working capital, liquidity, need
27
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
for funding and income, are subject to certain risks and uncertainties that
would cause actual results to differ materially from those indicated in the
forward-looking statements, due to several important factors such as the rapid
technological and market changes that create significant business risks in the
market for the Company's services, the intensely competitive nature of the
Company's industry and the possible adverse effects of such competition, the
Company's need for significant additional financing, the availability of such
financing, and the Company's dependence on strategic relationships, among
others, and other risks and factors identified from time to time in the
Company's reports filed with the Securities and Exchange Commission, including
the risk factors set forth under the caption "The Business - Risk Factors" in
the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
The Company incurred a net loss of $28.2 million for the quarter ended March 31,
2000 as compared to a net loss of $7.5 million for the quarter ended March 31,
1999 of which $22.1 million and $4.0 million are attributable to the following
non-cash charges and other expenses:
FOR THE THREE MONTHS ENDED,
---------------------------
MARCH 31, MARCH 31,
--------- ---------
2000 2000
(IN MILLIONS)
Additional allowance for doubtful accounts $ 1.1 $ 0.2
Amortization of goodwill and other intangibles (primarily
related to acquisitions) 2.9 0.6
Deferred compensation to employees of acquired companies 1.4 0.9
Deferred compensation expense related to stock options 5.8 --
Depreciation and amortization 3.2 1.4
Interest expense, net of the amortization of debt discounts
related to debt 1.2 0.6
Amortization of debt discounts 0.8 0.3
Merger expenses 2.5 --
Penalty warrants expense 1.5 --
Other items 1.7 --
----- -----
Total $22.1 $ 4.0
===== =====
The $2.5 million of merger expenses incurred by us related to investment banking
and advisory fees, legal and accounting costs and expenses associated with
printing and mailing the proxy statement for the special stockholders meeting.
After deducting the above items, the loss for the quarter ended March 31, 2000
was $6.1 million, compared to a net loss of $3.5 million for the quarter ended
March 31, 1999. The principal factors for the losses incurred for the quarter
ended March 31, 2000 are: (1) the continued incurrence of upfront costs to build
out capacity to meet the Company's anticipated growth relating primarily to the
traffic that will result from the Trans Global merger, (2) increased competition
in certain international telecommunications markets, (3) a change in pricing by
Trans Global's primary supplier during 1999 which increased costs and drove
margins down, (4) the costs of integrating the Company's acquisitions, (5)
headcount increases, and (6) legal and other charges for professional services
principally incurred to support the acquisition operations.
28
eGLOBE, INC.
MARCH 31, 2000
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
For the Three Months Ended March 31, 2000 Compared to the Three Months Ended
March 31, 1999.
REVENUE
Revenues for the three months ended March 31, 2000 of $35.1 million decreased
$9.1 million (20.6%) from $44.2 million for the same period in 1999. This
decrease in revenue occurred primarily in the Network Services segment
(primarily Trans Global). This decrease was in part due to Trans Global's
decision to shift away from being a purely arbitrage resale business to a direct
route and IP structure in order to gain the advantage of better gross profit
margins. Positive effects of the shift to the direct route and IP structure were
evident in the 37% growth in revenue from the fourth quarter of 1999 of $16.5
million to revenue for the first quarter of 2000 of $22.6 million. Additionally,
declines were experienced in both Enhanced Services and Network Services due to
increasing competition, which has put downward pressure on both prices and
margins. This decrease was offset by revenue from the acquisitions of ORS and
Coast, which occurred in the third and fourth quarters of 1999. These
acquisitions added an additional $1.4 million and $1.8 million of revenue in the
quarter ended March 31, 2000 to the Customer Care and Retail Services segments,
respectively.
GROSS PROFIT
Gross profit for the three months ended March 31, 2000 was $2.7 million or 7.6%
of revenue as compared to $2.1 million or 4.8% of revenue for the same period in
1999. Network Services margins declined to 3.6% from 4.2% while Enhanced
Services margins improved to 18.0% from 9.9% for the quarters ended March 31,
2000 and March 31, 1999, respectively. The improvement in margins in the
Customer Care and Retail segments of the business is due to acquisitions which
occurred in the third and fourth quarters of 1999. The improvement in Enhanced
Services is in part due to acquisitions of companies in February and December of
1999 as well as more cost effective routing of telecommunications traffic. The
decline in the Network Services segment is related to leases of capacity and
other up-front costs necessary to implement new routes and services, primarily
in the Middle East and in the Asia Pacific regions. As long as the Company
continues to expand its global IP network and adds additional IP routes, there
will be pressure on gross margins since the Company expenses the cost of
starting up a new IP route. Although there are some initial start up costs, a
significant amount of the routes are now beginning to make a positive
contribution. However, the Company believes that the added efficiencies of the
IP routes will quickly (usually within two quarters) begin to add positively to
the gross margin. It is also expected that costs to build out the network to
accommodate the anticipated threefold increase in traffic resulting from the
Trans Global merger and the need to build out routes for Latin America to grow
routes and services will continue to contribute negatively to gross margins.
Management believes margins will continue to improve as the Company more
efficiently fills its routes and obtains additional owned capacity.
29
eGLOBE, INC.
MARCH 31, 2000
- --------------------------------------------------------------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES, EXCLUSIVE OF $5.9 MILLION, $1.4
MILLION AND $0.9 MILLION REPORTED BELOW OF DEFERRED COMPENSATION RELATED TO
STOCK OPTIONS AND ACQUISITIONS
Selling, general and administrative expenses, exclusive of $5.9 million, $1.4
million and $0.9 million reported below of deferred compensation related to
stock options and acquisitions totaled $15.5 million for the three months ended
March 31, 2000 compared to $6.1 million for the same period in 1999, for an
increase of $9.4 million. The increase in selling, general and administrative
expenses is in part due to certain non-cash charges of $2.9 million, including a
$0.9 million increase in the reserve for doubtful accounts, and costs associated
with the Trans Global merger, the special proxy filing and related professional
charges which added an additional $3.7 million in costs.
After taking out the effect of these charges, the change in selling, general and
administrative costs totaled $2.8 million. This remaining increase is
principally the result of increases in personnel as a result of the acquisition
activity which added an additional $2.5 million in payroll related costs and a
net increased headcount of 80 employees from March 31, 1999 through March 31,
2000. Subsequent to the close of the quarter ended March 31, 2000, the Company
has continued to take steps to eliminate duplicate facilities and other
redundancies.
DEFERRED COMPENSATION RELATED TO STOCK OPTIONS
Deferred compensation expense related to stock options of $5.9 million was
recorded for the three months ended March 31, 2000. This charge was to record
the value of options granted in excess of shares available for grant under the
Employee Stock Option Plan ("Employee Plan"). The Board of Directors granted
these options to certain executives and directors subject to stockholder
approval of the increase in the number of shares available under the Employee
Plan. The stockholders approved the increase of the number of shares available
under the Employee Plan from 3,250,000 to 7,000,000 shares on March 23, 2000.
The excess of the market price of $9.94 on March 23, 2000 (stockholder approval
date) and the option exercise price for these options was $15.2 million and is
being recorded as compensation expense over the vesting period of the options.
There were no similar charges recorded in the quarter ended March 31, 1999.
DEFERRED COMPENSATION RELATED TO ACQUISITIONS
The Company recorded a deferred compensation expense of $1.4 million for the
three months ended March 31, 2000 compared to $0.9 million for the same period
in 1999. This non-cash charge relates to stock allocated to employees of
acquired companies by their former owners out of acquisition consideration paid
by the Company. Such transactions, adopted by the acquired companies prior to
acquisition, require the Company to record the market value of the stock
issuable to employees as of the date of acquisition as compensation expense with
a corresponding credit to stockholders' equity and to continue to record the
effect of subsequent changes in the market price of the issuable stock until
actual issuance.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expenses totaled $6.1 million for the three months
ended March 31, 2000 compared to $2.0 million for the same period in 1999. This
increase of $4.1 million is principally due to amortization charges of $2.9
million related to goodwill and other intangibles associated with the
acquisitions completed since December 2, 1998. The remaining balance of $1.3
million was primarily attributable to increases in the fixed assets related to
acquired companies and additions at Trans Global.
30
eGLOBE, INC.
MARCH 31, 2000
- --------------------------------------------------------------------------------
INTEREST EXPENSE
Interest expense totaled $2.0 million for the three months ended March 31, 2000
compared to $0.9 million for the same period in 1999. This increase was
primarily due to an increase in debt and $0.8 million of amortization of the
debt discounts related to the value of the warrants associated with various debt
financings.
INTEREST INCOME
Interest income for the three months ended March 31, 2000 was $0.1 million
compared to $0.2 million for the same period in 1999. This decrease in interest
income is the result of the decrease in revenues and the increase in acquisition
activity both of which reduced cash reserves available for investment.
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA
As the Company continues its aggressive growth plan during the year 2000 and as
it intends to pursue that plan into the foreseeable future, the Company will
require large cash infusions and aggressive cash management. The Company has
raised significant financing through a combination of issuances of preferred
stock and proceeds from the exercise of warrants and options. Cash and cash
equivalents were $1.3 million at March 31, 2000 compared to $2.7 million at
December 31, 1999. Short-term investments were $3.0 million at March 31, 2000 as
compared to $1.5 million at December 31, 1999. The decrease in cash and cash
equivalents of $1.4 was primarily due to the use of cash to support the
Company's planned expansion of its telecommunication networks and its increased
operational costs associated with the various acquisitions and the merger with
Trans Global. The increase in short-term investments of $1.5 million was
primarily due to an increase in Certificates of Deposit purchased to back
letters of credit given as security for payments to various vendors. Accounts
receivable, net, increased by $6.0 million to $21.1 million at March 31, 2000
from $15.1 million at December 31, 1999, mainly due to increased revenues and
the extension of credit to new wholesale carrier customers. Cash outflows for
operating activities for the three months ended March 31, 2000 totaled $17.2
million, as compared to cash inflows of $1.1 million for the three months ended
March 31, 1999. This decrease was due primarily to the Company's growth through
acquisitions and the effect that the acquisition activity and upfront costs to
add capacity had on operating losses and higher selling, general and
administrative expenses. See further discussion in "Results of Operations."
There was a net working capital deficiency of $39.9 million at March 31, 2000
compared to a deficiency of $44.7 million at December 31, 1999.
Cash outflows for investing activities during the three months ended March 31,
2000 totaled $2.1 million, which was $5.0 million higher than the cash inflows
for the three months ended March 31, 1999. This increased outflow was due
primarily to net purchases of short-term investments of $1.6 million in 2000 as
compared to net sales of these investments of $3.7 million in 1999, offset by no
advances in 2000 to non-affiliates subsequently acquired as compared to $0.5
million of advances in 1999.
Cash generated from financing activities totaled $18.0 million during the three
months ended March 31, 2000 compared to $7.6 million during the three months
ended March 31, 1999. This increase of $10.4 million was primarily due to net
proceeds from sales of preferred stock of $18.4 million (as compared to net
proceeds of $7.7 million in 1999), proceeds from the exercise of warrants and
options of $2.4 million and proceeds from notes payable-related party of $0.7
million. These proceeds were offset by principal payments of $2.9 million on
notes payable and payments of $0.6 million on various capital leases.
On an operating level, the Company is continuing to try to negotiate certain
contract and payment terms with an Enhanced Services customer that has a
significant outstanding balance due to the Company. The Company has recorded
significant reserves to cover this outstanding balance. The Company has not been
able to work out a resolution with this customer. The Company may have to take a
more aggressive course of action to resolve this matter and is considering all
alternatives at this time.
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eGLOBE, INC.
MARCH 31, 2000
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CURRENT FUNDING REQUIREMENTS
For the first quarter of 2000, the Company met its cash requirements from (1)
proceeds from the exercise of options and warrants of $2.4 million, (2) proceeds
of $0.5 million from the sales of Series N Preferred Stock, (3) proceeds of
$15.0 million from the sale of Series P Convertible Preferred Stock ("Series P
Preferred Stock"), and (4) proceeds of $4.0 million from the sale of Series Q
Convertible Preferred Stock ("Series Q Preferred Stock").
Current funds will not permit the Company to achieve the growth, both short and
long-term that management is targeting. This growth will require additional
capital. The plan under which the Company is currently operating requires
substantial additional funding through the first quarter of 2001 of up to $20
million. This estimate is based on conservative projections of a scaled growth
plan using worst case scenarios for operations. Even if the Company meets its
projections for becoming EBITDA (Earnings Before Interest, Taxes, Depreciation
and Amortization) positive after eliminating non-cash items during the third
quarter of 2000, the Company will still have capital requirements through March
2001. The Company will need to fund its pre-existing liabilities and notes
payable obligations and the purchase of capital equipment, along with financing
its growth plans to meet the needs of its acquisition program.
The Company will receive $6.0 million in proceeds from the sale of additional
shares of Series Q Preferred Stock immediately upon the effectiveness of the
registration of the common stock underlying this preferred stock. The Company
anticipates that the additional capital needed will come from a combination of
financings that could consist of debt, private equity, a public follow-on
offering, or a line of credit facility during the twelve-month period from April
2000 through March 2001. There is the possibility that the amount of financing
required could be diminished by secured equipment-based financings. In addition
to the firm commitment discussed previously, the Company is proceeding with
other financing opportunities, which have not been finalized. The Company has a
variety of opportunities in both the debt and equity markets to raise the
necessary funds, which it needs to achieve its growth plan through the end of
the quarter ended March 31, 2001.
The Company anticipates that increased sales in international markets where the
company is focusing its efforts could lead to higher margins and therefore
reduce its net working capital deficiency and contribute to its funding
requirements through the first quarter of 2001. As a result, the projected
funding requirements discussed above could be reduced should this occur.
There is a risk that the Company will not reach breakeven on a cash basis
(excluding non-cash charges) as projected and will continue to incur operating
losses. If this occurs and should the Company be unsuccessful in its efforts to
raise additional funds to cover such losses, then the Company's growth plans
would be sharply curtailed and its business would be adversely affected.
On December 14, 1999, Trans Global entered into a letter agreement with AT&T,
Trans Global's largest supplier, regarding the payment of various past due 1999
switch and circuit costs. Pursuant to that agreement, Trans Global agreed to pay
AT&T approximately $13.8 million in consecutive monthly installments at 9%
interest through January 1, 2001. The payable is secured by certain assets of
Trans Global. As of March 31, 2000, the remaining balance due to AT&T was $10.5
million. Trans Global, as of May 22, 2000 has not paid $2.5 million of scheduled
32
eGLOBE, INC.
MARCH 31, 2000
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payments that were due in April and May 2000. In addition, approximately $2.7
million of payables for current usage are in arrears. Trans Global is currently
in discussions with AT&T regarding alternative arrangements for settlement of
the outstanding obligations, and believes that conclusion of an arrangement that
is not materially adverse to the immediate or long-term future operations of the
Company is likely. There can be no assurance that Trans Global will be able to
satisfactorily resolve this matter. Should this not be resolved and should AT&T
take action to take possession of the assets held as security, Trans Global
believes that its business will not be adversely impacted. There is no guarantee
that Trans Global and therefore the Company will not have its operations
affected adversely should a satisfactory resolution between the parties not be
reached.
The Company is obligated under certain conditions to redeem the shares of Series
P Preferred Stock and Series Q Preferred Stock. See Note 9 to the Consolidated
Financial Statements for further discussion.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
At March 31, 2000, we had other financial instruments consisting of cash and
fixed and variable rate debt which are held for purposes other than trading. The
substantial majority of our debt obligations have fixed interest rates and are
denominated in U.S. dollars, which is our reporting currency. We measure our
exposure to market risk at any point in time by comparing the open positions to
a market risk of fair value. The market prices we use to determine fair value
are based on management's best estimates, which consider various factors
including: closing exchange prices, volatility factors and the time value of
money. At March 31, 2000, the carrying value of our debt obligations, excluding
capital lease obligations, was $18.9 million, (net of unamortized discount of
$6.4 million) which also approximates fair value. The weighted-average interest
rate of our debt obligations, excluding capital lease obligations, at March 31,
2000 was 6.8%. At March 31, 2000, $0.2 million of our cash was restricted in
accordance with the terms of our financing arrangements and certain acquisition
holdback agreements. We actively monitor the capital and investing markets in
analyzing our capital raising and investing decisions. At March 31, 2000, we
were exposed to some market risk through interest rates on our long-term debt,
preferred stock and foreign currency. At March 31, 2000, our exposure to market
risk was not material. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
ITEM 1 LEGAL PROCEEDINGS
The following information sets forth information relating to material legal
proceedings involving the Company and certain of its executive officers and
directors. From time to time, the Company and its executive officers and
directors become subject to litigation which is incidental to and arises in the
ordinary course of business. Other than as set forth herein, there are no
material pending legal proceedings involving the Company or its executive
officers and directors.
AMERICAN INTERNATIONAL TELEPHONE V. EXECUTIVE TELECARD, LTD. This suit was filed
in July 1999 in the Supreme Court of New York, New York County and concerns a
transmission vendor seeking to collect approximately $300,000. The Company has
substantial counterclaims and is vigorously defending this suit.
33
eGLOBE, INC.
MARCH 31, 2000
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MCI WORLDCOM, INC. LITIGATION. In October 1999, MCI WorldCom filed suit against
us in the District Court, City and County of Denver, Colorado seeking in excess
of $2,500,000 pursuant to various service contracts. The Company disputes the
amount allegedly owed based on erroneous invoices, the quality of service
provided and unfair and deceptive billing practices. Moreover, the Company has
filed a counterclaim alleging significant offsets, among other items. The
Company will continue to vigorously defend this suit and prosecute its
counterclaims.
SWIFTCALL HOLDINGS (USA) LTD. V. eGLOBE, INC. This lawsuit was filed on May 19,
2000, claiming damages on account of an alleged failure by the Company to file a
registration statement for resale of the shares of common stock received by the
plaintiff in connection with the Company's acquisition of an affiliate of the
plaintiff. The Company has not had an opportunity to fully evaluate this claim
but believes that it has credible defenses.
ITEM 2 - CHANGES IN SECURITIES
During the three months ended March 31, 2000 the Company offered and sold the
following equity securities that were not registered under the Securities Act:
1. On January 2, 2000, the Company sold 36,000 shares of its common stock to a
member of its senior management team. This employee issued a note receivable to
the Company for this purchase of common stock.
2. The Company offered and sold additional securities during the three months
ended March 31, 2000. These transactions were included in the Company's Form
10-K filed on April 7, 2000.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 23, 2000, the Company held a special meeting of stockholders. The
results of the meeting were included in the Company's Form 10-K filed with the
Securities and Exchange Commission on April 7, 2000.
ITEM 5 - OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27 Financial Data Schedule
b. Reports on Form 8-K
1. A report on Form 8-K dated March 17, 2000 under Item 2 was filed
with the Securities and Exchange Commission on March 23, 2000 to
report the closing of a $4 million equity private placement with
RGC International Investors, LDC.
2. The Company filed additional reports on Form 8-K during the three
months ended March 31, 2000. These are listed in the Company's
Form 10-K filed on April 7, 2000.
34
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed in its
behalf by the undersigned, thereunto duly authorized.
eGLOBE, INC.
(Registrant)
By /s/ David Skriloff
--------------------------------
David Skriloff
Chief Financial Officer
Principal Financial Officer)
Date: August 18, 2000
35