SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM APRIL 1, 1998 TO DECEMBER 31, 1998
Commission File Number: 1-10210
EXECUTIVE TELECARD, LTD.
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d/b/a eGlobe, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3486421
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation of organization) No.)
2000 Pennsylvania Avenue, NW, Suite 4800, Washington, DC 20006
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(Address of principal executive offices)
Registrant's telephone number, including area code: (303) 691-2115
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK $.001 PAR VALUE
(Title of Class)
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 any 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 No X
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing sale price of such stock as of March 31, 1999
amounted to $51,388,246.
The number of shares outstanding of each of the registrant's classes of common
stock as of March 31, 1999 was 21,344,694 shares, all of one class of $.001 par
value common stock.
EXECUTIVE TELECARD, LTD.
d/b/a/ eGlobe, Inc.
FORM 10-K
NINE MONTH PERIOD ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PAGE
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PART I Item 1 Business 4-33
Item 2 Properties 34
Item 3 Legal Proceedings 34
Item 4 Submission of Matters to a Vote of Security Holders
PART II Item 5 Market for Registrant's Common Stock and Related
Stockholder Matters 35-37
Item 6 Selected Consolidated Financial Information 38
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 39-52
Item 7A Quantitative and Qualitative Disclosure About Market Rate 52
Item 8 Consolidated Financial Statements and Supplementary Data F-1 to F-53
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III Item 10 Directors and Executive Officers of the Registrant 48 - 52
Item 11 Executive Compensation 52 - 60
Item 12 Security Ownership of Certain Beneficial Owners and
Management 60 - 64
Item 13 Certain Relationships and Related Transactions 64
PART IV Item 14 Exhibits, Financial Statements, Schedules and Reports on
Form 8-K 65
SIGNATURES 66-67
G Glossary G1-G3
EXECUTIVE TELECARD, LTD.
d/b/a/ eGlobe, Inc.
PART I
ITEM 1 - BUSINESS (GENERAL)
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains certain forward-looking statements
that involve risks and uncertainties. In addition, members of the Company's
senior management may, from time to time, make certain forward-looking
statements concerning the Company's operations, performance and other
developments. The Company's actual results could differ materially from those
anticipated in such forward-looking statements as a result of various factors,
including those set forth under the caption "Business--Risk Factors" and
elsewhere in this annual report on Form 10-K, as well as factors which may be
identified from time to time in the Company's other filings with the Securities
and Exchange Commission or in the documents where such forward-looking
statements appear. Unless the context suggests otherwise, references in this
annual report on Form 10-K to "eGlobe" or to the "Company" mean Executive
TeleCard, Ltd. and its subsidiaries.
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OUR BUSINESS
The Company is incorporated in the State of Delaware under the corporate
name of Executive TeleCard, Ltd. On August 14, 1998, we began doing business
under the name ("d/b/a/") eGlobe. Management believes that creating a new
corporate identity is an important step in the continuing development of the
Company. The common stock of the Company is quoted on the Nasdaq National Market
under the symbol "EGLO".
General
In 1998, the Company restructured key portions of its operations, refocused
its business, and changed its name. It took these actions because management
believed that the Company needed to concentrate on what it does best and do it
better.
The business of eGlobe is to provide services to large telecommunications
companies, primarily to telephone companies that are dominant in their national
markets, and to specialized telephone companies, to Internet Service Providers
("ISP's") and to issuers of credit cards as well. The services of the Company
enable its customers to provide global reach for "enhanced" or "value added"
telecommunications services that they supply, in turn, to their customers. Until
1998, the entire focus of eGlobe was on supporting calling card services. In
1998, that focus began to change.
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Taking advantage of our key assets - our operating platforms in more than
40 countries, our ability to originate telephone calls (and in many cases,
provide data access) in more than 90 countries and territories, and our customer
and operating relationships built over the years - we started working with
customers to extend their lines of services. A key part of that extension was
the recognition that "IP" (Internet Protocol) technologies had become a basic
element of our business and a principal need of our customers - even the card
services business relies on portions of its billing and operating functions on
IP software and services. To support the extension of services, in December
1998, we acquired IDX International, Inc. ("IDX") with its IP voice and fax
capabilities and made significant investments in unified messaging software. In
addition, we began exploring ways to integrate other services into our operating
platforms, including additional acquisitions that might complement current
offerings or extend our portfolio of services.
After our year of restructuring and refocus, we are implementing our new,
broader service strategy and leave 1998 committed to a program of growth. That
program will demand substantial new resources, particularly, human resources and
cash. For those reasons, in the first quarter of 1999 we raised $10.0 million
from the sale of equity, arranged a $20.0 million debt facility from an
affiliate of a major stockholder, entered into a key vendor financing
arrangement, and plan to raise substantial amounts of additional capital during
the next two years. Growth in the international telecommunications business
often results in a disparity between cash outlays and inflows during periods of
growth, with outlays far exceeding inflows. If its growth plans are successful,
eGlobe anticipates a period of cash flow disparity.
Management expects to invest in growth. Cash will be the key element of
that investment - whether it takes the form of recruiting personnel, acquiring
technology, expanding facilities, or extending the business base through
marketing or acquisitions.
In 1998, we made two principal investments in growth - the acquisition of
IDX and the investment in, and acquisition of a technology license for, unified
messaging technology. Already in 1999, we have furthered our strategy through
the acquisition of Telekey, Inc. ("Telekey") and our negotiations to extend our
role in unified messaging and related technologies through a joint venture
investment in the company that developed the messaging software that our new
services will be based upon.
Operating Platforms and IP Network
In more than 40 locations around the world, we have installed operating
platforms. These platforms are computers, software and related communications
termination equipment. In many instances, our platforms are co-located with the
international gateway facilities of the dominant telecommunications company in a
national market - frequently that company is both the operating partner and the
customer. The platforms are connected to both the local telephone network and to
international networks. The platforms supply global services to our customers -
their functions include managing voice and data access to one or more networks,
identifying and validating user access, providing various levels of transaction
processing, routing calls or data messages, providing access to additional
service functions (for example, the unified messaging service currently in beta
test), and supplying billing and accounting information. One of the strengths of
the platform is its
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inherent flexibility, subject to necessary interface and applications
programming, in providing a "front end" access node for a range of different
services.
Until the end of 1998, we had no transmission facilities of our own. The
network of platforms relied on transmission services supplied by others to route
calls or messages. With the acquisition of IDX, that began to change. IDX has
developed, and is working to expand, an international network of
telecommunications trunks that employ Internet Protocol as the basic method of
transporting telephone calls, faxes or data messages. Our platforms are
beginning to use that network to route calls and messages. Use of the IDX
network to provide transmission services for our other services will reduce
costs, create other operating efficiencies and, perhaps most important, permit
us to offer new IP based services to our customers, services which would have
been difficult if not impossible to supply without the IDX network.
IDX, like eGlobe works principally as a provider to, and operating partner
with, telephone companies and ISP's. This key element of the IDX network and
service model helps it mesh with our operating platform service. In combination
with us IDX is concentrating on developing business and operating arrangements
with the existing customers of eGlobe. So far this strategy appears to be
successful, establishing IDX trunk connections collocated with the operating
platforms in the international gateway facilities of our customers.
Services
In 1999, we will concentrate on three lines of service: Network Services
(the IP voice and fax capabilities of IDX); Card Services; and the first
elements of a new suite of services called "Global Office" which is being built
around the global access capabilities of the operating platforms and the first
phase of the unified messaging service.
Network Services
We offer new, low-cost transmission services by transmitting digitized and
compressed voice and data messages as IP packets over an international network
of frame relay which we manage as a packet-switched private network. This
approach resembles that used by many large corporations to transport voice and
data over their wide area networks. We believe that IDX's voice service,
"CyberCall," and fax service, "CyberFax," provide significant efficiencies to
customers, compared to PSTN transmission, for the portion of the transmission
delivered by the IP network. We believe that the call quality of IDX service is
comparable to that of the PSTN. A portion of the telephony connection must be
routed over the PSTN. However, by increasing the number of nodes on the IDX
network over time, as supported by traffic flow, we expect to reduce the portion
of the call flowing over the PSTN. This should reduce cost and increase the
network's efficiency, since the call or fax can be delivered to the intended
recipient from the closest network node.
IDX offers several additions to its each of its primary services, including
billing and report generation designed exclusively to support the CyberFax and
CyberCall products. We believe that these features significantly enhance the
attractiveness of the IDX services to telephone companies and
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internet service providers. We are working with telephone companies and ISP's to
increase the use of the IDX network and increase the number of network nodes
through which service can be delivered.
eGlobe offers an international toll free service ("Service 800") that
allows a caller to make a long distance telephone call without paying the
applicable international toll charges, which are billed to the Service 800
customer (normally the recipient of the calls). This service was our original
service prior to introducing our calling card services several years ago. We are
presently offering international toll-free service for calls originating in
Australia, Austria, Canada, Denmark, France, Hong Kong, Japan, the Netherlands,
Switzerland, the United Kingdom, the United States and West Germany, among
others. Given its characteristics, the service has been consolidated into
network services division managed by IDX.
Card Services
Card Services provide customers (telephone companies, ISP's and other card
issuers, such as specialized carriers and banks) with the ability to offer
calling card programs to their customers. Services include platform services -
we provide our operating platforms and the customer provides transmission
services - and enhancement services where we provide a combination of platform
and transmission services. Calling card services include validation, routing,
multi-currency billing and payments, in addition to credit, prepaid and true
debit functionality.
The service is designed for telecommunications operators (including
integrated telephone companies, wholesale network providers, resale carriers and
ISP's) and corporations looking for a calling card solution to enhance their
core business (which is often not related to telecoms) with global calling
capabilities on a prepaid, postpaid, debit or limit basis. These customers want
us to originate and terminate calls domestically and internationally. Customers
are billed for use of the platform and transmission on a per minute basis.
Contracts are ordinarily multi-year, sometimes with minimum use requirements.
We maintain a central processing center in Denver, Colorado for user
validation, storage, and processing of billing information. We offer card
service customer interface in multiple languages (whether via computer or via
operators).
We provide 24-hour operator assistance and other customer service options.
This assistance includes "default to operator" assistance for calls from rotary
and pulse-tone telephones. Our operating platforms diverts calls placed from
such telephones to an operator who processes the call. The default-to-operator
feature enables access to our Platforms from any telephone in any country or
territory in our network.
The following table lists some features provided in our card services offerings:
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CALLING CARD FEATURES
STANDARD FEATURES: ENHANCED FEATURES:
Operator Default Customized Languages, Prompts and Closing
Operator Assistance Conference Calling
Language Selection Translation Services
Self-Selected PIN Access to U.S. Toll-Free Numbers
Multiple Calling
Star Key (*) Prompt Restart
Auto Redial
Prompt Interrupt
Voice Mail Compatibility
GLOBAL OFFICE AND NEW SERVICES
In 1998, we invested more than $1 million in unified messaging and related
technologies to help prepare the core elements of a new service offering. In
combination with the voice and data access capabilities of the operating
platforms, this unified messaging technology will provide a global capability
for an end user to dial up the internet while traveling, or dial into a
corporate intranet, and retrieve and manage voice mail, email and faxes around
the world with a local telephone call.
This new offering is being developed in combination with key customers,
primarily a handful of national telephone companies that combine their local
telephone dominance with a dominant internet position in their home markets. The
service will be supplied to the telephone company which will in turn make it
available to their telephone and internet customers - the target audience is the
early technology adapter and the business executive and professional traveling
away from the office.
The unified messaging technology is software-based. In facilities terms, a
server will be added to the operating platform to support the messaging
functionality.
The plan is to expand the first phase of the offering described above over
the course of the next year with additional services - in particular, the same
software that supports the messaging capability is capable of supporting
voice-based telephone access to the net and the world wide web, both to retrieve
or review information or to support other transactions.
STRATEGY
Our goal is to become a leading network-based provider of global software
defined services. To achieve this goal, our present strategy includes:
BUILDING ON GLOBAL PRESENCE AND STRATEGIC RELATIONSHIPS
We believe that international relationships and alliances are important in
offering services and that these relationships will be even more important as
competition expands globally. We have long-standing relationships with national
telephone companies and ISP's. We want to deepen our relationships with these
telecommunication companies and increase the number of services we
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provide to them. We believe that we will have a competitive advantage to the
extent that we can maintain and further develop our existing relationships.
EXPANDING SERVICE OFFERINGS AND FUNCTIONALITY WHILE MAINTAINING CORE
SERVICES
We believe that it will be necessary to offer a suite of enhanced business
communications services, and that the early providers of credible multi-service
offerings will have an advantage. We have introduced global IP voice and IP fax
services, and we plan to introduce a broad range of other services including
Global Office(TM). We believe that new service offerings and increased product
diversification will allow us to achieve a greater return on assets, reduce the
seasonality of our revenue stream and decrease exposure to global or regional
economic downturns. We also believe that we will be well served by maintaining
our existing core card services business which is a necessary complement to many
of our planned new services.
FOCUSING ON INTERNATIONAL CARRIERS AND OTHER CARD COMPANIES
Many telecommunications companies market their services directly to
businesses and other end users. We offer our services principally to national
carriers and ISP's, as well as to some specialized telecom companies and card
issuers. These companies, in turn, use our services to provide an enhanced
service to their customers. We believe that many of these providers will
continue to outsource the kind of services we offer and are increasingly seeking
new revenue sources by offering value-added services such as those we intend to
offer. We also believe that we provide a cost-efficient opportunity because of
our existing international network and low cost processing made possible by the
network operating platforms. We further believe that we derive a significant
advantage in marketing to these customers because of our independence from the
major global carriers, which allows national telephone companies, ISP's and card
issuers to do business with us without risking their customer bases.
CONTINUING FOCUS ON THE BUSINESS TRAVELER
In identifying and offering new services to support our customers, we will
continue to pursue services which build upon our strengths, particularly our
global reach. As a result, we have has a particular focus on providing services
that will be valuable to the business or professional user away from their
office, particularly traveling around the world.
INDUSTRY BACKGROUND
During the last decade, due to changing regulatory environments and
numerous mergers, acquisitions and alliances among the major communications
providers, there has been a convergence in the services offered by
communications companies. The result has been increased globalization of
services, strong competition from new entrants into different communications
industry segments and the increasing need to differentiate services. In
addition, companies have been focusing on areas where they have expertise,
superior technology and cost advantages, and have sought to purchase or
outsource the portions of the service where they do not have such advantages. We
believe that this trend is precipitating the pursuit of new services and expect
that it will result in increased outsourcing of more complex value-added
services that are unrelated to the core expertise of an organization.
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The evolving environment for communications has increased the number of
messages sent and received and the types and means of communications mobile
professionals use. With advances in many areas of communications technology,
professionals and other travelers are demanding additional features from their
telephone and internet providers, particularly ease of Internet access, true
global access and unified messaging.
INTERNET PROTOCOL (IP)
Unlike the transmission technology which is the basis of the PSTN, where
voice and data are transported in the form of relatively continuous analog and
digital signals, Internet Protocol-based transmission transports voice and data
in the form of data packets which do not flow in a continuous channel. As a
result of this essentially "random" packet transport system, the information
being transported - whether voice, video, fax or other forms of messages or
information - is much more easily managed and manipulated. That relative ease of
management and manipulation leads to a wide range of new functions and services,
all of which are possible as a result of the underlying IP capability. This has
led to a proliferation of IP based services and is rapidly making IP the
technical basis for many new value-added and enhanced services, including voice
(telephone) services. Indeed, our card services already rely on IP capabilities
in key billing and transaction management functions.
IP, therefore will, in our judgement, ultimately become the dominant
underlying service protocol. That means that without regard to the type of
information--whether voice or data, card service or messaging, the ability to
call home or "surf" the web--IP will be a key building block for "enhanced"
"value added", or "intelligent" network services in the future.
With the acquisition of IDX and our investment in unified messaging, IP has
become a core technology in our service mix.
Early Internet voice transmission was of poor quality, but IP transmission
quality improved significantly with the development of an IP "gateway" that
connects telephone calls between IP networks and PSTN networks. The computer
server converts the PSTN voice into data packets and routes the data over the
Internet or another IP network. A second computer server in the destination area
converts the data back to analog form and switches it to the local phone network
as a local call. IP gateways have enabled IP telephony to evolve into numerous
new services and networks.
IP telephony offers many benefits;
o simplified management;
o use for both voice and data transmission allows consolidation of
traffic over a single network;
o reduction of overhead and maintenance costs for the IP portion of the
transmission, and
o enables use of applications such as video, voice mail, conferencing,
messaging, data-sharing, and directory services over the same network.
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Other technologies--such as ISDN and ATM--also have brought some of the benefits
of consolidating telephone and data networks. IP transmission also offers
ubiquity. The communications industry requires large scale acceptance of new
technologies to justify the massive investment in infrastructure needed to
implement them. The ubiquity and critical mass that the Internet has achieved
has attracted significant investment and application development, which also
have promoted and developed IP transmission.
MARKET
The global telecommunications services industry is growing significantly.
Two of the fastest growth areas have been mobile communication related services
and international telecommunication services, which have grown at impressive
rates.
We believe that demand for global telecommunications services, including
our offerings, will continue to grow substantially as a result of (1) increased
reliance by business users on telecommunication services; (2) increased
globalization of business; and (3) use of the Internet.
Changes in global telecommunication services have dramatically increased
both the number of messages and the medium used. Messages are increasingly
taking electronic form as electronic mail and other electronic communications
tools usage has grown. Increased e-mail usage, in turn, has led to increased
demand for mobile, dial-up access to the Internet.
The growth in the global telecommunications market also reflects the
increasingly international nature of business, the significant growth of
emerging and newly industrialized economies and the increase in international
trade. We believe that as multinational corporations globalize, and expand into
new markets, their demand for diverse and customized telecommunications services
will continue to grow. Increased globalization will lead to increased demand for
products and services that address the communication and information management
needs of an increasingly mobile society. Growth in communication and information
demand on the part of international travelers is further evidenced by the
proliferation of electronic devices (such as notebook and subnotebook computers
with modems, both wireline and wireless) and the explosive growth of the
Internet, corporate intranets and network services that allow travelers remote
access to their home offices. As business travel grows, the percentage of
travelers who have a need for remote office access to messaging and
communication services will increase.
The Internet continues to become a preferred solution in many circumstances
to the increased message and communication needs of mobile consumers. The
worldwide commercial Internet/intranet market has grown very rapidly, and this
growth is expected to continue. Many factors are driving this increase in demand
for Internet access by an increasingly more mobile group of end users. Strategic
developments affecting this demand for nomadic Internet access include:
o increasing deregulation and competition in telecommunications
markets;
o growth of Internet usage to a critical mass to achieve near
universal acceptance;
o dramatic increase in the use of e-mail, and
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o decreasing access costs to backbone providers and end users.
In addition to consumer use, corporations have been moving online. The
number of large companies with a Web presence continues to increase, as does the
number of registered commercial domains. This increase in corporate use
indicates how quickly the Internet has become a mainstream channel for corporate
marketing, communications and business transactions.
COMPETITION
Our industry is intensely competitive and rapidly evolving. The
communications industry is dominated by companies much larger than us, with much
greater name recognition, much larger customer bases and substantially greater
financial, personnel, marketing, engineering, technical and other resources than
we have. In addition, several other companies have commenced offerings, or have
announced intentions to offer, enhanced communications services similar to
certain of the enhanced services we plan to offer.
Our core services compete against services provided by companies such as
AT&T Corp., British Telecom, MCI/Worldcom and Global One, as well as some
smaller multinational providers. In providing enhanced services we expect to
compete with businesses already offering or planning to offer such services.
These companies include Premiere Technologies (provides enhanced communication
services and is developing a unified messaging platform), JFAX (remote office
services) and General Magic (provides IP based integrated voice and data
applications). We expect other parties to develop platform products and services
similar to our services offered.
We believe the principal factors affecting competition include services and
features, geographic coverage, price, quality, reliability of service and name
recognition. We expect to build upon our global network and operating platform
by offering a broader range of services, by expanding our relationships with
national telephone companies and other large companies that outsource business
to us, and by continuing to provide processing services efficiently. We believe
we will be able to compete effectively if we can successfully implement our
competitive strategy. However, to the extent other companies are successful in
offering superior enhanced communication services or introducing such services
before we do, we likely would be adversely affected and such effects could
material. See "Risk Factors-Rapid technological and market changes create
significant risks to us."
SALES AND MARKETING
We market our services to national telephone companies, ISP's, specialized
telecom companies, and card issuers which in turn provide our services to their
customers. During 1998, we established a direct sales force (approximately 15
people) to focus on sales to these customers. To be close to our customers, we
have based much of our direct sales force in Europe and Asia. Also during 1998,
we established a marketing staff responsible primarily for providing marketing
support to the sales efforts at varying levels of involvement. The marketing
staff also promotes the Company's corporate image in the marketplace and
provides marketing support to our customers to encourage their customers to use
our services. We pay sales commissions to our sales employees and agents.
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ENGINEERING
Our engineering personnel are responsible for provisioning and implementing
network upgrades and expansion and updating, testing and supporting proprietary
software applications, as well as creating and improving enhanced system
features and services. Our software engineering efforts include (1) updating our
proprietary network of operating platforms and integrating our software with
commercially available software and hardware when feasible, and (2) identifying
and procuring improved services compatible with our existing services and
platforms.
TECHNOLOGY: INTELLECTUAL PROPERTY RIGHTS
We regard our operating platforms and our global IP voice, IP fax and other
software as proprietary and have implemented some protective measures of a legal
and practical nature to ensure they retain that status. We have filed a patent
application relating to certain aspects of the operating platform with the U.S.
Patent and Trademark Office, and are taking steps to extend our patent
application to certain international jurisdictions. We have also registered
certain trade or service marks with the U.S. Patent and Trademark Office, and
applications for registration of additional marks are currently pending. Certain
trade or service marks also have been registered in some European and other
countries, and applications for registration of additional marks are pending. In
addition to filing patents and registering marks in various jurisdictions, we
obtain contractual protection for our technology by entering into
confidentiality agreements with our employees and customers. We also limit
access to and distribution of our operating platforms, hardware, software,
documentation and other proprietary information.
There can be no assurance, however, the steps we have taken to protect our
proprietary rights will be adequate to deter misappropriation of our technology.
Despite our measures, competitors could copy certain aspects of our operating
platform and our global IP voice, IP fax and other software or obtain
information which we regard as trade secrets. Further, if challenged, there can
be no assurance we can successfully defend any patent issued to us or any marks
registered by us. In any event, we believe that such technological innovation
and expertise and market responsiveness are as (or more) important than the
legal protections described above. We believe it is likely our competitors will
independently develop similar technology and we will not have any rights under
existing laws to prevent the introduction or use of such technology. See "Risk
Factors--We Have Only Limited Protection of Proprietary Rights and Technology
and are Exposed to Risks of Infringement Claims."
CUSTOMERS
For the nine month period ended December 31, 1998, Telefonos de Mexico,
S.A., de C.V. ("Telmex"), MCI and Worldcom, Inc. (primarily its affiliates ATC
and LDDS), and Telecom Australia accounted for 19%, 16% and 10%, respectively,
of our revenues and were the only customers accounting for 10% or more of our
revenues. In the fourth calendar quarter of 1998, we experienced a significant
and permanent decline in revenues from several North American customers,
particularly Telmex. See Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.
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REGULATION
We are subject to regulation as a telecommunications service provider in
some jurisdictions. In addition, we or a local partner is required to have
licenses or approvals in those countries where we operate and where equipment is
installed.
UNITED STATES FEDERAL REGULATION
Pursuant to the Communications Act of 1934, as amended (the "Communications
Act"), the Federal Communications Commission ("FCC") is required to regulate the
telecommunications industry in the U. S. Under current FCC policy,
telecommunications carriers reselling the services of other carriers, and not
owning domestic telecommunications transmission facilities of their own, are
considered non-dominant and, as a result, are subject to streamlined regulation.
The degree of regulation varies between domestic telecommunications services
(services which originate and terminate within the U. S.) and international
telecommunications services (services which originate in the U. S. and terminate
in a foreign country or vice versa).
Non-dominant providers of domestic services do not require prior
authorization from the FCC to provide service. However, non-dominant providers
of international services must obtain authorization to provide service from the
FCC pursuant to Section 214 of the Communications Act. Carriers providing
international service also must file a tariff with the FCC, setting forth the
terms and conditions under which they provide international services. The FCC
has determined that it no longer will require non-dominant providers of domestic
services to file tariffs, but instead will require carriers to post this
information on the Internet. That decision has been stayed, pending appeal by
the U.S. Court of Appeals for the District of Columbia Circuit. We provide both
domestic and international services to and from the U.S. and therefore must
possess authority under Section 214 of the Communications Act and must file
tariffs for domestic and international services with the FCC. We have held an
authorization to provide service since 1989. We also have tariffs on file with
the FCC setting forth the terms and conditions under which we provide domestic
and international services.
In addition to these authorization and tariff requirements, the FCC imposes
a number of additional requirements on all telecommunications carriers.
The regulatory requirements in force today impose a relatively minimal
burden on us. There can be no assurance, however, that the current regulatory
environment and the present level of FCC regulation will continue, or that we
will continue to be considered non-dominant.
NON-U.S. GOVERNMENT REGULATION
Telecommunications activities are subject to government regulation to
varying degrees in every country throughout the world. In many countries where
we operate, equipment cannot be connected to the telephone network without
regulatory approval, and therefore installation and operation of our operating
platform or other equipment requires such approval. We have licenses or other
equipment approvals in the jurisdictions where we operate. In most jurisdictions
where we conduct business, we rely on our local partner to obtain the requisite
authority. In many countries our
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local partner is a national telephone company, and in some jurisdictions also is
(or is controlled by) the regulatory authority itself.
As a result of relying on our local partners, we are dependent upon the
cooperation of the telephone utilities with which we have made arrangements for
our authority to conduct business, as well as for operational and certain of our
administrative requirements. Our arrangements with these utilities are
nonexclusive and take various forms. Although some of these arrangements are
embodied in formal contracts, any telephone utility could cease to accommodate
our requirements at any time. Depending upon the location of the telephone
utility, such action could have a material adverse effect on our business and
prospects. In some cases, principally countries which are members of the
European Community and the U. S., laws and regulations provide that the
arrangements necessary for us to conduct our service may not be arbitrarily
terminated. However, the time and cost of enforcing our rights may make legal
remedies impractical. We presently have good relations with most of the foreign
utilities with which we do business. There can be no assurance, however, that
such relationships will continue or that governmental authorities will not seek
to regulate aspects of our services or require us to obtain a license to conduct
our business.
Many aspects of our international operations and business expansion plans
are subject to foreign government regulations, including currency regulations.
There can be no assurance that foreign governments will not adopt regulations or
take other actions that would have a direct or indirect adverse impact on our
business opportunities. See "Risk Factors--Risks Associated with International
Business."
IP TELEPHONY
The regulation of IP telephony is still evolving. The U. S. FCC has stated
that some forms of IP telephony appear to be similar to "traditional" telephone
service, but the FCC has not decided whether, or how, to regulate providers of
IP telephony. In addition, several efforts have been made to enact U.S. federal
legislation that would either regulate or exempt from regulation services
provided over the Internet. State public utility commissions also may retain
intrastate jurisdiction and could initiate proceedings to regulate the
intrastate aspects of IP telephony. A number of countries currently prohibit IP
telephony. Other countries permit but regulate IP telephony. If and to the
extent that governments prohibit or regulate IP telephony, we could be subject
to regulation and possibly to a variety of penalties under foreign or U.S. law,
including without limitation, orders to cease operations or to limit future
operations, loss of licenses or of license opportunities, fines, seizure of
equipment and, in certain foreign jurisdictions, criminal prosecution.
EMPLOYEES
As of December 31, 1998, we employed two hundred-two (202) employees, as
follows: one hundred eleven (111) in Denver, Colorado, seven (7) in Tarrytown,
New York, four (4) in Washington, D.C., twenty-seven (27) in Reston, Virginia,
one (1) in Nyon, Switzerland, nine (9) in Silkeborg, Denmark, fourteen (14) in
Hong Kong, twenty-nine (29) in Taipei, Taiwan, one (1) in Brussels, Belgium,
seven (7) in Godalming, United Kingdom and one (1) in Limassol, Cyprus. See Note
13 to the Consolidated Financial Statements for geographic business segment
information.
15
CERTAIN RECENT DEVELOPMENTS
Effective with the period ended December 31, 1998, the Company changed to a
December 31, fiscal year end. Therefore, the period ended December 31, 1998
represents a nine month period as compared to the twelve month fiscal years
ended March 31, 1998, 1997, 1996 and 1995.
IDX ACQUISITION. On December 2, 1998, we acquired IDX International, Inc.
("IDX"), a privately held Virginia corporation (the "IDX acquisition"). IDX is a
supplier of IP (Internet protocol) fax and IP voice platforms and services to
telecommunications operators and ISP's in 14 countries. With 56 employees, IDX
currently has approximately $6.5 million of annualized revenue (based upon
revenues for the most recent two month period ended December 31, 1998). IDX will
provide us with two key services for our new suite of Internet services: IP fax
and IP voice. For at least the first year, IDX will operate as a separate
subsidiary, although we have begun to use its services to support some of the
card services requirements. IDX will operate with its existing management and
personnel in facilities in Reston, Virginia.
Under the merger agreement signed with IDX, we recently elected Hsin Yen,
the President of IDX, and Richard Chiang, the Chairman of IDX prior to the IDX
acquisition, to our Board of Directors. This expands our Board to a total of 11
directors. As the President of IDX, Hsin Yen reports directly to Mr. Vizas, our
Chairman and Chief Executive Officer.
As a result of the IDX acquisition, all of the shares of common stock and
preferred stock of IDX, outstanding immediately prior to the effective time of
the IDX acquisition (excluding any treasury shares) were converted into, in the
aggregate, (a) 500,000 shares of our Series B Convertible Preferred Stock
("Series B Preferred Stock"), which are convertible into up to 2,500,000 shares
(2,000,000 shares until stockholder approval is obtained) of our common stock
("Common Stock"), subject to adjustment as described below, (b) warrants to
purchase up to 2,500,000 shares of our Common Stock, subject to stockholder
approval as well as adjustment as described below (the "IDX Warrants"), and (c)
$5.0 million which amount is subject to decrease as described below, in interest
bearing Convertible Subordinated Promissory Notes.
The shares of Series B Preferred Stock are convertible at the holders
option at any time at the then current conversion rate. The shares of Series B
Preferred Stock will automatically convert into shares of our Common Stock on
the earlier to occur of (a) the first date that the 15 day average closing sales
price of our Common Stock is equal to or greater than $8.00 or (b) 30 days after
the later to occur of (i) December 2, 1999 or (ii) the receipt of any necessary
stockholder approval relating to the issuance of the Common Stock upon such
conversion, subject to IDX's achievement of certain revenue and EBITDA
objectives.
The IDX Warrants are exercisable only to the extent that IDX achieves
certain revenue and EBITDA goals over the twelve months ending December 2, 1999
(and if stockholder approval is received). We have "guaranteed" a price of $8.00
per share at December 2, 1999 to recipients of the Common Stock issuable upon
the conversion or exercise, as the case may be, of the Series B Preferred Stock
and IDX Warrants, subject to IDX's achievement of certain revenue and EBITDA
objectives. If the market price is less than $8.00 on December 2, 1999, subject
to IDX's achievement of certain revenue and EBITDA objectives, we will issue
additional shares of Common Stock
16
upon conversion of the Series B Preferred Stock and exercise of the IDX Warrants
(subject to the receipt of any necessary stockholder approval) based on the
ratio of $8.00 to the market price, but not more than an aggregate of 7 million
additional shares of Common Stock.
The Convertible Subordinated Promissory Notes are due in three installments
(the first of which was paid in stock in March 1999) through October 30, 1999,
and are payable in cash or Common Stock (valued at the then market price). In
addition, we have agreed to pay the accrued but unpaid dividends (the "IDX
Accrued Dividends") on IDX's preferred stock under an interest bearing
Convertible Subordinated Promissory Note in the original principal amount of
$418,000 due May 31, 1999. We are entitled to reduce the aggregate principal
balance of the last payment due on the Convertible Subordinated Promissory Notes
by the amount of the IDX Accrued Dividends and certain other deferred amounts
unless offset by net proceeds from the sale of a subsidiary of IDX and a note
issued to IDX by an option holder. See Note 6 to the Consolidated Financial
Statements for further discussion.
UCI ACQUISITION. On December 31, 1998, we acquired UCI Tele Networks, Ltd.
("UCI"), a privately held corporation established under the laws of the Republic
of Cyprus (the "UCI acquisition"). UCI is a development stage calling card
business serving Greece, Cyprus and the Middle East. We have projected that the
UCI acquisition will provide projected revenues in 1999 ranging between $2 and
$3 million. UCI will operate with its existing management and personnel from
offices in Limassol, Cyprus.
We acquired UCI for 125,000 shares of our Common Stock (50% delivered at
the acquisition date and 50% to be delivered February 1, 2000, subject to
adjustment); warrants to purchase 50,000 shares of our Common Stock, with an
exercise price equal to the market price at the time of issuance of $1.63 and
$2.1 million in promissory notes or cash, according to a payment schedule and
subject to adjustments based on an earnout formula, each as described below. We
paid UCI $75,000 in January 1999; we agreed to pay UCI $500,000 with interest at
the rate of 8% per annum 180 days following the UCI closing date; we agreed to
pay UCI $500,000 with interest at the rate of 8% per annum 18 months following
the UCI closing date, and we agreed to pay UCI $1.025 million on February 1,
2000 or December 31, 2000, subject to certain adjustments as discussed below.
We agreed to adjust the purchase price we paid to acquire UCI as follows.
If the closing market price on the Nasdaq National Market of our Common Stock on
February 1, 2000 is less than $8.00, we will issue additional shares of our
Common Stock equal in number to: $1 million divided by the closing market price
of our Common Stock on December 1, 1999, less 125,000 shares of our Common
Stock. These shares as well as the 62,500 shares of Common Stock to be delivered
are subject to adjustment as discussed below.
If UCI does not achieve 100% of its revenue target as of February 1, 2000,
we will pay less cash and issue fewer shares of our Common Stock. If UCI
achieves more than 100% of its revenue target for the same period, then we shall
pay up to $300,000 in additional cash to UCI. See Note 6 to the Consolidated
Financial Statements for further discussion.
EXCHANGE WITH RONALD JENSEN. In November 1998, we reached an agreement
with Mr. Ronald Jensen, who is also our largest stockholder. The agreement
concerned settlement of
17
unreimbursed costs and potential claims. Mr. Jensen had purchased $7.5 million
of our Common Stock in a private placement in June 1997 and later was elected
Chairman of our Board of Directors. After approximately three months, Mr. Jensen
resigned his position, citing both other business demands and the challenges of
managing our business. During his tenure as Chairman, Mr. Jensen incurred staff
and other costs that were not billed to eGlobe. Also, Mr. Jensen subsequently
communicated with our current management, indicating there were a number of
issues raised during his involvement with eGlobe relating to the provisions of
his share purchase agreement which could result in claims against us.
To resolve all current and potential issues, Mr. Jensen agreed with us
to exchange his current holding of 1,425,000 shares of Common Stock for 75
shares of our 8% Series C Cumulative Convertible Preferred Stock ("Series C
Preferred Stock"), which management estimated to have a fair market value of
approximately $3.4 million and a face value of $7.5 million. The terms of the
Series C Preferred Stock permit Mr. Jensen to convert the Series C Preferred
Stock into the number of shares equal to the face value of the preferred stock
divided by 90% of common stock market price, but with a minimum conversion price
of $4.00 per share and a maximum of $6.00 per share, subject to adjustment if we
issue Common Stock for less than the conversion price. The difference between
the estimated fair value of the Series C Preferred Stock to be issued and the
market value of the Common Stock surrendered resulted in a one-time non-cash
charge to our statement of operations of $1.0 million in the quarter ended
September 30, 1998 with a corresponding credit to stockholders' equity.
In connection with subsequent issuances of securities which are
convertible into or exercisable for our Common Stock, we discussed with Mr.
Jensen the extent to which the conversion price of the Series C Preferred Stock
should be adjusted downward. The parties agreed to exchange all of the
outstanding Series C Preferred Stock for shares of Common Stock, which exchange
would have the same economic effect as if the Series C Preferred Stock had been
converted into Common Stock with an effective conversion price of $2.50 per
share. On February 16, 1999, we agreed to exchange 75 shares of Series C
Preferred Stock then held by Mr. Jensen for 3,000,000 shares of Common Stock.
The market value of the 1,125,000 incremental shares of Common Stock issued of
approximately $2.7 million will be recorded as a preferred stock dividend in the
quarter ended March 31, 1999. See Notes 7 and 17 to the Consolidated Financial
Statements for further discussion.
SERIES D PREFERRED STOCK. We concluded a private placement of $3 million in
January 1999 with Vintage Products Ltd. ("Vintage"). We sold (i) 30 shares of
our 8% Series D Cumulative Convertible Preferred Stock (the "Series D Preferred
Stock"), (ii) warrants to purchase 112,500 shares of Common Stock, with an
exercise price of $.01 per share, and (iii) warrants to purchase 60,000 shares
of Common Stock, with an exercise price of $1.60 per share, to Vintage. In
addition, we agreed to issue to Vintage, for no additional consideration,
additional warrants to purchase the number of shares of Common Stock equal to
$250,000 (based on the market price of the Common Stock on the last trading day
prior to June 1, 1999 or July 1, 2000, as the case may be), or pay $250,000 in
cash, if we do not (i) consummate a specified merger transaction by May 30,
1999, or (ii) achieve, in the fiscal quarter commencing July 1, 2000, an
aggregate amount of gross revenues equal to or in excess of 200% of the
aggregate amount of gross revenues achieved by the Company in the fiscal quarter
ended December 31, 1998.
18
The shares of Series D Preferred Stock are convertible, at the holder's
option, into shares of our Common Stock at any time after April 13, 1999 at a
conversion price, which is subject to adjustment if we issue Common Stock for
less than the conversion price, equal to the lesser of $1.60 or, if we fail to
have positive EBITDA for at least one of the first three fiscal quarters of 1999
or we fail to complete a public offering of equity securities for a price of at
least $3.00 per share and with gross proceeds to us of at least $20 million on
or before the end of the third fiscal quarter of 1999, the market price just
prior to conversion. The shares of Series D Preferred Stock will automatically
convert into Common Stock upon the earliest of (i) the first date on which the
market price of the Common Stock is $5.00 or more per share for any 20
consecutive trading days, (ii) the date on which 80% or more of the Series D
Preferred Stock we issued has been converted into Common Stock, or (iii) the
date we close a public offering of equity securities at a price of at least
$3.00 per share and with gross proceeds to us of at least $20 million.
The shares of Series D Preferred Stock must be redeemed if it ceases to be
convertible (which would happen if the number of shares of Common Stock issuable
upon conversion of the Series D Preferred Stock exceeded 19.9% of the number of
shares of Common Stock outstanding when the Series D Preferred was issued, less
shares reserved for issuance under warrants). Redemption is in cash at a price
equal to the liquidation preference of the Series D Preferred Stock at the
holder's option or our option 45 days after the Series D Preferred Stock ceases
to be convertible. If we receive stockholder approval to increase the number of
shares issuable we must issue the full amount of Common Stock upon conversion of
the Series D Preferred Stock even if the number of shares exceeds the 19.9%
maximum number.
Vintage has agreed to purchase 20 additional shares of Series D Preferred
Stock plus warrants for $2 million upon the registration of the Common Stock
issuable upon the conversion of the Series D Preferred Stock. At that time we
will issue to Vintage warrants to purchase 75,000 shares of Common Stock, with
an exercise price of $.01 per share, and warrants to purchase 40,000 shares of
Common Stock, with an exercise price of $1.60. See Note 17 to the Consolidated
Financial Statements for further discussion.
SERIES E PREFERRED STOCK. In February 1999, contemporaneously with the
exchange of Mr. Jensen's Series C Preferred Stock for shares of common stock, we
concluded a private placement of $5 million with EXTL Investors LLC, a limited
liability company in which Ronald Jensen and his wife are the sole members
("EXTL Investors"). We sold 50 shares of our 8% Series E Cumulative Convertible
Redeemable Preferred Stock (the "Series E Preferred Stock"), and warrants (the
"Series E Warrants") to purchase (i) 723,000 shares of Common Stock with an
exercise price of $2.125 per share and (ii) 277,000 shares of Common Stock with
an exercise price of $.01 per share to EXTL Investors.
The shares of the Series E Preferred Stock may be redeemed at a redemption
price equal to the face value plus accrued dividends, in cash or in Common
Stock, at our option or at the option of any holder, provided that the holder
has not previously exercised the convertibility option described, at any time
following the date that is five years after we issue the Series E Preferred
Stock. The Series E Preferred Stockholder may elect to make the shares of Series
E Preferred Stock convertible into shares of Common Stock at any time after
issuance. We also may elect to make the shares of Series E Preferred Stock
convertible, but only if (i) we have positive EBITDA for at least one of the
first three fiscal quarters of 1999 or (ii) we complete a public offering of
equity securities for a price of at least
19
$3.00 per share and with gross proceeds to us of at least $20 million on or
before the end of the third fiscal quarter of 1999. On April 9, 1999 in
connection with the $20 million financing discussed below, the Series E
Preferred Stockholders exercised the convertibility option. As a result, the
Series E Preferred Stock is no longer redeemable.
The shares of Series E Preferred Stock will automatically be converted into
shares of our Common Stock, on the earliest to occur of (x) the first date as of
which the last reported sales price of our Common Stock on Nasdaq is $5.00 or
more for any 20 consecutive trading days during any period in which Series E
Preferred Stock is outstanding, (y) the date that 80% or more of the Series E
Preferred Stock we have issued has been converted into Common Stock, or (z) we
complete a public offering of equity securities at a price of at least $3.00 per
share and with gross proceeds to us of at least $20 million. The initial
conversion price for the Series E Preferred Stock is $2.125, subject to
adjustment if we issue Common Stock for less than the conversion price. See Note
17 to the Consolidated Financial Statements for further discussion.
TELEKEY ACQUISITION. On February 12, 1999, we acquired Telekey, Inc.
("Telekey"), a privately held Georgia corporation (the "Telekey acquisition").
Telekey provides a range of card based telecommunications services (calling,
voice mail, email and others) primarily to foreign academic travelers (teachers
and students) visiting the US and Canada. Telekey will operate with its existing
management and personnel in existing facilities in Atlanta, Georgia.
As a result of the Telekey acquisition, all of the shares of common stock
of Telekey outstanding immediately prior to the effective time of the Telekey
acquisition were converted into, in the aggregate, (a) a base amount of
1,010,000 shares of our Series F Convertible Preferred Stock ("Series F
Preferred Stock") at closing, (b) at least 505,000 and up to 1,010,000 shares of
Series F Preferred Stock two years later (or upon a change of control or certain
events of default if they occur before the end of two years), subject to
Telekey's meeting certain revenue and EBITDA tests, (c) $125,000 in cash at
closing and (d) a Promissory Note in the original principal amount of $150,000,
payable in equal monthly installments over one year, issued at closing.
The shares of Series F Preferred Stock will automatically convert into
shares of our Common Stock on the earlier to occur of (a) the first date that
the 15 day average closing sales price of our Common Stock is equal to or
greater than $4.00 or (b) July 1, 2001. We have "guaranteed" a price of $4.00
per share at December 31, 1999 to recipients of the Common Stock issuable upon
the conversion of the Series F Preferred Stock, subject to Telekey's achievement
of certain revenue and EBITDA objectives. If the market price is less than $4.00
on December 31, 1999, we will issue additional shares of Common Stock upon
conversion of the Series F Preferred Stock based on the ratio of $4.00 to the
market price, but not more than an aggregate of 600,000 additional shares of
Common Stock.
DEBT FINANCING. On April 9, 1999, we and our wholly owned subsidiary eGlobe
Financing Corporation ("eGlobe Financing"), entered into a Loan and Note
Purchase Agreement with EXTL Investors (which, together with its affiliates, is
our largest stockholder). eGlobe Financing initially borrowed $7 million from
EXTL Investors and we granted EXTL Investors warrants (1/3 of which are
presently exercisable) to purchase 1,500,000 shares of our Common Stock at an
exercise price of $.01 per
20
share. As a condition to receiving this $7.0 million unsecured loan, we entered
into a Subscription Agreement with eGlobe Financing under which we have
irrevocably agreed to subscribe for eGlobe Financing stock for an aggregate
subscription price of up to $7.5 million (the amount necessary to repay the loan
and accrued interest).
As part of the Loan and Note Purchase Agreement, EXTL Investors agreed to
purchase $20 million of 5% Secured Notes from eGlobe Financing, upon our
request, provided that we first obtain any required stockholder approval at our
next stockholder meeting. If we issue the Secured Notes to EXTL Investors, we
must repay the $7 million initial loan. We also must grant EXTL Investors
warrants to purchase 5,000,000 shares of our Common Stock at an exercise price
of $1.00 per share, although 2/3 of the initial warrants to purchase 1,500,000
shares will expire if we issue the secured notes.
If eGlobe Financing does not issue Secured Notes for the $20 million after
we obtain stockholder approval (or if we do not obtain approval at our next
annual stockholder meeting), the $7 million loan must be repaid on the earliest
to occur of (i) April 9, 2000, (ii) the date that we complete an offering of
debt or equity securities from which we receive net proceeds of at least $30
million or (iii) the occurrence of an event of default. Also, the remaining 2/3
of the initial warrants to purchase 1,500,000 shares will become exercisable at
that time.
The Secured Notes, if sold, must be repaid in 36 specified monthly
installments commencing on the first month following issuance, with the
remaining unpaid principal and accrued interest being due in a lump sum with the
last payment. The entire amount becomes due earlier if we complete an offering
of debt or equity securities from which we receive net proceeds of at least $100
million (a "Qualified Offering"). The principal and interest of the Secured
Notes may be paid in cash. However, up to 50% of the original principal amount
of the Secured Notes may be paid in our Common Stock at our option if (i) the
closing price of our Common Stock on Nasdaq is $8.00 or more for any 15
consecutive trading days, (ii) we close a public offering of our equity
securities at a price of at least $5.00 per share and with gross proceeds to us
of at least $30 million, or (iii) we close a Qualified Offering (at a price of
at least $5.00 per share, in the case of an offering of equity securities).
The proceeds of these financings will be used by us to fund capital
expenditures relating to our network of IP trunks and intelligent platforms for
calling card and unified messaging services, and for working capital and general
corporate purposes. The proceeds of the Secured Notes would also be used to
repay the $7 million initial loan and our approximately $8 million of senior
indebtedness to IDT Corporation.
If eGlobe Financing issues the Secured Notes, we will transfer
substantially all of our operating assets to eGlobe Financing so that EXTL
Investors can have a security interest in our assets to secure payment under the
Secured Notes. The security interest would be subject to certain exceptions for
existing debt and vendor financing. We and our operating subsidiaries would
guarantee payment of the Secured Notes.
21
EXTL Investors also has agreed, under the Loan and Note Purchase Agreement,
to make advances to eGlobe Financing from time to time based upon eligible
accounts receivable. These advances may not exceed the lesser of 50% of eligible
accounts receivable and (ii) the aggregate amount of principal payments made by
eGlobe Financing under the Secured Notes. We will guarantee repayment of these
advances, which also will be secured by the same security arrangement as the
Secured Notes.
The Loan and Note Purchase Agreement contains several covenants which we
believe are fairly customary, including prohibitions on:
(i) mergers and sales of substantially all assets;
(ii) sales of material assets other than on an arm's length basis and in
the ordinary course;
(iii) encumbering any of our assets (except for certain permitted liens);
(iv) incurring or having outstanding indebtedness other than certain
permitted debt (which includes certain existing debt and future equipment and
facilities financing), or prepaying any subordinated indebtedness; or
(v) paying any dividends or distributions on any class of our capital stock
(other than any dividend on outstanding preferred stock or additional preferred
stock issued in the future) or repurchasing any shares of our capital stock
(subject to certain exceptions).
The Loan and Note Purchase Agreement contains several fairly standard
events of default, including:
(i) non-payment of any principal or interest on the $7 million loan or the
Secured Notes, or non- payment of $250,000 or more on any other indebtedness;
(ii) failure to perform any obligation under the Loan and Note Purchase
Agreement or related documents;
(iii) breach of any representation or warranty in the Loan and Note
Purchase Agreement;
(iv) inability to pay our debts as they become due, or initiation or
consent to judicial proceedings relating to bankruptcy, insolvency or
reorganization;
(vi) dissolution or winding up, unless approved by EXTL Investors; and
(vi) final judgment ordering payment in excess of $250,000.
OTHER POTENTIAL ACQUISITIONS. We are currently negotiating to acquire,
substantially all the assets of two other companies. One of such companies would
be acquired by a joint venture between
22
the seller and us. The cash element of the aggregate purchase prices for these
potential acquisitions is approximately $1.0 million plus financial commitments
of approximately $1.3 million. In addition, we will issue preferred stock
convertible into between 230,000 and 1.1 million shares of common stock.
RISK FACTORS
We caution you that our performance is subject to risks and uncertainties.
There are a variety of important factors like those that follow that may cause
our future results to differ materially from those projected in any of our
forward-looking statements made in this Annual Report on Form 10-K or otherwise.
WE HAVE INCURRED SIGNIFICANT LOSSES, ATTRIBUTABLE IN PART TO NUMEROUS CHARGES
We incurred a net loss of $13.3 million for the fiscal year ended March 31,
1998 and a net loss of $7.1 million for the nine month period ended December 31,
1998. We continue to incur operating losses and are likely to report net losses
for the next year, due in part to large non-cash charges for goodwill,
amortization and amortization of debt discount. A significant portion of the
losses for the year ended March 31, 1998 resulted from the following charges;
corporate realignment costs of $3.1 million, settlement costs of $3.9 million
(for previously existing litigation settled by new management), an additional
income tax provision of $1.5 million, an additional allowance for doubtful
accounts of $1.4 million and warrants associated with debt of $0.5 million. Some
of these charges resulted from a detailed review of the Company's activities
initiated by new management. Excluding these items, we incurred a net loss for
the fiscal year ended March 31, 1998 of $2.3 million. Of the net loss for the
nine month period ended December 31, 1998, $1.0 million was attributable to
settlement costs relating to certain claims by our former Chairman and largest
stockholder, an additional allowance for doubtful accounts totaled $0.8 million
and warrants associated with debt equaled $0.6 million. Management has been
taking steps to introduce new services and new revenues and replace lost
revenues. However, our ability to achieve profitability and positive cash flow
depends upon a number of factors, including our ability to increase revenue
while maintaining or reducing costs by achieving economies of scale. A variety
of factors, external and internal, may keep us from succeeding in increasing or
maintaining revenue or achieving or sustaining economies of scale and positive
cash flow in the future, and our failure to do so could have a material adverse
effect on our business.
WE NEED ADDITIONAL CAPITAL TO FINANCE OUR OPERATING AND CAPITAL REQUIREMENTS
We estimate we will need to raise up to $40 million during the current
fiscal year to have sufficient working capital to facilitate running our
business, acquiring assets and technology, repaying indebtedness incurred in
connection with certain acquisitions, upgrading our facilities, and developing
new services. (See "Management's Discussion and Analysis of Financial Condition
and Results of Operations Liquidity, Capital Resources and Other Financial
Data"). In addition, we will need to repay or refinance our existing $7.5
million term loan (plus approximately $1.0 million in interest) that will be due
and payable in full in August 1999. To the extent that we spend more on
acquisitions or service development our need for additional financing will
increase. We have reached
23
agreements to raise $32.0 million in financing: $10.0 million from the sale of
preferred stock, $8.0 million of which has been received in January and February
1999, and $2.0 million of which is subject to registration of the stock $20.0
million in a long-term debt facility subject to stockholder approval and more
than $2.0 million of vendor financing. However, there is no assurance that we
will satisfy the conditions or receive the committed but unfunded financing. If
such Proposed Financing is not raised as expected, we will face a significant
and immediate need for additional funds. There can be no assurance that we will
be able to raise the necessary funds in a timely manner or on favorable terms.
Should we be unsuccessful in our efforts to raise additional capital, we will be
required to curtail our expansion plans. If we do not raise enough additional
capital to repay the term loan and interest by August 1999, there will be a
material adverse effect on our business and financial condition.
OUR CUSTOMERS CHANGED DURING 1998
In fiscal 1998, we added significant new card service revenue for the first
time in two years and shed a substantial portion of our existing card service
revenue. Several of our largest North American calling card services customers,
who accounted for approximately 40% of our revenues during the fiscal year ended
March 31, 1998, have substantially reduced their use of our services and can be
expected to end their use of our services in the near future. As a result, we
have experienced a decline in card service revenue. Although we have added new
customers for our card services, during the third quarter of 1998 and
subsequently, such customers have not yet generated revenues sufficient to
offset losses from existing customers. Our results of operations have been
negatively and significantly affected by this change. Any further such changes
could negatively and materially impact our business, financial condition and
results of operations.
RAPID TECHNOLOGICAL AND MARKET CHANGES CREATE SIGNIFICANT RISKS FOR US
The markets for our services are characterized by rapidly changing
technology, changes in customer needs, changes in cost structures, evolving
industry standards and frequent new service and product introductions. Our
future success will depend, in significant part, on our ability to develop and
introduce new services, to meet changing customer needs on a timely and
cost-effective basis, to remain competitive with products and services based on
new technologies, to modify our cost structure, to maintain cost-effective
services, and enhance our existing services. We may not be successful in
achieving these goals.
We, like others in our industry, believe it will be necessary to offer a
suite of enhanced business communications services, and that those companies
which do not offer acceptable services in a timely manner will not be able to
compete successfully. We may not be able to keep up with rapid technological and
market changes and we may not be able to offer acceptable new services in a
timely manner to be able to compete successfully. In addition, others may
develop services or technologies that will render our services or technology
noncompetitive or obsolete. Because the telecommunications services industry is
highly competitive and characterized by rapid technological advances, our
ability to realize our expectations will depend on:
o our success at enhancing our current offerings;
24
o our ability to develop new products and services that keep pace
with developments in technology;
o our ability to meet evolving customer requirements, especially
ease-of-use requirements;
o our ability to deliver those products through appropriate
distribution channels, and
o our ability to license technology from third parties.
This will require, among other things, that we:
o correctly anticipate customer needs and price our products
competitively;
o hire and retain personnel with the necessary skills and
creativity;
o provide adequate funding for development efforts, and
o manage distribution channels effectively.
Our competitive position and operating results could suffer if:
o we fail to anticipate or to respond adequately to customer
requirements or to technological developments, particularly those
of our competitors; and
o we delay the development, production, testing, marketing, or
availability of new or enhanced products or services, or
customers fail to accept such products or services.
COMPETITION MAY AFFECT OUR BUSINESS ADVERSELY
Our industry is intensely competitive and rapidly evolving. The
communications industry is dominated by companies much larger than us, with much
greater name recognition, larger customer bases and financial, personnel,
marketing, engineering, technical and other resources substantially greater than
ours. To the extent that these companies offer services similar to and priced
competitively with our services, there likely would be a negative effect on our
pricing and revenues, which in turn could have a material adverse effect on our
business, financial condition and results of operations. Our ability to succeed
will depend in part on such larger companies outsourcing to companies such as
ours services of the type we offer. In addition, several other companies have
offered or have announced intentions to offer enhanced communications services
similar to certain of the enhanced services we plan to offer. To the extent that
such entities are successful in offering superior services or introducing
credible service offerings before we do, we likely would be adversely affected
and such effects could be material. We expect new types of products and services
not yet
25
announced or available in the marketplace to be developed and introduced which
will compete with the services we offer today and plan to offer.
OUR BUSINESS DEPENDS ON CREATING AND MAINTAINING STRATEGIC RELATIONSHIPS
A principal element of our strategy is to maintain our existing, and create
new, strategic relationships with international carriers and others. These
relations enable or would enable us to offer additional services that we cannot
offer on our own and to offer our services to a larger customer base than we
could otherwise reach through our direct marketing efforts. We believe
international relationships and alliances are important in offering calling card
services and that such relationships will be even more important as providers
add new services. Our success depends in part on our ability to maintain and
develop such relationships, the quality of these relationships and the ability
of these strategic partners to market services effectively. Our failure to
maintain and develop such relationships or our strategic partners' failure to
market our services successfully could have a material adverse effect on our
business, financial condition and results of operations.
THERE ARE RISKS ASSOCIATED WITH THE RECENT IDX, UCI AND TELEKEY ACQUISITIONS,
AND WITH FUTURE ACQUISITIONS
We acquired IDX, an IP fax and voice company, in December 1998. As a result
of the IDX acquisition, we added 47 employees and two operating locations.
Although we have made changes to integrate IDX into our operations, to
assimilate the new employees and to implement reporting, monitoring and
forecasting procedures with respect to the former IDX businesses, we may have
difficulty implementing these steps. In addition, the continuing integration of
IDX into our operations may divert management attention from our existing
businesses and may result in additional administrative expense. We acquired IDX
subject to a variety of existing obligations. Moreover, in our due diligence
investigation of IDX, we may not have discovered all matters of a material
nature relating to IDX and its business.
We acquired UCI, a calling card services company, in December 1998, adding
one employee and one operating location. In February 1999, we acquired Telekey,
a calling card services company, adding eight employees and one operating
location. We are subject to the same risks with respect to the UCI acquisition
and the Telekey acquisition as described in the prior paragraph with respect to
the IDX acquisition.
As part of our business strategy, we will continue to evaluate strategic
acquisitions of businesses and to pursue joint ventures principally relating to
our current operations. These transactions commonly involve certain risks,
including, among others, that:
o we may experience difficulty in assimilating acquired operations,
services, products and personnel, which may divert our management's
attention from other business concerns;
o the acquisition may disrupt our ongoing business by placing
significant administrative, technical and financial demands on our
systems, procedures and controls;
26
o we may not be able to successfully incorporate acquired technology and
rights into our service offerings and maintain uniform standards,
controls, procedures, and policies;
o we may not be able to locate or acquire appropriate companies at
attractive prices;
o we may lack the necessary experience to enter new markets; and
o an acquisition may impair our relationships with employees and
customers as a result of changes in management.
We may not be successful in overcoming these risks or any other problems
encountered in connection with future transactions. Expected benefits from
future acquisitions, if any, may not be fully realized or realized within the
expected time frame, revenues following future acquisitions may be lower than
expected, and operating costs or customer loss and business disruption following
future acquisitions, if any, may be greater than expected, and costs or
difficulties related to the integration of the businesses, if any, that we may
acquire may be greater than expected.
The purchase price allocations for the acquisitions made to date are
preliminary pending resolution of certain purchase price elements. The recorded
goodwill associated with these acquisitions may materially increase when the
contingencies are resolved. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Notes 6 and 17 to the
Consolidated Financial Statements for additional discussion.
We believe that additional acquisitions may require additional capital
resources. Therefore, we may be required to borrow money, or otherwise obtain
financing, for future acquisitions. If we are unable to procure suitable
financing, we may be unable to complete desired acquisitions. In addition, a
transaction could materially adversely affect our operating results if we (1)
dilute our shareholders by issuing additional equity securities, (2) incur
additional debt, or (3) amortize acquisition or debt-related expenses for
goodwill and other intangible assets, and (4) write-off software development
costs.
WE WILL RELY ON IP TELEPHONY, THE REGULATION OF WHICH IS CHANGING AND UNCERTAIN
Since IP telephony is a recent market development, the regulation of IP
telephony is still evolving. A number of countries currently prohibit IP
telephony. Other countries permit but regulate IP telephony. In the U.S., the
FCC has stated that some forms of IP telephony appear to be similar to
traditional telephone services, but the FCC has not decided whether, or how, to
regulate providers of IP telephony. In addition, several efforts have been made
to enact U.S. federal legislation that would either regulate or exempt from
regulation services provided over the Internet. State public utility commissions
also may retain intrastate jurisdiction and could initiate proceedings to
regulate the intrastate aspects of IP telephony. If governments, prohibit or
regulate IP telephony, we could be subject to a variety of regulatory
requirements or penalties, including without limitation, orders to cease
operations or to limit future operations, loss of licenses or of license
opportunities, fines, seizure of equipment and, in certain jurisdictions,
criminal prosecution. The revenue and/or profit generated from Internet
telephony may have become a significant portion of our overall revenue and/or
profit at the time IP telephony is regulated and/or curtailed. Any of the
developments
27
described above could have a material adverse effect on our business, operating
results and financial condition.
WE HAVE SIGNIFICANTLY INCREASED OUR OUTSTANDING SHARES OF CAPITAL STOCK AND WE
MAY HAVE FURTHER DILUTION
During the past few months, we significantly increased the number of
outstanding shares of capital stock. As described below under the caption
"Certain Recent Developments," we issued Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock in connection with the IDX acquisition, the Telekey acquisition,
the settlement with Mr. Jensen and two financings. We also granted warrants to
providers of bridge loans, the former IDX stockholders and the investors in the
two financings. As a result, the number of shares of Common Stock on a
fully-diluted basis has increased from 17.8 million shares as of November 1,
1998 to 39.5 million shares as of April 9, 1999. (These figures exclude employee
and director options and assume conversion of all preferred stock, exercise of
all in the money options and warrants and full achievement of all earn out
provisions related to certain acquisitions have been achieved by companies
acquired as of April 9, 1999). This has resulted in a significant reduction in
the respective percentage interests of our Company held by our stockholders
(other than those purchasing additional stock in the recent financings). We
expect to issue additional shares of capital stock in connection with financing
agreements we have entered into (described above) and further financings,
acquisitions and joint ventures. We will be required under the terms of existing
agreements to issue additional stock if the market price of our Common Stock
does not equal $8.00 (subject to IDX meeting its performance objectives) by
December 1999 of $10.00 related to the stockholder litigation settlement by mid
2000.
WE DEPEND ON CARRIERS AND OTHERS FOR TRANSMISSION SERVICES
We do not own telecommunications transmission facilities and therefore
depend on telecommunications carriers for transmission. We generally procure
these long distance telecommunication services via strategic arrangements with
the carriers owning such facilities or more common commercial arrangements for
the supply of transmissions capacity. Our ability to make our business
profitable will depend, in part, on our ability to continue to obtain
transmission services on favorable terms. We believe that as providers add new
and enhanced communications services, cost will be a key reason for
distinguishing between services. Accordingly, we will need to keep reducing our
transmission costs and pursue low cost alternative routing technologies. Failure
to obtain transmission services at favorable rates could result in losses on
particular services or over particular routes, and could lead to a loss of
customers, which could have a material adverse effect on our business, financial
condition and results of operations.
WE ARE EXPOSED TO THE ASIAN ECONOMIC CRISIS
The continuing economic crisis in Asia has had a negative impact on our
revenues and prospects with Asian customers. Since we expect the IDX acquisition
to contribute significantly to our revenues, because IDX sells its services in
large part to Asian customers, our financial results will be tied more closely
to the Asian economic situation. While we expect demand in Asia to increase as
the affected economies recover, we do not know when and if this recovery will
occur. The problems
28
in Asia could dampen demand for our services, including those provided by IDX,
which could result in a significant adverse impact on our financial condition
and results of operations.
WE HAVE ONLY LIMITED PROTECTION OF PROPRIETARY RIGHTS AND TECHNOLOGY AND ARE
EXPOSED TO RISKS OF INFRINGEMENT CLAIMS
We rely primarily on a combination of intellectual property laws and
contractual provisions to protect our proprietary rights and technology.
However, these laws and contractual provisions provide only limited protection.
Unauthorized parties may copy our technology, reverse engineer our software or
otherwise obtain and use information we consider proprietary. In addition, the
laws of some foreign countries do not protect our proprietary rights to the same
extent as the laws of the U.S. Our means of protecting our proprietary rights
and technology may not be adequate. In addition, it is likely that our
competitors will independently develop similar technology and that we will not
have any rights under existing laws to prevent the introduction or use of such
technology.
Many patents, copyrights and trademarks have been issued in the
telecommunication service area. We believe that in the ordinary course of our
business third parties may claim that our current or future products or services
infringe the patent, copyright or trademark rights of such third parties. We
cannot ensure that actions or claims alleging patent, copyright or trademark
infringement will not be brought against us, or that, if such actions are
brought, we will ultimately prevail. Any such claims, regardless of their merit,
could be time consuming, result in costly litigation, cause delays in
introducing new or improved products or services, require us to enter into
royalty or licensing agreements, or cause us to stop using the challenged
technology, trade name or service mark at potentially significant expense to us.
If our key technology is found to infringe the intellectual property rights of
others, it could have a material adverse effect on our business, financial
condition and results of operations.
OUR OPERATING PLATFORMS AND SYSTEMS MAY FAIL OR BE CHANGED, EXPOSING OUR
BUSINESS TO DOWNTIME
Our operations depend upon protecting and maintaining our operating
platforms and central processing center against damage, technical failures,
unauthorized intrusion, natural disasters, sabotage and similar events. We have
taken certain precautions to protect ourselves and our customers from events
that could interrupt delivery of our services. However, we cannot ensure that an
event would not cause the failure of one or more of our communications platforms
or even our entire network. Such an interruption could have a material adverse
effect on our business, financial condition and results of operations.
Our operating platforms and networks are vulnerable to computer viruses or
similar disruptive problems caused by our customers or their customers. Computer
viruses or problems caused by third parties could lead to interruptions, delays,
or cessation in service to our customers. Third parties could also potentially
jeopardize the security of confidential information stored in our computer
systems or our customers' computer systems, which could cause losses to us or
our customers or deter some from subscribing to our services. Although we intend
to continue to implement security measures to prevent unauthorized access to
information or systems, "hackers" have circumvented such measures in the past,
and others may be able to circumvent our security measures or the security
measures of our third-party providers in the future. To alleviate problems
caused by computer viruses
29
or other inappropriate uses or security breaches, we may have to interrupt,
delay or cease service to our customers, which could have a material adverse
effect on our business, financial condition, and results of operations. In
addition, customers or others may assert claims of liability against us as a
result of any such interruption.
WE DEPEND ON KEY MANAGEMENT AND PERSONNEL
Our success depends upon the continued efforts of our senior management
team and our technical, marketing and sales personnel. We believe our continued
success will depend to a significant extent upon the efforts and abilities of
Christopher J. Vizas, our Chairman and Chief Executive Officer (who joined us in
December 1997), and certain other key executives. Mr. Vizas has entered into an
employment agreement, which expires on December 5, 2000. We also believe that to
be successful we must hire and retain highly qualified engineering personnel. In
particular, we rely on certain key employees to design and develop our
proprietary operating platforms and related software, systems and services.
Competition in the recruitment of highly qualified personnel in the
telecommunications services industry is intense. Hiring employees with the
skills and attributes required to carry out our strategy can be extremely
competitive and time-consuming. We may not be able to retain or successfully
integrate existing personnel or identify and hire additional qualified
personnel. If we lose the services of key personnel or are unable to attract
additional qualified personnel, our business could be materially and adversely
affected. We do not have key-man life insurance.
FAILURE TO OBTAIN YEAR 2000 COMPLIANCE MAY HAVE ADVERSE EFFECTS ON US
We are aware of the issues associated with the programming code in existing
computer systems as the year 2000 approaches. The "Year 2000 Issue" or "Y2K
Issue" arises because many computer and hardware systems use only two digits to
represent the year. As a result, these systems and programs may not process
dates beyond the year 1999, which may cause errors in information or system
failures. Assessments of the potential effects of the Y2K issue vary markedly
among different companies, governments, consultants, economists and
commentators, and it is not possible to predict what the actual impact may be.
Because we use Unix-based systems for our platforms and operating systems to
deliver service to customers, we believe material modifications may not be
required to ensure Y2K compliance. However, we are in the process of assessing
and testing the software resident on all our system hardware to validate this
assertion and anticipate that testing will be completed by June 1999. We are in
various stages of our analysis, assessment, planning and remediation and are
using internal and external resources to identify, correct or reprogram, and
test the computer system for Y2K compliance. We anticipate completing all
reprogramming efforts, including testing, by June 1999. Management is continuing
to update and evaluate the financial impact of Y2K compliance and expects that
total costs will not exceed $1.0 million. We are proceeding with an internal
certification process of our propriety systems (e.g. operating platforms and
billing systems). We intend to use external sources as necessary to validate our
certification of these critical systems. No material costs have been incurred
during the nine month period ended December 31, 1998 and management estimates
that we will incur most of the costs during 1999.
To operate our business, we rely upon providers of telecommunications
services, Internet services, government agencies, utility companies and other
third party providers ("External
30
Providers"). We are also assessing the Year 2000 readiness of our key External
Providers, and customers. We undertook this project to assure ourselves that we
would have adequate resources to cover our various telecommunications
requirements. The failure of our External Providers or customers to address
adequately their Year 2000 readiness could affect our business adversely. As
part of our contingency planning efforts, we will identify alternative sources
or strategies where necessary. In addition, we are aware of the potential for
claims against us for damages arising from products and services that are not
Year 2000 ready. We believe that such claims against us would be without merit.
Finally, the Year 2000 presents a number of risks and uncertainties that could
affect us, including utilities failures, competition for personnel skilled in
the resolution of Year 2000 issues and the nature of government responses to the
issues, among others. Our expectations as to the extent and timeliness of
modifications required to achieve Year 2000 compliance is a forward-looking
statement subject to risks and uncertainties. Actual results may vary materially
as a result of a number of factors, including, among others, those described in
this paragraph. We may not be able to successfully modify on a timely basis such
products, services and systems to comply with Year 2000 requirements, the
failure of which could have a material adverse effect on our operating results.
A significant portion of our business is conducted outside of the U. S.
External Providers located outside of the U. S. may face significantly more
severe Year 2000 issues than similar entities located in the U. S.. If such
External Providers located outside the United States are unable to rectify their
Year 2000 issues, we may be unable to effectively conduct portions of our
business, which could result in a material adverse effect on our financial
condition and results of operations.
Our worst-case Year 2000 scenarios would include: (i) undetected errors or
uncorrected defects in our current product offerings; (ii) corruption of data
contained in our internal information systems; and (iii) the failure of
infrastructure services provided by External Providers. We are in the process of
reviewing our contingency planning in all of these areas and expect the plans to
include, among other things, the availability of support personnel to assist
with customer support issues, manual "work arounds" for internal software
failure, and substitution of systems, if needed. We anticipate that the Company
will have a contingency plan in place by June, 1999.
OUR BUSINESS IS EXPOSED TO THE RISKS ASSOCIATED WITH INTERNATIONAL BUSINESS
We conduct a significant portion of our business outside the U. S. and
accordingly, derive a portion of our revenues and accrue expenses in foreign
currencies. Accordingly, our results of operations may be materially affected by
international events and fluctuations in foreign currencies. We do not employ
foreign currency controls or other financial hedging instruments.
Our international operations and business expansion plans are also subject to a
variety of government regulations, currency fluctuations, political
uncertainties and differences in business practices, staffing and managing
foreign operations, longer collection cycles in certain areas, potential changes
in tax laws, and greater difficulty in protecting intellectual property rights.
Governments may adopt regulations or take other actions, including raising
tariffs, that would have a direct or indirect adverse impact on our business
opportunities within such governments' countries. Furthermore, from time to
time, the political, cultural and economic climate in various national markets
and regions of the world may not be favorable to our operations and growth
strategy.
31
OUR BUSINESS IS SUBJECT TO REGULATORY RISKS
Though we do not own telecommunications transmission facilities, but
instead use the facilities of other carriers, we are subject to regulation in
many jurisdictions.
U. S. Federal Regulation. Under current FCC policy, telecommunications
carriers reselling the services of other carriers and not owning their own
telecommunications transmission facilities are considered non-dominant and, as a
result, are subject to streamlined regulation. We must have an authorization
from the FCC to provide international services, and must file tariffs at the FCC
setting forth the terms and conditions under which we provide both international
and domestic services. These and other regulatory requirements impose a
relatively minimal burden on us at the present time. However, we cannot ensure
that the current US regulatory environment and the present level of FCC
regulation will continue, or that we will continue to be considered
non-dominant.
Other Government Regulation. In most countries where we operate, equipment
cannot be connected to the telephone network without appropriate approvals, and
therefore, we must obtain such approval to install and operate our operating
platforms or other equipment. In most jurisdictions where we conduct business we
rely on our local partner to obtain the requisite authority. Relying on local
partners causes us to depend entirely upon the cooperation of the telephone
utilities with which we have made arrangements for our authority to conduct
business, as well as operational and certain of our administrative requirements.
Any telephone utility could cease to accommodate our requirements at any time.
Depending upon the location of the telephone utility, such action could have a
material adverse effect on our business and prospects. Such relationships may
not continue and governmental authorities may seek to regulate our services or
require us to obtain a license to conduct our business.
ACCOMMODATING THE EURO COULD IMPACT OUR BUSINESS
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and the euro, making the euro their common legal currency on that
date. There will be a transition period between January 1, 1999 and January 1,
2002, during which the old currencies will remain legal tender in the
participating countries as denominations of the euro. During the transition
period, public and private parties may pay for goods and services using either
the euro or the participating country's former currency on a no compulsion, no
prohibition basis. Conversion rates, however, will no longer be computed
directly from one former currency to another. Instead, a triangular process will
apply whereby an amount denominated in one former currency will first be
converted into the euro. The resultant euro-denominated amount will then be
converted into the second former currency. At this time, we do not believe that
the euro's introduction will have a material impact on our business during the
transition period, but we cannot accurately predict the impact on our business.
OUR STOCK PRICE WILL FLUCTUATE, AND COULD FLUCTUATE SIGNIFICANTLY
Market prices for securities of telecommunications services companies have
generally been volatile. Since our common stock has been publicly traded, the
market price of our common stock has fluctuated over a wide range and may
continue to do so in the future. The market price of our
32
common stock could be subject to significant fluctuations in response to various
factors and events, including, among other things:
o the depth and liquidity of the trading market for our common stock;
o quarterly variations in actual or anticipated operating results;
o growth rates;
o changes in estimates by analysts;
o market conditions in the industry;
o announcements by competitors;
o regulatory actions; and
o general economic conditions.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations, which have particularly affected the market
prices of the stocks of high-technology companies and which may be unrelated to
the operating performance of particular companies. Furthermore, our operating
results and prospects from time to time may be below the expectations of public
market analysts and investors. Any such event could result in a decline in the
price of our common stock.
WE HAVE ADOPTED CERTAIN ANTI-TAKEOVER PROVISIONS
We have adopted a rights plan and have entered into a stockholder rights
agreement dated February 27, 1997 between ourselves and American Stock Transfer
& Trust Company, as rights agent (the "Rights Agreement"). The Rights Agreement
provides for issuing rights (the "Rights") for each share of common stock
outstanding on February 28, 1997. Each Right represents the right to purchase
one one-hundredth of a share of our Series A Participating Preferred Stock (the
"Series A Preferred Stock") at a price of $70 per one-hundredth of a share of
Series A Preferred Stock, subject to adjustment. All shares of common stock we
issued between the date of adoption of the Rights Agreement and the distribution
date (as defined in the Rights Agreement) or, the date, if any, on which the
Rights are redeemed will have Rights attached to them. The Rights become
exercisable upon the occurrence of certain defined change of control triggering
events. The Rights will have certain anti-takeover effects as they will cause
substantial dilution to a person or group that acquires a substantial interest
in us without the prior approval of our Board of Directors. The effect of the
Rights may be to inhibit a change in control in our business (including a third
party tender offer at a price which reflects a premium to then prevailing
trading prices) that may be beneficial to our stockholders.
Our restated certificate of incorporation allows our Board of Directors to
issue up to five million shares of preferred stock and to fix the rights,
privileges and preferences of those shares without any further vote or action by
the stockholders. The rights of the holders of the common stock
33
will be subject to, and may be adversely affected by, the rights of the holders
of any shares of preferred stock that we may issue in the future. Any issuances
of preferred stock in the future could have the effect of making it more
difficult for a third party to acquire a majority of our outstanding voting
stock. In addition, we are subject to certain anti-takeover provisions of the
Delaware General Business Corporation Law, which could have the effect of
discouraging, delaying or preventing a change of control.
WE ANTICIPATE THAT WE WILL NOT PAY CASH DIVIDENDS
We have not declared or paid cash dividends on our common stock since
August 1996 when we declared a stock split which we effected in the form of a
ten percent (10%) stock dividend. We currently intend to retain any future
earnings to finance growth and therefore we do not anticipate paying cash
dividends in the foreseeable future. In addition, our payment of cash dividends
is currently subject to certain restrictions under the terms of the Series D
Preferred Stock and the Series E Preferred Stock.
ITEM 2 - PROPERTIES
- - --------------------------------------------------------------------------------
The land and building occupied by the Company at 4260 East Evans Avenue,
Denver, Colorado, consisting of approximately 14,000 sq. ft., was purchased in
December 1992. The Company rents office space at the following locations:
Tarrytown, New York; Paris, France; Brussels, Belgium; Nyon, Switzerland; Hong
Kong, H.K.; Silkeborg, Denmark; Godalming, United Kingdom; Washington, D.C.;
Reston, Virginia; Atlanta, Georgia; Taipai, Taiwan; and Limassol, Cyprus. The
Company believes that its facilities are adequate for operations for the coming
year.
ITEM 3 - 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.
The Company, its former auditors, certain of its present and former
directors and others are defendants in a consolidated securities law class
action, which alleges that certain public filings and reports made by us
including our Forms 10-K for the 1991, 1992, 1993 and 1994 fiscal years (i) did
not present fairly the financial condition of the Company and its earnings; and
(ii) failed to disclose the role of Richard Bertoli as a consultant to the
Company.
34
On April 2, 1998 the parties entered into a formal settlement agreement.
Pursuant to the settlement agreement the plaintiffs agreed to release the
Company and the other defendants from all obligation or liability and we agreed,
on behalf of the Company and the other defendants, to deliver to a settlement
administrator a total of 350,000 shares of our Common Stock and to pay the
settlement administrator up to $50,000 in actual reasonable charges and expenses
incurred in connection with providing notice to the expenses incurred in
connection with providing notice to the plaintiffs and administering the
settlement. A charge of $3.5 million was recorded in the fourth quarter of the
year ended March 31, 1998 and represents the value assigned to the 350,000
shares of Common Stock referred to above, which have been valued at a maximum
possible value of $10.00 per share pursuant to the terms of the settlement
agreement. Such value relates to our obligation to issue additional stock or
cash if the market price of our stock is less than $10.00 per share during the
relevant periods, as defined. We have obligation to issue additional stock if
our share price is above $10.00 per share for fifteen consecutive days during
the two year period after all shares have been distributed to the class. The
settlement is subject to Court approval. The shares of the Company's Common
Stock have been issued. The actions have gone to final judgment and all appeal
periods have expired.
CSI CORP. V. EXECUTIVE TELECARD, LTD., CASE NO. 98 CV 8329, DIV./CTRM. 7,
DISTRICT COURT, CITY AND COUNTY OF DENVER, STATE OF COLORADO
We are a defendant in an action brought by a Colorado reseller of
transmission services, October 28, 1998. The lawsuit arises out of a transaction
wherein the plaintiff and we contemplate forming a limited liability company for
purposes of developing sales opportunities generated by the plaintiff. We and
the plaintiff were unable to arrive at a definitive agreement on their
arrangement and the plaintiff sued, claiming breach of a noncircumvention
agreement. Discovery has not commenced as yet, litigation is in its early
stages, and therefore, an additional opinion cannot be given at the present
time. We believe this claim is without merit and plans to defend this action
vigorously.
ROBERT N. SCHUCK V. EXECUTIVE TELECARD, LTD., CASE NO. 98 CIV. 5037, U.S.D.C.,
S.D.N.Y.
A former officer of the Company who was terminated in the fall of 1997 filed
suit against the Company in July 1998. The executive entered into a termination
agreement. We made the determination that there were items which the executive
failed to disclose to the Company and therefore we ceased making payments to the
executive pending further investigation. The executive sued, claiming employment
benefits including expenses, vacation pay and rights to options. The parties
have agreed in principle, to a settlement, which is being documented presently.
In the event that settlement does not go froward, we are defending this action
and believe that, ultimately, we will prevail.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - --------------------------------------------------------------------------------
None.
35
Executive TeleCard, Ltd.
d/b/a eGlobe
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
- - --------------------------------------------------------------------------------
A. MARKET INFORMATION
Our common stock has traded on the Nasdaq National Market under the symbol
"EXTL" from December 1, 1989 through September 18, 1998 and since that date
under the symbol "EGLO".
The following table reflects the high and low prices reported on the Nasdaq
National Market for each quarter of the fiscal year ended March 31, 1998.
High Low
---- ---
Quarter Ended June 30, 1997 $ 9 1/4 $ 4 1/2
Quarter Ended September 30, 1997 8 3/4 3 1/4
Quarter Ended December 31, 1997 4 1 19/32
Quarter Ended March 31, 1998 4 19/32 2 1/4
The following table reflects the high and low prices reported on the Nasdaq
National Market for each quarter of the nine month period ended December 31,
1998 and the quarter ended March 31, 1999.
High Low
---- ---
Quarter Ended June 30, 1998 $ 4 1/4 $ 2 1/32
Quarter Ended September 30, 1998 3 9/16 1 9/16
Quarter Ended December 31, 1998 2 1/2 1 1/4
Quarter Ended March 31, 1999 3 5/16 11/2
On April 13, 1999 the last reported sale price of our common stock on the
NASDQ National market was $4.50 per share.
B. RECENT SALES OF UNREGISTERED SECURITIES
During the nine month period ended December 31, 1998, we offered and sold
the following equity securities that were not registered under the Securities
Act:
(1) On June 18, 1998, we issued to an existing stockholder in connection
with his $1.0 million loan to the Company warrants to purchase 67,000 shares of
our Common Stock at an exercise price of $3.03125 per share, and we repriced to
$3.75 and extended existing warrants for 55,000 shares of Common Stock.
Subsequent to December 31, 1998 the exercise price of the 122,000
36
warrants was lowered to $1.5125 per share and the expiration dates were extended
through January 31, 2002.
(2) On September 1, 1998, we issued a warrant to purchase 25,000 shares of
our Common Stock at an exercise price of $2.00 per share to a private investor
in connection with his $250,000 loan to a subsidiary of ours. The warrant is
exercisable at any time until September 1, 2003. We advanced the proceeds to a
software company for development of unified messaging software. We are
negotiating a joint venture arrangement whereby we will share 50% ownership
interest of certain software technology related to commercial development of
messaging technology. See note 17 to the Consolidated Financial Statements for
further discussion.
(3) On September 2, 1998, we issued a warrant to purchase 2,500 shares of
our Common Stock at an exercise price of $2.00 per share to an investment firm
in exchange for services rendered to us. The warrant is exercisable at anytime
until September 1, 2003
(4) On December 2, 1998, we issued (a) 500,000 shares of the Series B
Preferred Stock, which are convertible into up to 2,500,000 shares (2,000,000
shares until stockholder approval is obtained) of Common Stock, subject to
adjustment as described below, (b) the IDX Warrants, subject to IDX's
achievement of certain revenue and EBITDA objectives, at an exercise price of
$.001 per share, if shareholder approval is obtained, and (c) $5.4 million which
amount is subject to decrease, in interest bearing Convertible Subordinated
Promissory Notes in exchange for all of the stock of IDX.
The shares of Series B Preferred Stock are convertible into up to 2,500,000
shares of Common Stock (2,000,000 shares until stockholder approval is
obtained), subject to adjustment as described below. The shares of Series B
Preferred Stock are convertible at the holders' option at any time at the then
current conversion rate. The shares of Series B Preferred Stock will
automatically convert into shares of Common Stock on the earlier to occur of (a)
the first date that the 15 day average closing sales price of Common Stock is
equal to or greater than $8.00 or (b) 30 days after the later to occur of (i)
December 2, 1999 or (ii) the receipt of any necessary stockholder approval
relating to the issuance of the Common Stock upon such conversion. We have
guaranteed a price of $8.00 per share on December 2, 1999, subject to IDX's
achievement of certain revenue and EBITDA objectives. If the market price of the
Common Stock is less than $8.00 on December 2, 1999 and IDX has met its
objectives, we will issue additional shares of Common Stock upon conversion of
the Series B Preferred Stock (subject to the receipt of any necessary
stockholder approval) based on the ratio of $8.00 to the market price (as
defined, but not less than $3.3333 per share), but not more than 3.5 million
additional shares of Common Stock.
The IDX Warrants are exercisable only to the extent that IDX (which is managed
by the former IDX executives for the "earn-out" period) achieves certain revenue
and EBITDA goals over the twelve months following the merger closing date and if
stockholder approval is obtained. We have guaranteed a price of $8.00 per share
on December 2, 1999, subject to IDX's achievement of certain revenue and EBITDA
objectives. If the market price of the Common Stock is less than $8.00 on
December 2, 1999, we will issue additional shares of Common Stock upon exercise
of the IDX Warrants based on the ratio of $8.00 to the market price (but not
less than $3.3333 per share), up to a maximum of 3.5 million additional shares
of Common Stock.
37
The Convertible Subordinated Promissory Notes are due in four installments
(the first of which was paid in stock in March 1999) through October 30, 1999.
If we fail to meet any of the three maturity dates, the matured balance of the
Convertible Subordinated Promissory Notes will begin to accrue default interest
at the rate of LIBOR plus 400 basis points until repaid and we will issue the
former IDX stockholders warrants to purchase shares of Common Stock equal to ten
percent (10%) of the matured balance, including interest. In lieu of paying the
matured balance in cash, we may elect, in our sole discretion, to convert all or
part of the matured balance into shares of Common Stock.
(5) On November 18, 1998, we agreed with Mr. Jensen to exchange his holding
of 1,425,000 shares of Common Stock for 75 shares of Series C Preferred Stock
convertible into 1,875,000 shares of Common Stock at such date based on the
terms of the Series C Preferred Stock. On February 16, 1999, we agreed to
exchange the Series C Preferred Stock for 3,000,000 shares of our Common Stock.
(6) On December 31, 1998, we issued an aggregate of 62,500 shares of our
Common Stock and a warrant to purchase 50,000 shares of our Common Stock at an
exercise price of $1.63 per share along with other consideration of $2.1
million, $1.1 million subject to adjustment, in exchange for all of the stock of
UCI. In addition, we agreed to issue an additional 62,500 shares of Common Stock
on February 1, 2000 subject to adjustment based on UCI meeting certain revenue
targets. We also agreed to issue additional shares of Common Stock if the market
price of our Common Stock on February 1, 2000 is less than $8.00 per share
subject to adjustment based on UCI meeting its revenue targets.
See "Executive Compensation" for information regarding the grant of options
to purchase shares of Common Stock to some of our employees under our 1995
Employee Stock Option and Appreciation Rights Plan as partial consideration for
the execution of employment, confidentiality and non-competition agreements and
to our directors under the Director Stock Option Plan as consideration for
services provided.
Each issuance of securities described above was made in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act or
Regulation D promulgated thereunder for transactions by an issuer not involving
any public offering. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for distribution in connection with such transactions. All
recipients had adequate access to information about us through their
relationship with us or through information about us made available to them.
C. HOLDERS
The approximate number of holders of our common stock as of March 31, 1999
was in excess of 4,300 record and beneficial owners.
38
D. DIVIDENDS
We have not paid or declared any cash dividends on our common stock since
our inception and anticipate not paying any cash dividends on our common stock
in the near future. In addition, our payment of cash dividends is currently
subject to certain restrictions under the terms of the Series D Preferred Stock
and the Series E Preferred Stock. We declared a ten percent (10%) common stock
split, effected in the form of a stock dividend, on June 30, 1995 and
distributed on August 25, 1995 to stockholders of record as of August 10, 1995.
On May 21, 1996 we declared another ten percent (10%) stock dividend.
Stockholders of record as of June 14, 1996 received the dividend on August 5,
1996.
Balance of this page intentionally left blank.
39
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL INFORMATION
- - --------------------------------------------------------------------------------
The following is a summary of selected consolidated financial data of
eGlobe as of and for the five most recent fiscal periods ended. This data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our Consolidated Financial Statements
and the Notes thereto appearing elsewhere in this document. Effective with the
period ended December 31, 1998, the Company elected to convert to a December 31
fiscal year end. Therefore, the period ended December 31, 1998 represents a
nine-month period as compared to the twelve-month fiscal years ended March 31,
1998, 1997, 1996 and 1995.
FOR THE NINE MONTH
PERIOD ENDED DECEMBER FOR THE YEARS
31, ENDED
(3) (4) MARCH 31,
-----------------------------------------------------------------------------------------
1998 1998 1997 1996 1995
STATEMENT OF OPERATIONS:
Net Revenues $ 22,490,642 $ 33,122,767 $ 33,994,375 $ 30,298,228 $ 22,980,726
Income (Loss) from Operations (5,939,633) (5,700,424) 2,423,564 3,097,009 (292,307)
Other Income (Expense) (1,150,559) (5,949,486) (1,401,612) 69,843 (4,324,193)
Net Income (Loss) (7,090,192) (13,289,910) 773,952 2,852,852 (4,616,500)
Net Earnings (Loss) per
Common Share: (1)(2)
Basic $ (0.40) $ (0.78) $ 0.05 $ 0.18 $ (0.30)
Diluted $ (0.40) $ (0.78) $ 0.05 $ 0.18 $ (0.30)
AS OF AS OF
DECEMBER 31, MARCH 31,
-----------------------------------------------------------------------------------------
1998 1998 1997 1996 1995
BALANCE SHEET:
Cash and Cash Equivalents $ 1,407,131 $ 2,391,206 $ 2,172,480 $ 950,483 $ 1,734,232
Total Assets 36,388,161 22,900,456 23,679,686 16,732,074 12,943,044
Long-Term Obligations 1,237,344 7,735,581 9,737,007 2,150,649 671,774
Total Liabilities 31,045,443 15,779,696 15,720,414 9,692,065 9,023,293
Total Stockholders' Equity 5,342,718 7,120,760 7,959,272 7,040,009 3,919,751
(1) Based on the weighted average number of shares outstanding during the
period.
(2) The weighted average number of shares outstanding during the periods
has been adjusted to reflect two ten percent (10%) stock splits,
effected in the form of stock dividends and distributed August 25,
1995 and August 5, 1996.
(3) Includes the December 2, 1998 acquisition of IDX for which the Company
acquired all of the common and preferred stock of IDX. See Note 6 to
the Consolidated Financial Statements.
(4) Includes the December 31, 1998 acquisition of UCI.. See Note 6 to the
Consolidated Financial Statements.
40
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- - --------------------------------------------------------------------------------
GENERAL
In 1998, the Company changed its fiscal year end from March 31 to December 31.
This change reflects some of the more fundamental changes instituted by
management.
The business of the Company is to provide services to large telecommunications
companies, primarily to telephone companies which are dominant in their national
market, and to specialized telephone companies and to Internet Service Providers
("ISP's") as well. The services of the Company enable its customers to provide
global reach for "enhanced" or "value added" services that they are supplying,
in turn, to their end user customers. Prior to 1998, the entire focus was on
supporting calling card services. In 1998 that focus began to change.
Taking advantage of the key assets of the Company - its operating platforms in
more than forty countries, its ability to originate telephone calls (and in many
cases, provide data access) in more than 90 countries and territories, and the
customer and operating relationships built over the years - management started
working with customers to extend the line of services. A key part of that
extension was the recognition that "IP" (Internet Protocol technologies) had
become a basic element of the Company's business and a principal need of its
customers- even the card services business relies on IP software and services in
its billing and operating functions. To support the extension of services, the
Company acquired IDX, as discussed below, with its IP voice and fax capabilities
and made significant investments in unified messaging software. In addition, the
Company began exploring ways to integrate other services into its operating
platforms, including additional acquisitions which might complement current
offerings or extend the Company's portfolio of services.
After a year of restructuring and refocus, the Company is implementing its new,
broader services strategy and leaves 1998 committed to a program of growth. This
program will demand substantial new resources, particularly human resources and
cash. For these reasons, in the first quarter of 1999 the Company raised $10
million from the sale of equity, arranged a $20 million debt facility from an
affiliate of a major stockholder, entered into a key vendor financing
arrangement and plans to raise substantial amounts of additional capital during
the next two years. Growth in international telecommunications business often
results in a disparity between cash outlays and inflows during periods of
growth, with outlays far exceeding inflows. The Company has entered such a
period of growth.
Management expects to invest in growth. Cash will be the key element of that
investment - whether it takes the form of recruiting personnel, acquiring
technology, expanding facilities, or extending the business base through
marketing or acquisitions. In 1998, the Company made two principal investments
in growth - the acquisition of IDX and the investment in, and the acquisition of
a technology license for, unified messaging technology.
On December 2, 1998, the Company acquired IDX International, Inc. ("IDX")
which provides IP (Internet Protocol) voice and fax transmission services,
principally to telephone companies and ISP's. The Company acquired all of the
common and preferred stock of IDX for (a) 500,000 shares of Series B Convertible
Preferred Stock valued at $3.5 million which is convertible into a maximum of
2,500,000 shares (2,000,000 shares until stockholder approval is obtained) of
common stock; (b) warrants to purchase up to an additional 2,500,000 shares of
common stock
41
(subject to stockholder approval and to IDX meeting "earnout" objectives
described below); (c) $5.4 million in 7.75% convertible subordinated promissory
notes ("IDX Notes") (subject to adjustment as described below); (d) $1.5 million
in bridge loan advances to IDX made by the Company prior the acquisition which
were converted into part of the purchase price plus accrued interest charges of
$0.04 million and (e) direct costs associated with the acquisition of $0.4
million. The Company plans to include the requests for the approval of the
warrants and additional stock as matters to be voted upon by the stockholders at
the next annual meeting. The acquisition has been accounted for under the
purchase method of accounting. The financial statements of the Company reflect
the preliminary allocation of the purchase price. The preliminary allocation has
resulted in acquired goodwill of $10.9 million, which is being amortized on a
straight-line basis over seven years. The allocation has not been finalized due
to several purchase price elements which are contingent upon working capital
levels, stockholder approvals subsequent to the date of acquisition, IDX's
ability to achieve certain revenue and EBITDA objectives twelve months after the
date of close and the stock price of the Company's common stock during the same
twelve month period. Based on the contingent price elements discussed above,
goodwill associated with the acquisition may materially increase when these
contingencies are resolved. (See Note 6 to the Consolidated Financial Statements
for further discussion).
The consolidated revenues and costs for the period ended December 31, 1998
included the IDX results of operations for the month of December which are not
material to the consolidated financial statements. For the fiscal year ending
December 31, 1999, however, the Company expects the IDX services to become a
significant source of revenue growth.
The Company made a cash investment of more than $1 million in unified
messaging technology in the nine months ended December 31, 1998. Most of those
funds consisted of advances to a software based service company in which the
Company is considering making a joint venture investment. For the investment,
the Company received a technology license and has participated in the
development and beta testing of the core software. The Company is preparing to
launch a new service in cooperation with some of its existing customers based on
this technology. While the Company does not expect significant revenues or
returns from this investment in 1999, it believes that IP and voice services
based on this technology will become a significant portion of its business in
2000 and beyond. For this reason, management plans to continue its investment in
this software in 1999 and may enter into a joint venture arrangement which will
give it a greater voice in the further development of the software.
Revenue. Through December 31, 1998, most of the revenue of the Company
resulted from providing services and was generated through contracts for card
services, the sale of international toll free services, and to a limited degree,
by use of the Company's legacy proprietary calling cards. The charge for service
is on a per call basis, determined primarily by minutes of use and the
originating and terminating points of the call. The charging structure for IDX
is substantially similar. Some contracts call for monthly minimums and almost
all contracts are multi-year agreements. As the Company begins to provide new
services, it expects its model for charging for services to remain basically the
same, although in certain new offerings, such as unified messaging, there are
likely to be basic monthly subscriber charges in addition to per transaction
charges. In prior years, the Company generated revenue from other sources,
generally sales of billing and platform systems and nonrecurring special
projects.
42
Costs. The principal component of the cost of revenue for card services and
IP voice and fax services is transmission costs. The Company continues to pursue
strategies for reducing costs of transmission. These strategies include
establishing partnering arrangements with various carriers, negotiating more
cost-effective agreements with other carriers and routing traffic to the
lowest-cost, highest quality providers. Also, in fiscal year 1999 and
thereafter, the strategy will include cost effective provisioning of the
Company's own IP trunks.
Other components of operating costs are selling, general and administrative
expenses, which include personnel costs, consulting and legal fees, travel
expenses, bad debt allowances and other administrative expenses. Depreciation
and amortization expense includes the allocation of the cost of transmission
equipment, property and office equipment, and various intangible assets,
principally goodwill arising from several recent acquisitions, over their useful
lives.
RESULTS OF OPERATIONS
NINE MONTH PERIOD ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED MARCH 31, 1998
Overview. The Company incurred a net loss of $7.1 million for the nine
month period ended December 31, 1998 compared to a net loss of $13.3 million for
the year ended March 31, 1998. The table below shows a comparative summary of
certain significant charges to income in both periods, some of which are
nonrecurring, which affected net operating results:
(in millions)
Nine month period ended Year Ended March
December 31, 1998 31, 1998
-------------------------------------------------------------
Corporate realignment costs $ - $ 3.1
Proxy-related litigation settlement costs 0.1 3.9
Settlement costs 1.0 -
Additional income tax provision - 1.5
Allowance and write-offs for bad debts 0.8 1.4
Warrants associated with debt 0.6 0.5
Other items 0.4 0.6
----- ------
$ 2.9 $ 11.0
===== ======
After deducting these items, the loss for the nine month period ended
December 31, 1998 totaled $4.2 million compared to $2.3 million for the full
year ended March 31, 1998.
The principal factors in the loss for the nine month period are: (1)
reduction in business arrangements, including the termination of contracts or
business arrangements which did not fit with the focus of the Company; (2)
reduction in prices to provide more competitive offerings; (3) more aggressive
collection efforts, including demands for timely payments from customers with
outstanding delinquent accounts, which resulted in a substantial decline in
revenues from what had
43
formerly been the largest customer of the Company; (4) a continuing decline in
revenue from non-core, but large, North American customers; (5) the inclusion of
revenue from a major card service contract which, in the first phase of this
contract in the fourth calendar quarter of 1998, was billed largely on a cost
reimbursable basis; and (6) continued weakness in our Asian customer base during
the entire nine month period. The negative effect of these factors on gross
profit contribution is estimated to be $2.2 million for the nine month period
ended December 31, 1998.
Management has taken steps to reverse this trend through the expansion of
its service offerings to its existing customers, expansion of the customer base
through revamped sales and marketing and through acquisitions. Management
believes that these steps will result in significant revenue growth throughout
1999 and an improvement in margins beginning in the second and third quarters of
1999.
Revenue. Revenue for the nine month period ended December 31, 1998 totaled
$22.5 million compared to $33.1 million for the full year ended March 31, 1998.
Of this total, $18.6 million was derived from the card services customer base
with which the Company began the period (the "legacy customer base"). For the
six months ended September 30, 1998, revenue from our legacy calling card
customer base averaged $7.2 million per quarter. (For the fiscal year ended
March 31, 1998 services revenue averaged approximately $7.7 million per
quarter). As discussed above, revenue from this legacy customer base declined
over the period and represented only $4.2 million in the quarter ended December
31, 1998. These declines from the legacy customer base are expected to be
permanent (with the exception of the decline in Asia) and are derived largely
from North American customers, including particularly the large customer which
had substantial delinquencies in payment. The legacy customers that represent
most of the decline are not crucial to the Company's network of operating
platforms nor to the global growth strategy and the extension of services upon
which management is focusing.
Offsetting this decline somewhat is the inclusion in revenue for the nine
month period ended December 31, 1998 of $2.0 million, mainly in the last three
months, from a significant card services contract with a new North American
customer. However, in the first phase of this contract, the Company agreed to
bill this customer on a cost-reimbursable basis for the major portion of this
business. Accordingly, this revenue source has contributed only a minor amount
of margin to the Company's operating results to date. In 1999, the Company has
begun a second phase of the contract which is expected to provide higher revenue
and margins than the cost-reimbursable basis experienced in the quarter ended
December 31, 1998.
Revenue from the Company's Asian card service base was $5.9 million for the
nine month period ended December 31, 1998 compared to $10.3 million for the year
ended March 31, 1998. Economic activity in most areas of the Asia-Pacific region
remains weak and the Company's near term outlook for card services revenue in
this market is that it will continue at current levels. However, the Company
anticipates that a significant portion of the expected revenue growth from new
services, such as those acquired with IDX, will come from this region.
Also included in the consolidated revenue for the nine month period ended
December 31, 1998 is $0.6 million, which represents IDX revenues for the month
of December 1998. Based on new
44
contracts executed during late 1998 and the first quarter of 1999, revenue
contribution from IDX is expected to be significant in calendar 1999.
Gross Profit. Gross profit was 44% of total revenue or $9.9 million for the
nine month period ended December 31, 1998, compared to 43% or $14.3 million for
the full year ended March 31, 1998. Excluding the effects of the low margin
first phase of the large new card services contract described above, gross
profit from the Company's card service business was 46% for the nine month
period ended December 31, 1998. This margin improvement over that realized in
the previous year (43%) is due primarily to active efforts to reduce operating
costs. Cost of revenue is expected to continue to fluctuate as new pricing and
contractual arrangements are put in place and as the Company's revenue mix
continues to change. Transmission costs, the principal element of cost of
service, should also begin to show the positive impact in 1999 arising from use
of the expanding IP transmission network of IDX.
Selling, General and Administrative Expenses ("SG&A"). These expenses
totaled $12.6 million for the nine month period ended December 31, 1998 compared
to $14.0 million for the full year ended March 31, 1998. Included in the nine
month total is a $0.8 million provision for doubtful accounts compared to $1.4
million for the full year ended March 31, 1998. In the fourth calendar quarter
of 1998, the Company incurred a non-cash charge of $0.4 million for compensation
expense related to the IDX acquisition for a granting by the IDX stockholders of
acquisition consideration to a number of IDX employees. Excluding this charge,
other SG&A expenses, principally salaries and benefits, travel, legal and
professional fees and other overhead costs averaged $3.8 million per quarter
during the nine month period ended December 31, 1998, compared to $3.2 million
per quarter for the year ended March 31, 1998. The principal factors in this
increase are higher personnel costs resulting from recruitment and upgrading of
management and additions to the marketing and sales staff.
Settlement Costs. As described in Note 7 to the Consolidated Financial
Statements, the Company and its largest stockholder entered into a settlement
agreement to resolve all current and future claims. The difference in value
between the Convertible Preferred Stock issued to the stockholder and the common
stock surrendered by the stockholder was $1.0 million, which resulted in a
non-cash charge to the statement of operations in the quarter ended September
30, 1998.
Depreciation and Amortization Expense. This expense for the nine month
period ended December 31, 1998 totaled $2.3 million compared to $2.8 million for
the full year ended March 31, 1998. These charges are expected to increase
significantly in the future as the full effect of amortization of goodwill
arising from recent acquisitions is charged to the statement of operations.
Other Expenses (Income). Interest expense totaled $1.0 million for the nine
month period ended December 31, 1998 compared to $1.6 million for the full year
ended March 31, 1998. This cost will increase in future reporting periods due to
the increase in debt assumed as part of the acquisition program in 1998 and 1999
as well as the $7.0 million in financing finalized in April 1999.
The Company recorded a foreign currency transaction loss of $0.1 million
during the nine month period ended December 31, 1998 arising from foreign
currency cash and accounts receivable balances maintained by the Company during
the period in which the U.S. dollar strengthened. For the year ended March 31,
1998, this charge was $0.4 million. The Company's exposure to foreign
45
currency losses is mitigated due to the variety of customers and markets which
comprise the Company's customer base, as well as geographic diversification of
that customer base. In addition, the majority of the Company's largest customers
settle their accounts in U.S. dollars.
During the nine months ended December 31, 1998, the Company incurred $0.1
million proxy related litigation expenses as compared to $3.9 million for the
year ended March 31, 1998. Related to the class action lawsuit for which a
settlement agreement was reached in April 1998. Of the amount recorded in the
year ended March 31, 1998, $3.5 million related to the escrow of 350,000 shares
of the Company's common stock, which have been valued at $10.00 per share
pursuant to the terms of the settlement agreement. Such value relates to the
Company's obligation to issue additional stock or cash if the market price of
the Company's stock is less than $10.00 per share during the defined periods.
See Note 8 to the Consolidated Financial Statements for further discussion.
Taxes on Income. No income tax provision was recorded for the nine month
period ended December 31, 1998 due to the operating losses incurred. Taxes on
income for the year ended March 31, 1998 were $1.6 million. The tax provision
for amounts currently due is primarily the result of the Company's completion of
a study to simplify its tax and corporate structure wherein it identified
potential tax issues arising out of its international subsidiaries. In
connection with this study, the Company realized it had potential tax
liabilities and recorded an additional tax provision of $1.5 million in the
fourth quarter of the year ended March 31, 1998. The Company's study was
completed in January, 1999 and no additional reserve for taxes was recorded as
of December 31, 1998. The eventual outcome cannot be predicted with certainty.
No tax claims have been asserted against the Company. See Note 12 to the
Consolidated Financial Statements for further discussion regarding taxes on
income.
YEAR ENDED MARCH 31, 1998 COMPARED TO YEAR ENDED MARCH 31, 1997
Overview. The Company incurred a net loss of $13.3 million for the year
ended March 31, 1998, of which $11.0 million is attributable to the following
charges:
(in millions)
Corporate realignment costs $ 3.1
Proxy-related litigation settlement costs 3.9
Additional income tax provision 1.5
Additional allowance for doubtful accounts 1.4
Warrants associated with debt 0.5
Other items 0.6
-----
$11.0
=====
46
Some of these charges resulted principally from a detailed review of the
Company's activities initiated by new management in the last few months of
fiscal 1998 and are described in more detail below.
Excluding these items, the Company incurred a net loss for the year ended
March 31, 1998 of $2.3 million compared to net income in fiscal 1997 of $0.8
million. The difference is principally due to a $1.6 million contribution to net
income in fiscal 1997 of revenues from non-services sources which did not recur
in fiscal 1998. Also in the year ended March 31, 1998, the Company's gross
profit from its services business remained flat compared to fiscal 1997 while it
incurred additional recurring operating expenses of $1.1 million, principally
depreciation and amortization. Interest expense, excluding a $0.5 million charge
related to the amortization of debt discount associated with warrants (see Note
11 to the Consolidated Financial Statements for further information), increased
by $0.3 million over fiscal 1997. Foreign exchange losses increased by $0.3
million over fiscal 1997.
New management has taken steps to increase revenues and improve margins.
They have completed a review of the operations and activities of the Company and
have refocused the Company's marketing and sales activities with an emphasis on
stabilizing and growing the existing core business and on adding new services.
In practical terms, this means that: (1) the Company refocused its resources on
both expanding its customer base and extending its line of services to realize
the value of its global network of operating platforms; (2) the Company
established a small staff devoted to improving its network structure and
reducing its marginal transmission costs (and, therefore, its cost of revenue),
and contracts were entered into which will help to reduce transmission costs in
the next fiscal year; (3) the Company increased its sales and marketing staff
and allocated additional funds for marketing and promotional activities; and (4)
staffing needs were assessed and reductions and realignments were completed. The
Company instituted a process to add new network and operations staff as
necessary to support new contracts.
A thorough review of corporate practices and procedures was completed in
1998. This review resulted in a number of improvements to internal reporting and
review procedures. The Company also undertook a study to simplify its
organizational and tax structure and identified potential international tax
issues. In connection with this study, the Company realized it had potential tax
liabilities and recorded an additional tax provision of $1.5 million in the
fiscal year ended March 31, 1998 to reserve against liabilities which might
arise under the existing structure. The Company's study was completed in January
1999 and no additional reserve for taxes was recorded as of December 31, 1998.
The eventual outcome cannot be predicted with certainty. No tax claims have been
asserted against the Company.
Revenue for the year ended March 31, 1998 was $33.1 million. By comparison,
revenue for the year ended March 31, 1997 was $34.0 million, including $2.0
million attributable to non-service
47
revenue (principally billing and platform equipment sales, revenue from calling
card production and contract settlement charges related to disputes over special
projects). Although total revenue decreased from the year ended March 31, 1997
to the year ended March 31, 1998, services revenue increased $1.0 million or 3%.
The increase was due to increased customer usage partially offset by a
combination of three elements: a decline in revenue from the long distance
resale services of the Company; lower per minute revenue due to new pricing
programs which went into effect in the first and second quarters of the year
ended 1998; and a lack of new revenue generating contracts in the fiscal year
ended March 31, 1998.
Gross Profit. Gross profit was 43% or $14.3 million for the year ended
March 31, 1998, compared to 47% or $16.1 million for the year ended March 31,
1997. This decline was due partially to the positive margin contribution of
non-service revenues in the year ended March 31, 1997 which did not reoccur in
the year ended March 31, 1998. Excluding the effects of non-service revenue,
gross profit for services revenue was 43% for the year ended March 31, 1998
compared to 45% for fiscal 1997. This decrease was due to lower pricing related
to various customer contracts which was not offset by corresponding decreases in
transmission costs, the principal component of cost of revenue. Cost of revenue
was expected to fluctuate in the next few periods as new pricing and contractual
arrangements were put in place and as the Company worked to improve its network
structure and transmission costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $14.0 million for the year ended March 31, 1998,
compared to $11.9 million for the year ended March 31, 1997, an increase of $2.1
million or 18%. As a percentage of revenue, selling, general and administrative
expenses were 42% and 35% for the years ended March 31, 1998 and 1997,
respectively. A major factor in the increase was the addition of $1.3 million to
the allowance for doubtful accounts. Of this amount, half was related to one
customer who, in the Company's view, unilaterally took unsubstantiated credits
off invoiced amounts and refused to pay a large invoice for contract settlement
charges related to a special project. The Company had an allowance as of March
31, 1998 to reflect potential costs of collection. (In the quarter ending
December 31, 1998, the Company recovered $1.5 million in cash and a $0.4 million
usage credit from this customer. This settlement resulted in no additional
write-off for bad debts). The balance of the remaining increase in the allowance
was spread among several accounts, principally in the Asia-Pacific area, to
provide for collection issues that may arise from economic and other factors.
The Company incurred $0.8 million in other selling, general and administrative
expenses related to increases in payroll due to the hiring of new management and
other personnel, consulting and legal fees, travel expenses and for internal
communication costs.
Corporate Realignment Expense. The Company incurred various realignment
costs during the year ended March 31, 1998 resulting from the review of
operations and activities undertaken by new corporate management. These costs,
which totaled $3.1 million, include employee severance, legal and consulting
fees and the write down of certain investments made in the Company's Internet
service development program.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the year ended March 31, 1998 was $2.8 million compared to $1.7
million for the year ended March 31,
48
1997, an increase of $1.1 million or 59%. In addition to an increase in the
asset base of $2.1 million in the year ended March 31, 1998, a full year's
depreciation was recorded in the year ended March 31, 1998 for fiscal 1997
property additions of $5.0 million, a significant portion of which occurred in
the latter part of fiscal 1997.
Other Expense (Income). Interest expense for the year ended March 31, 1998
was $1.6 million, compared to $0.8 million for the year ended March 31, 1997, an
increase of $0.8 million or 101%. This increase relates primarily to expenses of
$0.5 million related to additional interest expense associated with warrants to
purchase common stock issued in connection with debt obligations. Also, there
was an increase in average borrowings during the year ended March 31, 1998 and
the Company incurred additional finance charges relating to the extensions of a
term loan.
The Company recorded a foreign currency transaction loss of $0.4 million
for the year ended March 31, 1998 arising from foreign currency cash and
accounts receivable balances maintained by the Company during the year. The
Company's exposure to foreign currency losses is mitigated due to the variety of
customers and markets which comprise the Company's customer base, as well
geographic diversification of that customer base. In addition, most of the
Company's largest customers settle their accounts in U.S. dollars.
During the year ended March 31, 1998, the Company incurred proxy related
litigation expense of $3.9 million arising from the class action lawsuit for
which a settlement agreement was reached, as described earlier (see "Item 3 -
Legal Proceedings"). Of this amount, $3.5 million related to the escrow of
350,000 shares of the Company's common stock, which was valued at $10.00 per
share pursuant to the terms of the settlement agreement. Such value related to
the Company's obligation to issue additional stock or cash if the market price
of the Company's stock is less than $10.00 per share during the defined periods.
See Note 8 to the Consolidated Financial Statements for further discussion.
Taxes on Income. Taxes on income for the year ended March 31, 1998 were
$1.6 million, with no comparable tax provision for the year ended March 31,
1997. This tax provision was primarily the result of the Company's study to
simplify its tax structure wherein it identified potential international tax
issues and realized it had potential tax liabilities. Refer to Note 12 to the
Consolidated Financial Statements for further discussion regarding taxes on
income.
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA
As discussed above, management launched an aggressive growth plan toward
the end of 1998 and intends to pursue that plan into the foreseeable future. A
result of that plan will be increasing cash demands and the need for aggressive
cash management. To accomplish all that it seeks to do, management will have to
acquire significant financing, some of which it has already achieved in the
first quarter of 1999.
Cash and cash equivalents were $1.4 million at December 31, 1998 compared
to $2.4 million at March 31, 1998. Accounts payable totaled $5.8 million at
December 31, 1998 compared to $1.1 million at March 31, 1998, resulting
principally from deferrals of payments to certain vendors and
49
professional service firms due to the Company's tight cash situation (see
discussion below for financings in the first quarter of 1999 which were used, in
part, to bring these companies and firms more current). Accrued expenses
increased by $2.0 million to $6.2 million at December 31, 1998 primarily due to
accruals for interest costs on debt payable only at maturity and costs accrued
for acquisitions and transmission for which no bills had been received as of
December 31, 1998. Cash inflows from operating activities for the nine month
period ended December 31, 1998 totaled $3.6 million, compared to outflows of
$2.5 million for the full year ended March 31, 1998. There was a net working
capital deficiency of $21.0 million at December 31, 1998 compared to positive
working capital of $2.4 million at March 31, 1998. In addition to the Company's
operating losses, this large change in working capital resulted principally from
the reclassification of $8.5 million of debt due in August 1999 ($7.5 million)
and December 1999 ($1.0 million) to a current liability as of December 31, 1998
and to short-term indebtedness totaling $6.3 million incurred primarily during
the fourth calendar quarter of 1998 related to acquisitions (see Note 6 to the
Consolidated Financial Statements). Of this latter amount, up to $5.4 million
(plus accrued interest) may be paid, at the Company's sole discretion, by
issuance of common stock. The first $1.0 million was repaid by the issuance of
common stock in March 1999.
In the nine month period ended December 31, 1998, in addition to the $2.2
million paid in connection with the acquisition of IDX, the Company acquired
property and equipment of approximately $2.0 million and made other investments,
principally advances totaling $1.0 million to the unified messaging company
which provides the software upon which the Company is basing its new messaging
service and in which the Company is considering making a joint venture
investment. This compares to $2.1 million in property and equipment additions
for the full year ended March 31, 1998. In both periods, the property and
equipment expenditures were principally for upgrades and additions to the global
network of operating platforms. Cash generated from financing activities totaled
$0.7 million during the nine month period ended December 31, 1998, mainly due to
proceeds from a $1.0 million loan from an existing stockholder received in June
1998, which is payable in December 1999. For the full year ended March 31, 1998,
cash generated from financing activities totaled $4.8 million, the primary
source being the issuance of common stock for $7.5 million reduced by the net
retirement of long-debt obligations of $3.0 million.
In January and February, 1999, the Company entered into two separate
financing transactions through the issuance of preferred stock and warrants
totaling $10.0 million (see Note 17 to the Consolidated Financial Statements).
Proceeds from these financings to date are $8.0 million with the remaining $2.0
million to be received upon registering the underlying common stock issuable on
conversion. Substantially all of the proceeds from these financings have been
used during the first quarter of 1999 to reduce accounts payable and to meet the
capital expenditure and working capital requirements of the business.
In February 1999, the Company acquired Telekey, a communications services
company, with a card based range of services including calling, e-mail,
voicemail and other features which will be incorporated in the expanded service
offerings of the Company. Telekey was acquired for cash, short-term notes of
$0.3 million and convertible preferred stock. See Note 17 to the Consolidated
Financial Statements.
50
In April 1999, the Company obtained a financing commitment in the form of
long-term debt totaling $20.0 million from an affiliate of the Company's largest
stockholder. This commitment is subject to stockholder approval (see Note 18 to
the Consolidated Financial Statements). In addition, the lender provided a loan
of $7.0 million with a term of one year which is intended to serve as a bridge
to stockholder approval or the acquisition of other financing.
Current Funding Requirements. The Company has the following estimated firm
cash obligations and requirements during calendar 1999:
(in millions)
Repayment of loans due August and December $ 9.5
1999, including interest
Payment of promissory note issued in connection 0.5
with acquisition
Payment of estimated tax obligations related to prior 1.1
years
Y2K compliance program (see below) 1.0
-----
$12.1
=====
Through April 14, 1999, the Company acquired new funding and commitments in
excess of $32.0 million: $10.0 million from the sale of convertible stock (of
which the $8.0 million has been received and $2.0 million will be advanced upon
registration of the underlying common shares); $20.0 million in committed
long-term debt which is subject to stockholder approval (under the commitment,
the Lender has provided a bridge loan of $7.0 million which the Company has
drawn down); and $2.0 million or more in vendor financing for network equipment
purchases. Assuming that stockholder approval is forthcoming for the long-term
debt, these funds might permit the Company to meet a modest baseline growth
plan. To achieve the growth, both short and long-term, that management is
targeting, however, will require additional capital. The plan under which the
Company is currently operating requires cash in the second half of the year
which the Company anticipates will come from (1) a capital markets financing of
debt or equity in the second half of the year of up to $30.0 million, and (2)
secured equipment based financing of up to $10.0 million.
The Company's growth plan contemplates, in addition to the firm cash
obligations noted above, additional capital needs of up to $38.0 million
(including expenditures for the first quarter which, as noted above, used most
of the $8.0 million in proceeds from the sale of convertible stock). Most of
these funds will be used for network expansion and upgrade, for the extension of
the line of services, for a few key acquisitions and investments, and, in
particular, for the launch of new services, such as the messaging service. If
significantly less capital is available, plans will need to be curtailed,
negatively affecting growth, particularly the launch of new services.
Of the financing currently committed, $13.0 million is subject to
stockholder approval at the Company's next annual meeting scheduled to occur in
the second quarter of 1999. The Company's management believes that there is a
high probability that stockholder approval will be obtained. However, if this
approval does not occur, the Company will be required to find additional sources
of
51
capital in the short-term, principally to repay the indebtedness (including
interest) of $8.5 million due in August 1999. In that event, there can be no
assurance that the Company can raise additional capital or generate sufficient
funds from operations to meet its obligations. The lack of funds from these
sources would force the Company to curtail its existing and planned levels of
operations and would therefore have a material adverse effect on the Company's
business.
TAXES
During 1998, the Company undertook a study to simplify its organizational
and tax structure and identified potential international tax issues. In
connection with this study, the Company determined that it had potential tax
liabilities and recorded an additional tax provision of $1.5 million in the year
ended March 31, 1998 to reserve against liabilities which could have arisen
under the existing structure. The Company initiated discussions with the
Internal Revenue Service ("IRS") related to the U. S. Federal income tax issues
identified by the study and filed with the IRS returns for the Company for the
years ended March 31, 1991 through 1998 reflecting these findings. Neither the
eventual outcome of these discussions or of any other issues can be predicted
with certainty.
As of December 31, 1998, the Company has recorded a net deferred tax asset
of $8.3 million and has approximately $16.3 million of net operating loss
carryforwards available. The Company has recorded a valuation allowance equal to
the net deferred tax asset as management has not been able to determine that it
is more likely than not that the deferred tax asset will be realized based in
part on the foreign operations and availability of the operating loss
carryforwards to offset only U.S. tax provisions. In addition, included in the
net operating carryforwards are approximately $6.0 million acquired in the IDX
acquisition that are limited in use to approximately $0.3 million per year and
must be offset only by taxable income generated from IDX. See Note 12 to the
Consolidated Financial Statements regarding further discussion of taxes on
income.
EFFECT OF INFLATION
The Company believes that inflation has not had a material effect on the
results of operations to date.
ACCOUNTING PRONOUNCEMENTS AND YEAR 2000 ISSUES
Recent Accounting Pronouncements - The Financial Accounting Standards Board
("FASB") has issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 requires companies to record derivatives on
the balance sheet as assets or liabilities, measured at fair market value. Gains
or losses resulting from changes in the values of those derivatives are
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999 and is currently not applicable to the Company.
Year 2000 Issues - The Company is aware of the issues associated with the
programming code in existing computer systems as the year 2000 approaches. The
"Year 2000 Issue" or "Y2K Issue" arises because many computer and hardware
systems use only two digits to represent the year. As a
52
result, these systems and programs may not process dates beyond the year 1999,
which may cause errors in information or system failures. Assessments of the
potential effects of the Y2K issue vary markedly among different companies,
governments, consultants, economists and commentators, and it is not possible to
predict what the actual impact may be. Because the Company uses Unix-based
systems for its platforms and operating systems to deliver service to customers,
the Company believes material modifications may not be required to ensure Y2K
compliance. However, the Company is in the process of assessing and testing the
software resident on all its system hardware to validate this assertion and
anticipate that testing will be completed by June 1999. The Company is in
various stages of its analysis, assessment, planning and remediation and is
using internal and external resources to identify, correct or reprogram, and
test the computer system for Y2K compliance. The Company anticipates completing
all reprogramming efforts, including testing, by June 1999. Management is
continuing to update and evaluate the financial impact of Y2K compliance and
expects that total costs will not exceed $1.0 million. The Company is proceeding
with an internal certification process of its propriety systems (e.g. Calling
card and billing systems). The Company intends to use external sources as
necessary to validate our certification of these critical systems. No material
costs have been incurred during the nine month period ended December 31, 1998
and management estimates that the Company will incur most of the costs during
1999.
The Company is also in the process of assessing Year 2000 readiness of
its key suppliers and customers. This project has been undertaken with a view
toward assuring that the Company has adequate resources to cover its various
telecommunications requirements. A failure of the Company's suppliers or
customers to address adequately their Year 2000 readiness could affect the
Company's business adversely. The Company's worst-case Year 2000 scenarios would
include: (i) undetected errors or uncorrected defects in its current product
offerings; (ii) corruption of data contained in its internal information
systems; and (iii) the failure of infrastructure services provided by External
Providers. The Company is in the process of reviewing its contingency planning
in all of these areas and expects the plans to include, among other things, the
availability of support personnel to assist with customer support issues, manual
"work arounds" for internal software failure, and substitution of systems, if
needed. The Company anticipates that it will have a contingency plan in place by
June 1999. In addition, the Company is aware of the potential for claims against
it for damages arising from products and services that are not Year 2000 ready.
The Company believes that such claims against it would be without merit.
Finally, the Year 2000 presents a number of risks and uncertainties that could
affect the Company, including utilities failures, competition for personnel
skilled in the resolution of Year 2000 issues and the nature of government
responses to the issues among others. The Company's expectations as to the
extent and timeliness of modifications required in order to achieve Year 2000
compliance is a forward-looking statement subject to risks and uncertainties.
Actual results may vary materially as a result of a number of factors,
including, among others, those described in this paragraph. There can be no
assurance however, that the Company will be able to successfully modify on a
timely basis such products, services and systems to comply with Year 2000
requirements, which failure could have a material adverse effect on the
Company's operating results.
53
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- - --------------------------------------------------------------------------------
The Company measures its exposure to market risk at any point in time by
comparing the open positions to a market risk of fair value. The market prices
the Company uses 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 December 31, 1998, the
Company was exposed to some market risk through interest rates on its long-term
debt and preferred stock and foreign currency. At December 31, 1998, the
Company's exposure to market risk was not material. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Other Expenses
(Income)."
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
ITEM 8 - FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of December 31, and March 31, 1998 F-3 - F-4
Consolidated Statements of Operations for the Nine Months Ended
December 31, 1998, and the Years Ended March 31, 1998, and 1997 F-5
Consolidated Statements of Stockholders' Equity for the Nine Months Ended
December 31, 1998, and the Years Ended March 31, 1998, and 1997 F-6
Consolidated Statements of Comprehensive Income (Loss) for the Nine Months
Ended December 31, 1998 and the Years Ended March 31, 1998 and 1997 F-7
Consolidated Statements of Cash Flows for the Nine Months Ended
December 31, 1998, and the Years Ended March 31, 1998, and 1997 F-8 - F-10
Summary of Accounting Policies F-11 - F-17
Notes to Consolidated Financial Statements F-18 - F-54
SCHEDULE -
II Valuation and Qualifying Accounts F-55
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Executive TeleCard, Ltd.
d/b/a eGlobe, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Executive
TeleCard, Ltd. (d/b/a eGlobe, Inc.) and subsidiaries as of December 31, 1998 and
March 31, 1998 and the related consolidated statements of operations,
stockholders' equity, comprehensive income (loss) and cash flows for the nine
months ended December 31, 1998 and for each of the two years in the period ended
March 31, 1998. We have also audited the schedule listed in the accompanying
index. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Executive TeleCard,
Ltd. (d/b/a eGlobe, Inc.) and subsidiaries at December 31, 1998 and March 31,
1998, and the results of their operations and their cash flows for the nine
month period ended December 31, 1998 and for each of the two years in the period
ended March 31, 1998, in conformity with generally accepted accounting
principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO SEIDMAN, LLP
--------------------
BDO SEIDMAN, LLP
March 19, 1999
except for Note 18, which is as of April 10, 1999
Denver, Colorado
F-2
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
CONSOLIDATED BALANCE SHEETS
- - --------------------------------------------------------------------------------
DECEMBER 31, 1998 MARCH 31, 1998
- - -------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT:
Cash and cash equivalents $ 1,407,131 $ 2,391,206
Restricted cash 100,438 --
Accounts receivable, less
allowance of $986,497 and
$1,472,197 for doubtful accounts 6,850,872 7,719,853
Other current assets 494,186 376,604
TOTAL CURRENT ASSETS 8,852,627 10,487,663
- - -------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT,
net of accumulated depreciation
and amortization (Note 1) 13,152,410 11,911,310
GOODWILL AND OTHER INTANGIBLE ASSETS,
net of accumulated amortization of
$926,465 and $725,884 12,106,603 203,875
OTHER:
Advances to a potential joint
venture (Note 17) 970,750 --
Deposits 518,992 233,901
Deferred financing and acquisition costs 736,071 --
Other assets 50,708 63,707
- - -------------------------------------------------------------------------------------------------------------
Total other assets 2,276,521 297,608
- - -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $36,388,161 $22,900,456
=============================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
CONSOLIDATED BALANCE SHEETS
- - --------------------------------------------------------------------------------
DECEMBER 31, 1998 MARCH 31, 1998
- - -----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable $ 5,798,055 $ 1,135,800
Accrued expenses (Note 2) 6,203,177 4,222,806
Income taxes payable (Note 12) 1,914,655 2,004,944
Notes payable, principally related to
acquisitions (Notes 5 and 6) 6,298,706 --
Current maturities of long-term debt (Note 4) 8,540,214 244,020
Other liabilities 1,053,292 436,545
- - -----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 29,808,099 8,044,115
LONG-TERM DEBT, net of current maturities (Note 4) 1,237,344 7,735,581
- - -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 31,045,443 15,779,696
- - -----------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
(Notes 3 - 9, 11, 12, 14, 15, 17 and 18)
STOCKHOLDERS' EQUITY (Note 11 and 17):
Preferred stock, authorized 5,000,000 shares:
Series B Convertible Preferred Stock, $.001
par value, 500,000 shares authorized and
outstanding (Note 6) 500 --
8% Series C Cumulative Preferred Stock,
$.001 par value, 275 shares authorized, 75
shares outstanding (Note 7) 1 --
Common stock, $.001 par value, 100,000,000
shares authorized, 16,362,966 and 17,346,766
shares outstanding 16,362 17,346
Additional paid-in capital 33,975,268 25,046,831
Stock to be subscribed (Note 8) -- 3,500,000
Accumulated deficit (28,566,346) (21,476,154)
Accumulated other comprehensive income (loss) (83,067) 32,737
- - -----------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 5,342,718 7,120,760
- - -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 36,388,161 $ 22,900,456
=================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- - --------------------------------------------------------------------------------
Nine Months
Ended Years Ended March 31,
December 31,
1998 1998 1997
- - -----------------------------------------------------------------------------------------------------------------
REVENUE (Note 13) $ 22,490,642 $ 33,122,767 $ 33,994,375
COST OF REVENUE 12,619,245 18,866,292 17,913,995
- - -----------------------------------------------------------------------------------------------------------------
GROSS PROFIT 9,871,397 14,256,475 16,080,380
- - -----------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Selling, general and administrative 12,558,553 14,047,864 11,915,864
Settlement costs (Note 7) 996,532 -- --
Corporate realignment expense (Note 2) -- 3,139,191 --
Depreciation and amortization 2,255,945 2,769,844 1,740,952
- - -----------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 15,811,030 19,956,899 13,656,816
- - -----------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (5,939,633) (5,700,424) 2,423,564
- - -----------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (1,018,049) (1,651,236) (849,073)
Interest income 59,947 45,839 51,291
Foreign currency transaction loss (130,757) (409,808) (75,409)
Proxy related litigation expense (Note 8) (119,714) (3,900,791) (528,421)
Other income (expense), net 58,014 (33,490) --
- - -----------------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE (1,150,559) (5,949,486) (1,401,612)
- - -----------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE TAXES
ON INCOME (7,090,192) (11,649,910) 1,021,952
TAXES ON INCOME (Note 12) -- 1,640,000 248,000
- - -----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (7,090,192) $(13,289,910) $ 773,952
- - -----------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) PER SHARE (Note 5):
Basic $ (0.40) $ (0.78) $ 0.05
Diluted $ (0.40) $ (0.78) $ 0.05
- - -----------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- - --------------------------------------------------------------------------------
NINE MONTHS ENDED DECEMBER 31, 1998 AND PREFERRED PREFERRED
YEARS ENDED MARCH 31, COMMON STOCK STOCK - SERIES B STOCK - SERIES C
1998 AND 1997 SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, APRIL 1, 1996 15,849,488 $ 15,849 -- $ -- -- $ --
Stock issued in connection with
litigation
settlement 11,000 11 -- -- -- --
Exercise of stock options 752 1 -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- --
Net income for the year -- -- -- -- -- --
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 15,861,240 15,861 -- -- -- --
Stock issued in lieu of cash payments 42,178 42 -- -- -- --
Stock issued in connection with
private placement, net (Note 11) 1,425,000 1,425 -- -- -- --
Stock to be subscribed (Note 8) -- -- -- -- -- --
Exercise of stock appreciation rights 18,348 18 -- -- -- --
Issuance of warrants to purchase
stock (Note 11) -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- --
Net loss for the year -- -- -- -- -- --
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 17,346,766 17,346 -- -- -- --
Stock issued in connection with
litigation
settlement (Note 8) 28,700 28 -- -- -- --
Subscribed stock issued to common
escrow (Note 8) 350,000 350 -- -- -- --
Issuance of warrants to purchase stock
(Note 11) -- -- -- -- -- --
Stock issued in connection with
acquisitions (Note 6) 62,500 63 500,000 500 -- --
Exchange of common stock for Series C
Preferred (Note 7) (1,425,000) (1,425) -- -- 75 1
Compensation costs related to
acquisition
(Note 6) -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- --
Net loss for the period -- -- -- -- -- --
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 16,362,966 $ 16,362 500,000 $ 500 75 $ 1
ACCUMULATED
NINE MONTHS ENDED DECEMBER 31, STOCK TO BE ADDITIONAL ACCUMULATED OTHER TOTAL
1998 AND YEARS ENDED MARCH 31, SUBSCRIBED PAID- IN DEFICIT COMPREHENSIVE STOCKHOLDERS'
1998 AND 1997 CAPITAL INCOME (LOSS) EQUITY
- - ----------------------------------------------------------------------------------------------------------------------------
BALANCE, APRIL 1, 1996 $ -- $ 15,901,574 $ (8,960,196) $ 82,782 $ 7,040,009
Stock issued in connection with
litigation
settlement -- 146,238 -- -- 146,249
Exercise of stock options -- -- -- -- 1
Foreign currency translation adjustment -- -- -- (939) (939)
Net income for the year -- -- 773,952 -- 773,952
- - ----------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 -- 16,047,812 (8,186,244) 81,843 7,959,272
Stock issued in lieu of cash payments -- 244,226 -- -- 244,268
Stock issued in connection with
private placement, net (Note 11) -- 7,481,075 -- -- 7,482,500
Stock to be subscribed (Note 8) 3,500,000 -- -- -- 3,500,000
Exercise of stock appreciation rights -- 137,530 -- -- 137,548
Issuance of warrants to purchase
stock (Note 11) -- 1,136,188 -- -- 1,136,188
Foreign currency translation adjustment -- -- -- (49,106) (49,106)
Net loss for the year -- -- (13,289,910) -- (13,289,910)
- - ----------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 3,500,000 25,046,831 (21,476,154) 32,737 7,120,760
Stock issued in connection with
litigation
settlement (Note 8) -- 81,600 -- -- 81,628
Subscribed stock issued to common
escrow (Note 8) (3,500,000) 3,499,650 -- -- --
Issuance of warrants to purchase stock
(Note 11) -- 328,231 -- -- 328,231
Stock issued in connection with
acquisitions (Note 6) -- 3,601,000 -- -- 3,601,563
Exchange of common stock for Series C
Preferred (Note 7) -- 997,956 -- -- 996,532
Compensation costs related to
acquisition
(Note 6) -- 420,000 -- -- 420,000
Foreign currency translation adjustment -- -- -- (115,804) (115,804)
Net loss for the period -- -- (7,090,192) -- (7,090,192)
- - ----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ -- $ 33,975,268 $(28,566,346) $ (83,067) $ 5,342,718
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
- - --------------------------------------------------------------------------------
NINE MONTHS
ENDED YEARS ENDED MARCH 31,
DECEMBER 31,
----------------------------------------------------
1998 1998 1997
NET INCOME (LOSS) $ (7,090,192) $(13,289,910) $ 773,952
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS (115,804) (49,106) (939)
----------------------------------------------------
COMPREHENSIVE NET INCOME (LOSS) $ (7,205,996) $(13,339,016) $ 773,013
====================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements
F-7
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS NINE MONTHS ENDED YEARS ENDED MARCH 31,
DECEMBER 31, 1998 1998 1997
- - -----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $ (7,090,192) $(13,289,910) $ 773,952
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization 2,255,945 2,769,844 1,740,952
Provision for bad debts 789,187 1,433,939 404,410
Settlement costs (Note 7) 996,532 -- --
Common stock issued in lieu of cash payments -- 144,268 146,249
Issuance of options and warrants for services (Note 11) 190,417 220,000 --
Compensation costs related to acquisition (Note 6) 420,000 -- --
Amortization of debt discount (Note 4) 254,678 478,580 --
Proxy related litigation expense (Note 8) 81,628 3,500,000 --
Gain on sale of property and equipment (57,002) -- --
Impairment reserve for assets -- 143,668 --
Other, net -- 137,548 --
Changes in operating assets and liabilities:
Accounts receivable 886,768 (915,661) (2,359,402)
Other current assets 177,494 52,860 (318,437)
Accounts payable 3,248,364 444,673 37,174
Accrued expenses 1,033,420 2,414,406 (2,321,403)
Other liabilities 371,368 (39,008) (114,914)
- - -----------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,558,607 (2,504,793) (2,011,419)
- - -----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Acquisitions of property and equipment (1,990,368) (2,150,280) (5,043,062)
Proceeds from sale of property and equipment 126,638 -- --
Advances to a potential joint venture (Note 17) (970,750) -- --
Purchase of companies, net of cash acquired (Note 6) (2,207,447) -- --
Restricted cash (100,438) -- --
Other assets (108,863) 26,693 (151,013)
- - -----------------------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (5,251,228) (2,123,587) (5,194,075)
- - -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from notes payable (Notes 3 and 4) 1,450,000 7,810,000 10,297,429
Deferred financing and acquisition costs (524,154) -- --
Proceeds from issuance of common stock -- 7,482,500 --
Payments on capital leases (197,938) (447,997) --
Payments on notes payable (19,362) (9,997,397) (1,869,938)
- - -----------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 708,546 4,847,106 8,427,491
- - -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (984,075) 218,726 1,221,997
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,391,206 2,172,480 950,483
- - -----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,407,131 $ 2,391,206 $ 2,172,480
===================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-8
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
NINE MONTHS ENDED YEARS ENDED
DECEMBER 31, MARCH 31,
1998 1998 1997
- - --------------------------------------------------------------------------------------------------------------
Cash paid during the period for:
Interest $ 176,095 $1,267,399 $ 654,180
Income taxes $ 96,000 $ 101,181 $ 79,352
- - --------------------------------------------------------------------------------------------------------------
Non-cash investing and financing activities:
Equipment acquired
under capital lease
obligations $ 329,421 $ 312,213 $ 705,660
- - --------------------------------------------------------------------------------------------------------------
Common stock issued
for acquisition of
equipment $ -- $ 100,000 $ --
- - --------------------------------------------------------------------------------------------------------------
Unamortized debt
discount related to
warrants $ 321,094 $ 437,608 $ --
==============================================================================================================
F-9
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (CON'T)
IDX ACQUISITION, NET OF CASH ACQUIRED (Note 6)
NINE MONTH
PERIOD ENDED YEARS ENDED
DECEMBER 31, MARCH 31, MARCH 31,
1998 1998 1997
--------------------------------------------------------
Working capital deficit, other
than cash acquired $ (930,634) $ - $ -
Property and equipment 975,009 - -
Purchase price in excess of the
net assets acquired 10,917,867 - -
Other assets 163,229 - -
Notes payable issued in
acquisition (5,418,024) - -
Capital stock issued in
acquisition (3,500,000) - -
--------------------------------------------------------------------------------------------------------------------
Net cash used to acquire IDX $ 2,207,447 $ - $ -
--------------------------------------------------------------------------------------------------------------------
UCI ACQUISITION, NET OF CASH ACQUIRED (Note 6)
NINE MONTH
PERIOD ENDED YEARS ENDED
DECEMBER 31, MARCH 31, MARCH 31,
1998 1998 1997
---------------------------------------------------------
Purchase price in excess of the
net assets acquired $ 1,176,563 $ -- $ --
Accrued cash payment due in 1999 (75,000) -- --
Note payable issued in acquisition (1,000,000) -- --
Common stock issued for
Acquisition (101,563) -- --
------------------------------------------------------------------------------------------------------------------
Net cash used to acquire UCI $ -- $ -- $ --
------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-10
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES
- - --------------------------------------------------------------------------------
ORGANIZATION AND Executive TeleCard, Ltd. (d/b/a eGlobe, Inc.) and
BUSINESS subsidiaries, (collectively, the "Company") provide
services to large telecommunications companies,
primarily to telephone companies which are dominant in
their national markets and to specialized telephone
companies and to Internet Service Providers as well. The
services of the Company enable its customers to provide
global reach for "enhanced" or "value added" services
that they are supplying, to their end user customers.
Prior to 1998, the entire focus was on supporting
calling card services. In 1998, that focus began to
change.
The key assets of the Company - its operating platforms
in more than 40 countries, its ability to originate
telephone calls (and in many cases, provide data access)
in more than 90 countries and territories, and its
customer and operating arrangements around the world --
permit extension of the Company's line of services at
incremental cost. In 1998, the Company began that
extension of services through acquisition and
investment.
In December 1998, the Company acquired IDX
International, Inc. ("IDX"), a supplier of Internet
Protocol, ("IP") transmission services, principally to
telecommunications carriers, in 14 countries. This
acquisition allows the Company to offer two additional
services, IP voice and IP, fax to its customer base.
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 (See Note 6).
During the nine months ending December 31, 1998, the
Company advanced approximately $1.0 million to a
software based service company in which the Company is
considering making a joint venture investment. For these
advances, the Company received a technology license and
has participated in the development and beta testing of
the core software. This investment provides the basis
for a new set of IP and voice services which the Company
expects to launch in 1999. (See Note 17).
MANAGEMENT'S As of December 31, 1998, the Company had a net working
PLAN capital deficiency of $21.0 million resulting
principally from a net loss of $7.1 million for the nine
months ended December 31, 1998, reclassification of $8.5
million of debt due in August 1999 ($7.5 million) and
December 1999 ($1.0 million) to a current liability as
of December 31, 1998 and short-term indebtedness of $6.3
million incurred during the fourth calendar quarter of
1998 primarily related to two acquisitions (see Note 6
for further discussion). Of this latter amount, up to
$5.4 million (plus accrued interest) may be paid, at the
Company's sole discretion, by the issuance of common
stock. The first $1.0 million was repaid by the issuance
of common stock in March 1999.
F-11
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES
- - --------------------------------------------------------------------------------
MANAGEMENT'S In January and February 1999, the Company raised $8.0
PLAN (CON'T) million in cash through the issuance of convertible
preferred stock and warrants. The Company will receive
an additional $2.0 million upon registration of the
common stock underlying the convertible preferred stock.
(See Note 17 for additional information on these
issuances). Substantially all of the $8.0 million of
proceeds was used in the first calendar quarter of 1999
to support current operations and capital expenditure
requirements for equipment to support new customer
contracts and to pay-down accounts payable, principally
to telecommunications vendors and professional service
firms. On April 9, 1999, the Company entered into a
financing commitment totaling $20.0 million with an
affiliate of the Company's largest stockholder in the
form of long-term debt. This commitment is subject to
approval by the Company's stockholders at its annual
meeting scheduled to occur in the second calendar
quarter of 1999. The Company's management believes that
there is a high probability that stockholder approval
will be obtained (see Note 18 for additional information
on this financing). However, if stockholder approval is
not obtained, the Company will be required to pursue
additional sources of capital, to repay the indebtedness
due in August 1999 of $8.5 million, including accrued
interest of approximately $1.0 million, and to support
the business plan of the Company.
Under the terms of this commitment, the lender provided
the Company with a $7.0 million unsecured loan which is
due on the earlier of one year or approval of the $20.0
million facility by the stockholders.
The estimated capital requirements for 1999 needed to
meet the Company's pre-existing cash obligations of
approximately $12.1 million and to finance its growth
plan are approximately $50.0 million. Through April 10,
1999, the Company acquired new funding and commitments
in excess of $32.0 million: $10 million from the sale of
convertible stock (of which the $8.0 million has been
received and $2.0 million will be advanced upon
registration of the underlying common shares); $20.0
million in committed long-term debt which is subject to
stockholder approval (under the commitment the lender
has provided a bridge loan of $7.0 million which the
Company has drawn down); and $2.0 million or more in
vendor financing for network equipment purchases.
Assuming that stockholder approval is forthcoming for
the long-term debt, these funds should permit the
Company to meet a modest baseline growth plan. To
achieve the growth, both in the short and long term,
that the business plan anticipates, however, will
require additional capital of $18.0 million. The Company
anticipates that these cash needs in the latter part of
the year will come from (1) a capital market financing
of debt or equity in the second half of the year of up
to $30.0 million and (2) secured equipment-based
financing of up to $10.0 million. Should the Company be
unable to raise additional funds from these or other
sources, then its plans will be sharply curtailed and
its business adversely affected.
F-12
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES
- - --------------------------------------------------------------------------------
Although the Company's management believes that
stockholder approval for the financing by the lender
described above is probable, in the event approval is
not obtained, there can be no assurance that the Company
will raise additional capital or generate funds from
operations sufficient to meet its obligations and
planned requirements. The lack of sufficient funds from
these sources would force the Company to curtail both
its existing and planned levels of operations and would
therefore have an adverse effect on the Company's
business.
CHANGE OF Effective with the period ended December 31, 1998, the
FISCAL YEAR stockholders of the Company approved the change of the
fiscal year to a December 31 fiscal year end. Therefore,
the period ended December 31, 1998 represents a
nine-month period as compared to a twelve month period
for fiscal years ended March 31, 1998 and 1997.
Information for the comparable nine month period ended
December 31, 1997 is summarized below (unaudited):
Revenue $ 25,583,730
Gross profit $ 10,905,014
Taxes on income $ 140,000
Net loss $ (5,335,692)
Net loss per common share:
Basic $ (0.31)
Diluted $ (0.31)
BASIS OF The consolidated financial statements have been prepared
PRESENTATION in accordance with generally accepted accounting
AND principles and include the accounts of the Company and
CONSOLIDATION its wholly-owned subsidiaries. All material intercompany
transactions and balances have been eliminated in
consolidation.
FOREIGN For subsidiaries whose functional currency is the local
CURRENCY currency and which do not operate in highly inflationary
TRANSLATION economies, all net monetary and non-monetary assets and
liabilities are translated at current exchange rates and
translation adjustments are included in stockholders'
equity. Revenues and expenses are translated at the
weighted average rate for the period. Foreign currency
gains and losses resulting from transactions are
included in the results of operations in the period in
which the transactions occurred.
F-13
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES
- - --------------------------------------------------------------------------------
USE OF The preparation of financial statements in conformity
ESTIMATES with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the
reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
FINANCIAL Financial instruments, which potentially subject the
INSTRUMENTS Company to concentrations of credit risk consist
AND principally of cash and cash equivalents and trade
CONCENTRATIONS accounts receivable.
OF CREDIT RISK
The Company places its cash and temporary cash
investments with quality financial institutions.
Concentrations of credit risk with respect to trade
accounts receivable are limited due to the variety of
customers and markets which comprise the Company's
customer base, as well as the geographic diversification
of the customer base. The Company routinely assesses the
financial strength of its customers and, as a
consequence, believes that its trade accounts receivable
credit risk exposure is limited. Generally, the Company
does not require collateral or other security to support
customer receivables. As of December 31, 1998, the
Company had approximately 30% and 12% in trade accounts
receivable from two customers. In addition, a few of the
Company's card services customers, who accounted for
approximately 40% of revenues during the fiscal year
ended March 31, 1998, have during the nine month period
ended December 31, 1998 substantially reduced their use
of the Company's services and can be expected to end
their use of such services in the near future. As a
result, the Company has experienced a decline in card
service revenue. At December 31, 1998, there were no
other significant concentrations of credit risk.
Some of the Company's customers are permitted to choose
the currency in which they pay for calling services from
among several different currencies determined by the
Company. Thus, the Company's earnings may be materially
affected by movements in the exchange rate between the
U.S. dollar and such other currencies. The Company does
not engage in the practice of entering into foreign
currency contracts in order to hedge the effects of
foreign currency fluctuations.
The carrying amounts of financial instruments, including
cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses approximated fair value
because of the immediate or short-term maturity of these
instruments. The difference between the carrying amount
and fair value of the Company's notes payable and
long-term debt is not significant.
F-14
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES
- - --------------------------------------------------------------------------------
RESTRICTED Restricted cash consists of $0.1 million on deposit with
CASH a financial institution to secure a letter of credit
issued to a transmission vendor related to a new
agreement whereby the Company will perform platform and
transmission services.
PROPERTY, Property and equipment are recorded at cost. Additions,
EQUIPMENT, installation costs and major improvements of property
DEPRECIATION and equipment are capitalized. Expenditures for
AND maintenance and repairs are expensed as incurred. The
AMORTIZATION cost of property and equipment retired or sold, together
with the related accumulated depreciation or
amortization, are removed from the appropriate accounts
and the resulting gain or loss is included in the
statement of operations.
Depreciation and amortization is computed using the
straight-line method over the estimated useful lives of
the related assets ranging from five to twenty years.
The Company follows the provisions of the Financial
Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment of Long-lived Assets and
for Long-lived Assets to Be Disposed Of ". Long-lived
assets and certain identifiable intangibles to be held
and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be
recoverable. The Company continuously evaluates the
recoverability of its long-lived assets based on
estimated future cash flows from and the estimated
liquidation value of such long-lived assets, and
provides for impairment if such undiscounted cash flows
are insufficient to recover the carrying amount of the
long-lived asset.
SOFTWARE SFAS No. 86, "Accounting for the Costs of Computer
DEVELOPMENT Software to be Sold, Leased, or Otherwise Marketed",
COSTS requires the capitalization of certain software
development costs incurred subsequent to the date when
technological feasibility is established and prior to
the date when the product is generally available for
licensing. The Company defines technological feasibility
as being attained at the time a working model of a
software product is completed. Capitalized software
development costs will be amortized using the
straight-line method over the estimated economic life of
approximately three years.
RESEARCH AND Research and development costs are expensed as incurred.
DEVELOPMENT
GOODWILL AND Intangible assets consist primarily of goodwill arising
INTANGIBLE ASSETS from acquisitions and licenses and trademarks which are
recorded at cost. Goodwill of $10.9 million and $1.1
million was recorded in connection with the acquisition
of IDX and UCI on December 2, 1998 and December 31,
1998, respectively. See Note 6 for discussion of
acquisitions.
F-15
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES
- - --------------------------------------------------------------------------------
Amortization of goodwill is provided over seven years on
a straight-line basis. Amortization is provided on the
straight-line method over ten years for licenses and
trademarks. Amortization expense for the nine months
ended December 31, 1998 and the fiscal years ended March
31, 1998 and 1997 was $0.2 million, $0.05 million and
$0.19 million, respectively. At December 31, 1998 and
March 31, 1998, accumulated amortization of goodwill and
other intangible assets was $0.93 million and $0.73
million, respectively. The carrying value of intangible
assets is periodically reviewed and impairments, if any,
are recognized when the expected future benefit to be
derived from individual intangible assets is less than
its carrying value. The carrying value of goodwill will
be periodically reviewed based on the future estimated
undiscounted cash flows to determine if any impairment
should be recognized.
DEFERRED Deferred financing and acquisition costs represent third
FINANCING AND party costs and expenses incurred which are directly
ACQUISITION traceable to pending acquisitions and financing efforts.
COSTS The costs and expenses will be matched with completed
financings and acquisitions and accounted for according
to the underlying transaction. The costs and expenses
associated with unsuccessful efforts will be expensed in
the period in which the acquisition or financing has
been deemed to be unsuccessful. The Company evaluates
all pending acquisition and financing costs quarterly to
determine if any deferred costs should be expensed in
the period.
REVENUE Revenue from the provision of calling card and IP
RECOGNITION transmission services is recognized as utilized by
customers. Billings to customers are based upon
established tariffs filed with the United States Federal
Communications Commission, or for usage outside of the
tariff requirements, at rates established by the
Company.
TAXES ON INCOME The Company accounts for income taxes under SFAS No.
109, "Accounting for Income Taxes". Under SFAS No. 109,
deferred tax assets and liabilities are determined based
on the temporary differences between the tax basis of
assets and liabilities and their reported amounts in the
financial statements using enacted tax rates in effect
for the year in which the differences are expected to
reverse.
NET EARNINGS The Company applies SFAS No. 128, "Earnings Per Share"
(LOSS) PER SHARE for the calculation of "Basic" and "Diluted" earnings
(loss) per share. Basic earnings (loss) per share
includes no dilution and is computed by dividing income
(loss) available to common stockholders by the weighted
average number of common shares outstanding for the
period. Diluted earnings (loss) per share reflects the
potential dilution of securities that could share in the
earnings (loss) of an entity.
F-16
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES
- - --------------------------------------------------------------------------------
STOCK OPTIONS The Company applies Accounting Principles Board ("APB")
Opinion 25, "Accounting for Stock Issued to Employees,"
and related Interpretations in accounting for all stock
option plans. Under APB Opinion 25, no compensation cost
has been recognized for stock options granted to
employees as the option price equals or exceeds the
market price of the underlying common stock on the date
of grant.
SFAS No. 123, "Accounting for Stock-Based Compensation,"
requires the Company to provide pro forma information
regarding net income (loss) as if compensation cost for
the Company's stock option plans had been determined in
accordance with the fair value based method prescribed
in SFAS No. 123. To provide the required pro forma
information, the Company estimates the fair value of
each stock option at the grant date by using the
Black-Scholes option-pricing model. See Note 11 for
required disclosures.
Under SFAS No. 123, compensation cost is recognized for
stock options granted to non-employees at the grant date
by using the Black-Scholes option-pricing model.
CASH The Company considers cash and all highly liquid
EQUIVALENTS investments purchased with an original maturity of three
months or less to be cash equivalents.
COMPREHENSIVE During the period ended December 31, 1998, the Company
INCOME (LOSS) adopted SFAS No. 130, "Reporting Comprehensive Income".
The implementation of SFAS No. 130 required comparative
information for earlier years to be restated.
Comprehensive income (loss) is comprised of net income
(loss) and all changes to stockholders' equity, except
those due to investments by stockholders, changes in
paid-in capital and distributions to stockholders. The
Company has elected to report comprehensive income
(loss) in a consolidated statement of comprehensive
income (loss).
RECENT The FASB has recently issued SFAS No. 133, "Accounting
ACCOUNTING for Derivative Instruments and Hedging Activities". SFAS
PRONOUNCEMENTS No. 133 requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair
market value. Gains or losses resulting from changes in
the values of those derivatives are accounted for
depending on the use of the derivative and whether it
qualifies for hedge accounting. The key criterion for
hedge accounting is that the hedging relationship must
be highly effective in achieving offsetting changes in
fair value or cash flows. SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999 and is
currently not applicable to the Company.
RECLASSIFICATIONS Certain consolidated financial amounts have been
reclassified for consistent presentation.
F-17
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
1. PROPERTY AND Property and equipment at December 31, and March 31,
EQUIPMENT 1998 consisted of the following:
DECEMBER 31, 1998 MARCH 31, 1998
-------------------------------------------------------------------------------------------------
Land $ 122,300 $ 192,300
Buildings and improvements 983,053 941,458
Calling card platform equipment 13,480,369 12,424,718
IP transmission equipment 887,540 -
Operations center equipment and furniture 8,085,517 7,142,360
Call diverters 1,400,855 1,400,855
Equipment under capital leases (Note 4) 1,278,743 949,322
Internet communications equipment 562,700 563,175
-------------------------------------------------------------------------------------------------
26,801,077 23,614,188
Less accumulated depreciation and amortization 13,648,667 11,702,878
-------------------------------------------------------------------------------------------------
$13,152,410 $11,911,310
-------------------------------------------------------------------------------------------------
Property and equipment at December 31, 1998 and March
31, 1998, includes certain telephone, IP transmission
equipment and office equipment under capital lease
agreements with an original cost of approximately $1.3
million and $1.0 million, respectively and accumulated
depreciation of $0.4 million and $0.3 million,
respectively. Depreciation expense for the nine month
period ended December 31, 1998 and the years ended March
31, 1998 and 1997 was $2.1 million, $2.7 million and
$1.6 million, respectively.
2. ACCRUED Accrued expenses at December 31, 1998 and March 31, 1998
EXPENSES consisted of the following:
DECEMBER 31, 1998 MARCH 31, 1998
------------------------------------------------------------------------------------------------------
Telephone carriers $3,091,457 $2,591,511
Corporate realignment expenses 350,830 754,849
Legal and professional fees 387,130 320,341
Salaries and benefits 513,230 267,681
Interest expense 646,360 64,714
Costs associated with acquisitions 696,955 -
Other 517,215 223,710
------------------------------------------------------------------------------------------------------
$6,203,177 $4,222,806
------------------------------------------------------------------------------------------------------
The Company incurred various realignment expenses during
the year ended March 31, 1998 resulting from the review
of operations and activities undertaken by new corporate
management. These costs, which totaled $3.1 million,
included primarily employee severance, legal and
consulting fees and the write down of certain
investments made in the Company's Internet service
development program. The Company does not anticipate
further realignment expenses in the future. Costs
associated with acquisitions primarily consists of $0.4
million for billing system development costs for a
pending acquisition and $0.2 million for legal fees
related to the issuance of certain preferred stock
subsequent to December 31, 1998.
F-18
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
3. NOTES At December 31 and March 31, 1998, current notes payable
PAYABLE, consisted of the following:
PRINCIPALLY
RELATED TO
ACQUISITIONS
DECEMBER 31, MARCH 31,
1998 1998
--------------------------------------------------------------------------------------------------------
12 % unsecured term note payable to an investor, net of
unamortized discount of $26,351, interest and principal
repaid in March 1999 (1) $ 223,649 $ -
Convertible subordinated promissory note for acquisition of
IDX, interest and principal repaid in March 1999 through
issuance of common stock. (2) (See Note 6) 1,000,000 -
Convertible subordinated promissory note for acquisition of
IDX, interest and principal payable May 1999. (2) (See Note
6) 418,024 -
Convertible subordinated promissory note for acquisition of
IDX, interest and principal payable June 1999. (2) (See
Note 6) 1,500,000 -
Convertible subordinated promissory note for acquisition of
IDX, interest and principal payable October 1999. (2) (See
Note 6) 2,500,000 -
8% promissory note for acquisition of UCI, interest and
principal payable June 1999, net of unamortized discount of
$42,967 (3) (See Note 6) 457,033 -
Short-term loan from two officers (See Note 10) 100,000 -
Short-term note payable to an investor in April 1999. 100,000 -
--------------------------------------------------------------------------------------------------------
Total notes payable $6,298,706 $ -
--------------------------------------------------------------------------------------------------------
F-19
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
3. NOTES (1) In September 1998, a subsidiary of the Company
PAYABLE, entered into a bridge loan agreement with an
PRINCIPALLY investor for $250,000. The proceeds were advanced
RELATED TO to a company that is developing messaging
ACQUISITIONS technology. The Company is in the process of
(CON'T) negotiating a joint venture arrangement whereby it
would own 50% of this software technology. (See
Note 17). In connection with this transaction, the
lender was granted warrants to purchase 25,000
shares of the Company's common stock at a price of
$2.00 per share. The value assigned to the warrants
of $26,351 was recorded as a discount to the note
and will be amortized through March 1999 as
additional interest expense. The warrants expire on
September 1, 2003 and as of December 31, 1998,
these warrants have not been exercised. The Company
is currently negotiating with the lender to extend
this loan. However, there can be no assurance that
such extension will be received.
(2) In December 1998, the Company acquired IDX. In
connection with this transaction, convertible
subordinated promissory notes were issued in the
amount of $5.0 million. An additional note of $0.4
million for accrued but unpaid dividends owed by
IDX was also issued by the Company and is due May
31, 1999. The notes bear interest at LIBOR plus
2.5% (7.75% at December 31, 1998). Each of the
notes, plus accrued interest, may be paid in cash
or shares of the Company's common stock, at the
sole discretion of the Company. If the Company
elects to pay the notes with common stock, the
price of the common stock on the due date of the
notes determines the number of shares to be issued.
In March 1999, the Company elected to pay the first
note (including interest) in shares of common stock
and issued approximately 474,000 shares of common
stock to discharge this indebtedness. (See Note 6
for a description of a possible reduction in the
principal amount of the convertible subordinated
promissory notes payable).
(3) On December 31, 1998, the Company acquired UCI. In
connection with this transaction, the Company
issued a promissory note for $0.5 million bearing
interest at 8% due June 27, 1999. In connection
with the note, UCI was granted warrants to purchase
50,000 shares of the Company's common stock at a
price of $1.63 per share. The warrants expire on
December 31, 2003. The value assigned to the
warrants of $42,967 was recorded as a discount to
the note and will be amortized through June 1999 as
additional interest expense. At December 31, 1998,
these warrants have not been exercised. (See Note 6
for further discussion).
F-20
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
4. LONG-TERM At December 31 and March 31, 1998 long-term debt
DEBT consisted of the following:
DECEMBER 31, MARCH 31,
1998 1998
-----------------------------------------------------------------------------------------------------------
8.875% unsecured term note payable to a telecommunications
company, interest and principal payable August 1999, net of
unamortized discount of $205,932 and $437,608 (1) $7,294,068 $7,062,392
8.87% unsecured term note payable to a stockholder, interest
and principal payable December 1999, net of unamortized
discount of $45,844 (2) 954,156 -
8% promissory note for acquisition of UCI, interest and
principal payable June 2000 (See Note 6) 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 305,135 310,000
Capitalized lease obligations 724,199 607,209
-----------------------------------------------------------------------------------------------------------
Total 9,777,558 7,979,601
Less current maturities, net of unamortized discount of
$251,776 and $437,608 8,540,214 244,020
-----------------------------------------------------------------------------------------------------------
Total long-term debt $1,237,344 $ 7,735,581
-----------------------------------------------------------------------------------------------------------
F-21
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
4. LONG-TERM (1) In February 1998, the Company borrowed $7.5 million
DEBT from a telecommunications company. In connection
(CON'T) with this transaction, the lender was granted
warrants to purchase 500,000 shares of the
Company's common stock at a price of $3.03 per
share. The warrants expire on February 23, 2001.
The value assigned to such warrants when granted in
connection with the above note agreement was
approximately $0.5 million and was recorded as a
discount to long-term debt. The discount is being
amortized over the term of the note as interest
expense. At December 31, 1998, these warrants have
not been exercised.
(2) In June 1998, the Company borrowed $1.0 million
from an existing stockholder. In connection with
this transaction, the lender was granted warrants
to purchase 67,000 shares of the Company's common
stock at a price of $3.03 per share. The warrants
expire in June 2001. The stockholder also received
as consideration for the loan the repricing and
extension of a warrant for 55,000 shares which is
now exercisable on or before February 2001 at a
price of $3.75 per share. The value assigned to
such warrants, including the revision of terms, was
approximately $68,846 and was recorded as a
discount to the note payable. The discount is being
amortized over the term of the note as interest
expense. At December 31, 1998, these warrants have
not been exercised. Subsequent to year end, the
exercise price of 122,000 warrants was lowered to
$1.5125 per share and the expiration dates were
extended through January 31, 2002. The value
assigned to the revision in terms will be recorded
as additional interest expense in 1999.
F-22
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
4. LONG-TERM Future maturities of long-term debt and future minimum
DEBT (CON'T) lease payments under capital lease obligations at
December 31, 1998 are as follows:
LONG-TERM CAPITAL
YEARS ENDING DECEMBER 31, DEBT LEASES TOTAL
--------------------------------------------------------------------------------------------------------
1999 $8,506,956 $ 362,545 $ 8,869,501
2000 507,534 321,115 828,649
2001 8,159 189,939 198,098
2002 8,836 - 8,836
2003 9,569 - 9,569
Thereafter 264,081 - 264,081
--------------------------------------------------------------------------------------------------------
Total payments 9,305,135 873,599 10,178,734
Less amounts
representing interest - 149,400 149,400
--------------------------------------------------------------------------------------------------------
Principal payments 9,305,135 724,199 10,029,334
Less current maturities 8,506,956 285,034 8,791,990
--------------------------------------------------------------------------------------------------------
Total Long-Term Debt $ 798,179 $ 439,165 $ 1,237,344
--------------------------------------------------------------------------------------------------------
Subsequent to December 31, 1998, the Company entered
into additional capital lease obligations requiring
future minimum lease payments of approximately $0.6
million through 2001.
F-23
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
5. EARNINGS (LOSS) Earnings per share are calculated in accordance with
PER SHARE SFAS No. 128, "Earnings Per Share". Under SFAS No. 128,
basic earnings (loss) per share is calculated as income
(loss) available to common stockholders divided by the
weighted average number of common shares outstanding.
Diluted earnings per share is calculated as net income
(loss) divided by the diluted weighted average number of
common shares. The diluted weighted average number of
common shares is calculated using the treasury stock
method for common stock issuable pursuant to outstanding
stock options and common stock warrants. Common stock
options and warrants of 44,234 and 203,782 were not
included in diluted earning (loss) per share for the
nine months ended December 31, 1998 and the fiscal year
ended March 31, 1998, respectively, as the effect was
antidilutive due to the Company recording a loss for
these periods. In addition, convertible preferred stock
and convertible subordinated promissory notes
convertible into 5,323,926 shares of common stock were
not included in diluted earnings (loss) per share for
the nine month period ended December 31, 1998 due to the
loss for the period.
Options and warrants to purchase 2,017,317 shares of
common stock at exercise prices ranging from $2.56 to
$6.61 per share and convertible preferred stock
convertible into 1,875,000 shares of common stock were
outstanding at December 31, 1998 but were not included
in the computation of diluted earnings (loss) per share
because the exercise prices or conversion price were
greater than the average market price of the common
stock. Options and warrants to purchase 2,049,315 shares
of common stock at exercise prices from $3.00 to $6.94
per share were outstanding at March 31, 1998 but were
not included in the computation of diluted earnings
(loss) per share because the exercise prices were
greater than the average market price of the common
shares. Options and warrants to purchase 821,087 shares
of common stock at exercise prices from $5.75 to $14.88
per share were outstanding at March 31, 1997 but were
not included in the computation of diluted earnings
(loss) per share because the exercise prices were
greater than the average market price of the common
shares.
Contingently issuable warrants to purchase up to
2,500,000 shares of common stock (subject to stockholder
approval) related to a recent acquisition have not been
included in the computation of diluted earnings (loss)
per share as the contingency had not been met as of
December 31, 1998. See Note 6.
Various issuances of convertible preferred stock,
relating to financings and acquisitions, have been
completed both prior to and subsequent to December 31,
1998 that could have a significant effect on the
weighted average number of common shares in future
periods. See Notes 11 and 17 for further disclosure.
F-24
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
5. EARNINGS (LOSS) PER SHARE (CON'T) NINE
MONTHS ENDED YEARS ENDED
DECEMBER 31, MARCH 31, MARCH 31,
1998 1998 1997
-----------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE:
NUMERATOR
Net earnings (loss) $ (7,090,192) $ (13,289,910) $ 773,952
DENOMINATOR
Weighted average shares outstanding 17,736,654 17,082,495 15,861,240
-----------------------------------------------------------------
PER SHARE AMOUNTS
Basic earnings (loss) $ (0.40) $ (0.78) $ 0.05
-----------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER SHARE:
NUMERATOR
Net earnings (loss) $ (7,090,192) $ (13,289,910) $ 773,952
DENOMINATOR
Weighted average shares outstanding 17,736,654 17,082,495 15,861,240
Effect of dilutive securities
Options and warrants - - 297,390
-----------------------------------------------------------------
Weighted average common shares and
assumed conversions outstanding 17,736,654 17,082,495 16,158,630
-----------------------------------------------------------------
PER SHARE AMOUNTS
Diluted earnings (loss) $ (0.40) $ (0.78) $ 0.05
-----------------------------------------------------------------
F-25
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
6. BUSINESS All acquisitions, have been accounted for under the
ACQUISITIONS purchase method of accounting. The results of operations
of the acquired businesses are included in the
consolidated financial statements from the date of
acquisition.
IDX - On December 2, 1998, the Company acquired all of
the common and preferred stock of IDX, a privately-held
IP based fax and telephony company, for (a) 500,000
shares of the Company's Series B Convertible Preferred
Stock ("Series B Preferred") valued at $3.5 million
which are convertible into 2,500,000 shares (2,000,000
shares until stockholder approval is obtained and
subject to adjustment as described below) of common
stock; (b) warrants ("IDX Warrants") to purchase up to
an additional 2,500,000 shares of common stock (subject
to stockholder approval as well as adjustment as
described below); (c) $5.0 million in 7.75% convertible
subordinated promissory notes ("IDX Notes") (subject to
adjustment as described below); (d) $1.5 million in
bridge loan advances to IDX made by the Company prior to
the acquisition which were converted into part of the
purchase price plus associated accrued interest of $0.04
million; (e) $0.4 million for IDX dividends accrued and
unpaid on IDX's Preferred Stock under a convertible
subordinated promissory note and (f) direct costs
associated with the acquisition of $0.4 million. The
Company also advanced approximately $0.4 million to IDX
prior to acquisition under an agreement to provide IDX
up to $2.3 million for working capital purposes over the
next twelve months. These pre-acquisition advances were
not considered part of the purchase price.
The Company plans to include these requests for the
approval of the warrants and additional stock as matters
to be voted upon by the stockholders at the next annual
meeting. This acquisition has been accounted for under
the purchase method of accounting. The financial
statements of the Company reflect the preliminary
allocation of the purchase price. The preliminary
allocation has resulted in acquired goodwill of $10.9
million that is being amortized on a straight-line basis
over seven years. The purchase price allocation has not
been finalized pending resolution of several purchase
price elements, which are contingent upon the following:
(a) The amounts of Series B Preferred Stock and
IDX Warrants to be issued are subject to
stockholder approval subsequent to the date of
acquisition.
F-26
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
6. BUSINESS (b) IDX's ability to achieve certain revenue and EBITDA
ACQUISITIONS (EBITDA represents operating income before interest
(CON'T) expense, income taxes, depreciation and
amortization) objectives twelve months after the
acquisition date may limit the amount of warrants
to be granted as well as eliminate the Company's
price guarantee as discussed in (d) below.
(c) The shares of Series B Preferred stock are
convertible at the holders' option at any time at
the then current conversion rate. The shares of
Series B Preferred stock will automatically convert
into shares of common stock on the earlier to occur
of (a) the first date that the 15 day average
closing sales price of common stock is equal to or
greater than $8.00 or (b) 30 days after the later
to occur of (i) December 2, 1999 or (ii) the
receipt of any necessary stockholder approval
relating to the issuance of the common stock upon
such conversion. The Company has guaranteed a price
of $8.00 per share on December 2, 1999, subject to
IDX's achievement of certain revenue and EBITDA
objectives. If the market price of the common stock
is less than $8.00 on December 2, 1999, and IDX has
met its performance objectives, the Company will
issue additional shares of common stock upon
conversion of the Series B Preferred stock (subject
to the receipt of any necessary stockholder
approval) based on the ratio of $8.00 to the market
price (as defined, but not less than $3.3333 per
share), but not more than 3.5 million additional
shares of common stock will be issued.
(d) The Company has guaranteed a price of $8.00 per
common stock share relative to the warrants
issuable as of December 2, 1999, subject to IDX's
achievement of certain revenue and EBITDA
objectives. If these objectives are achieved and
the market price of the common stock is less than
$8.00 on December 2, 1999, the Company will issue
additional shares of common stock upon exercise of
the IDX Warrants based on the ratio of $8.00 to the
market price (as defined, but not less than $3.3333
per share), up to a maximum of 3.5 million
additional shares of common stock. However, if the
average closing sales price of the common stock for
any 15 consecutive days equals or is greater than
$8.00 per share prior to December 2, 1999 there is
no price guarantee upon exercise of the warrants.
The IDX warrants cannot be issued until stockholder
approval is obtained.
F-27
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
6. BUSINESS (e) IDX must meet certain working capital levels at the
ACQUISITIONS date of acquisition. To the extent that IDX has a
(CON'T) working capital deficiency, as defined, as of the
date of acquisition, the Company may reduce the
number of shares of the Series B Preferred Stock
currently held by the stockholders and may in some
circumstances reduce the amount outstanding on the
principal balance of the third IDX note referred to
below.
(f) The Company is obligated to pay accrued but unpaid
dividends ("Accrued Dividends") on IDX's previously
outstanding preferred stock under an interest
bearing convertible subordinated promissory note in
the principal amount of approximately $0.4 million
due May 31, 1999. The Company, however, is entitled
to reduce the $2.5 million principal balance of the
third IDX Note as discussed below and in Note 3 by
the amount of the Accrued Dividends and certain
defined amounts unless offset by proceeds from the
sale of an IDX subsidiary and a note issued to IDX
by an option holder. The Company may also elect to
pay this obligation in cash or in shares of common
stock.
(g) The IDX Notes consist of four separate notes and
are payable in cash or common stock at the
Company's sole discretion. The notes have varying
maturity dates through October 31, 1999. See Note 3
for the terms and conditions of the IDX Notes.
Payment of the IDX Notes is subject to adjustment
upon the resolution of certain contingencies as
discussed above.
Based on the contingent purchase price elements as
listed above, goodwill associated with the acquisition
may materially increase when these contingencies are
resolved.
The holders of the Series B Preferred Stock are not
entitled to dividends unless declared by the Board of
Directors. The shares of Series B Preferred Stock are
not redeemable. Further, the Company has agreed to
register for resale the shares of common stock
underlying the conversion rights of the holders of the
Series B Preferred Stock, the IDX warrants and the IDX
Notes.
F-28
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
6. BUSINESS At the acquisition date, the stockholders of IDX
ACQUISITIONS received Series B Preferred Stock and warrants as
(CON'T) discussed above, which are ultimately convertible into
common stock subject to IDX meeting its performance
objectives. These stockholders in turn granted preferred
stock and warrants, each of which is convertible into a
maximum of 240,000 shares of the Company's common stock,
to IDX employees. The underlying common stock granted by
the IDX stockholders to certain employees has been
initially valued as $420,000 of compensation . The
actual number of common shares issued upon conversion of
the preferred stock and warrants will ultimately be
determined by stockholder approval, the achievement, by
IDX, of certain performance goals and the market price
of the Company's stock over the contingency period of up
to twelve months from the date of acquisition. The stock
grants are performance based and will be adjusted each
reporting period (but not below zero) for the changes in
stock price until the shares and/or warrants (if and
when) issued are converted to common stock.
The following unaudited pro forma consolidated results
of operations are presented as if the IDX acquisition
had been made at the beginning of the periods presented.
For March 31, 1998 pro forma results, IDX amounts
include its December 31, 1997 year end as compared to
the Company's March 31, 1998 year end. The one month
period of IDX for December 1998, is included in the
Company's results of operations for the nine months
ended December 31, 1998. As a result, for comparative
purposes, the Company has included an eight month period
of IDX from April 1, 1998 through November 30, 1998 in
its nine months ended December 31, 1998 pro forma
results below.
PERIODS ENDED
DECEMBER 31, 1998 MARCH 31, 1998
-------------------------------------------
NET REVENUES $ 24,251,500 $ 33,690,777
NET LOSS $(10,053,116) $(16,548,510)
BASIC AND DILUTED LOSS PER SHARE $ (0.47) $ (0.85)
F-29
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
6. BUSINESS UCI - On December 31, 1998, the Company acquired all of
ACQUISITIONS the common stock issued and outstanding of UCI, a
(CON'T) privately-held corporation established under the laws of
the Republic of Cyprus, for 125,000 shares of common
stock (50% delivered at the acquisition date and 50% to
be delivered February 1, 2000, subject to adjustment),
and $2.1 million payable as follows: (a) $75,000 payable
in cash in January 1999; (b) $0.5 million in the form of
a note, with 8% interest payable monthly due June 30,
1999; (c) $0.5 million in the form of a note, with 8%
interest payable monthly due no later than June 30,
2000; (d) $1.0 million in the form of a non-interest
bearing note ("Anniversary Payment") to be paid on
February 1, 2000 or December 31, 2000, depending on the
percentage of projected revenue achieved, subject to
adjustment; and (e) warrants to purchase 50,000 shares
of common stock with an exercise price of $1.63 per
share. See Note 3 for the terms and conditions of the
two $0.5 million UCI Notes. The 62,500 shares of common
stock issued at the acquisition date were valued at
$101,563. The Company has agreed to register for resale
the shares of common stock and UCI warrants.
This acquisition has been accounted for under the
purchase method of accounting. The financial statements
of the Company reflect the preliminary purchase price
allocation. The purchase price allocation has not been
finalized pending resolution of several purchase price
elements, which are contingent upon the following:
(a) If the closing sales price on NASDAQ of the
Company's common stock on February 1, 2000 is
less than $8.00, additional shares will be
issued determined by subtracting (i) $1.0
million divided by the closing sales price on
February 1, 2000 from (ii) 125,000. These
shares as well as the 62,500 shares to be
delivered are subject to adjustment as
discussed below.
(b) If UCI does not achieve 100% of its $3.0
million projected revenue target as of
February 1, 2000, for each 10% by which the
projected revenue is less than 100% of the
projected revenue target, there will be a 10%
reduction in the Anniversary Payment and the
number of shares issuable pursuant to (a).
(c) If UCI achieves more than 100% of its $3.0
million projected revenue target as of
December 31, 1999, there will be a 10%
increase in the Anniversary Payment, not to
exceed $0.3 million due and payable as of
December 31, 2000.
(d) If the Company completes a private financing
and receives between $10 million to $19.9
million or $20 million, it will be required to
repay 50% or 100%, respectively, of the
outstanding principal and interest of the
first note as discussed above.
F-30
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
6. BUSINESS (e) If after the date of acquisition, a contract
ACQUISITIONS with a major customer of UCI is cancelled and
(CON'T) it is not reinstated or replaced by June 30,
1999, the principal amount of the first and
second note as discussed above will be
adjusted. F-30
Based on the contingent purchase price elements as
listed above, goodwill associated with the acquisition
may increase when these contingencies are resolved. UCI
had minimal operations prior to the acquisition and the
aggregate value of the non-contingent consideration of
$1.2 million has been recorded as goodwill and will be
amortized, on a straight-line basis, over seven years.
The effects of the acquisition of UCI are not material
to net revenues, net earnings or earnings per share for
pro forma information purposes and, accordingly, has not
been included in the pro forma presentation presented
for IDX above.
7. SETTLEMENT In November 1998, the Company reached an agreement with
WITH PRINCIPAL its former chairman, Mr. Ronald Jensen, who is also the
STOCKHOLDER Company's largest stockholder. The agreement concerned
settlement of his unreimbursed costs and other potential
claims.
Mr. Jensen had purchased $7.5 million of eGlobe's common
stock in a private placement in June 1997 and later was
elected Chairman of the Board of Directors. After
approximately three months, Mr. Jensen resigned his
position citing both other business demands and the
demands presented by the challenges of the Company.
During his tenure as Chairman, Mr. Jensen incurred staff
and other costs which were not billed to the Company.
Also, Mr. Jensen subsequently communicated with the
Company's current management indicating that there were
a number of issues raised during his involvement with
the Company relating to the provisions of his share
purchase agreement which could result in claims against
the Company.
In order to resolve all current and potential issues,
Mr. Jensen and the Company agreed to exchange his
current holding of 1,425,000 shares of common stock for
75 shares of 8% Series C Cumulative Convertible
Preferred Stock ("Series C Preferred"), which management
estimated to have a fair market value of approximately
$3.4 million and a face value of $7.5 million. The terms
of the Series C Preferred stock permit Mr. Jensen to
convert the face value of the preferred stock to common
stock at 90% of market price, subject to a minimum
conversion price of $4.00 per share and a maximum of
$6.00 per share. The difference between the estimated
fair value of the preferred stock issued and the market
value of the common stock surrendered resulted in a
one-time non-cash charge to the Company's statement of
operations of approximately $1.0 million for the quarter
ended September 30, 1998, with a corresponding credit to
stockholders' equity. See Note 11 for further discussion
of the terms of the Series C Preferred.
F-31
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
7. SETTLEMENT In February 1999, contemporaneous with a financing
WITH PRINCIPAL transaction between the Company and Mr. Jensen, the
STOCKHOLDER conversion terms of the Series C Preferred were amended
(CON'T) and Mr. Jensen agreed to exchange his Series C Preferred
for 3,000,000 shares of common stock. See Note 17 for
further discussion.
8. PROXY RELATED The Company, its former auditors, certain of its present
LITIGATION AND and former directors and others were defendants in a
SETTLEMENT consolidated securities class action which alleged that
COSTS certain public filings and reports made by the Company,
including its Forms 10-K for the 1991, 1992, 1993 and
1994 fiscal years (i) did not present fairly the
financial condition of the Company and its earnings; and
(ii) failed to disclose the role of a consultant to the
Company.
The Company and its former auditors vigorously opposed
the action, however, the Company decided it was in the
stockholders' best interest to curtail costly legal
proceedings and settle the case.
Under the Stipulation of Settlement dated April 2, 1998,
the Company issued 350,000 shares of its common stock
into a Settlement Fund that will be distributed among
the Class. Settlement becomes effective only upon entry
of a final judgment by the Court and upon entry of final
judgments in two related Delaware Actions (which as of
March 31, 1999 have not yet been received), and upon the
expiration of the time to appeal or upon exhaustion of
appellate review in this action, were any appeal to be
taken.
As a result of the above action and related matters, the
Company recorded $0.1 million, $3.9 million and $0.5
million in costs and expenses during the nine months
ended December 31, 1998 and the years ended March 31,
1998 and 1997. Included in the March 31, 1998 amount, is
a charge of $3.5 million which represented the value
assigned to the 350,000 shares of common stock referred
to above, which were valued at $10.00 per share pursuant
to the terms of the settlement agreement. Such value
relates to the Company's obligation to issue additional
stock if the market price of the Company's stock is less
than $10.00 per share during the defined periods. The
Company has no obligation to issue additional stock if
its share price is above $10.00 per share for fifteen
consecutive days during the two year period after all
shares have been distributed to the Class. As of
December 31, 1998, all of the shares have not been
distributed to the Class and therefore the start of the
two year window has not commenced.
Additionally, the Company settled with another
stockholder related to the same securities class action
in May 1998 and issued that stockholder 28,700 shares of
common stock at the market price at the date of
settlement for a total value of $0.08 million.
F-32
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
9. OTHER The Company is a defendant in an action brought by a
LITIGATION Colorado reseller of transmission services. The lawsuit
arises out of a transaction wherein the plaintiff and
the Company contemplated forming a limited liability
company for purposes of developing sales opportunities
generated by the plaintiff. The Company and the
plaintiff were unable to arrive at a definitive
agreement on their arrangement and the plaintiff sued,
claiming breach of a noncircumvention agreement,
notwithstanding the fact that the plaintiff agreed to
and was a part of the transaction. The Company believes
this claim is without merit and plans to defend this
action vigorously.
A former officer of the Company who was terminated in
the fall of 1997 filed suit against the Company in July
1998. The executive entered into a termination
agreement. The Company made the determination that there
were items which the executive failed to disclose to the
Company and therefore the Company ceased making payments
to the executive pending further investigation. The
executive sued, claiming employment benefits including
expenses, vacation pay and rights to options. The
Company is defending this action vigorously and believes
that it ultimately will prevail.
The Company and its subsidiaries are also parties to
various other legal actions and various claims arising
in the ordinary course of business. Management of the
Company believes that the disposition of such other
actions and claims will not have a material effect on
the financial position, operating results or cash flows
of the Company.
10. RELATED PARTY On December 31, 1998, two officers of the Company each
TRANSACTIONS loaned $0.05 million to the Company for short term
needs. The loans were repaid, including a 1% fee, in
February 1999.
In June 1998, an existing stockholder loaned the Company
$1.0 million. See Note 4 for a description of this
transaction. Subsequent to December 31, 1998, this same
stockholder loaned $0.2 million to the Company for short
term needs. This $0.2 million note was subsequently
converted into 125,000 shares of common stock. See Note
17 for further discussion.
As described in Notes 17 and 18, an affiliate of the
Company's largest stockholder made two financing
commitments to the Company subsequent to year end
totaling $25.0 million.
F-33
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
11. STOCKHOLDERS' COMMON STOCK
EQUITY
On June 3, 1997, the Board of Directors approved the
sale of 1,425,000 shares of the Company's common stock
for $7.5 million to Mr. Ronald Jensen. Proceeds of $3.0
million from the sale were used to reduce long-term
debt. The remainder of the proceeds was used for working
capital. In November 1998, the Company agreed to issue
shares of Series C Preferred Stock in exchange for the
1,425,000 shares of common stock as described in Note 7.
In February 1999, contemporaneous with a financing
transaction between the Company and Mr. Jensen (see Note
17), Mr. Jensen agreed to exchange his Series C
Preferred for 3,000,000 shares of common stock.
As described in Note 8, during the nine months period
ended December 31, 1998 and year ended March 31, 1998,
the Company agreed to issue 28,700 shares and 350,000
shares of common stock in connection with the settlement
of litigation.
As described below and in Note 6, in December 1998 the
Company made two acquisitions. The equity consideration
paid to date for these acquisitions includes the
issuance of Series B Preferred Stock convertible into
2,000,000 (subject to stockholder approval the preferred
will be convertible into 2,500,000) shares of common
stock and the issuance of 62,500 shares of common stock.
Equity consideration paid for these acquisitions is
subject to adjustment upon resolution of certain
contingencies as discussed in Note 6.
PREFERRED STOCK
Per the Company's restated certificate of incorporation
and as approved by the Company's stockholders on May 14,
1996, the Board of Directors was given the authority to
issue up to 5,000,000 shares of preferred stock without
obtaining further stockholder approval. The preferred
stock can be issued in series. The rights and
preferences of preferred stock are established by the
Company's Board of Directors upon issuance of each
series. As of December 31, 1998, the following series of
stock were authorized by the Board of Directors.
F-34
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
11. STOCKHOLDERS' SERIES B CONVERTIBLE PREFERRED STOCK
EQUITY (CON'T)
In connection with the IDX acquisition, the Company
issued 500,000 shares of Series B Convertible Preferred
Stock ("Series B"), certain warrants and promissory
notes in the original principal amount of $5.0 million
subject to adjustment in exchange for all the
outstanding common and preferred shares of IDX. (See
Note 6 for further information regarding the IDX
acquisition). The shares of Series B stock are
convertible at the holders' option at any time at the
then current conversion rate (currently at a 4 to 1
ratio of common stock to preferred). The shares of
Series B will automatically convert into shares of
common stock on the earlier to occur of (a) the first
date that the 15 day average closing sales price of
common stock is equal to or greater than $8.00 or (b) 30
days after the later to occur of (i) December 2, 1999 or
(ii) the receipt of any necessary stockholder approval
relating to the issuance of the common stock upon such
conversion. The Company has guaranteed a price of $8.00
per share on December 2, 1999, subject to IDX's
achievement of certain revenue and EBITDA objectives. If
the market price of the common stock is less than $8.00
per share on December 2, 1999 and IDX has met its
performance objectives, the Company will issue
additional shares of common stock upon conversion of the
Series B stock (subject to stockholder approval) based
on the ratio of $8.00 to the market price (as defined,
but not less than $3.3333 per share), but not more the
3.5 million additional shares of common stock will be
issued. The Series B stock has no stated liquidation
preferences, is not redeemable and has weighted voting
rights equal to 25% of the number of common shares into
which it can be converted. The holders of the Series B
stock are not entitled to dividends unless declared by
the Board of Directors.
8% SERIES C CUMULATIVE CONVERTIBLE PREFERRED STOCK
The Company authorized 275 shares of 8% Series C
Cumulative Convertible Preferred Stock ("Series C"),
with a par value of $.001 per share. These shares can be
issued in different series. All series have identical
rights, preferences, privileges and restrictions. The
holders of Series C stock are entitled to receive
cumulative annual dividends at 8% of the liquidation
price ($0.1 million per share) when declared by the
Board of Directors. Dividends accrue from the issuance
date of the stock and are fully cumulative. Cumulative
dividends shall be payable quarterly beginning September
30, 2000 when declared by the Board of Directors. The
terms of the Series C stock permit the holders to
convert the Series C stock into the number of common
shares equal to the face value of the preferred stock
divided by 90% of the market price, but with a minimum
conversion price of $4.00 per share and an maximum
conversion price of $6.00 per share, subject to
adjustment if the Company issues common stock for less
than the conversion price. If the holder of the Series C
stock converts the Series C stock to common stock, all
rights to
F-35
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
11. STOCKHOLDERS' accrued dividends shall be waived. If the Company does
EQUITY (CON'T) not achieve certain gross revenue targets by a specific
date, the Company will issue warrants to purchase 5,000
shares of common stock for each share of Series C stock
at an exercise price of $0.01 per share. The warrants
will be issuable and exercisable only if the last
reported sales price of the common stock has not
exceeded a price per share equal to 125% of the initial
conversion price of the Series C stock to common stock.
The Series C has no voting rights unless the dividend
payments are in arrears for six quarters. Should that
occur, the holders of the Series C stock have the right
to elect a director to the Board. The Company must
obtain an affirmative vote representing at least 66 2/3%
of the outstanding shares of Series C stock before the
Company can issue any preferred stock which would be
senior to or pari passu with the Series C stock. This
condition excludes Series A preferred stock.
In November 1998, in connection with a settlement with
the Company's largest stockholder (see Note 7), 75
shares of Series C stock were issued to Mr. Ronald
Jensen in exchange for 1,425,000 shares of common stock
to resolve issues relating to the provisions of his
share purchase agreement which could have resulted in
claims against the Company. Under the Series C stock
agreement, if at July 1, 1999 the Company did not
achieve certain revenue tests, 5,000 warrants would be
issued for each share of Series C stock held by Mr.
Jensen. These warrants would have had an exercise price
of $0.01 per share and would have been issuable and
exercisable contingent upon certain stock prices of the
Company's common stock. Mr. Jensen waived all rights to
accrued dividends and warrants upon conversion of the
Series C stock into 3,000,000 shares of common stock.
See Note 17 for further discussion.
SERIES A PARTICIPATING PREFERRED STOCK
In February 1997, the Company adopted a rights plan and
entered into a stockholders rights agreement that
provides for the issuance of rights for each share of
common stock outstanding on February 28, 1997. Each
right represents the right to purchase one one-hundredth
of a share of the Company's Series A Participating
Preferred Stock ("Series A") at a price of $70 per
one-hundredth of a share of Series A, subject to
adjustment. All shares issued between the date of
adoption of the Rights Agreement and the distribution
date (as defined in the Rights Agreement) will have the
Rights attached to them. The Rights become exerciseable
upon the occurrence of certain defined change of control
triggering events. The Rights will have certain
anti-takeover effects, as they will cause substantial
dilution to a person or group that acquires a
substantial interest in the Company without the prior
approval of the Company's Board of Directors.
F-36
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
11. STOCKHOLDERS' EMPLOYEE STOCK OPTION AND APPRECIATION RIGHTS PLAN
EQUITY (CON'T)
On December 14, 1995, the Board of Directors adopted the
Employee Stock Option and Appreciation Rights Plan (the
"Employee Plan"), expiring December 15, 2005, reserving
for issuance 1,000,000 shares of the Company's common
stock. The Employee Plan was amended and restated in its
entirety during the year ended March 31, 1998, including
an increase in the number of shares available for grant
to 1,750,000 representing an increase of 750,000 shares.
The Employee Plan provides for grants to key employees,
advisors or consultants to the Company at the discretion
of the Compensation Committee of the Board of Directors,
of stock options to purchase common stock of the
Company. The Employee Plan provides for the grant of
both "incentive stock options," as defined in the
Internal Revenue Code of 1986, as amended, and
nonqualified stock options. Options that are granted
under the Employee Plan that are incentive stock options
may only be granted to employees (including
employee-directors) of the Company.
Stock options granted under the Employee Plan must have
an exercise price equal in value to the fair market
value, as defined, of the Company's common stock on the
date of grant. Any options granted under the Employee
Plan must be exercised within ten years of the date they
were granted. Under the Employee Plan, Stock
Appreciation Rights ("SAR's") may also be granted in
connection with the granting of an option and may be
exercised in lieu of the exercise of the option. A SAR
is exercisable at the same time or times that the
related option is exercisable. The Company will pay the
SAR in shares of common stock equal in value to the
excess of the fair market value, at the date of
exercise, of a share of common stock over the exercise
price of the related option. The exercise of a SAR
automatically results in the cancellation of the related
option on a share-for-share basis.
During the nine months ended December 31, 1998 and the
fiscal years ended March 31, 1998 and 1997, the
Compensation Committee of the Board of Directors granted
options to purchase an aggregate of 996,941, 1,584,629
and 439,600, respectively, shares of common stock to its
employees under the Employee Plan at exercise prices
from $1.469 to $3.813 per share for the nine months
ended December 31, 1998, $2.32 to $3.12 per share for
the year ended March 31, 1998 and $5.75 to $9.00 per
share for 1997. The employees were also granted SAR's in
tandem with the options granted to them in connection
with grants prior to December 5, 1997.
F-37
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
11. STOCKHOLDERS' As of December 31, 1998, options outstanding under this
EQUITY (CON'T) Employee Plan exceeded the shares available for grant by
390,109 shares. It is management's intention to request
stockholder approval to merge the Director Plan (see
below) into the Employee Plan, thereby permitting shares
currently reserved for issuance under the Director Plan
to be used to remedy this deficiency.
DIRECTORS STOCK OPTION AND APPRECIATION RIGHTS PLAN
On December 14, 1995, the Board of Directors adopted the
Directors Stock Option and Appreciation Rights Plan (the
"Director Plan"), expiring December 14, 2005. There are
870,000 shares of the Company's common stock reserved
for issuance under the Director Plan. The Director Plan
was amended and restated in its entirety during the year
ended March 31, 1998 so that it now closely resembles
the Employee Plan. In the nine month period ended
December 31, 1998, the Director Plan was amended so that
grants of options to directors are at the discretion of
the Board of Directors or the Compensation Committee. In
November 1997 and April 1998, each director (other than
members of the Compensation Committee) was granted an
option under the Director Plan, each to purchase 10,000
shares of common stock, with each option being effective
for five years commencing on April 1, 1998 and 1999,
respectively, and with each option vesting only upon the
achievement of certain corporate economic and financial
goals. By December 31, 1998, all of these options,
totaling 120,000 options, were forfeited because not all
of the corporate and financial goals were met. Prior to
the amendments to the Director Plan, each director
received an automatic grant of ten year options and a
corresponding SAR to purchase 10,000 shares of common
stock on the third Friday in December in each calendar
year. During the nine months ended December 31, 1998 and
the fiscal years ended March 31, 1998 and 1997, the
Compensation Committee of the Board of Directors
confirmed the grant of total options (including options
with vesting contingencies, to purchase 240,000, 85,000,
and 60,000, respectively, shares of common stock to its
directors pursuant to the Company's Director Plan at
exercise prices of $1.81 to $3.19 per share for the nine
month period ended December 31, 1998, $2.63 to $2.69 per
share for the year ended March 31, 1998 and $5.75 per
share for 1997. These exercise prices were equal to the
fair market value of the shares on the date of grants.
During the nine months ended December 31, 1998, the
Company recorded $184,788 in compensation expense
related to these director warrants.
F-38
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
11. STOCKHOLDERS' WARRANTS
EQUITY (CON'T)
In connection with the issuance of debt, the Board of
Directors granted warrants to purchase an aggregate of
92,000, 949,267 and 466,667 shares of common stock,
respectively, during the nine months ended December 31,
1998 and the two fiscal years ended March 31, 1998 and
1997, at exercise prices ranging from $2.00 to $3.03 per
share for the nine months ended December 31, 1998, $0.01
to $6.61 per share for year ended March 31, 1998 and
$7.88 to $14.88 for fiscal 1997. As a result of the 10%
stock split in 1996, certain warrants were increased
from 150,000 to 165,000. During the year ended March 31,
1998, 466,667 of the warrants granted above were
cancelled as the terms of the related debt were
renegotiated. The fair value of warrants at the grant
date was recorded as unamortized discount against the
related debt. These discounts are being amortized to
interest expense over the term of the loans using the
effective interest method. Additional interest expense
related to these warrants for the nine month period
ended December 31, 1998 and the year ended March 31,
1998 was $254,678 and $478,580, respectively. There was
no unamortized interest expense for the year ended March
31, 1997.
In the nine months ended December 31, 1998 and the years
ended March 31, 1998 and 1997, the Board of Directors
granted warrants to purchase an aggregate of 2,500,
91,200 and 238,800 shares of common stock, respectively,
to non-affiliates at exercise prices of $2.00 per share
for the nine month period ended December 31, 1998, $2.75
per share for the years ended March 31, 1998 and $6.88
to $6.98 for 1997. The fair value of these warrants at
the date of grant was recorded based on the underlying
transactions. The warrants are exercisable for periods
ranging from 12 to 60 months. During the nine months
ended December 31, 1998, 318,000 of the warrants granted
above expired.
During the nine months ended December 31, 1998, the
Board of Directors granted warrants to purchase an
aggregate of 2,550,000 (2,050,000 until stockholder
approval) shares of common stock to the stockholders or
owners of companies acquired as an element of the
purchase price at exercise prices of $0.01 to $1.63.The
warrants to purchase 2,500,000 (2,000,000 until
stockholder approval) shares of common stock are
exercisable contingent upon the acquired company meeting
certain revenue and EBITDA objectives twelve months from
the date of acquisition. See Note 6 for further
information.
F-39
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
11. STOCKHOLDERS' SFAS No. 123, "Accounting for Stock-Based Compensation"
EQUITY (CON'T) requires the Company to provide pro forma information
regarding net income (loss) and net earnings (loss) per
share as if compensation costs for the Company's stock
option plans and other stock awards had been determined
in accordance with fair value based method prescribed in
SFAS No. 123. The Company estimates the fair value of
each stock award by using the Black-Scholes
option-pricing model with the following weighted-average
assumptions used for grants in the nine months ended
December 31, 1998 and the fiscal years ended March 31,
1998 and 1997, respectively: no expected dividend yields
for all periods; expected volatility of 55%, 55% and
65%; risk-free interest rates of 4.51%, 5.82% and 5.91%;
and expected lives of 3.65 years, 2 years and 1.5 years
for the Plans and stock awards.
Under the accounting provisions for SFAS No. 123, the
Company's net earnings (loss) and per earnings (loss)
per share would have been decreased by the pro forma
amounts indicated below:
- - --------------------------------------------------------------------------------
NINE MONTHS ENDED YEARS ENDED
DECEMBER 31, MARCH 31, MARCH 31,
1998 1998 1997
------------------------------------------------------------------
NET EARNINGS (LOSS)
AS REPORTED $ (7,090,192) $ (13,289,910) $ 733,952
PRO FORMA $ (7,440,099) $ (13,457,713) $ (801,214)
EARNINGS (LOSS) PER SHARE
BASIC:
AS REPORTED $ (0.40) $ (0.78) $ 0.05
PRO FORMA $ (0.42) $ (0.79) $ (0.05)
DILUTED:
AS REPORTED $ (0.40) $ (0.78) $ 0.05
PRO FORMA $ (0.42) $ (0.79) $ (0.05)
F-40
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
11. STOCKHOLDERS' A summary of the status of the Company's stock option
EQUITY (CON'T) plans and outstanding warrants as of December 31, 1998
and March 31, 1998 and 1997 and changes during the nine
months and years ending on those dates is presented
below:
DECEMBER 31, MARCH 31, MARCH 31,
1998 1998 1997
------------------------ ------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
- - ------------------------------------------------------------------------------------------------------------------------------------
OUTSTANDING, BEGINNING OF PERIOD 3,412,489 $ 3.96 1,706,832 $ 6.58 1,000,042 $5.55
GRANTED 4,256,441 $ 0.78 2,710,096 $ 3.47 849,267 $7.64
EXPIRED (1,037,604) $ 4.13 (986,091) $ 6.87 (141,725) $5.52
EXERCISED - - (18,348) $ 5.75 (752) $5.26
OUTSTANDING, END OF PERIOD 6,631,326 $ 1.92 3,412,489 $ 3.96 1,706,832 $6.58
EXERCISABLE, END OF PERIOD 1,991,216 $ 3.86 1,875,860 $ 5.02 1,302,095 $6.78
- - ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE FAIR
VALUE OF OPTIONS AND WARRANTS
GRANTED DURING THE PERIOD $ 1.43 $ 1.41 $ 1.85
- - ------------------------------------------------------------------------------------------------------------------------------------
Included in the above table are certain options and warrants that are contingent
based on various future performance measures. (See Notes 5 and 11).
The following table summarizes information about stock options and warrants
outstanding at December 31, 1998:
OUTSTANDING EXERCISABLE
---------------------------------------------------------------------------
WEIGHTED WEIGHTED
REMAINING REMAINING
RANGE OF EXERCISE NUMBER OF CONTRACTUAL CONTRACTUAL
PRICES SHARES LIFE (YEARS) NUMBER OF SHARES LIFE (YEARS)
------------------------------------------------------------------------------------------------------
$ 0.01 2,890,000 0.91 15,000 0.11
$ 1.47-2.03 776,209 4.19 420,599 4.37
$ 2.25-2.88 656,500 4.96 240,000 4.37
$ 3.00-4.50 1,620,000 3.04 627,000 1.40
$ 5.45-6.61 688,617 3.99 688,617 3.99
------------------------------------------------------------------------------------------------------
TOTAL $ 0.01-6.61 6,631,326 2.54 1,991,216 3.75
------------------------------------------------------------------------------------------------------
F-41
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
12. TAXES ON During the year ended March 31, 1998, the Company
INCOME undertook a study to simplify its organizational and tax
structure and identified potential international tax
issues. In connection with this study, the Company
determined that it had potential tax liabilities and
recorded an additional tax provision of $1.5 million to
reserve against liabilities which might arise under the
existing structure. Upon completion of this study in
January 1999, the Company initiated discussions with the
Internal Revenue Service related to the U. S. Federal
income tax issues identified by the study and filed with
the IRS returns for the Company for the years ended
March 31, 1991 through 1998 reflecting these findings.
No additional tax reserve was recorded as of December
31, 1998 after completion of the study. The eventual
outcome of these discussions and of any other issues
cannot be predicted with certainty.
Taxes on income for the nine months ended December 31,
1998 and the years ended March 31, 1998 and 1997,
consisted of the following:
DECEMBER 31, MARCH 31, MARCH 31,
1998 1998 1997
------------------------------------------------------------------------------------------------------------
Current:
Federal $ -- $ -- $ 70,000
Foreign -- 140,000 166,000
State -- -- 12,000
Other -- 1,500,000 --
------------------------------------------------------------------------------------------------------------
Total Current 1,640,000 248,000
------------------------------------------------------------------------------------------------------------
Deferred:
Federal (416,000) (1,830,000) (584,000)
State (37,000) (163,000) (52,000)
------------------------------------------------------------------------------------------------------------
(453,000) (1,993,000) (636,000)
Change in
valuation allowance 453,000 1,993,000 636,000
------------------------------------------------------------------------------------------------------------
Total $ -- $ 1,640,000 $ 248,000
------------------------------------------------------------------------------------------------------------
F-42
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
12. TAXES ON As of December 31, 1998 and March 31, 1998 and 1997, the
INCOME (CON'T.) net deferred tax asset recorded and its approximate tax
effect consisted of the following:
DECEMBER 31, MARCH 31, MARCH 31,
1998 1998 1997
- - ------------------------------------------------------------------------------------------------------------------------------------
Net operating loss carry-
forwards $ 6,041,000 $ 3,496,000 $ 3,036,000
Nondeductible expense
accruals 1,525,000 1,295,000 --
Foreign net operating loss
carryforwards 260,000 -- --
Other 431,000 269,000 31,000
- - ------------------------------------------------------------------------------------------------------------------------------------
8,257,000 5,060,000 3,067,000
Valuation allowance (8,257,000) (5,060,000) (3,067,000)
- - ------------------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ -- $ -- $ --
- - ------------------------------------------------------------------------------------------------------------------------------------
F-43
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
12. TAXES ON The acquisition of IDX in December 1998 included a net
INCOME deferred tax asset of $2.7 million. This net deferred
(CON'T) tax asset consists primarily of U.S. and foreign net
operating losses. The acquisition also included a
valuation allowance equal to the net deferred tax asset
acquired.
For the years ended December 31, 1998 and March 31, 1998
and 1997, a reconciliation of the United States Federal
statutory rate to the effective rate is shown below:
DECEMBER 31, MARCH 31,
1998 1998 1997
- - ------------------------------------------------------------------------------------------------------------------------------------
FEDERAL TAX (BENEFIT), COMPUTED
AT STATUTORY RATE (34.0) % (34.0)% 34.0%
STATE TAX (BENEFIT), NET OF FEDERAL
TAX BENEFIT (1.0) (1.0) 1.0
EFFECT OF FOREIGN OPERATIONS 29.0 19.0 (74.0)
ADDITIONAL TAXES -- 13.0 --
CHANGE IN VALUATION ALLOWANCE 6.0 17.0 62.0
- - ----------------------------------------------------------------------------------------------------------------------------------
TOTAL 0% 14.0% 23.0%
- - ----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1998, the Company has net operating
loss carryforwards available of approximately $16.3
million which can offset future years U.S. taxable
income. Such carryforwards expire in various years
through 2018 and are subject to limitation under the
Internal Revenue Code of 1986, as amended.
Included in the net operating loss carryforwards are
approximately $6.0 million acquired in the IDX
acquisition. As a result of the change in ownership, as
defined by Section 382 of the Internal Revenue Code, the
net operating loss carryforwards acquired are limited in
use to approximately $330,000 per year and must be
offset only by taxable income generated from IDX.
F-44
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
13. SEGMENT The Company is engaged in one business segment -
INFORMATION Telecommunications Services. For purposes of allocating
revenues by country, the Company uses the physical
location of its customers as its basis.
The following table presents information about the
Company by geographic area:
ASIA NORTH LATIN
EUROPE PACIFIC AMERICA AMERICA OTHER TOTALS
(EXCLUDING
MEXICO)
------------------------------------------------------------------------------------------------------------
FOR THE NINE
MONTHS ENDING
DECEMBER 31, 1998
REVENUE
$ 1,966,765 $ 5,949,077 $ 9,009,306 $ 5,243,688 $ 321,806 $ 22,490,642
OPERATING LOSS $ (482,628) $ (1,460,017) $ (2,631,110) $ (1,286,901) $ (78,977) $ (5,939,633)
IDENTIFIABLE LONG
LIVED ASSETS $ 5,687,947 $ 4,962,397 $ 11,237,235 $ 1,470,903 $ 923,076 $ 24,281,558
------------------------------------------------------------------------------------------------------------
FOR THE YEARS
ENDING
MARCH 31, 1998
REVENUE $ 3,468,336 $ 10,294,483 $ 10,061,519 $ 8,248,078 $ 1,050,351 $ 33,122,767
OPERATING LOSS $ (596,900) $ (1,771,679) $ (1,731,586) $ (1,419,494) $ (180,765) $ (5,700,424)
IDENTIFIABLE LONG $ 4,880,910 $ 7,169,872 $ 8,616,014 $ 1,032,352 $ 997,433 $ 22,696,581
LIVED ASSETS
------------------------------------------------------------------------------------------------------------
FOR THE YEARS
ENDING
MARCH 31, 1997
REVENUE $ 6,169,378 $ 10,574,659 $ 8,220,081 $ 1,486,779 $ 7,543,478 $ 33,994,375
OPERATING INCOME
(LOSS) $ 439,834 $ 753,900 $ 586,034 $ 537,797 $ 105,999 $ 2,423,564
IDENTIFIABLE LONG $ 6,744,909 $ 4,734,010 $ 10,417,279 $ 1,219,323 $ 564,165 $ 23,679,686
LIVED ASSETS
------------------------------------------------------------------------------------------------------------
F-45
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
13. SEGMENT For the nine months ended December 31, 1998 and the
INFORMATION years ended March 31, 1998 and 1997 revenues from
(CON'T) significant customers consisted of the following:
DECEMBER 31, 1998 MARCH 31, 1998 MARCH 31, 1997
----------------------------------------------------------------------
CUSTOMER:
A 19% 18% 15%
B 16% 14% 9%
C 10% 11% 12%
14. COMMITMENTS EMPLOYMENT AGREEMENTS
AND
CONTINGENCIES The Company and certain of its subsidiaries have
agreements with certain key employees expiring at
varying times over the next three years. The Company's
remaining aggregate commitment at December 31, 1998
under such agreements is approximately $1.2 million.
CARRIER ARRANGEMENTS
The Company has entered into agreements with certain
long-distance carriers in the United States and with
telephone utilities in various foreign countries to
transmit telephone signals domestically and
internationally. The Company is entirely dependent upon
the cooperation of the telephone utilities with which it
has made arrangements for its operational and certain of
its administrative requirements. The Company's
arrangements are nonexclusive and take various forms.
Although some of these arrangements are embodied in
formal contracts, a telephone utility could cease to
accommodate the Company's arrangements at any time. The
Company does not foresee any threat to existing
arrangements with these utilities, however, depending
upon the location of the telephone utility, such action
could have a material adverse affect on the Company's
financial position, operating results or cash flows.
F-46
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
14. COMMITMENTS TELECOMMUNICATION LINES
AND
CONTINGENCIES In its normal course of business, the Company enters
(CON'T) into agreements for the use of long distance
telecommunication lines. As of December 31, 1998, future
minimum annual payments under such agreements are as
follows:
YEARS ENDING DECEMBER 31, TOTAL
-------------------------------------------------------------------------------------------------
1999 $ 1,705,412
2000 535,109
2001 421,728
2002 70,288
-------------------------------------------------------------------------------------------------
$ 2,732,537
-------------------------------------------------------------------------------------------------
LEASE AGREEMENTS
The Company leases office space and equipment under
various operating leases. As of December 31, 1998,
remaining minimum annual rental commitments under
noncancelable operating leases are as follows:
YEARS ENDED DECEMBER 31, TOTAL
-------------------------------------------------------------------------------------------------
1999 $ 1,230,586
2000 344,294
2001 233,377
2002 176,895
2003 180,895
-------------------------------------------------------------------------------------------------
$ 2,166,047
-------------------------------------------------------------------------------------------------
Rent expense for the periods ended December 31, 1998 and
March 31, 1998 and 1997 was approximately $0.5 million,
$0.6 million, and $0.4 million, respectively.
F-47
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
15. GOVERNMENT The telecommunications card industry is highly
REGULATIONS competitive and subject to extensive government
regulations, both in the United States and abroad.
Pursuant to the Federal Communications Act, the Federal
Communications Commission ("FCC") is required to
regulate the telecommunications industry in the United
States. Under current FCC policy, telecommunication
carriers, including the Company, who resell the domestic
services of other carriers and who do not own
telecommunication facilities of their own, are
considered to be non-dominant and, as a result, are
subject to the least rigorous regulation.
Telecommunications activities are also subject to
government regulations in every country throughout the
world. The Company has numerous licenses, agreements, or
equipment approvals in foreign countries where
operations are conducted. To date, the Company has not
been required to comply or been notified that it cannot
comply with any material international regulations in
order to pursue its existing business activities. There
can be no assurances, however, that in the current
United States regulatory environment, including the
present level of FCC regulations, that the Company will
continue to be considered non-dominant and that various
foreign governmental authorities will not seek to assert
jurisdiction over the Company's rates or other aspects
of its services. Such changes could have a material
adverse affect on the Company's financial condition,
operating results or cash flows.
In certain countries where the Company, through its
subsidiary IDX, has current or planned operations, the
Company may not have the necessary regulatory approvals
to conduct all or part of its voice and fax
store-and-forward services. In these jurisdictions, the
requirements and level of telecommunications
deregulation is varied, including internet protocol
telephony. Management believes that the degree of active
monitoring and enforcement of such regulation is
limited. Statutory provisions for penalties vary, but
could include fines and/or termination of the Company's
operations in the associated jurisdiction. Management
believes that the likelihood of significant penalties or
injunctive relief is remote. To date, the Company has
not been required to comply or been notified that it
cannot comply with any material international
regulations in order to pursue its existing business
activities. There can be no assurance, however, that
regulatory action against the Company will not occur.
Such action could have a material adverse affect on the
Company's financial condition, operating results or cash
flows.
F-48
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
15. GOVERNMENT The regulation of IP telephony is still evolving. To the
REGULATIONS Company's, knowledge, there currently are no domestic
(CON'T) laws or regulations that govern voice communications
over the Internet. The FCC is currently considering
whether to impose surcharges or additional regulation
upon providers of IP telephony. In addition, several
efforts have been made to enact U.S. federal legislation
that would either regulate or exempt from regulation
services provided over the Internet. State public
utility commissions also may retain intrastate
jurisdiction and could initiate proceedings to regulate
the intrastate aspects of IP telephony. A number of
countries currently prohibit IP telephony. Other
countries permit but regulate IP telephony. If foreign
governments, Congress, the FCC, or state utility
commissions prohibit or regulate IP telephony, the
Company could be subject to a variety of new regulations
or, in certain circumstances, to penalties under foreign
or U.S. law, including without limitation, orders to
cease operations or to limit future operations, loss of
licenses or of license opportunities, fines, seizure of
equipment and, in certain foreign jurisdictions,
criminal prosecution.
16. FOURTH The Company recorded in the fourth quarter of the year
QUARTER ended March 31, 1998 certain adjustments relative to
ADJUSTMENTS - warrants issued in connection with debt, proxy related
MARCH 31, 1998 litigation settlement costs and taxes amounting to an
aggregate of $5.5 million which are discussed in Notes
8, 11 and 12 to the consolidated financial statements.
17. SUBSEQUENT FINANCINGS
EVENTS
SERIES D CUMULATIVE CONVERTIBLE PREFERRED STOCK
In January 1999, the Company issued 30 shares of Series
D Cumulative Convertible Preferred Stock ("Series D
Preferred") to a private investment firm for $3.0
million. The holder has agreed to purchase 20 additional
shares of Series D Preferred stock for $2.0 million upon
registration of the common stock issuable upon
F-49
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
17. SUBSEQUENT conversion of this preferred stock. In connection with
EVENTS (CON'T) this transaction, the Company issued warrants to
purchase 112,500 shares of common stock with an exercise
price of $0.01 per share and warrants to purchase 60,000
shares of common stock with an exercise price of $1.60
per share. The Company will issue additional warrants to
purchase 75,000 shares of common stock, with an exercise
price of $0.01 per share and warrants to purchase 40,000
shares of common stock with an exercise price of $1.60
per share upon the issuance of the 20 additional shares
of Series D Preferred stock. The Series D Preferred
stock carries an annual dividend of 8%, payable
quarterly beginning December 31, 1999. The shares of
Series D Preferred stock are convertible, at the
holder's option, into shares of the Company's common
stock any time after April 13, 1999 at a conversion
price equal to the lesser of $1.60 or, in the case of
the Company's failure to achieve positive EBITDA or to
close a $20 million public offering by the third fiscal
quarter of 1999, the market price just prior to the
conversion date. The shares of Series D Preferred stock
will automatically convert into common stock upon the
earliest of (i) the first date on which the market price
of the common stock is $5.00 or more per share for any
20 consecutive trading days, (ii) the date on which 80%
or more of the Series D Preferred stock has been
converted into common stock, or (iii) the date the
Company closes a public offering of equity securities at
a price of at least $3.00 per share with gross proceeds
of at least $20 million.
As additional consideration, the Company agreed to issue
to the investor for no additional consideration,
additional warrants to purchase the number of shares of
common stock equal to $0.3 million (based on the market
price of the common stock on the last trading day prior
to June 1, 1999 or July 1, 2000, as the case may be), or
pay $0.3 million in cash, if the Company does not (i)
consummate a specified merger transaction by May 30,
1999, or (ii) achieve, in the fiscal quarter commencing
July 1, 2000, an aggregate amount of gross revenues
equal to or in excess of 200% of the aggregate amount of
gross revenues achieved by the Company in the fiscal
quarter ended December 31, 1998.
The shares of Series D Preferred stock must be redeemed
if it ceases to be convertible (which would happen if
the number of shares of common stock issuable upon
conversion of the Series D Preferred stock exceeded
19.9% of the number of shares of common stock
outstanding when the Series D Preferred stock was
issued, less shares reserved for issuance under
warrants). Redemption is in cash at a price equal to the
liquidation preference of the Series D Preferred stock
at the holder's option or the Company's option 45 days
after the Series D Preferred stock ceases to be
convertible. If the Company receives stockholder
approval to increase the number of shares issuable, it
will issue the full amount of common stock upon
conversion of the Series D Preferred stock even if the
number of shares exceeds the 19.9% maximum number.
F-50
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
17. SUBSEQUENT SERIES E CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED
EVENTS STOCK
(CON'T)
In February 1999, the Company issued 50 shares of Series
E Cumulative Convertible Redeemable Preferred stock
("Series E Preferred") to an affiliate of Mr. Ronald
Jensen, the Company's largest stockholder, for $5.0
million. The Series E Preferred carries an annual
dividend of 8%, payable quarterly beginning December 31,
2000. As additional consideration, the Company agreed to
issue to the holder three year warrants to purchase
723,000 shares of common stock at $2.125 per share and
277,000 shares of common stock at $0.01 per share.
The Series E Preferred holder may elect to make the
shares of Series E Preferred stock convertible into
shares of common stock (rather than redeemable) at any
time after issuance. The Company may elect to make the
shares of Series E Preferred stock are convertible, but
only if (i) it has positive EBITDA for at least one of
the first three fiscal quarters of 1999 or (ii)
completes a public offering of equity securities for a
price of at least $3.00 per share and with gross
proceeds to the Company of at least $20 million on or
before the end of the third fiscal quarter of 1999. The
shares of Series E Preferred stock will automatically be
converted into shares of the Company's common stock, on
the earliest to occur of (x) the first date as of which
the last reported sales price of the Company's common
stock on Nasdaq is $5.00 or more for any 20 consecutive
trading days during any period in which the Series E
Preferred stock is outstanding, (y) the date that 80% or
more of the Series E Preferred stock has been converted
into common stock, or (z) the Company completes a public
offering of equity securities at a price of at least
$3.00 per share and with gross proceeds to the Company
of at least $20 million. The initial conversion price
for the Series E Preferred stock is $2.125, subject to
adjustment if the Company issues common stock for less
than the conversion price. The shares of the Series E
Preferred stock may be redeemed at a price equal to the
liquidation preference plus accrued dividends in cash or
in common stock, at the Company's option or at the
option of any holder, provided that the holder has not
previously exercised the convertibility option
described, at any time after February, 2004. In
connection with a debt placement concluded in April
1999, the Series E Preferred holder elected to make such
shares convertible. Accordingly, such shares are no
longer redeemable. See Note 18 for additional
discussion.
Contemporaneous with this financing, the Company agreed
to issue 3,000,000 shares of common stock in exchange
for the 75 shares of Series C Preferred (convertible
into 1,875,000 shares of common stock on the exchange
date) held by Mr. Jensen. The market value of the
1,125,000 incremental shares of common stock issued will
be recorded in the first calendar quarter of 1999 as a
preferred stock dividend of approximately $2.7 million
with a corresponding credit to paid-in capital.
F-51
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
17. SUBSEQUENT STOCKHOLDER EQUITY FINANCING
EVENTS (CON'T)
In January 1999, the Company borrowed $0.2 million from
an existing stockholder due February 4, 1999. The note
had a maturity date of the earlier of (a) 30 days from
the date the note was signed, (b) completion of
financing by the Company of not less than $3.0 million,
or (c) the completion of the bridge financing by the
Company of not less than $1.0 million. The note carried
a service fee of 1% of the principal. The agreement
provided that if the note was not paid at maturity, the
holder would receive 40,000 warrants with an exercise
price of $1.00 and a term of 5 years. The note was
junior to all existing debt. In March 1999 (maturity
date), the stockholder agreed to convert the bridge loan
into 125,000 shares of common stock and was granted the
40,000 warrants and an additional 40,000 warrants,
exercisable at $1.60 per share with a term of 5 years.
The value of the warrants of $0.09 million will be
recognized as interest expense in the first quarter of
fiscal 1999.
ACQUISITIONS
As described in paragraph (2) to Note 3, subsequent to
December 31, 1998, the Company decided to pay the first
of the Convertible Subordinated Promissory Notes due to
IDX in common stock.
In February 1999, the Company completed the acquisition
of Telekey, Inc. ("Telekey"), for which it paid: (i)
$0.1 million at closing; (ii) issued a promissory note
for $0.2 million payable in equal monthly installments
over one year; (iii) issued 1,010,000 shares of Series F
Convertible Preferred Stock ("Series F Preferred"); and
(iv) agreed to issue at least 505,000 and up to an
additional 1,010,000 shares of Series F Preferred two
years from the date of closing (or upon a change of
control or certain events of default if they occur
before the end of two years), subject to Telekey meeting
certain revenue and EBITDA objectives.
The shares of Series F Preferred initially issued will
automatically convert into shares of common stock on the
earlier to occur of (a) the first date that the 15 day
average closing sales price of the common stock is equal
to or greater than $4.00 or (b) July 1, 2001. The
Company has guaranteed a price of $4.00 per share at
December 31, 1999 to recipients of the common stock
issuable upon the conversion of the Series F Preferred,
subject to Telekey's achievement of certain defined
revenue and EBITDA objectives. If the market price is
less that $4.00
F-52
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
17. SUBSEQUENT on December 31, 1999, the Company will issue additional
EVENTS (CON'T) shares of common stock upon conversion of the Series F
Preferred based on the ratio of $4.00 to the market
price, but not more than an aggregate of 600,000
additional shares of common stock. The Series F
Preferred carries no dividend obligation.
POTENTIAL JOINT VENTURE
The Company is in the process of negotiating a joint
venture arrangement whereby it would have a 50%
ownership interest of certain software technology
related to commercial development of messaging
technology. The software developer's current parent
company would retain a 50% ownership interest under the
proposed arrangement. If this transaction is
consummated, the Company will assume its pro rata share
of the software development funding needs for working
capital and payment of outstanding liabilities. The
Company's funding requirement under this proposed
arrangement is currently estimated to average $0.2
million per month through the year ending December 31,
1999.
As of December 31, 1998, the Company had advanced
approximately $1.0 million to this software company.
Through March 19, 1999, the Company has made additional
advances of $0.5 million. The Company owns a
non-exclusive license for the technology, the value of
which is currently estimated by management to exceed the
advances made to date.
In the event that the joint venture transaction does not
occur and the Company is unable to use or sell the
licensed technology to generate revenues, the Company
will evaluate the recoverability of these advances.
18. FINANCING In April 1999, the Company received a financing
COMMITMENT commitment of $20.0 million in the form of long-term
debt from an affiliate of its largest stockholder
("Lender"). This financing is subject to stockholder
approval; but under the terms of the Loan and Note
Purchase Agreement ("Agreement"), the Company initially
received an unsecured loan ("Loan") of $7.0 million
bearing interest at 8% payable monthly with principal
due April 2000. As additional consideration, the Lender
received warrants to purchase 1,500,000 shares of the
Company's common stock at an exercise price of $0.01 per
share, of which 500,000 warrants are immediately
exercisable and 1,000,000 warrants are exercisable only
in the event that the stockholders do not approve the
$20.0 million facility or the Company elects not to draw
it down.
F-53
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
Under the Agreement, the Lender also agreed to purchase
$20.0 million of 5% Secured Notes ("Notes,") at the
Company's request, provided that the Company obtains
stockholder approval to issue the Notes at its next
stockholder meeting, currently planned to occur during
the second quarter of 1999. If stockholder approval is
obtained and the Company elects to issue the Notes, the
initial $7.0 million Loan must be repaid from the
proceeds. Principal and interest on the Notes are
payable over three years in monthly installments of
$377,000 with a balloon payment of the outstanding
balance due on the third anniversary date. However, 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 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. These Notes, if issued, will be secured
by substantially all of the Company's existing operating
assets, although the Company can pursue certain
additional financing, including senior debt or lease
financing for future capital expenditures and working
capital requirements in furtherance of its growth plan.
As additional consideration for the Notes, if issued,
the Lender will receive warrants to purchase 5,000,000
shares of the Company's common stock at an exercise
price of $1.00 per share.
The Agreement contains certain debt covenants and
restrictions by and on the Company.
F-54
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- - --------------------------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND AT END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- - ------------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED DECEMBER 31, 1998 $1,472,197 $ 789,187 $1,274,887 $ 986,497
- - ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1998 $ 372,988 $1,433,939 $ 334,730 $1,472,197
- - ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1997 $ 625,864 $ 404,410 $ 657,286 $ 372,988
- - ------------------------------------------------------------------------------------------------------------------------------------
F-55
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
- - --------------------------------------------------------------------------------
None.
54
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE, INC.
PART III
- - --------------------------------------------------------------------------------
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- - --------------------------------------------------------------------------------
Shown below are the names of all Directors and executive officers of
eGlobe, all positions and offices held by each such person, the period during
which each person has served as such, and the principal occupations and
employment of each such person during the last five years:
DIRECTORS AND EXECUTIVE OFFICERS
CHRISTOPHER J. VIZAS, age 49, has been a Director of eGlobe since October
25, 1997 and the Chairman of the Board of Directors since November 10, 1997. Mr.
Vizas served as eGlobe's acting Chief Executive Officer from November 10, 1997
to December 5, 1997, on which date he became eGlobe's Chief Executive Officer.
Before joining eGlobe, Mr. Vizas was a co-founder of, and since October 1995,
has served as Chief Executive Officer of Quo Vadis International, an investment
and financial advisory firm. Before forming Quo Vadis International, he was
Chief Executive Officer of Millennium Capital Development, a merchant banking
firm, and of its predecessor Kouri Telecommunications & Technology. Before
joining Kouri, Mr. Vizas shared in the founding and development of a series of
technology companies, including Orion Network Systems, Inc. of which he was a
founder and a principal executive. From April 1987 to 1992, Mr. Vizas served as
Vice Chairman of Orion, an international a satellite communications company, and
served as a Director from 1982 until 1992. Mr. Vizas has also held various
positions in the United States government.
EDWARD J. GERRITY, JR., age 75, has been a Director of eGlobe since our
inception. He is a business consultant and President of Ned Gerrity &
Associates, a consulting firm, begun in 1985. Mr. Gerrity has also served as
Chairman of our Board of Directors. Mr. Gerrity served as an officer of ITT
Corp. from 1961 to 1985. While at ITT Corp., he was a member of the Management
Policy Committee, Director of Corporate and Government Relations on a worldwide
basis and a Director of several ITT Corp. subsidiaries. He retired from ITT
Corp. in February 1985. Mr. Gerrity was the President of American National
Collection Corp., a New York corporation, from 1993 to 1995 and he was a
director of Residual Corporation from 1987 until October 1994. See "Certain
Relationships and Related Transactions" below.
ANTHONY BALINGER, age 45, has been a Director of eGlobe since March 15,
1995. He served as eGlobe's President from April 25, 1995 to November 10, 1997
and also served as eGlobe's Chief Executive Officer from January 3, 1997 to
November 10, 1997. On November 10, 1997, he was appointed Senior Vice President
and Vice Chairman of eGlobe. Mr. Balinger has held a variety of positions at
eGlobe since his arrival in September 1993, including Chief Operating Officer
and Director of eGlobe's Asia-Pacific Operations. Mr. Balinger started his
career in 1971 with British Telecom as a digital systems design engineer. In
1983, he joined the Cable and Wireless Federation, an international alliance of
companies that provide telephone, cable and wireless operations in over 50
countries, where he performed much of the early design work for the Mercury
Communications Optical Fiber National Digital Network. In 1989, Mr. Balinger
moved to New York where he headed the Banking and Finance division for Cable and
Wireless Americas, Inc. from 1989 to 1992. In 1992, while still at Cable and
Wireless, Mr. Balinger was appointed International Product Manager for Optus
Communications, where he remained until he joined the Company. Mr. Balinger is a
Director and 45% stockholder of Executive Card Services HK Ltd. which provides
printing services to an affiliate of eGlobe in Hong Kong.
55
DAVID W. WARNES, age 52, has been a Director of eGlobe since June 30, 1995.
Mr. Warnes has been the Chief Operating Officer of Global Light
Telecommunications Inc. since September 1997 and a Director since June 1997. He
has been the President and Chief Executive Officer of Vitacom, a subsidiary of
Highpoint, since December 1995, and President and CEO of Highpoint since April
1998. Previously, Mr. Warnes held various senior management and executive
positions with Cable and Wireless or its affiliated companies for two decades.
From October 1992 through October 1995, he was Vice President, Operations and
Chief Operating Officer, and from August 1994 through October 1995, he was
Assistant Managing Director of Tele 2, a telecommunications service provider in
Sweden partially owned Cable and Wireless. From August 1988 through June 1992,
he was a principal consultant and General Manager, Business Development of IDC,
an international telecommunications service provider based in Japan and
partially owned by Cable and Wireless. Mr. Warnes is a Chartered Engineer, a
Fellow of the Institution of Electrical Engineers, and a graduate of the
University of East London.
RICHARD A. KRINSLEY, age 68, has been a Director of eGlobe since June 30,
1995. Mr. Krinsley retired in 1991 as the Executive Vice President and Publisher
of Scholastic Corporation; a publicly held company traded on the Nasdaq Stock
Market. He is presently, and has been since 1991, a member of Scholastic's Board
of Directors. While employed by Scholastic between 1983 and 1991, Mr. Krinsley,
among many other duties, served on that company's management committee. From
1961 to 1983, Mr. Krinsley was employed by Random House where he held, among
other positions, the post of Executive Vice President. At Random House, Mr.
Krinsley also served on that company's executive committee.
JAMES O. HOWARD, age 56, has been a Director of eGlobe since January 16,
1998. Since 1990, Mr. Howard has served as the Chief Financial Officer and a
member of the management committee of Benton International, Inc., a wholly owned
subsidiary of Perot Systems Corporation. From 1981 to 1990, Mr. Howard was
employed by Benton International, Inc. as a consultant and sector manager.
Before joining Benton International, Inc., Mr. Howard held a number of legal
positions in the federal government, including General Counsel of the National
Commission on Electronic Fund Transfers.
MARTIN SAMUELS, age 55, has been a Director of eGlobe since October 25,
1997. Mr. Samuels is an entrepreneur, strategic business planner and
professional investor with over twenty years of experience. Mr. Samuels' current
project is Y2K Strategies Corp. ("YSC"), a liaison company that Mr. Samuels
co-founded in 1997. Mr. Samuels is a principal, director and senior vice
president of YSC. Mr. Samuels' responsibilities at YSC include identifying,
negotiating with and contracting with the Year 2000 service providers and
systems integrators that YSC assists with their marketing, proposal development
and ongoing business relationship management. YSC also works with significant
public and private sector institutions in identifying, coordinating and
fulfilling their Year 2000 remediation requirements.
DONALD H. SLEDGE, age 58 has been a Director of eGlobe since November 10,
1997. Mr. Sledge has served as vice chairman, President and Chief Executive
Officer of TeleHub Communications Corp., a privately held technology development
company, since 1996. Mr. Sledge served as President and Chief Operating Officer
of West Coast Telecommunications, Inc., a long distance company, from 1994 to
1995. From 1993 to 1994, Mr. Sledge was employed by New T&T,
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a Hong Kong-based company, as head of operations. Mr. Sledge was Chairman and
Chief Executive Officer of Telecom New Zealand International from 1991 to 1993
and the Managing Director of Telecom New Zealand International's largest local
carrier from 1988 to 1991. Mr. Sledge is currently Chairman of the Board of
United Digital Network, a small interexchange carrier that operates primarily in
Texas, Oklahoma, Arizona and California. Mr. Sledge is a member of the Board of
Advisors of DataProse and serves as a director of AirCell Communications, Inc.
He also serves as advisor and board member to several small technology-based
start-up companies.
JOHN E. KOONCE, age 56, has been a Director of eGlobe since March 27, 1998.
In April 1998, Mr. Koonce was also engaged to serve as a financial advisor to
eGlobe and effective September 1, 1998 became the Company's Chief Financial
Officer. Mr. Koonce served as Chief Financial Officer of Orion from 1990 to
1993. During 1981-89, Mr. Koonce was employed by Biotech Capital Corporation and
its successor, Infotechnology, Inc. where he served in the positions of Chief
Financial Officer and President. During this time, he also served on the boards
of several public and private companies. Before 1981, Mr. Koonce worked for the
accounting firm Price Waterhouse at various domestic and foreign offices.
HSIN YEN, age 40, has been a Director of eGlobe since December 2, 1998. Mr.
Yen is the President and a founder of IDX and has served as the primary
architect of its growth. Before founding IDX, he served as founder and CEO of
InteliSys, Inc., the predecessor of IDX. Mr. Yen has had a 15-year career in
management information systems, including complex Internet/intranet global
network development.
RICHARD CHIANG, age 43, has been a Director of eGlobe since December 2,
1998. Mr. Chiang has been the Chairman and President of Princeton Technology,
Corp. since 1986 and Chairman since 1996. He has been on the Board of Directors
of Taitron Companies, Inc. and Buslogic, Inc. since 1989 and Alliance Venture
Capital Corp since 1996. Mr. Chiang served as Chairman for IDX International,
Inc. from 1997 to 1998. Mr. Chiang currently sits on the Board of Proware
Technology, Corp. which is a RAID subsystem business and as a Chairman at
Advanced Communication Devices, Corp. whose primary business is Networking
Switch Controller Chips. He has served with these two companies since 1996.
ALLEN MANDEL, age 60, was named Senior Vice President in 1991 and a
Director of eGlobe in 1990. He resigned from the Board of Directors on March 29,
1995 and as Senior Vice President on August 18, 1995 in connection with the then
ongoing proxy contest. Mr. Mandel was engaged to serve as a consultant to eGlobe
concerning accounting and financial matters on August 18, 1995 and was renamed
an officer of eGlobe on September 27, 1995, when he became Executive Vice
President - Finance and Administration and Chief Financial Officer, in which
posts he served until December 1997. Mr. Mandel currently serves as Senior Vice
President, Corporate Affairs of eGlobe. Mr. Mandel is a Certified Public
Accountant. He was an officer of Residual Corporation from 1991 to March 1995.
COLIN SMITH, age 55, was named Vice President of Legal Affairs and General
Counsel of eGlobe on February 1, 1998. From 1972 to February 1998, Mr. Smith was
a professor of law at the New England School of Law. Mr. Smith's areas of legal
expertise include business organizations, dispute resolution and practice
management. In addition to his teaching, Mr. Smith also ran a private consulting
practice that specialized in issues of corporate governance and entrepreneurial
ventures.
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ANNE HAAS, age 48, was appointed Vice President, Controller and Treasurer
of eGlobe on October 21, 1997. Ms. Haas served as the Vice President of Finance
of Centennial Communications Corp., a start-up multi-national two way radio
company, during 1996-97. From 1992 to 1996, Ms. Haas served as Controller of
Quark, Inc., a multi-national desk top publishing software company. Before 1992,
Ms. Haas worked for the accounting firm of Price Waterhouse in San Jose,
California and Denver, Colorado.
Directors are elected annually and hold office until the next annual
meeting of stockholders and until their successors are elected and qualified.
Executive Officers serve at the pleasure of the Board or until the next annual
meeting of stockholders. There are no family relationships between eGlobe's
Directors and Executive Officers.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our executive officers and
directors, and persons who own more than ten percent of the common stock of
eGlobe, to file reports of ownership and changes in ownership with the SEC and
the exchange on which the common stock is listed for trading. Those persons are
required by regulations promulgated under the Exchange Act to furnish us with
copies of all reports filed pursuant to Section 16(a). Based solely upon our
review of the copies of such reports furnished to eGlobe by our directors and
officers during and with respect to the nine month period ended December 31,
1998; we noted that, Hsin Yen and Richard Chiang did not file their Form 3s on a
timely basis. Since Messrs. Yen and Chiang became directors of eGlobe in
connection with the acquisition of IDX International they have neither acquired
nor disposed of any securities of eGlobe. We believe that all other reports were
submitted on a timely basis.
ITEM 11 - EXECUTIVE COMPENSATION
- - --------------------------------------------------------------------------------
The following table summarizes the compensation for the three most recent
fiscal periods ended December 31, 1998, March 31, 1998 and March 31, 1997 of our
Chief Executive Officer and the most highly compensated other executive officers
whose total annual salary and bonus exceed $100,000.
SUMMARY COMPENSATION TABLE
Long-Term Compensation Awards
Name and Principal Position Year Salary ($) Bonus ($) Other Annual Restricted Securities Underlying
Compensation ($) Stock Awards Options/SARs (#)
($)
Christopher J. Vizas *1998 153,847 0 0 0 110,000
CEO (1)
1998 62,308 0 0 0 520,000
1997 0 0 0 0 0
W. P. Colin Smith *1998 91,539 25,000 0 0 25,000
Vice President
Legal Affairs (2)
1998 11,538 0 0 0 100,000
1997 0 0 0 0 0
Anthony Balinger *1998 103,846 0 9,600 0 45,000
Senior Vice President and
Vice Chairman (4)
1998 150,000 0 0 7,875 84,310
1997 109,612 8,000 28,500 0 50,000
* Nine month period ended December 31, 1998
(1) Mr. Vizas has served as our Chief Executive Officer since December 5, 1997.
From November 10, 1997 to December 5, 1997, Mr. Vizas served as our acting
Chief Executive Officer. Mr. Vizas' employment agreement provides for a
base salary of $200,000, performance based bonuses of up to 50% of base
salary and options to purchase up to 500,000 shares, subject to various
performance criteria. See "Employment Agreements and Termination of
Employment and Change in Control Arrangements."
(2) Mr. Smith has served as our Vice President of Legal Affairs since February
1, 1998. Mr. Smith's employment agreement provides for a base salary of
$135,000, performance based bonuses of up $50,000 and options to purchase
up to 100,000 shares, subject to various performance criteria. See
"Employment Agreements and Termination of Employment and Change in Control
Arrangements."
(3) Mr. Balinger served as our President from April 1995 until November 10,
1997. Mr. Balinger served as Chief Executive Officer from January 3, 1997
through November 10, 1997. Mr. Balinger has served as our Senior Vice
President and Vice Chairman since November 6, 1997. Amounts shown as Other
Annual Compensation consist of an annual housing allowance paid to Mr.
Balinger while he resided in the United States and while he resides in Hong
Kong. See "Employment Agreement and Termination of Employment and Change of
Control Agreements."
58
OPTION/SAR GRANTS IN LAST FISCAL PERIOD
The following table sets forth the information concerning individual grants
of stock options and stock appreciation rights ("SARs") during the last periods
to each of the named Executive Officers during such periods.
OPTION/SAR GRANTS IN LAST FISCAL PERIODS
INDIVIDUAL GRANTS
Name Number of Percent of Total Exercise or Expiration Potential Realizable Value
Securities Options/SARs Granted Base Price Date at Assumed Annual Rates of
Underlying to Employees in ($/share) Stock Price Appreciation
Options/SARs Fiscal Period (2) for Option Term
Granted (#) (1) 5% 10%
Christopher J. Vizas 10,000 1.06% $3.18 04/01/03 $8,808 $19,463
100,000 10.55% $1.57 12/27/03 $ 0 $ 0
W. P. Colin Smith 25,000 2.64% $1.57 12/27/03 $ 0 $ 0
Anthony Balinger 10,000 1.06% $3.18 04/01/03 $8,808 $19,463
10,000 1.06% $3.68 04/16/03 $10,269 $22,596
25,000 2.64% $1.57 12/27/03 $ 0 $ 0
(1) All of the options and related SARs granted in the nine month period ended
December 31, 1998 to the named Executive Officers have a five year term.
(2) A total of 947,500 options were granted to employees of the Company in the
nine month period ended December 31, 1998 under eGlobe's 1995 Employee
Stock Option and Appreciation Rights Plan (the "Employee Stock Option
Plan").
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL PERIOD
AND FISCAL PERIOD-END OPTION/SAR VALUES
The following table sets forth information concerning each exercise of
stock options during the last fiscal period by each of the named Executive
Officers during such fiscal period and the fiscal period end value of
unexercised options.
59
Name Shares Acquired Value Number of Securities Underlying Value of Unexercised
on Exercise (#) Realized ($) Unexercised Options/SARs at Fiscal In-the-Money Options at Fiscal
Period-End (#) (1) Period-End ($)/SARS (2)
Unexercisable Exercisable Unexercisable Exercisable
Christopher J. Vizas 0 0 110,000 - $ (10,050) $ -
W. P. Colin Smith 0 0 25,000 - $ 1,375 $ -
Anthony Balinger 0 0 45,000 - $ (34,725) $ -
(1) Represents the aggregate number of stock options held as of December 31,
1998, including those which can and those which cannot be exercised
pursuant to the terms and provisions of eGlobe's current stock option
plans.
(2) Values were calculated by multiplying the closing transaction price of the
common stock as reported on the Nasdaq National Market on December 31, 1998
of $1.625 by the respective number of shares of common stock and
subtracting the exercise price per share, without any adjustment for any
termination or vesting contingencies.
COMPENSATION OF DIRECTORS
Effective November 10, 1997, and contingent upon eGlobe experiencing a
fiscal quarter of profitability, members of the Board receive a Director's fee
of $500 for each regular meeting and committee meeting attended. Our directors
are also reimbursed for expenses incurred in connection with attendance at Board
meetings.
During the fiscal periods ended 1995, 1996 and 1997, under eGlobe's 1995
Directors Stock Option and Appreciation Rights Plan (as amended, the "Directors
Stock Option Plan"), which then provided for automatic annual grants, each
Director received an annual grant of ten year options to purchase 10,000 shares
at an exercise price equal to the fair market value of our common stock on the
date of grant. Commencing with the amendments to the Directors Stock Option Plan
which were approved by our stockholders at the 1997 annual meeting held on
February 26, 1998, options to Directors may be made at the discretion of the
Board of Directors or Compensation Committee and there are no automatic grants.
Effective November 10, 1997, each Director who continued to serve on the
Board after subsequent stockholder meetings (other than members of the
Compensation Committee) was granted two options under the Directors Stock Option
Plan, each to purchase 10,000 shares of common stock with each option being
effective for five years terms commencing on April 1, 1998 and 1999,
respectively, with each such option vesting only upon the achievement of certain
corporate economic
60
and financial goals to be set by the Board and having an exercise price per
share equal to the market price per share at the close of trading on the date
they become effective.
On June 18, 1998 Mr. Sledge and Mr. Warnes were granted options to purchase
15,000 shares of common stock at $2.719 per share, the fair market value on the
date of the grant, which vested on the date of grant and has a term of five
years. On December 16, 1998, each of Messrs. Gerrity, Warnes, Krinsley, Sledge,
Samuels and Howard received an option to purchase 25,000 shares of common stock
at $1.813 per share, the fair market value on the date of the grant, which
vested on the grant date and has a term of five years. On December 27, 1998,
options to purchase 10,000 shares of common stock that were granted on November
10, 1997 to each of Messrs. Gerrity, Warnes, Krinsley, Balinger, Samuels, and
Sledge expired. On December 31, 1998, options to purchase 10,000 shares of
common stock that were granted on April 1, 1998 to each of Messrs. Gerrity,
Warnes, Krinsley, Sledge, Samuels and Howard expired. Both groups of the expired
options, noted above, vested only upon the achievement of certain corporate
economic and financial goals which were not achieved.
On April 16, 1998, Mr. Balinger was granted options to purchase an
aggregate of 10,000 shares of common stock. Such options have a term of five
years and vest in three equal annual installments, beginning on April 16, 1999,
at an exercise price per share equal to $3.68, the fair market value on the date
of the grant. These options vest only upon the achievement of certain
performance goals to be set by the Chief Executive Officer.
On December 27, 1998, Mr. Vizas was granted bonus options to purchase an
aggregate of 50,000 shares of common stock. Such options have a term of five
years and vest in ninety days from the grant date, at an exercise price per
share equal to $1.57, the fair market value on the date of the grant. In
addition, Mr. Vizas was granted options on December 27, 1998 to purchase an
aggregate of 50,000 shares of common stock at $1.57 per share, the fair market
value on the date of the grant. Such options have a term of five years and vest
in three equal annual installments, beginning on December 27, 1999. These
options vest only upon the achievement of certain performance goals to be set by
the Board. On December 5, 1998 options to purchase 100,000 shares of common
stock that were granted on December 5, 1997 to Mr. Vizas expired. These options
vested only upon the achievement of certain performance goals which were not
achieved.
On December 27, 1998, Mr. Balinger was granted bonus options to purchase an
aggregate of 10,000 shares of common stock. Such options have a term of five
years and vest in ninety days from the grant date, at an exercise price per
share equal to $1.57, the fair market value on the date of the grant. In
addition, Mr. Balinger was granted options on December 27, 1998 to purchase an
aggregate of 15,000 shares of common stock at $1.57 per share, the fair market
value on the date of the grant. Such options have a term of five years and vest
in three equal annual installments, beginning on December 27, 1999. These
options vest only upon the achievement of certain performance goals to be set by
the Chief Executive Officer.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
Effective December 5, 1997, we entered into a three year employment agreement
with Christopher J. Vizas, our Chief Executive Officer. Mr. Vizas' employment
agreement provides for a minimum salary of $200,000 per annum, reimbursement of
certain expenses, annual bonuses based on financial
61
performance targets to be adopted by eGlobe and Mr. Vizas, and the grant of
options to purchase an aggregate of 500,000 shares of common stock. The options
granted to Mr. Vizas pursuant to his employment agreement are comprised of
options to purchase 50,000 shares of common stock at an exercise price of $2.32
which vested upon their grant, options to purchase 50,000 shares of common stock
at an exercise price of $2.32 which vested on December 5, 1998 (contingent upon
Mr. Vizas' continued employment as of such date), options to purchase up to
100,000 shares of common stock at an exercise price of $2.32 which vested on
December 5, 1998, but which expired due to the company's failure to achieve
certain financial performance targets. Options to purchase 50,000 shares at an
exercise price of $3.50 which vest on December 5, 1999 (contingent upon Mr.
Vizas' continued employment as of such date), options to purchase up to 100,000
shares of common stock at an exercise price of $3.50 which vest on December 5,
1999 (contingent upon Mr. Vizas' continued employment as of such date and the
attainment of certain financial performance targets), options to purchase 50,000
shares at an exercise price of $4.50 which vest on December 5, 2000 (contingent
upon Mr. Vizas' continued employment as of such date), and options to purchase
up to 100,000 shares of common stock at an exercise price of $4.50 which vest on
December 5, 2000 (contingent upon Mr. Vizas' continued employment as of such
date and the attainment of certain financial performance targets). Each of the
options has a term of five years.
Mr. Vizas' employment agreement provides that, if eGlobe terminates Mr.
Vizas' employment other than pursuant to a "termination for cause", Mr. Vizas
shall continue to receive, for one year commencing on the date of such
termination, his full base salary, any bonus that is earned after the
termination of employment, and all other benefits and compensation that Mr.
Vizas would have been entitled to under his employment agreement in the absence
of termination of employment (the "Vizas Severance Amount"). "Termination for
cause" is defined as termination by eGlobe because of personal dishonesty,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law,
rule, or regulation (other than traffic violations or similar offenses), or
material breach of any provision of his employment agreement.
If there is an early termination of Mr. Vizas' employment following a
"change of control," Mr. Vizas would be entitled to a lump cash payment equal to
the Vizas Severance Amount. Additionally, if during the term of Mr. Vizas'
employment agreement there is a "change in control" of eGlobe and in connection
with or within two years after such change of control eGlobe terminates Mr.
Vizas' employment other than "termination for cause," all of the options
described above will vest in full to the extent and at such time that such
options would have vested if Mr. Vizas had remained employed for the remainder
of the term of his employment agreement. A "change of control" is deemed to have
taken place under Mr. Vizas employment agreement, among other things, if (i) any
person becomes the beneficial owner of 20% or more of the total number of voting
shares of eGlobe; (ii) any person becomes the beneficial owner of 10% or more,
but less than 20%, of the total number of voting shares of eGlobe, if the Board
of Directors makes a determination that such beneficial ownership constitutes or
will constitute control of eGlobe; or (iii) as the result of any business
combination, the persons who were directors of eGlobe before such transaction
shall cease to constitute at least two-thirds of the Board of Directors.
On September 22, 1997, we entered into a new three year employment
agreement with Anthony Balinger. Pursuant to his new employment agreement, Mr.
Balinger served as eGlobe's
62
President and Chief Executive Officer until November 10, 1997 when he resigned
that position and was appointed Senior Vice President and Vice Chairman of
eGlobe. Mr. Balinger's employment agreement provides for a minimum salary of
$150,000 per annum, reimbursement of certain expenses, a $1,600 per month
housing allowance, and payment for health, dental and disability insurance and
various other benefits. Mr. Balinger's employment agreement also provides for
payment of one year severance pay paid out over time, relocation to the
Philippines, buy-out of his auto lease and a 90 day exercise period for his
vested options after termination if eGlobe terminates Mr. Balinger without
"cause." "Cause" is defined as any criminal conviction for an offense by Mr.
Balinger involving dishonesty or moral turpitude, any misappropriation of
Company funds or property or a willful disregard of any directive of eGlobe's
Board of Directors. This employment agreement superseded a prior employment
agreement.
On February 1, 1998, the Company entered into an employment agreement with
Colin Smith pursuant to which Mr. Smith agreed to serve as Vice President of
Legal Affairs and General Counsel of the Company through December 31, 2000. Mr.
Smith's employment agreement provides for a minimum salary of $125,000 per
annum, reimbursement of certain expenses, annual and quarterly bonuses based on
financial performance targets to be adopted by the Chairman and Chief Executive
and Mr. Smith, and the grant of options to purchase an aggregate of 100,000
shares of Common Stock. The options granted to Mr. Smith pursuant to his
employment agreement are comprised of options to purchase 33,333 shares of
Common Stock at an exercise price of $3.125 which vested on February 1, 1999 but
which expired due to the Company's failure to achieve certain financial
performance targets, 33,333 shares of Common Stock at an exercise price of
$3.125 which will vest on February 1, 2000 (contingent upon Mr. Smith's
continued employment as of such date and the attainment of certain financial
performance targets) and 33,334 shares of Common Stock at an exercise price of
$3.125 which will vest on February 1, 2001 (contingent upon Mr. Smith's
continued employment as of such date and the attainment of certain financial
performance targets). Each of the options have a term of five years. Vesting of
all options will accelerate in the event that the current Chairman and Chief
Executive Officer (Christopher J. Vizas) ceases to be the Chief Executive
Officer of the Company and Mr. Smith's employment terminates or reasonable
advance notice of such termination is given.
Mr. Smith's employment agreement provides that, if the Company terminates
Mr. Smith's employment other than pursuant to a "termination for cause" or after
a material breach of the employment agreement by the Company, Mr. Smith shall
continue to receive, for six months (in all cases thereafter) commencing on the
date of such termination, his full base salary, any annual or quarterly bonus
that has been earned before termination of employment or is earned after the
termination of employment (where Mr. Smith met the applicable performance goals
prior to termination and the Company meets the applicable Company performance
goals after termination), and all other benefits and compensation that Mr. Smith
would have been entitled to under his employment agreement in the absence of
termination of employment (the "Smith Severance Amount"). A "termination for
cause" is defined as termination by the Company because of Mr. Smith's (i) fraud
or material misappropriation with respect to the business or assets of the
Company; (ii) persistent refusal or willful failure materially to perform his
duties and responsibilities to the Company, which continues after Mr. Smith
receives notice of such refusal or failure; (iii) conduct that constitutes
disloyalty to the Company and which materially harms the Company or conduct that
63
constitutes breach of fiduciary duty involving personal profit; (iv) conviction
of a felony or crime, or willful violation of any law, rule, or regulation,
involving moral turpitude; (v) the use of drugs or alcohol which interferes
materially with Mr. Smith's performance of his duties; or (vi) material breach
of any provision of his employment agreement.
If during the term of Mr. Smith's employment agreement there is a "change
in control" of the Company and in connection with or within two years after such
change of control the Company terminates Mr. Smith's employment other than
"termination for cause" or Mr. Smith terminates with good reason, the Company
shall be obligated, concurrently with such termination, to pay the Smith
Severance Amount in a single lump sum cash payment to Mr. Smith. A "change of
control" is deemed to have taken place under Mr. Smith's employment agreement,
among other things, if (i) any person becomes the beneficial owner of 35% or
more of the total number of voting shares of the Company, (ii) the Company sells
substantially all of its assets, (iii) the Company merges or combines with
another company and immediately following such transaction the persons and
entities who were stockholders of the Company before the merger own less than
50% of the stock of the merged or combined entity, or (iv) the current Chairman
and Chief Executive Officer (Christopher J. Vizas) ceases to be the Chief
Executive Officer of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Vizas, our Chief Executive Officer, serves as a member of the
Compensation Committee of the Board of Directors. Although Mr. Vizas makes
recommendations to the Compensation Committee of the Board of Directors with
regard to the other executive officers, including Named Executive Officers, he
did not participate in the Compensation Committee's deliberations with respect
to his own compensation.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee, which includes Messrs. Vizas, Gerrity, and
Krinsley, is responsible for approving all compensation for senior officers and
employees, making recommendations to the Board with respect to the grant of
stock options and eligibility requirements, including grants under and the
requirements of our stock option plans and may make grants to directors under
the Directors Stock Option Plan. The Compensation Committee believes that the
actions of each executive officer have the potential to impact our short-term
and long-term profitability and considers the impact of each executive officer's
performance in designing and administering the executive compensation program.
During the nine month period ended December 31, 1998, under the direction
of our new Chairman and Chief Executive Officer (retained in December 1997), we
hired a number of new executive officers. We negotiated compensation with each
officer. The Compensation Committee has obtained two salary surveys, obtained by
eGlobe regarding the compensation practices of other companies in the
communications or related industries and believes that the new executive
officers' compensation is consistent with salary surveys. In setting
compensation, the Compensation Committee adhered to the following philosophy,
objectives and policies:
64
PHILOSOPHY AND OBJECTIVES. The purpose of our executive compensation
program is to: (i) attract, motivate and retain key executives responsible for
our success of as a whole; (ii) increase stockholder value; (iii) increase our
overall performance; and (iv) increase the performance of the individual
executive.
EXECUTIVE COMPENSATION POLICIES. The Compensation Committee's executive
compensation policies are designed to provide competitive levels of compensation
that integrate compensation with our short-term and long-term performance goals,
reward above-average corporate performance, recognize individual initiative and
achievements, and assist us in attracting and retaining qualified executives.
The two salary surveys, indicate that the levels of executive officers' overall
compensation is at or below the mid range of salaries of similarly situated
senior executives in the communications or related industries. In determining
the incentive portions of executive compensation levels, particular factors
apart from industry comparables which the Compensation Committee believes are
important are growth in revenues, completion of our financing plans, or other
major transactions or corporate goals, implementation of our strategic plan and,
on a longer term basis, growth in stockholder value measured by stock price.
Our executive compensation structure is comprised of base salary, annual
cash performance bonuses, long-term compensation in the form of stock option
grants, and various benefits, including medical, and other benefits generally
available to all our employees.
BASE SALARY. In establishing appropriate levels of base salary, the
Compensation Committee negotiated with its new executives, considering their
functions, the significant level of commitment required to advance eGlobe to a
higher level of competitiveness, our size and growth rate and other factors. The
Compensation Committee has obtained the salary surveys of similar companies in
the local area. According to the surveys, executive base salaries generally were
in the mid range salary levels of similarly sized companies in similar
industries.
Annual Performance Bonuses. During the nine month period ended December 31,
1998, the Compensation Committee placed increased reliance on cash bonuses as a
significant portion of compensation for executives. Generally, potential bonuses
have ranged up to 50% of a senior executive's annual base salary and are paid on
an quarterly or annual basis. The actual amount of a bonus grant is determined
based upon performance criteria detailed in written performance goals
established based upon discussions between the senior executive and the
Company's human resource and/or senior management. Performance criteria include
the achievement of financial targets expressed in gross revenues and EBITDA and
other criteria based upon the Company's performance and the individual's
achievements during the course of the year.
Salary Increases and Bonus Awards: The Compensation Committee expects that
future salary increases and bonuses will be based on performance, either by
eGlobe or individual performance by the executive officer.
Stock Options and Stock Appreciation Rights: The Compensation Committee
expects that stock options will continue to play an important role in executive
officer compensation. The Compensation Committee has decided not to grant any
more tandem stock appreciation rights with stock options. The members of the
Committee believe that stock options not only encourage
65
performance by our executive officers but they align the interests of our
executive officers with the interests of our stockholders. The number of stock
options granted to each senior executive officer is determined subjectively,
both at the time we hire that executive and subsequently for performance
achievement, based on a number of factors, including the individual's
anticipated degree of responsibility, salary level, performance milestones
achieved and stock option awards by other similarly sized communications or
related companies. Stock option grants by the Compensation Committee generally
are under our employee stock option and appreciation rights plan at the
prevailing market value and will have value only if our stock price increases.
Grants made by the Compensation Committee generally vest in equal annual
installments over the five year grant period; executives must be employed by
eGlobe at the time of vesting to exercise the options. Option grants to Messrs.
Vizas, Smith and Balinger are discussed above under "Employment Agreements and
Termination of Employment and Change in Control Arrangements."
Employment Agreements. The compensation committee has previously authorized
the agreements with the named executive officers above under "Employment
Agreements and Termination of Employment and Change in Control Arrangements."
The compensation committee did not, however, authorize new employment
arrangements with any of the named executive officers during the nine months
ended December 31, 1998.
COMPENSATION COMMITTEE
Christopher J. Vizas
Edward J. Gerrity, Jr.
Richard A. Krinsley
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the number and percentage of shares of
eGlobe's common stock owned beneficially, as of March 31, 1999, by each Director
and executive officer of eGlobe, and by all Directors and executive officers of
eGlobe as a group. Information as to beneficial ownership is based upon
statements furnished to the Company by such persons.
Name and Address Number of Shares Percent of
of Beneficial Owner Owned of Record Common Stock
and Beneficially (1) Outstanding (2)
Christopher J. Vizas 214,768 (3) 1.00%
2000 Pennsylvania Avenue, N.W.
Suite 4800
Washington, D.C. 20006
Edward J. Gerrity, Jr. 107,150 (4) *
7 Sunset Lane
Rye, New York 10580
Anthony Balinger 91,043 (5) *
CLI Building, Room 2503
313-317 Hennessy Road
Wanchai, Hong Kong
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Name and Address Number of Shares Percent of
of Beneficial Owner Owned of Record Common Stock
and Beneficially (1) Outstanding (2)
David W. Warnes 61,000 (6) *
1330 Charleston Road
Mountain View, California 94043
Richard A. Krinsley 110,182 (7) *
201 West Lyon Farm
Greenwich, Connecticut 06831
Martin L. Samuels 87,000 (8) *
3675 Delmont Avenue
Oakland, California 94605
Donald H. Sledge 60,000 (9) *
27 Cherry Hills Court
Alamo, CA 94507
James O. Howard 35,000 (10) *
2601 Airport Drive, Suite 370
Torrance, California 90505
John E. Koonce 78,525 (11) *
11416 Empire Lane
Rockville, Maryland 20852
Hsin Yen 61,302 (12) *
IDX, International
11410 Isaac Newton Square,
Suite 100
Reston, Virginia 20190
Richard Chiang 858,292 (13) 3.87%
Princeton Technology Corporation
2F, No. 233-1, Bao Chiao Road
Hsin Tien, Taipei Hsien, Taiwan, R.O.C.
Allen Mandel 52,265 (14) *
9362 S. Mountain Brush Street
Highlands Ranch, Colorado 80126
Colin Smith 10,000 (15) *
4260 E. Evans Avenue
Denver, CO 80222
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Name and Address Number of Shares Percent of
of Beneficial Owner Owned of Record Common Stock
and Beneficially (1) Outstanding (2)
Anne Haas 15,616 (16) *
4260 E. Evans Avenue
Denver, CO 80222
All Named Executive Officers and Directors 1,864,343 (17) 7.22 %
as a Group (14 persons)
- - ----------
* Less than 1%
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
be a "beneficial owner" of a security if he or she has or shares the power
to vote or direct the voting of such security or the power to dispose or
direct the disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which that person has the right to
acquire beneficial ownership within 60 days from March 31, 1999. More than
one person may be deemed to be a beneficial owner of the same securities.
All persons shown in the table above have sole voting and investment power,
except as otherwise indicated. This table includes shares of common stock
subject to outstanding options granted pursuant to eGlobe's option plans.
(2) For the purpose of computing the percentage ownership of each beneficial
owner, any securities which were not outstanding but which were subject to
options, warrants, rights or conversion privileges held by such beneficial
owner exercisable within 60 days were deemed to be outstanding in
determining the percentage owned by such person, but were deemed not to be
outstanding in determining the percentage owned by any other person.
(3) Includes options to purchase 174,768 shares of common stock exercisable
within 60 days from March 31, 1999. Does not include options to purchase
360,000 shares of common stock which are not exercisable within such
period.
(4) Includes 1,100 shares held by Mr. Gerrity as a trustee and options to
purchase 96,050 shares of common stock exercisable within 60 days from
March 31, 1999. Does not include options to purchase 11,331 shares of
common stock which are not exercisable within such period.
(5) Includes options to purchase 90,043 shares of common stock exercisable
within 60 days from March 31, 1999. Does not include options to purchase
31,667 shares of common stock which are not exercisable within such period.
(6) Consists solely of options to purchase common stock exercisable within 60
days from March 31, 1999. Does not include options to purchase 10,000
shares of common stock which are not exercisable within such period.
(7) Includes options to purchase 46,000 shares of common stock exercisable
within 60 days from March 31, 1999. Does not include options to purchase
10,000 shares of common stock which are not exercisable within such period.
(8) Includes options to purchase 30,000 shares of common stock exercisable
within 60 days from March 31, 1999. Does not include options to purchase
10,000 shares of common stock which are not exercisable within such period.
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(9) Consists solely of options to purchase common stock exercisable within 60
days from March 31, 1999. Does not include options to purchase 10,000
shares of common stock which are not exercisable within such period.
(10) Consists solely of options to purchase common stock exercisable within 60
days from March 31, 1999. Does not include options to purchase 10,000
shares of common stock which are not exercisable within such period.
(11) Consists solely of options to purchase common stock exercisable within 60
days from March 31, 1999. Does not include options to purchase 95,000
shares of common stock which are not exercisable within such period.
(12) Includes (i) 57,696 shares of common stock issuable within 60 days from
March 31, 1999 upon the conversion of the Series B Convertible Preferred
Stock and (ii) warrants to purchase 3,606 shares of common stock owned by
HILK International, Inc. of which Mr. Yen is the sole stockholder. Does not
include warrants owned by HILK International, Inc. to purchase 72,120
shares of common stock not exercisable within such period.
(13) Includes (i) 807,804 shares of common stock issuable within 60 days from
March 31, 1999 upon the conversion of the Series B Convertible Preferred
Stock (ii) warrants to purchase 50,488 shares of common stock owned by
Chatwick Investments, Ltd., of which Mr. Chiang is the sole stockholder.
Does not include warrants owned by Chatwick Investments, Ltd. to purchase
1,009,755 shares of common stock not exercisable with such period.
(14) Includes options to purchase 44,355 shares of common stock exercisable
within 60 days from March 31, 1999. Does not include options to purchase
75,121 shares of common stock which are not exercisable within such period.
(15) Consists solely of options to purchase common stock exercisable within 60
days from March 31, 1999. Does not include options to purchase 81,667
shares of common stock not exercisable within 60 days from May 31, 1998.
(16) Consists solely of options to purchase common stock exercisable within 60
days from March 31, 1999. Does not include options to purchase 21,667
shares of common stock which are not exercisable within such period.
(17) Includes (i) options to purchase 746,581 shares of common stock exercisable
within 60 days from March 31, 1999 and (ii) 865,000 shares of common stock
issuable upon conversion of the Series B Convertible Preferred Stock within
60 days from March 31, 1999. Does not include (i) options to purchase
968,454 shares of common stock or (ii) warrants to purchase 1,135,969
shares of common stock not exercisable within such period.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth the number and percentage of shares of our
common stock owned beneficially, as of March 31, 1999, by any person who is
known to us to be the beneficial owner of 5% or more of our common stock.
Information as to beneficial ownership is based upon statements furnished to us
by such persons.
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Number of Shares Percent of
Name and Address Owned of Record Common Stock
of Beneficial Owner and Beneficially (1) Outstanding (2)
Ronald L. Jensen (3) 4,555,000 19.9%
5215 N. O'Connor, #300
Irving, Texas 75039
2,047,500 8.75%
Vintage Products, Ltd. (4)
111 Arlosorov Street
Tel Aviv, Israel
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
be a "beneficial owner" of a security if he or she has or shares the power
to vote or direct the voting of such security or the power to dispose or
direct the disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which that person has the right to
acquire beneficial ownership within 60 days from March 31, 1999. More than
one person may be deemed to be a beneficial owner of the same securities.
All persons shown in the table above have sole voting and investment power,
except as otherwise indicated.
(2) For the purpose of computing the percentage ownership of each beneficial
owner, any securities which were not outstanding but which were subject to
options, warrants, rights or conversion privileges held by such beneficial
owner exercisable within 60 days were deemed to be outstanding in
determining the percentage owned by such person, but were not deemed
outstanding in determining the percentage owned by any other person.
(3) Includes 1,555,000 shares of common stock issuable within 60 days from
March 31, 1999 upon the conversion of the 8% Series E Cumulative
Convertible Redeemable Preferred Stock owned by EXTL Investors LLC ("EXTL
Investors"), of which Mr. Jensen and his wife, Gladys Jensen, are the sole
members. Does not include (i) 1,052,941 shares of common stock issuable
upon conversion of the 8% Series E Cumulative Convertible Redeemable
Preferred Stock owned by EXTL Investors and (ii) warrants owned by EXTL
Investors to purchase 1,000,000 shares of common stock which may not be
issued unless shareholder approval is obtained. These amounts do not
reflect warrants to purchase 1,500,000 shares of common stock issued to
EXTL Investors in connections with the debt placement completed on April 9,
1999. Mr. Jensen has disclaimed beneficial ownership of all of the shares
owned by EXTL Investors in his statement filed with the Company. If none of
the shares owned by EXTL Investors were included, then Mr. Jensen would
beneficially own 3,000,000 shares (14.06%).
(4) Includes (i) 1,875,000 shares of common stock issuable within 60 days from
March 31, 1999 upon the conversion of 8% Series D Cumulative Convertible
Preferred Stock and (ii) warrants to purchase 172,500 shares of common
stock exercisable within 60 days from March 31, 1999.
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ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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In November 1998, we reached an agreement with Mr. Ronald Jensen, who is
also our largest shareholder. The agreement concerned settlement of unreimbursed
costs and potential claims. Mr. Jensen had purchased $7.5 million of our Common
Stock in a private placement in June 1997 and later was elected Chairman of our
Board of Directors. After approximately three months, Mr. Jensen resigned his
position, citing both other business demands and the challenges of managing our
business. During his tenure as Chairman, Mr. Jensen incurred staff and other
costs that were not billed to eGlobe. Also, Mr. Jensen subsequently communicated
with our current management, indicating there were a number of issues raised
during his involvement with eGlobe relating to the provisions of his share
purchase agreement which could result in claims against us.
To resolve all current and potential issues, Mr. Jensen agreed with us to
exchange his current holding of 1,425,000 shares of Common Stock for 75 shares
of our 8% Series C Cumulative Convertible Preferred Stock ("Series C Preferred
Stock"), which management estimated to have a fair market value of approximately
$3.4 million and a face value of $7.5 million. The terms of the Series C
Preferred Stock permit Mr. Jensen to convert the Series C Preferred Stock into
the number of shares equal to the face value of the preferred stock divided by
90% of common stock market price, but with a minimum conversion price of $4.00
per share and a maximum of $6.00 per share, subject to adjustment if we issue
Common Stock for less than the conversion price. The difference between the
estimated fair value of the Series C Preferred Stock to be issued and the market
value of the Common Stock surrendered resulted in a one-time non-cash charge to
our statement of operations of $1.0 million in the quarter ended September 30,
1998 with a corresponding credit to stockholders' equity.
In connection with subsequent issuances of securities which are convertible
into or exercisable for our Common Stock, we discussed with Mr. Jensen the
extent to which the conversion price of the Series C Preferred Stock should be
adjusted downward. The parties agreed to exchange all of the outstanding Series
C Preferred Stock (convertible into 1,875,000 shares of Common Stock) for shares
of Common Stock, which exchange would have the same economic effect as if the
Series C Preferred Stock had been converted into Common Stock with an effective
conversion price of $2.50 per share. On February 16, 1999, we agreed to exchange
75 shares of Series C Preferred Stock then held by Mr. Jensen for 3,000,000
shares of Common Stock. The market value of the 1,125,000 incremental shares of
common stock will be recorded as a dividend in the first quarter of 1999.
On December 31, 1998 two officers of the Company each loaned $50,000 to the
Company for short term needs. The loans were repaid, including a 1% fee, in
February, 1999.
In February 1999, we concluded a private placement of $5 million with EXTL
Investors. We sold 50 shares of our 8% Series E Cumulative Convertible
Redeemable Preferred Stock (the "Series E Preferred Stock"), and warrants (the
"Series E Warrants") to purchase (i) 723,000 shares of Common Stock with an
exercise price of $2.125 per share and (ii) 277,000 shares of Common Stock with
an exercise price of $.01 per share to the Jensen affiliate.
The Series E Preferred Stock agreement allowed for the shares of the Series
E Preferred Stock to be redeemed at a redemption price equal to the face value
plus accrued dividends, in cash or in
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Common Stock, at our option or at the option of any holder, provided that the
holder had not previously exercised the convertibility option described, at any
time following the date that is five years after we issue the Series E Preferred
Stock. On April 9, 1999, in connection with the financing describe below, the
holder exercised the convertibility option, as a result, the Series E Preferred
Stock is no longer redeemable.
The shares of Series E Preferred Stock will automatically be converted into
shares of our Common Stock, on the earliest to occur of (x) the first date as of
which the last reported sales price of our Common Stock on Nasdaq is $5.00 or
more for any 20 consecutive trading days during any period in which Series E
Preferred Stock is outstanding, (y) the date that 80% or more of the Series E
Preferred Stock we have issued has been converted into Common Stock, or (z) we
complete a public offering of equity securities at a price of at least $3.00 per
share and with gross proceeds to us of at least $20 million. The initial
conversion price for the Series E Preferred Stock is $2.125, subject to
adjustment if we issue Common Stock for less than the conversion price.
On April 9, 1999, we and our wholly owned subsidiary eGlobe Financing
Corporation entered into a Loan and Note Purchase Agreement with EXTL Investors
(which, together with its affiliates, is our largest stockholder). eGlobe
Financing initially borrowed $7 million from EXTL Investors and we granted EXTL
Investors warrants (1/3 of which are presently exercisable) to purchase
1,500,000 shares of our Common Stock at an exercise price of $.01 per share. As
a condition to receiving this $7 million loan, we entered into a Subscription
Agreement with eGlobe Financing under which we have irrevocably agreed to
subscribe for eGlobe Financing stock for an aggregate subscription price of up
to $7,560,000 (the amount necessary to repay the loan and accrued interest).
As part of the Loan and Note Purchase Agreement, EXTL Investors agreed to
purchase $20 million of 5% Secured Notes from eGlobe Financing, upon our
request, provided that we first obtain any required stockholder approval at our
next stockholder meeting. If we issue the Secured Notes to EXTL Investors, we
must repay the $7 million initial loan. We also must grant EXTL Investors
warrants to purchase 5,000,000 shares of our Common Stock at an exercise price
of $1.00 per share, although 2/3 of the initial warrants to purchase 1,500,000
shares will expire at that time.
If eGlobe Financing does not issue Secured Notes for the $20 million after
we obtain stockholder approval (or if we do not obtain approval at our next
annual stockholder meeting), the $7 million loan must be repaid on the earliest
to occur of (i) April 9, 2000, (ii) the date that we complete an offering of
debt or equity securities from which we receive net proceeds of at least $30
million or (iii) the occurrence of an event of default. Also, 2/3 of the initial
warrants to purchase 1,500,000 shares will become exercisable at that time.
The Secured Notes, if sold, must be repaid in 36 specified monthly
installments commencing on the first month following issuance, with the
remaining unpaid principal and accrued interest being due in a lump sum with the
last payment. The entire amount becomes due earlier if we complete an offering
of debt or equity securities from which we receive net proceeds of at least $100
million (a "Qualified Offering"). The principal and interest of the Secured
Notes may be paid in cash. However, up to 50% of the original principal amount
of the Notes may be paid in our Common Stock at our option if (i) the closing
price of our Common Stock on Nasdaq is $8.00 or more for any 15
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consecutive trading days, (ii) we close a public offering of our equity
securities at a price of at least $5.00 per share and with gross proceeds to us
of at least $30 million, or (iii) we close a Qualified Offering (at a price of
at least $5.00 per share, in the case of an offering of equity securities).
The proceeds of these financings will be used by us to fund capital
expenditures relating to our network of IP trunks and intelligent platforms for
calling card and unified messaging services, and for working capital and general
corporate purposes. The proceeds of the Secured Notes would also be used to
repay the $7 million initial loan and our approximately $8 million of senior
indebtedness to IDT Corporation.
If eGlobe Financing issues the Secured Notes, we will transfer
substantially all of our operating assets to eGlobe Financing so that EXTL
Investors can have a security interest in our assets to secure payment under the
Secured Notes. The security interest would be subject to certain exceptions for
existing debt and vendor financing. We and our operating subsidiaries would
guarantee payment of the Secured Notes.
EXTL Investors also has agreed, under the Loan and Note Purchase Agreement,
to make advances to eGlobe Financing from time to time based upon eligible
accounts receivable. These advances may not exceed the lesser of 50% of eligible
accounts receivable and the aggregate amount of principal payments made by
eGlobe Financing under the Secured Notes. We will guarantee repayment of these
advances, which also will be secured by the same security arrangement as the
Secured Notes.
The Loan and Note Purchase Agreement contains several covenants which we
believe are fairly customary, including prohibitions on:
(i) mergers and sales of substantially all assets;
(ii) sales of material assets other than on an arm's length basis and in
the ordinary course;
(iii) encumbering any of our assets (except for certain permitted liens);
(iv) incurring or having outstanding indebtedness other than certain
permitted debt (which includes certain existing debt and future equipment and
facilities financing), or prepaying any subordinated indebtedness; or
(v) paying any dividends or distributions on any class of our capital stock
(other than any dividend on outstanding preferred stock or additional preferred
stock issued in the future) or repurchasing any shares of our capital stock
(subject to certain exceptions).
The Loan and Note Purchase Agreement contains several fairly standard
events of default, including:
(i) non-payment of any principal or interest on the $7 million loan or the
Secured Notes, or non- payment of $250,000 or more on any other indebtedness;
73
(ii) failure to perform any obligation under the Loan and Note Purchase
Agreement or related documents;
(iii) breach of any representation or warranty in the Loan and Note
Purchase Agreement;
(iv) inability to pay our debts as they become due, or initiation or
consent to judicial proceedings relating to bankruptcy, insolvency or
reorganization;
(vi) dissolution or winding up, unless approved by EXTL Investors; and
(vi) final judgment ordering payment in excess of $250,000.
74
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE, INC.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
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a) 1. The financial statements are included in Part II, Item 8 beginning at
Page F-1:
2. Financial Statement Schedule
[] Schedule II Valuation and Qualifying Accounts
b) Reports on Form 8-K:
1. A report on Form 8-K dated June 24, 1998 under Item 5 was filed
with the Commission on June 24, 1998 to report the signing of the
definitive agreement to acquire IDX International, Inc.
2. A report on Form 8-K dated August 12, 1998 under Item 5 was filed
with the Commission on August 12, 1998 to report the signing of the
definitive agreement to acquire Connectsoft Communications
Corporation.
3. A report on Form 8-K dated December 17, 1998 under Item 2 was
filed with the Commission on December 17, 1998 to report the closing
of the acquisition of IDX International, Inc.
4. A report on Form 8-K dated March 1, 1999 under Item 2 was filed
with the Commission on March 1, 1999 to report the closing of the
acquisition of Telekey, Inc.
Exhibits:
2.1 Agreement and Plan of Merger, dated June 10, 1998, by and among
Executive TeleCard, Ltd., IDX International, Inc., EXTEL Merger Sub
No. 1, Inc. and the stockholders of IDX International, Inc.
(Incorporated by reference to Exhibit 2.1 in Current Report on Form
8-K of Executive TeleCard, Ltd. dated June 24, 1998).
2.2 Consent and Extension, dated August 27, 1998, by and among Executive
TeleCard, Ltd., IDX International, Inc., EXTEL Merger Sub No. 1, Inc.
and Jeffey Gee, as representative of the stockholders of IDX
International, Inc. (Incorporated by reference to Exhibit 2.2 in
Current Report on Form 8-K of Executive TeleCard, Ltd. dated December
17, 1998).
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2.3 Amendment No. 2 to Agreement and Plan of Merger, dated October __,
1998, by and among Executive TeleCard, Ltd., IDX International, Inc.,
EXTEL Merger Sub No. 1, Inc. and the stockholders of IDX
International, Inc. (Incorporated by reference to Exhibit 2.3 in
Current Report on Form 8-K of Executive TeleCard, Ltd. dated December
17, 1998).
2.4 Agreement and Plan of Acquisition, dated September 30, 1998, by and
among Executive TeleCard, Ltd., UCI Tele Networks, Ltd. and United
Communications International LLC.
2.5 Agreement and Plan of Merger, dated February 3, 1999, by and among
Executive TeleCard, Ltd., Telekey, Inc., eGlobe Merger Sub No. 2, Inc.
and the stockholders of Telekey, Inc. (Incorporated by reference to
Exhibit 2.1 in Current Report on Form 8-K of Executive TeleCard, Ltd.
dated March 1, 1999).
3.1 Restated Certificate of Incorporation as amended July 26, 1996 and
August 29, 1996 (Incorporated by reference to Exhibit 3.1 in Quarterly
Report on Form 10-Q of Executive TeleCard, Ltd. for period ended
September 30, 1996).
3.2 Certificate of Correction to Certificate of Amendment to the Restated
Certificate of Incorporation dated July 31, 1998 (Incorporated by
reference to Exhibit 3 in Quarterly Report on Form 10-Q of Executive
TeleCard, Ltd. for period ended June 30, 1998).
3.3 Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.4
in Annual Report on Form 10-K of Executive TeleCard, Ltd. for the
fiscal year ended March 31, 1998).
3.4 Amendment to Bylaws.
4.1 Rights Agreement dated as of February 18, 1997 between Executive
TeleCard, Ltd. and American Stock Transfer & Trust Company, which
includes the form of Certificate of Designations setting forth the
terms of the Series A Participating Preference Stock of Executive
TeleCard, Ltd. as Exhibit A, the form of right certificate as Exhibit
B and the Summary of Rights to Purchase Preference Shares as Exhibit C
(Incorporated by reference to Exhibit 1 in Registration Statement on
Form 8-A of Executive TeleCard, Ltd. dated February 26, 1997).
4.2 Form of Letter from the Board of Directors of Executive TeleCard, Ltd.
to Stockholders mailed with copies of the Summary of Rights
(Incorporated by reference to Exhibit 2 in Registration Statement on
Form 8-A of Executive TeleCard, Ltd. dated February 26, 1997).
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4.3 Certificate of Designations, Rights and Preferences of Series B
Convertible Preferred Stock of Executive TeleCard, Ltd. (Incorporated
by reference to Exhibit 4.1 in Current Report on Form 8-K of Executive
TeleCard, Ltd. dated December 17, 1998).
4.4 Form of Warrant by and between Executive TeleCard, Ltd. and each of
the stockholders of IDX International, Inc. (Incorporated by reference
to Exhibit 4.2 in Current Report on Form 8-K of Executive TeleCard,
Ltd. dated June 24, 1998).
4.5 Forms of Convertible Subordinated Promissory Notes payable to the
stockholders of IDX International, Inc. in the aggregate principal
amount of $5,000,000 (Incorporated by reference to Exhibit 4.3 in
Current Report on Form 8-K of Executive TeleCard, Ltd. dated December
17, 1998).
4.6 Form of Convertible Subordinated Promissory Note payable to the
preferred stockholders of IDX International, Inc. in the aggregate
principal amount of $418,024 (Incorporated by reference to Exhibit 4.4
in Current Report on Form 8-K of Executive TeleCard, Ltd. dated
December 17, 1998).
4.7 Forms of Promissory Notes payable to United Communications
International LLC in the aggregate principal amount of $2,025,000.
4.8 Forms of Warrant to purchase shares of common stock of Executive
TeleCard, Ltd.
4.9 Certificate of Designations, Rights and Preferences of 8% Series C
Cumulative Convertible Preferred Stock of Executive TeleCard, Ltd.
4.10 Certificate of Designations, Rights and Preferences of 8% Series D
Cumulative Convertible Preferred Stock of Executive TeleCard, Ltd. and
Certificate of Correction of Series D Preferred Stock Certificate of
Designations.
4.11 Certificate of Designations, Rights and Preferences of 8% Series E
Cumulative Convertible Redeemable Preferred Stock of Executive
TeleCard, Ltd.
4.12 Certificate of Designations, Rights and Preferences of Series F
Convertible Preferred Stock of Executive TeleCard, Ltd. (Incorporated
by reference to Exhibit 4.1 in Current Report on Form 8-K of Executive
TeleCard, Ltd. dated March 1, 1999).
4.13 Compensation Agreement dated September 2, 1998 between Executive
TeleCard, Ltd., C-Soft Acquisition Corp. and Brookshire Securities
Corp., providing a warrant to purchase 2,500 shares of common stock of
Executive TeleCard, Ltd.
4.14 Agreement dated June 18, 1998 by and between Executive TeleCard, Ltd.
and Seymour Gordon.
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4.15 Promissory Note in the original principal amount of $1,000,000 dated
June 18, 1998 between Executive TeleCard, Ltd. and Seymour Gordon.
4.16 Warrant to purchase 500,000 shares of common stock of Executive
TeleCard, Ltd. dated February 23, 1998 issued to IDT Corporation
(Incorporated by reference to Exhibit 10.15 in Annual Report on Form
10-K of Executive TeleCard, Ltd. for the fiscal year ended March 31,
1998).
4.17 Promissory Note of C-Soft Acquisition Corp., as maker, and Executive
TeleCard, Ltd., as guarantor, payable to Dr. J. Soni in the original
principal amount of $250,000 dated September 1, 1998, providing a
warrant to purchase 25,000 shares of common stock of Executive
TeleCard, Ltd.
4.18 Form of Warrant to purchase 1,500,000 shares of common stock of
Executive TeleCard, Ltd. issued to EXTL Investors LLC.
10.1 Agreement between Executive TeleCard S.A. (Switzerland) and Telstra
Corporation Limited (Australia) for Enhancement of Telecom Australia
Calling Card dated August 3, 1993 (Incorporated by reference to
Exhibit 10.12 in Form 10-K of Executive TeleCard, Ltd. for the fiscal
year ended March 31, 1996). This Agreement is subject to a grant of
confidential treatment filed separately with the U.S. Securities and
Exchange Commission.
10.2 Promissory Note and Stock Option Agreement between Executive TeleCard,
Ltd. and World Wide Export, Ltd. dated February 28, 1996 (Incorporated
by reference to Exhibit 10.20 in Form 10-K of Executive TeleCard, Ltd.
for the fiscal year ended March 31, 1996).
10.3 Promissory Note and Stock Option Agreement between Executive TeleCard,
Ltd. and Seymour Gordon dated February 28, 1996 (Incorporated by
reference to Exhibit 10.21 in Form 10-K of Executive TeleCard, Ltd.
for the fiscal year ended March 31, 1996).
10.4 Promissory Note and Stock Option Agreement between Executive TeleCard,
Ltd. and Network Data Systems, Limited dated June 27, 1996
(Incorporated by reference to Exhibit 10.2 in Quarterly Report on Form
10-Q of Executive TeleCard, Ltd. for the period ended June 30, 1996).
10.5 Settlement Agreement dated April 2, 1998 between Executive TeleCard,
Ltd. and parties to In re: Executive TeleCard, Ltd. Securities
Litigation, Case No. 94 Civ. 7846 (CLB), U.S.D.C., S.D.N.Y.
(Incorporated by reference to Exhibit 10.8 in Annual Report on Form
10-K of Executive TeleCard, Ltd. for the fiscal year ended March 31,
1998).
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10.6 1995 Employee Stock Option and Appreciation Rights Plan, as amended
and restated (Incorporated by reference to Exhibit 10.9 in Annual
Report on Form 10-K of Executive TeleCard, Ltd. for the fiscal year
ended March 31, 1998).
10.7 1995 Directors Stock Option and Appreciation Rights Plan, as amended
and restated. (Incorporated by reference to Exhibit 10.10 in Annual
Report on Form 10-K of Executive TeleCard, Ltd. for the fiscal year
ended March 31, 1998).
10.8 Employment Agreement for Christopher J. Vizas dated December 5, 1997
(Incorporated by reference to Exhibit 10 in Quarterly Report on Form
10-Q of Executive TeleCard, Ltd. for the period ended December 31,
1997).
10.9 Employment Agreement for Colin Smith dated February 1, 1998
(Incorporated by reference to Exhibit 10.12 in Annual Report on Form
10-K of Executive TeleCard, Ltd. for the fiscal year ended March 31,
1998).
10.10 Employment Agreement for Hsin Yen, as Chief Executive Officer of IDX
International, Inc. dated December 2, 1998.
10.11 Promissory Note dated February 23, 1998 between Executive TeleCard,
Ltd. and IDT Corporation (Incorporated by reference to Exhibit 10.14
in Annual Report on Form 10-K of Executive TeleCard, Ltd. for the
fiscal year ended March 31, 1998).
10.12 Contract of Services, dated January 5, 1995, between Executive
TeleCard, Ltd. and Telefonos de Mexico, S.A. de C.V. (Incorporated
by reference to Exhibit 10.19 in Annual Report on Form 10-K/A of
Executive TeleCard, Ltd. for the fiscal year ended March 31, 1998).
10.13 Modification Agreement, dated as of June 17, 1996, by and between
Executive TeleCard, Ltd. and Telefonos de Mexico, S.A. de C.V.
(Incorporated by reference to Exhibit 10.20 in Annual Report on Form
10-K/A of Executive TeleCard, Ltd. for the fiscal year ended March
31, 1998).
10.14 Agreement (Facility Lease) dated December 1, 1998 between Swiftcall
Equipment and Services (USA) Inc. and Executive TeleCard, Ltd.
10.15 Form of Promissory Note payable to the former stockholders of
Telekey, Inc. in the aggregate principal amount of $150,000.
(Incorporated by reference to Exhibit 4.2 in Current Report on Form
8-K of Executive TeleCard, Ltd. dated March 1, 1999).
79
10.16 Loan and Note Purchase Agreement dated April 9, 1999 between EXTL
Investors LLC, eGlobe Financing Corporation and Executive TeleCard,
Ltd.
10.17 Form of Promissory Note in the original principal amount of
$7,000,000 dated April 9, 1999 of eGlobe Financing Corporation
payable to EXTL Investors LLC.
10.18 Subscription Agreement dated April 9, 1999 between Executive
TeleCard, Ltd. and eGlobe Financing Corporation.
21 Subsidiaries of Executive TeleCard, Ltd.
23 Consent of BDO Seidman, LLP
27 Financial Data Schedule
99.1 Section 214 Authorization for Executive TeleCard, Ltd. (Incorporated
by reference to Exhibit 10.5 in Form S-1 Registration Statement of
Executive TeleCard, Ltd. (No. 33-25572)).
99.2 Assignment of Section 214 Authorization for IDX International, Inc.
80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EXECUTIVE TELECARD, LTD.
d/b/a eGlobe, Inc.
Dated: April 14, 1999 BY: /s/ Anne E. Haas
-----------------------------------
Anne E. Haas
Vice President, Controller and Treasurer
(Principal Accounting Officer)
Pursuant to the requirement of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in
capacities and on the dates indicated.
Dated: April 14, 1999 BY: /s/ Christopher J. Vizas
--------------------------------
Christopher J. Vizas
Chairman of the Board of Directors, and Chief
Executive Officer (Principal Executive Officer)
Dated: April 14, 1999 BY: /s/ Anthony Balinger
--------------------------------
Anthony Balinger,
Vice Chairman and Director
Dated: April 14, 1999 BY: /s/ Richard Chiang
--------------------------------
Richard Chiang, Director
Dated: April 14, 1999 BY: /s/ Edward J. Gerrity
--------------------------------
Edward J. Gerrity, Director
Dated: April 14, 1999 BY: /s/ James O. Howard
--------------------------------
James O. Howard, Director
Dated: April 14, 1999 BY: /s/ John E. Koonce
--------------------------------
John E. Koonce,
Director and Chief Financial Officer
Dated: April 14, 1999 BY: /s/ Richard A. Krinsley
--------------------------------
Richard A. Krinsley, Director
81
Signatures Continued
Dated: April 14, 1999 BY: /s/ Martin L. Samuels
--------------------------------
Martin L. Samuels, Director
Dated: April 14, 1999 BY: /s/ Donald H. Sledge
--------------------------------
Donald H. Sledge, Director
Dated: April 14, 1999 BY: /s/ David W. Warnes
--------------------------------
David W. Warnes, Director
Dated: April 14, 1999 BY: /s/ Hsin Yen
--------------------------------
Hsin Yen, Director
82
GLOSSARY
"ATM" shall mean a commercialized switching and transmission technology
that is one of a general class of packet technologies that relay traffic by way
of an address contained within the first five bits of a standard fifty-three
bit-long packet or cell. ATM-based packet transport was specifically developed
to allow switching and transmission of mixed voice, data and video (sometimes
referred to as "multi-media" information) at varying rates. The ATM format can
be used by many different networks, including LANs.
"Bit" shall mean the smallest unit in data communications.
"Calling Card Platforms" shall mean interactive call processing platforms
from which the Company runs its proprietary routing, application and data access
software.
"Carriers" shall mean providers of telecommunications services locally or
between local exchanges on a interstate or intrastate basis.
"Data packets" shall mean blocks of information being sent or received over
a network.
"800 Services" shall mean toll free services to the person making the call.
The call is billed to the recipient.
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"FCC" shall mean Federal Communications Commission.
"Frame relay" shall mean a high speed, data packet switching service used
to transmit digital information, including, but not limited to voice and data
between Frame Relay Access Devices (FRADs). Frame relay supports data units of
variable lengths at access speeds ranging from 56 kilobits per second to 1.5
megabits per second. "Gateway" shall mean the connection between otherwise
incompatible networks, such as technology necessary to translate or convert the
code and protocol used by PSTN networks for use on IP networks.
"IP" or "Internet protocol" shall mean the method of transmission of
electronic data typically utilized across the Internet
"IP fax" shall mean the ability to route fax transmission over a data
packet switched network, including the Internet.
"IP telephony" shall mean the technology and the techniques to communicate
via voice, video or image at varying speeds from real-time to time-delayed over
a data packet switched network, generally referring to the Internet.
"IP voice" shall mean the ability to route voice calls over a data packet
switched network, including the Internet.
"ISPs" or "Internet Service Providers" shall mean a vendor who provides
access for customers to the Internet and World Wide Web.
"ISDN" or "Integrated Services Digital Network" shall mean a complex
network concept designed to provide a variety of voice, data and digital
interface standards. Incorporated into ISDN are many new enhanced services, such
as high speed data file transfer, desk top video conferencing, telepublishing,
telecommuting, telepresence learning (distance learning), remote collaboration
(screened sharing), data network linking and home information services.
"Kilobit" shall mean one thousand bits of information. The information
carrying capacity of a circuit may be measured in "kilobits per second."
"Low cost routing or transmission" shall mean the use of a carrier's
facilities that, based on cost advantages are preferable to use by a carrier of
its own facilities.
"Megabit" shall mean one million bits of information. The information
carrying capacity of a circuit may be measured in "megabits per second."
"Node" shall mean an individual point of origination and termination of
data on the network transported using frame relay or similar technology.
"PIN" or "personal identification number" shall mean a code used by a
customer to complete a call with a calling card.
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"Post-paid calling card services" shall mean the service that entitles a
customer to make telephone calls by using a telephone card and be billed
subsequently for the service. The customer periodically pays for time actually
used in the same way a customer would pay for local telephone service from their
home. Mobile professionals and other high volume and repetitive users often use
these services because the amount of telephone calling time is not limited.
"Prepaid calling card services" shall mean the service that entitles a
customer to purchase in advance a specified amount of telephone calling time.
Generally companies sell prepaid telephone cards in many denominations up to $50
and the value of the card decreases as the customer makes calls.
"PSTN" or "Public Switched Telephone Network" shall mean the world wide
voice telephone network available to anyone with a telephone and access
privileges.
"PTTs" or "Postal, Telegraph and Telephone Authorities" shall mean the
telephone and telecommunication providers in most foreign countries which are
usually controlled by their governments.
"Remote office services" shall mean technology which enables access from
personal computers or telephones to a corporate LAN to enable a mobile
professional to access voice, electronic mail and fax messages from outside
their office.
"Switch" shall mean a device that opens or closes circuits or selects the
paths or circuits to be used for transmission of information. Switching is a
process of interconnecting circuits to form a transmission path between users.
"Unified messaging" shall mean a platform which provides a single source
access to voice, electronic mail and fax messages.
"World Direct" shall mean the network over which the Company originates
voice traffic in 88 countries and territories and terminates traffic anywhere in
the world.
85