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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
eVENTURES GROUP, INC.
(Exact name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
DELAWARE 75-2233445
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
ONE EVERTRUST PLAZA, 8TH FLOOR, 07302
JERSEY CITY, NEW JERSEY (ZIP CODE)
(Address of Principal Executive Offices)
</TABLE>
201-200-5515
(Registrant's telephone number, including area code)
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.00002 PER SHARE
(Title of Class)
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ITEM 1. BUSINESS
COMPANY OVERVIEW
eVentures Group, Inc., is an Internet communications holding company that
provides a range of services including voice, Internet, data, fax, e-mail and
video transmission through its consolidated subsidiaries and affiliated
companies. Our strategy is to develop and operate our majority-owned
subsidiaries, and to make acquisitions of and take strategic positions in other
Internet and communications companies that provide services and/or products that
complement our core businesses. Our strategy envisions and promotes
opportunities for synergistic business relationships among the Internet and
communications companies that we own or invest in.
We have generated increasing revenues from our core businesses over the
last three years. On a historical basis we have generated net revenues and
losses from operations during the periods indicated in the table below:
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FISCAL YEARS ENDED JUNE 30, 6 MOS.
------------------------------------- ENDED DEC. 31,
1997 1998 1999 1999
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<S> <C> <C> <C> <C>
Revenues.......................... $ 921,599 $ 1,713,403 $27,248,273 $22,661,838
Loss from Operations.............. (375,707) (4,736,468) (3,614,442) (9,452,752)
</TABLE>
We had assets of $4.3 million, $15.7 million and $58.0 million as of June
30, 1998, June 30, 1999 and December 31, 1999, respectively.
We operate in one business segment, the provision of communications
services over a network which uses communications technologies that allow for
the simultaneous high speed, large scale transmission of voice, video and data.
ORGANIZATION AND HISTORY
In connection with our reorganization in September and October 1999, we
acquired the common stock of e.Volve Technology Group, Inc. owned by IEO
Holdings Limited and Infinity Investors Limited and the stock of AxisTel
Communications, Inc. owned by IEO Holdings Limited. We also acquired a minority
interest in i2v2.com, Inc., owned by IEO Holdings Limited, all of the shares of
e.Volve common stock not owned by IEO Holdings Limited and Infinity Investors
Limited, and all of the shares of AxisTel stock not owned by IEO Holdings
Limited. As a result of our reorganization, Infinity Investors Limited and the
shareholders of IEO Holdings Limited, which are IEO Investments Limited and
Infinity Emerging Subsidiary Limited (all of these entities are collectively
referred to as the "Infinity Entities") owned 28,500,000 shares of our common
stock, representing 66.7% of the then outstanding shares of our common stock,
and became our controlling stockholders. The Infinity Entities are investment
funds controlled by affiliates of Barrett Wissman, one of our Directors and our
President and Chief Executive Officer, and Clark Hunt, one of our Directors.
As a result of our reorganization we became a holding company with two
wholly-owned operating subsidiaries, e.Volve and Axistel, a minority interest in
i2v2.com, Inc., and a 50% interest in Innovative Calling Technologies, LLC. We
have since made minority investments in three additional companies; Fonbox Inc.,
Televant, Inc. and LC39 Venture Group LLC. We have also agreed to acquire
Internet Global Services, Inc. Because we are a holding company, we rely
entirely on the business performance of our operating subsidiaries.
We were originally incorporated in 1987 as "Adina, Inc." We allowed our
corporate existence to lapse in February 1996 and were subsequently reinstated
as "eVentures Group, Inc." in August 1999.
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OUR SUBSIDIARIES AND AFFILIATES
The following table lists, as of March 7, 2000, our consolidated
subsidiaries and affiliates:
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DATE OF PERCENTAGE
NAME INVESTMENT OWNERSHIP
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e.Volve.............................. June, 1998 through October, 1999 100.0%
AxisTel.............................. October, 1998 through September, 1999 100.0%
Innovative Calling Technologies...... April, 1999 50.0%
Fonbox............................... November, 1999 8.0%
February, 2000 23.0%
-----
31.0%
Callrewards.......................... February, 2000 30.0%
PhoneFree.com........................ July, 1999 16.0%
Launch Center 39..................... January, 2000 2.1%
</TABLE>
eVENTURES' HOLDINGS AND SUBSIDIARIES
[GRAPH]
Our wholly-owned subsidiaries, e.Volve and AxisTel, operate a private
communications network which consists of digital switching, routing, and signal
management equipment, as well as digital fiber optic cable lines. e.Volve and
AxisTel provide voice, Internet, data, fax, e-mail and video transmission
services to customers over our network.
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e.Volve
e.Volve was incorporated on June 26, 1996 as Orix Leasing, Inc. Orix
Leasing changed its name to Orix Global Communications, Inc. on March 20, 1997,
then to e.Volution, Inc. on May 17, 1999 and subsequently to e.Volve Technology
Group, Inc. on May 18, 1999. e.Volve has one operating subsidiary, e.Volve
Technology Group de Mexico, S.A. de C.V. (f/k/a Latin Gate de Mexico, S.A. de
C.V.). Prior to our reorganization, each of IEO Holdings Limited and Infinity
Investors Limited acquired shares of e.Volve common stock representing one-third
of the outstanding shares of e.Volve common stock and warrants to purchase 170
shares of e.Volve common stock. The warrants were cancelled as part of the
reorganization. In addition, IEO Holdings Limited and Infinity Investors Limited
owned debentures issued by e.Volve in the aggregate amount of approximately $8.0
million. We acquired these debentures on September 22, 1999 and they were
reclassified as intercompany loans when we acquired the remaining 33.3% of
e.Volve from its other stockholders. Prior to our reorganization, all of the
equity interests in IEO Holdings Limited were owned by IEO Investments Limited
and Infinity Emerging Subsidiary Limited.
AxisTel
AxisTel was incorporated on August 25, 1998. Prior to our reorganization,
IEO Holdings Limited acquired (i) one Class B Convertible Share of AxisTel (ii)
a promissory note of AxisTel in the aggregate principal amount of $3.5 million
and (iii) a warrant to purchase 1,499 Class A Common Shares of AxisTel for $3.5
million. Immediately prior to our reorganization, IEO Holdings Limited
surrendered the promissory note as consideration for the exercise of the
warrant, and converted the Class B Convertible Share into a Class A Common
Share. As a result, immediately prior to our reorganization, IEO Holdings
Limited owned 1,500 Class A Common Shares of AxisTel, representing 50% of the
outstanding equity interest in AxisTel.
Internet Global Services, Inc.
On March 7, 2000 we entered into an agreement to acquire all of the issued
and outstanding shares of stock of Internet Global Services, Inc., commonly
referred to as iGlobal, in exchange for approximately 2,588,000 shares of our
common stock. This transaction remains subject to customary closing conditions
and we expect to close this transaction during our third quarter.
iGlobal owns and operates a network for the distribution of
communications-based products and services which include voice, DSL, unified
messaging, and Internet call waiting. iGlobal has established marketing
relationships with Internet Service Providers, which are companies that provide
access for customers to the Internet, and affinity groups for the introduction,
sales and customer support of these products and services. By providing these
services, iGlobal can enable its marketing partners to increase their product
and service offerings with minimal additional cost. In return iGlobal can reach
more end users than if it developed these marketing and sales channels
internally. Each product or service is co-branded with iGlobal's brand name
Telares(TM) and is marketed under a revenue-sharing agreement.
Innovative Calling Technologies, LLC
On April, 19, 1999, e.Volve and Dataten Technologies formed Innovative
Calling Technologies, a Nevada limited liability company, with each party owning
50% of e.Volve and Dataten Technologies entered into an agreement pursuant to
which e.Volve agreed to fund the capital requirements of Innovative Calling
Technologies until Innovative Calling Technologies is able to generate
sufficient cash flow to fund its operations and Dataten Technologies agreed to
provide certain technology and personnel to Innovative Calling Technologies.
e.Volve's agreement to fund Innovative Calling Technologies' capital
requirements does not envision any minimum fundings and is entirely subject to
e.Volve's discretion.
Innovative Calling Technologies is a provider of automated operator
services with emphasis on software development, billing solutions and network
applications for the Internet and voice telephony environment. Innovative
Calling Technologies focuses on the processing and billing of credit card, third
party, collect, prepaid and long distance calls over private networks and the
Internet. Innovative Calling Technologies provides its services primarily to the
tele-marketing, pay phone, call center and hotel industries. e.Volve
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entered into this agreement to diversify its business and leverage e.Volve's
relationships in Mexico where we believed Dataten's automated operator
technology could lead to significant business opportunities in the call center
and hotel industries. During the six months ended December 31, 1999, Innovative
Calling Technologies had revenues of $1.1 million and a loss from operations of
$53,239.
The Company does not exercise majority control of the joint venture and
thus accounts for its investment pursuant to the equity method. Under the equity
method, we record our funding at cost and adjust the carrying amount of the
investment to recognize our share of the income or losses of Innovative Calling
Technologies' after the date of acquisition. During fiscal year 1999, we
invested $125,130 in Innovative Calling Technologies and recorded equity in loss
of affiliate of $33,776.
PhoneFree.com
In June 1999, we acquired 21% of the common stock of i2v2.com, which does
business under the name PhoneFree.com. Subsequently, our ownership interest was
diluted to 17% due to a sale of common stock by PhoneFree.com in July of 1999
and was diluted further to 16% due to a sale of common stock by PhoneFree.com in
December of 1999.
On March 3, 2000, we loaned $3.0 million to PhoneFree.com under a
promissory note dated March 2, 2000. The promissory note is due on September 1,
2000 and bears interest at 7%. PhoneFree.com may repay this promissory note at
any time, subject to our right to convert it into PhoneFree.com common stock. We
can convert the promissory note into PhoneFree.com common stock:
(i) if PhoneFree.com raises equity capital from other investors on or
before August 31, 2000, in which case our conversion price will be equal to
95% of the per share subscription or conversion price in such equity
capital raise; or
(ii) if PhoneFree.com does not raise equity capital from other
investors on or before August 31, 2000, we can convert the promissory note
on or after September 1, 2000, at a per share conversion price that values
all the common and preferred stock of PhoneFree.com at $50.0 million.
In connection with the loans made under the promissory note, we also
received a four-year warrant to purchase 240,000 shares of PhoneFree.com at a
price equal to 110% of the conversion price of the promissory note. The warrant
may not be called by PhoneFree. If we include this warrant, but not the
promissory note, we would beneficially own approximately 18% of the outstanding
shares of common stock of PhoneFree.com.
PhoneFree.com develops and markets an Internet Protocol telephony product
and operates a website called PhoneFree.com at the Internet address
www.PhoneFree.com. Internet Protocol telephony is the real time transmission of
voice communications in the form of digitized "packets" of information over the
public Internet or a private network, similar to the way in which e-mail and
other data is transmitted. The Phonefree software, which can be downloaded from
the website, allows users to conduct "real-time" duplex voice conversations from
PC to PC and PC to phone. This software functions with normal multimedia PC
hardware over the Internet. PC to PC calls are free to users with Internet
Service Providers connections, regardless of their duration and destination
while PC to phone service in the U.S. is generally available for a flat monthly
fee.
Five of our directors are members of the ten-member board of directors of
PhoneFree.com, although we have a contractual right to appoint only one director
to PhoneFree.com's board.
Fonbox
On November 23, 1999, we acquired 500,000 shares of Series A preferred
stock of Fonbox, representing approximately 8.0% of the outstanding equity
interests of Fonbox, for $500,000. Pursuant to an option granted in connection
with our initial investment in Fonbox, on January 31, 2000, we purchased an
additional 1,000,000 newly issued shares of Series A preferred stock of Fonbox
for $1.0 million. In addition, in connection with our exercise of this option,
we acquired 350,000 shares of common stock of Fonbox from each
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of Spydre Zeta L.L.C. and NetProvide Ltd. in exchange for an aggregate of 27,860
shares of our common stock. As of February 29, 2000, we own approximately 31% of
the capital stock of Fonbox.
Fonbox is a development stage company which offers Internet-based
communications solutions for the Portuguese-speaking and Spanish-speaking market
in Latin America and elsewhere. They intend to further cross-messaging, natural
language access, and phone-based Internet access technologies through their
Lineabox (www.lineabox.com), unified messaging product. Fonbox currently offers
Internet fax services in Miami and Sao Paolo, Brazil. Our chief executive
officer is a member of the board of directors of Fonbox.
Callrewards
On February 11, 2000, we acquired 750,000 shares of Series A-1 convertible
preferred stock of Televant, Inc., which does business under the name
Callrewards, for $750,000 which represents 30% of the outstanding capital stock
of Callrewards. Under our agreement with Callrewards, we are obligated for $1.0
million to purchase, when Callrewards has at least 100,000 active users, shares
of Series A-2 convertible preferred stock of Callrewards, which on the date of
purchase will be convertible into 20% of the ownership interest in Callrewards
on a fully-diluted basis. We are obligated to purchase shares of Series A-3
convertible preferred stock of Callrewards, which on the date of purchase will
be convertible into 20% of Callrewards on a fully-diluted basis, for $2.5
million when Callrewards has at least 250,000 active users.
Callrewards owns and operates the Callrewards.com(TM) Website. Callrewards
is a development stage company that intends to derive its revenues from
advertising and e-commerce transactions. Callrewards is integrating
loyalty-based marketing programs with advertising, all over a private network.
Callrewards intends to offer its users free long distance telephone calls
straight from their PC to a telephone anywhere in the world in exchange for
agreeing to view advertising and receive targeted e-mail.
Launch Center 39
On January 27, 2000, we acquired for $1.0 million, 100,000 Series A
Preferred Units of LC39 Venture Group, LLC, which does business under the name
Launch Center 39. This represented approximately 2.1% of the equity and voting
interests of Launch Center 39.
Launch Center 39 is an incubator which provides a series of services for
launching Internet and new media companies. These services include a unique
combination of funding, strategic advice and business development, shared legal,
financial and other professional services, shared infrastructure, and
partnerships for strategic recruiting. These services can be leveraged across
all the companies utilizing Launch Center 39 in order to provide substantial
benefits and economies of scale for all early stages of growth. This incubator
model enables Launch Center 39 to rapidly validate entrepreneurial ideas, create
"instant companies," closely supervise the initial growth of these companies,
and graduate the businesses through a first round of external venture financing.
In return, Launch Center 39 obtains a significant equity stake in these
companies at an attractive valuation and has greater control over continued
funding than a traditional venture capital or angel fund.
OUR BUSINESS AND STRATEGY
Our business and strategy involves the following components:
- Develop and operate our existing majority owned Internet and
communications companies;
- Acquire, or take strategic minority positions in, other Internet and
communications companies; and
- Promote opportunities for synergistic business relationships among the
Internet and communications companies that we own or invest in.
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This business and strategy is generally referred to as creating an
"Econet." Our goal is to become a leading communications "Econet." Our Econet
strategy is focused on three main "vertical" segments and two "horizontal"
segments. Our strategy can be graphically displayed as follows:
[GRAPHIC]
Our subsidiaries and affiliates may operate in multiple "vertical" or
"horizontal" spaces.
Networks
In the communications industry, the term "network" refers to an integrated
electronic system composed of switching equipment and transmission links
designed to provide transportation, direction and management of information for
specific media. The Internet is comprised of many interconnected networks which
use common approaches called "protocols" which define information coding,
software, routing and switching requirements to achieve interconnected data
transmission. We believe that the Internet has become a medium of
mass-communications because of its ability to transmit data between tens of
millions of end points, especially personal computers and office desk-top
computers. In a further phase of its development, software has been developed
which makes possible voice communications over the Internet, and the Internet
has become a rapidly growing medium of voice as well as data communication.
We believe that there is a trend in the communications industry to
integrate the data transmission capabilities of the Internet with the quality
and convenience associated with traditional telephone networks. Our network can
carry high volumes of voice, data, and Internet traffic as well as video and fax
traffic. We believe that our network also makes possible more effective exchange
of data and voice traffic between the Internet and traditional telephone
networks. We believe that these advantages arise because of the high volume of
digital information that can be transmitted over our network compared to
conventional Internet networks or more conventional communications networks. We
have deployed a network which also incorporates Asynchronous Transfer Mode
technology, which allows for high speed, large scale digital communications, and
as a result is designed to handle streams of digital information from a wide
range of media. As transmission capacity, the Internet, and the more
conventional communications network, expand, we believe that networks such as
ours, will play an increasingly important role in communications as a favorable
best means of multi-media transmission. We believe that our network is central
to our Econet strategy because
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our network companies provide facilities and services that can be utilized by
all of our subsidiaries and affiliates.
We consider Axistel, e.Volve, Fonbox and Callrewards to be network
businesses because they each own and operate communications networks and provide
their customers with access to those networks as part of their service and
product offerings.
Enabling Technologies
Enabling technologies are hardware and software products and applications
that facilitate communications services over the Internet and over private
communications networks. We view the licensing, ownership and development of
enabling technologies as vital to our strategy because enabling technologies:
- enhance our ability to customize services to meet customer demands and
requirements;
- allow us to improve the speed and efficiency or our networks;
- provide new applications and products to our customers; and
- are a means to support all of our subsidiaries and affiliates.
Both PhoneFree.com and Innovative Calling Technologies provide such
enabling technologies.
Network User Interfaces
Network user interface businesses provide us with the opportunity to reach
customers and offer them our services and products. We believe that owning,
developing and investing in companies that provide network user interfaces will
allow our subsidiaries and affiliates to:
- develop relationships with end-users;
- enhance our ability to bundle and cross-sell products and services; and
- create customer loyalty.
PhoneFree.com, Fonbox and Callrewards all provide network user interfaces.
We intend to create alliances with these affiliates to provide our communication
services to customers.
Support Services and Accelerators
As part of our strategy, we may own or invest in companies that provide
support services to Internet and communications businesses. Support services may
include web design and consulting, ad serving or online marketing. We believe
that companies offering support services:
- enhance the ability of our other companies to organically grow their
operations and customer bases; and
- facilitate the development of products and services that enhance customer
experiences and loyalties.
As of March 7, 2000, we have not developed, acquired or invested in any
companies that provide support services.
We may also invest in "accelerators" or "incubators", which are companies
that provide various degrees of strategy, guidance, funding and services to
start-up businesses on the Internet. We believe that accelerators and incubators
can provide us with the opportunity to invest indirectly in promising start-up
companies that we might not otherwise obtain. As of March 7, 2000, our only
investment in an accelerator or incubator is our investment in Launch Center 39.
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OUR NETWORK
Our network meets operating standards established for Internet data
transmission. These standards are termed Internet Protocol, which is software
that allows for the transmission and assembly of digitized packets of data over
the Internet. In addition, our network incorporates Asynchronous Transfer Mode
technologies, which allows for high-speed, large scale digital communications.
We believe that Asynchronous Transfer Mode technologies have many important
benefits which reduce the cost and improve the quality of digital
communications. For example, Asynchronous Transfer Mode technology allows us to
utilize bandwidth more efficiently than circuit-switched technology because we
can transmit multiple streams of information simultaneously over a single
circuit. We can also use Asynchronous Transfer Mode technology to provide voice,
video and data services over a single network rather than having to build and
operate separate networks for each service. Asynchronous Transfer Mode
technology, in conjunction with a private network, also provides quality voice
communication on par with that of top tier telecommunications carriers.
Our network consists of the following elements:
Points of Presence. Points of Presence are the entrance points for
communications traffic over our network. At many of our Points of Presence, we
use our equipment to translate voice to data for transmission and retrieval over
our network, and provide Internet Protocol, Asynchronous Transfer Mode, and
leased line data services. Our Points of Presence are also gateways that are
connected to the public switched telephone network, Internet or network access
points as well as interconnection facilities to large telecommunications
carriers, in order to move traffic between our network and those other
transmission facilities.
The Internet. We use the Internet to transmit some of our voice and fax
traffic and to deliver other value-added services, because of its global
coverage, rapid growth and flexible connectivity. By using the Internet, we
avoid having to extend our network to areas that would not be profitable. Also,
our affiliate companies may use the Internet in conjunction with our network.
However, until technology allows us to provide guaranteed levels of service, the
Internet will remain a secondary means of transmission for our network
businesses.
Our network connects with the networks of telecommunications carriers,
government telecommunications authorities and businesses at Points of Presence.
Our network is scaleable, which means it can be expanded to serve increased
traffic volumes. As of March 7, 2000, we had network facilities and Points of
Presence in the following locations:
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<CAPTION>
COUNTRY CITY
- ------- ----
<S> <C>
United States................................... Jersey City, New Jersey
New York, New York (3 Points of
Presence)
Philadelphia, Pennsylvania
Alpharetta and Atlanta, Georgia
Boston and Cambridge, Massachusetts
Miami, Florida
Dallas, Texas
Kansas City, Kansas
Los Angeles, California
Jamaica......................................... Montego Bay
Mexico.......................................... Mexico City
India........................................... New Delhi
Syria........................................... Damascus
Sri Lanka....................................... Colombo
United Kingdom.................................. London
</TABLE>
We transmit voice, data, Internet and fax traffic from the United States to
countries around the world through either our own networks or through
connections with other telecommunications carriers or Internet Service
Providers. During the three months ended December 31, 1999, we transmitted
approximately 141.3 million minutes over our network. Our customers can
interconnect with this network through dedicated
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circuits from their facilities to one of our Points of Presence. Alternatively,
our customers may elect to colocate and install equipment directly at our
facilities in Jersey City, Kansas City, Mexico City or Miami to eliminate the
cost of back-hauling traffic from their facilities to one of our enhanced Points
of Presence.
OUR SERVICES
Voice Services
We provide telephone and Asynchronous Transfer Mode voice services to all
of our customers. We offer global call completion services, and other
value-added services, that provide our customers with a cost-effective
alternative for the transmission of both voice and fax messages. Through our
ability to send voice messages efficiently and inexpensively our customers can
utilize our network facilities to their advantage.
Data Services
International and Domestic Private Line Services. We offer point to point
services with a wide range of capacities, providing connections between
customers' locations based on customers' bandwidth needs. These can be monitored
and maintained by our network operations control center.
Hub Service. Hub service provides our customers with the ability to
aggregate and distribute bandwidth. For customers who need to distribute
circuits to multiple locations, we can provide the connectivity between our hub
site and a customer's locations creating a simple, manageable, networking
solution.
Internet Access Services
Direct Access. We offer dedicated Internet services that meet the needs of
the smallest commercial user to the most sophisticated high bandwidth customers.
We provide a complete end-to-end solution, allowing the service implementation
process to be smooth and transparent to the end user.
Server Colocation Services
Server Colocation. Our facilities in Jersey City, Kansas City, Mexico City
and Miami offer complete environmentally-controlled areas for customers to house
web servers. These colocation sites are physical places where other carriers can
interconnect with our own network. Options for server hosting space include open
racks, secured cabinets and caged secured areas. We work with customers to find
the solution that is right for their business.
OUR MARKETS AND CUSTOMERS
Our subsidiaries generally compete in the market for voice, Internet, data,
fax, e-mail and video transmission services. We compete against many providers
of these services, referred to as carriers. Carriers are usually classified by
size into first, second and third tier. First tier carriers generally have
annual revenues in excess of $2 billion and include certain
government-affiliated monopolies. Second tier carriers have revenues generally
in the $750 million to $2 billion range, and have fewer direct operating
agreements with other carriers and fewer international facilities than first
tier carriers. Third tier carriers are typically switch-based resellers with
revenues of less than $750 million.
We provide services to all three tiers of carriers, who transmit voice,
Internet, data, fax, e-mail and video traffic through our Points of Presence for
completion worldwide. For fiscal year 1999, 65% of our revenues came from Qwest,
18% from RSL, and 16% from Star. During the six months ended December 31, 1999,
Qwest represented approximately 75% of our revenues. With the acquisition of
AxisTel in our reorganization, we acquired a more diversified customer base and
we began providing retail services to PhoneFree.com's users. As a result, during
the three months ended December 31, 1999, Qwest's portion of our total revenue
declined to approximately 60%, primarily because of the inclusion of revenue
from AxisTel's customers. No other customer accounted for more than 5% of our
revenues during either the six month or the three month periods ended December
31, 1999.
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e.Volve and Qwest have entered into a switched services agreement and a
carrier service agreement for international terminating traffic. Under these
agreements, e.Volve provides switched interstate telecommunications services and
international outbound telecommunications services to Qwest. Our switched
services agreement does not obligate Qwest to use our services, but permits
Qwest to use our services upon Qwest's periodic acceptance of our rates. Qwest
may choose not to use our services for a variety of reasons. Our carrier service
agreement for international terminating traffic, which was entered into on
September 17, 1998, is for a one year term with automatic successive renewals
for one-year periods until termination by either party.
In addition to being a customer of e.Volve, Qwest and e.Volve have entered
into an Indefeasible Right of Use ("IRU") agreement. Under the IRU agreement,
Qwest granted e.Volve an indefeasible right to use a fiber optic circuit between
New York and Los Angeles for twenty years, and e.Volve agreed to pay Qwest a
total of $15.0 million in four installments between October 1, 1999 and
September 30, 2001. In addition, e.Volve agreed to pay Qwest a monthly operation
and maintenance charge of $25,000 per month beginning January 1, 2000.
As of March 7, 2000, we have not utilized our right to use the fiber optic
circuit and have not taken delivery of the circuit because we are in a dispute
with Qwest over the terms of the IRU agreement.
Qwest has made certain demands for payment under the IRU agreement. e.Volve
has not made any payments and e.Volve, eVentures and Qwest have commenced
negotiations for a restructuring of the terms of the IRU agreement.
Historically, we have terminated traffic for our customers in India through
a joint venture with Uni-Tel, Inc. Under the joint venture, we agreed to pay
Uni-Tel $250,000 per site in cash and shares of our common stock to open up to
ten facilities in India. We also agreed to pay Uni-Tel's termination costs.
e.Volve believes that Uni-Tel has breached its agreements by failing to
adequately manage its network and pay its expenses related to operations in
India, and has stopped making certain payments to Uni-Tel. Uni-Tel has stopped
terminating our traffic in India. e.Volve and Uni-Tel are negotiating a
settlement agreement in order to resolve this dispute.
SALES AND MARKETING
Our sales efforts target leading telecommunications carriers and Internet
Service Providers both in the United States and overseas. Our sales personnel
have long-standing relationships in the telecommunications industry and are
frequently supplemented by senior members of management. In the United States,
we sell directly to carriers and have successfully developed brand awareness and
beneficial relationships through numerous channels including the Internet, trade
shows, speaking engagements and joint-marketing programs. The ability to provide
quality of service acceptable to leading carriers is a strong selling point for
us. These carriers have traffic that frequently exceeds their capacity and
compels them to seek alternative channels that offer comparable quality,
particularly where those channels can offer better pricing. Our sales process
often involves a test by our potential customers of our services with traffic to
a particular country. Our experience has been that once a carrier has begun to
use our network for a single country and has found our quality to be acceptable,
the sales process with respect to that carrier becomes easier in other countries
where it operates.
In overseas markets, we seek to establish relationships with local service
providers that have the local market expertise to provide the termination
services we need. We believe that the opportunity we offer these companies to
terminate a substantial number of minutes makes us an attractive partner. Prime
candidates for overseas partners are carriers, call back companies, cellular,
and paging companies and Internet Service Providers.
COMPETITION
We have several public and private competitors who have or are establishing
Econets. These competitors include CMGI, Inc., Internet Capital Group, Rare
Medium Group, idealab, eCompanies and Divine Interventures. To date only CMGI
has announced plans to directly enter the communications field, through a
strategic alliance with Pacific Century Cyberworks and through a new investment
fund called @Ventures
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Technology Fund. We also face competition for new acquisitions and investments
from hundreds of venture capital and private equity funds. While it is difficult
to generalize competitive factors in this market, we believe that we compete on
the following factors:
- acquisition price or valuation;
- perceived value of having our company as an investor;
- ability to close transactions quickly; and
- reputation of our principals.
Many of our competitors have significantly greater capital resources and
human resources than we do, which may allow them to analyze and conclude more
transactions then we can. Our competitors generally have longer operating
histories and well known reputations, which could give them an advantage in
terms of developing more promising acquisition and investment opportunities and
persuading sellers of businesses or entrepreneurs to choose them over us in a
competitive situation. While we feel that we currently have a "first-mover"
advantage in assembling a publicly-traded communications Econet, we may not be
able to maintain that advantage for very long.
Our subsidiaries and affiliates generally compete in markets that are new,
intensely competitive, highly fragmented and rapidly changing, primarily on the
basis of the following factors:
- breadth of geographic presence;
- ease of integration;
- ability to offer turnkey solutions;
- price;
- performance;
- flexibility;
- customer service;
- scaleability;
- reliability; and
- network quality and capacity.
There are low barriers to entry to new or existing businesses seeking to
offer Internet Protocol telephony or other services over networks. Competition
can come from many sources and may be focused on different segments of our
business.
We face competition from a variety of sources, including domestic and
international carriers, large Internet Service Providers, and Internet companies
such as America Online, Prodigy/Compuserve, Earthlink and Juno Online with more
resources, longer operating histories and more established positions in the
Internet and communications marketplace. We also compete with small companies
who have focused primarily on Internet Protocol telephony. A number of these
competitors may merge or form strategic partnerships. As a result, certain of
these competitors may be able to offer, or bring to market earlier, products or
services that are superior to our own in terms of features, quality, pricing or
other factors. Our failure to compete successfully in any of the markets in
which we compete could have a material adverse effect on our business,
prospects, results of operations or financial condition or on the price of our
common stock. We also expect that the ability to offer enhanced service
capabilities, including new services, will become an increasingly important
competitive factor in the near future.
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Telecommunications Companies and Long Distance Providers
Large carriers around the world, such as British Telecom and Deutsche
Telecom, have started to deploy packet-switched networks for voice and fax
traffic. These carriers have substantial resources and have large budgets
available for research and development. In addition, several companies, such as
MCI WorldCom, Level 3 and Qwest Communications, are building fiber-optic
networks, primarily in the United States, for Internet Protocol telephony
traffic. These networks can be expected to carry voice and fax and these newer
companies may expand into international markets.
Internet Telephony Service Providers
A number of companies have started Internet Protocol telephony operations
in last few years. AT&T Clearinghouse, GRIC Communications and IXC
Communications sell international voice and fax over the Internet and compete
directly with us. Other Internet Protocol telephony companies, including;
iBasis, Net2Phone, deltathree.com, and ITXC are currently focusing on the retail
market and personal computer-based Internet Protocol telephony, but may compete
with us in the future.
GOVERNMENT REGULATION
Regulation of Internet Telephony
United States Government Regulation of the Internet and Internet
Telephony. We believe that under United States law the Internet-related services
that we provide constitute information services, rather than telecommunications
services. As such, our services are not currently regulated by the Federal
Communications Commission or state agencies responsible for regulating
telecommunications carriers (although aspects of our operations may be subject
to state or federal regulation such as regulations governing universal service
funding, confidentiality of communications, copyright, and excise taxes).
However, several efforts have been made to enact federal legislation that would
either regulate or exempt from regulation services provided over the Internet.
Therefore, we cannot be sure that Internet-related services such as ours will
not be regulated in the future. Increased regulation of the Internet may slow
its growth by negatively impacting the cost of doing business over the Internet.
This would materially adversely affect our business, financial condition and
results of operations.
We also cannot be sure that Internet Protocol telephony will continue to be
lightly regulated by the Federal Communications Commission and state regulatory
agencies. Although the Federal Communications Commission has determined that, at
present, Information Service Providers, including Internet Protocol telephony
providers, are not telecommunications carriers, we cannot be certain that this
position will continue. On April 10, 1998, the Federal Communications Commission
issued its report to Congress concerning the implementation of the universal
service provisions of the Telecommunications Act. In the report, the Federal
Communications Commission indicated that it would examine the question of
whether certain forms of phone-to-phone Internet Protocol telephony are
information services or telecommunications services. The Federal Communications
Commission noted that it did not have, as of the date of the report, an adequate
record on which to make a definitive pronouncement, but that certain forms of
phone-to-phone Internet Protocol telephony appear to have the same functionality
as non-Internet telecommunications services and lack the characteristics that
would render them information services. If the Federal Communications Commission
were to determine that certain information services, like those we provide, are
subject to Federal Communications Commission regulation as telecommunications
services, the Federal Communications Commission may require providers of
Internet Protocol telephony services to make universal service contributions,
pay access charges or be subject to traditional common carrier regulation. It is
also possible that PC-to-phone and phone-to-phone services may be regulated by
the Federal Communications Commission differently in the future. In addition,
the Federal Communications Commission sets the access charges on traditional
telephony traffic and if it reduces these access charges, the cost of
traditional long distance telephone calls will probably be lowered, thereby
decreasing our competitive pricing advantage.
Changes in the legal and regulatory environment relating to the Internet
connectivity market, including regulatory changes which affect
telecommunications costs or that may increase the likelihood of competition
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from the regional Bell operating companies or other telecommunications
companies, could increase our costs of providing service. For example, the
Federal Communications Commission recently has determined that subscriber calls
to Internet service providers should be classified for jurisdictional purposes
as interstate calls. This determination could affect a telephone carrier's costs
for provision of service to these providers by eliminating the payment of
reciprocal compensation to carriers terminating calls to these providers. The
Federal Communications Commission has pending a proceeding to encourage the
development of cost-based compensation mechanisms for the termination of calls
to Internet Service Providers. Meanwhile, state agencies will determine whether
carriers receive reciprocal compensation for these calls. If new compensation
mechanisms increase the costs to carriers of terminating calls to Internet
Service Providers or if states eliminate reciprocal compensation payments, the
affected carriers could increase the price of service to Internet Service
Providers to compensate, which could raise the cost of Internet access to
consumers.
In addition, although the Federal Communications Commission to date has
determined that providers of Internet services should not be required to pay
interstate access charges, this decision may be reconsidered in the future. This
decision could occur if the Federal Communications Commission determines that
the services provided are basic interstate telecommunications services and no
longer subject to the exemption from access charges that we currently benefit
from and are also enjoyed by other providers of enhanced services. Access
charges are assessed by local telephone companies to long-distance companies for
the use of the local telephone network to originate and terminate long- distance
calls, generally on a per minute basis. The Federal Communications Commission
has stated publicly that it would be inclined to hold the provision of phone-to-
phone Internet Protocol telephony to be a basic telecommunications service and
therefore subject to access charges and universal service contribution
requirements. In a Notice of Inquiry released September 29, 1999, the Federal
Communications Commission again asked for comments on the regulatory status of
Internet Protocol telephony. Specifically, the Federal Communications Commission
asked commentators to address whether Internet Protocol telephony service
generally, and phone-to-phone service in particular, may be regulated as a basic
telecommunications service. If the Federal Communications Commission concludes
that any or all Internet Protocol telephony should be regulated as basic
communications service, it eventually could require that Internet Protocol
telephony providers must contribute to universal service funds and pay access
charges to local telephone companies. The imposition of access charges or
universal service contributions would substantially increase our costs of
serving Internet access customers.
International Government Regulation of the Internet and Internet
Telephony. We provide our services to customers in various countries in Europe,
Asia, Latin America, and the Middle East. The regulatory treatment of Internet
and other communications services in these countries varies widely and is
subject to constant change. Some countries currently impose little or no
regulation on Internet Protocol telephony, as in the United States. Conversely,
other countries that prohibit or limit competition for traditional voice
telephony services generally do not permit Internet Protocol telephony or
strictly limit the terms under which it may be provided. Still other countries
regulate Internet Protocol telephony like traditional voice telephony services
or determine on a case-by-case basis whether to regulate Internet Protocol
telephony as a voice service or as another telecommunications service. Finally,
in many countries, Internet Protocol telephony has not been addressed by
legislation or the regulatory authorities. The varying and constantly changing
regulation of Internet Protocol telephony in the countries in which we currently
provide or may provide services may materially adversely affect our business,
financial condition and results of operations.
We provide our services in other countries in which the regulatory status
of Internet Protocol telephony is unclear or in the process of development, and
in countries in which regulatory processes are not as transparent as in the
United States. Changes in the regulatory regimes of these countries that have
the effect of limiting or prohibiting Internet Protocol telephony, or that
impose new or additional regulatory requirements on providers of such services,
may result in our being unable to provide service to one or more of the
countries in which we currently operate. That result could materially adversely
affect our business, financial condition and results of operations.
In addition, as we expand into additional foreign countries, such countries
may require that we qualify to do business in that particular country, that we
are otherwise subject to regulation or that we are prohibited from conducting
our business in that particular country. Our failure to qualify as a foreign
corporation in a
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jurisdiction in which we are required to do so, or to comply with foreign laws
and regulations, would materially adversely affect our business, financial
condition and results of operations, including by subjecting us to taxes and
penalties and/or by precluding us from, or limiting us in, the enforcement of
contracts in such jurisdictions. Likewise, our customers may be or become
subject to requirements to qualify to do business in a particular foreign
country, to otherwise comply with regulations, or to cease from conducting
business in that particular country. We cannot be certain that our customers are
currently in compliance with regulatory or other legal requirements in their
respective countries, that they will be able to comply with existing or future
requirements, and/or that they will continue in compliance with any
requirements. The failure of our customers to comply with these requirements
could materially adversely affect our business, financial conditions and results
of operations.
Regulation of the Internet
Congress has recently adopted legislation that regulates certain aspects of
the Internet, including online content, user privacy, taxation, access charges,
liability for third-party activities and jurisdiction. In addition, a number of
initiatives pending in Congress and state legislatures would prohibit or
restrict advertising or sale of certain products and services on the Internet,
which may have the effect of raising the cost of doing business on the Internet
generally. The European Union has also enacted several directives relating to
the Internet, one of which addresses online commerce. In addition, federal,
state, local and foreign governmental organizations are considering other
legislative and regulatory proposals that would regulate the Internet. Increased
regulation of the Internet may hinder its growth, which may in turn negatively
impact the cost of doing business via the Internet or otherwise materially
adversely affect our business, results of operations and financial condition.
The Federal Trade Commission has adopted regulations regarding the
collection and use of personal identifying information obtained from minors when
accessing websites, and may adopt additional online privacy regulations. These
regulations may include requirements that companies establish certain procedures
to disclose and notify users of privacy and security policies, obtain consent
from users for certain collection and use of information and to provide users
with the ability to access, correct and delete personal information stored by
the company. These regulations may also include enforcement and redress
provisions. There can be no assurance that we will adopt policies that conform
with any regulations adopted by the Federal Trade Commission. Moreover, even in
the absence of those regulations, the Federal Trade Commission has begun
investigations into the privacy practices of companies that collect information
on the Internet. One investigation resulted in a consent decree pursuant to
which an Internet company agreed to establish programs to implement the
principles noted above. We may become subject to a similar investigation, or the
Federal Trade Commission's regulatory and enforcement efforts may adversely
affect our ability to collect demographic and personal information from users,
which could have an adverse effect on our ability to provide highly targeted
opportunities for advertisers and electronic commerce marketers. Any of these
developments would materially adversely affect our business, results of
operations and financial condition.
The European Union has adopted a directive that imposes restrictions on the
collection and use of personal data. Under the directive, citizens of the
European Union are guaranteed rights to access their data, rights to know where
the data originated, rights to have inaccurate data rectified, rights to
recourse in the event of unlawful processing and rights to withhold permission
to use their data for direct marketing. The directive could, among other things,
affect United States companies that collect information over the Internet from
individuals in European Union member countries, and may impose restrictions that
are more stringent than current Internet privacy standards in the United States.
In particular, companies with offices located in European Union countries will
not be allowed to send personal information to countries that do not maintain
adequate standards of privacy. The directive does not, however, define what
standards of privacy are adequate. As a result, the directive may adversely
affect the activities of entities such as us that engage in data collection from
users in European Union member countries.
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INTELLECTUAL PROPERTY
We regard our copyrights, service marks, trademarks, trade dress, trade
secrets and similar intellectual property as critical to our success, and we
rely on trademark and copyright law, trade secret protection and confidentiality
and/or license agreements with our employees, customers, partners and others to
protect our proprietary rights. We pursue the registration of our trademarks and
service marks in the United States and have applied for the registration of
certain of our trademarks and service marks. AxisTel has applied for
registration of the names "AxisTel" and "Global Telephony Xchange Service", but
has not completed the registration process. However, we have never filed any
application to protect the name "eVentures" and do not currently have any
patents or other material intellectual property. Additionally, the name
"eVentures" is generic in nature and we may not be able to protect it. We do not
own the domain name eVentures.com, which is being used by a business that is
soliciting business plans, capital and advisors for start-up companies. We have
notified that company of the potential confusion and we intend to attempt to
fully enforce whatever rights we may have to protect our name.
EMPLOYEES
As of March 7, 2000, we had 35 full-time employees and one part-time
employee. We also employ a limited number of independent contractors and
temporary employees on a periodic basis. Our employees are not represented by a
labor union and we consider our labor relations to be good.
THE REORGANIZATION TRANSACTIONS
Prior to September 22, 1999:
Mick Y. Wettreich, our then controlling shareholder owned 10,145,830
shares of our common stock, representing approximately 98.3% of our
outstanding common stock;
each of IEO Holdings Limited and Infinity Investors Limited owned (i)
1,200 shares of common stock of e.Volve, representing one-third of the
outstanding common stock of e.Volve, (ii) a 50% interest in e.Volve
debentures in an aggregate principal amount of $8.0 million and (iii) a
warrant to purchase 170 shares of e.Volve common stock;
IEO Holdings Limited owned (i) one Class B Convertible Share of
AxisTel, (ii) a promissory note of AxisTel in the aggregate principal
amount of $3.5 million and (iii) a warrant to purchase 1,499 Class A Common
Shares of AxisTel for $3.5 million. Immediately prior to our
reorganization, IEO Holdings Limited surrendered the promissory note as
consideration for the exercise of the warrant, and converted the Class B
Convertible Share into a Class A Common Share. As a result, immediately
prior to our reorganization, IEO Holdings Limited owned 1,500 Class A
Common Shares of AxisTel, representing 50% of the outstanding equity
interest in AxisTel;
IEO Holdings Limited owned 1,832,880 shares of common stock of
PhoneFree.com, representing approximately 17% of the outstanding equity
interest in PhoneFree.com;
IEO Investments Limited and Infinity Emerging Subsidiary Limited owned
all of the equity interests of IEO Holdings Limited;
the remaining shares of e.Volve and AxisTel were held by persons and
entities unrelated to Mick Y. Wettreich or the Infinity Entities; and
none of the Infinity Entities owned any shares of our common stock.
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See the chart below for a description of our ownership structure on
September 22, 1999, immediately prior to the reorganization.
[DIAGRAM]
In September and October 1999, we consummated our reorganization pursuant
to the terms of an Agreement and Plan of Reorganization dated September 22, 1999
and an Agreement and Plan of Exchange dated as of October 19, 1999. In
connection with our reorganization, the following transactions occurred:
Infinity Investors Limited, IEO Investments Limited and Infinity Emerging
Subsidiary Limited purchased 2,317,193 shares, 3,422,552 shares and 2,515,255
shares, respectively, of our common stock, from Mick Y. Wettreich for at a
purchase price of approximately $0.02353 per share or an aggregate of $194,235.
In addition, the former President of e.Volve, Steve Loglisci, the Chief
Financial Officer of e.Volve, Trevor Huffard, and one of the executive officers
appointed as part of our reorganization, Stuart Chasanoff, purchased 150,000
shares, 50,000 shares and 45,000 shares, respectively, of our common stock from
Mick Y. Wettreich on the same terms and conditions.
IEO Holdings Limited merged with and into eVentures Holdings, L.L.C. We
issued as merger consideration to IEO Investments Limited and Infinity Emerging
Subsidiary Limited, the two shareholders of IEO Holdings Limited, 8,393,648 and
6,168,545 shares of our common stock, respectively.
We issued 5,682,807 shares of our common stock to Infinity Investors
Limited in exchange for its contribution to eVentures of its shares of e.Volve
common stock, its warrant to purchase shares of e.Volve common stock and its
interest in the e.Volve debentures to eVentures.
We issued an aggregate of 6,381,000 shares of our common stock to the
shareholders of AxisTel, other than IEO Holdings Limited, in exchange for their
contribution to eVentures of their stock in AxisTel.
We issued an aggregate of 5,831,253 shares of our common stock to the
shareholders of e.Volve, other than IEO Holdings Limited and Infinity Investors
Limited, in exchange for their contribution to eVentures of their e.Volve common
stock.
We determined the number of shares to be issued to each participant in the
reorganization after consideration of the relative values of each of the
entities involved and arm's-length negotiations with the shareholders of e.Volve
and AxisTel (other than the Infinity Entities).
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Our decision to effect the reorganization was based on the following
factors:
- We believed that we could create the first publicly-traded company with a
strategy of creating a communications Econet;
- We believed that effecting the reorganization could enhance our ability
to raise capital and broaden the base of our potential investors; and
- We believed that our investors would be best served by combining with
AxisTel and e.Volve and acquiring an interest in PhoneFree.com through
the reorganization.
See the chart below for a description of our ownership structure following
the completion of our reorganization.
[CHART]
As a result of our reorganization, we own all of the issued and outstanding
equity interests in e.Volve and AxisTel, and, after giving effect to recent
dilution, own approximately 16% of the outstanding shares of PhoneFree.com. In
connection with our reorganization, all of the warrants to purchase shares of
e.Volve common stock owned by IEO Holdings Limited and Infinity Investors
Limited were canceled and the e.Volve debentures were recharacterized as
intercompany indebtedness.
Following our reorganization, the Infinity Entities owned an aggregate of
28,500,000 shares of our common stock, representing 64.1% of the then
outstanding shares of our common stock, and became our
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controlling stockholders, and Mick Y. Wettreich owned 1,645,830 shares of our
common stock, representing approximately 3.6% of our then outstanding common
stock. Infinity Investors Limited also purchased 500,000 shares of our common
stock in a private placement of our common stock on September 28, 1999.
As of March 7, 2000, the Infinity Entities owned an aggregate of 29,000,000
shares of our outstanding common stock, representing approximately 61.4% of our
outstanding shares of common stock.
Upon the consummation of our reorganization, Daniel L. Wettreich, Mick Y.
Wettreich's brother, resigned as our sole director and the Infinity Entities
appointed Messrs. Fred A. Vierra, Clark K. Hunt, Olaf Guerrand-Hermes, Mark R.
Graham and Barrett N. Wissman to serve on our board of directors. Information
about these individuals appears on pages 41 through 43 of this Form 10/A. Also,
Daniel L. Wettreich resigned as our president, and the following persons were
appointed as our officers:
<TABLE>
<S> <C>
Fred Vierra.............................. Chairman of the Board
Barrett N. Wissman....................... President and Chief Executive Officer
Stuart Chasanoff......................... Vice President of Business Development,
General Counsel and Secretary
John Stevens Robling, Jr. ............... Vice President and Chief Financial
Officer
Samuel Litwin............................ Managing Director of Communications
Holdings
Mitchell Arthur.......................... Managing Director of Communications
Holdings
</TABLE>
Information about these persons appears on pages 43 and 44 of this Form
10/A.
RISK FACTORS
Investors considering acquiring shares of our common stock should consider
carefully risks associated with our forward-looking statements, as well as the
following investment considerations.
Cautionary Statement Concerning Forward-Looking Statements
We have made forward-looking statements in this Form 10/A that are subject
to risks and uncertainties. These statements generally include the words
"believe," "expect," "anticipate," "intend," "estimate" or similar expressions.
These statements reflect our current views with respect to future events that
are subject to certain risks, uncertainties and assumptions, including without
limitation any statements regarding the following: market opportunities,
strategies, competition, expected activities, additional financing, strategic
alliances and projected expenditures. If one or more of these risks or
uncertainties materialize, or should our assumptions prove incorrect, actual
results may vary materially from those described in this Form 10/A. We cannot
assure our investors that the anticipated results will occur, that these
judgments or assumptions will prove correct or that unforeseen developments will
not occur.
RISK FACTORS RELATING TO OUR COMPANY
We Have Never Made A Profit And May Never Generate A Profit
We have incurred operating losses of $3.6 million and $9.5 million for the
fiscal year ended June 30, 1999 and the six months ended December 31, 1999,
respectively, and had an accumulated deficit of $19.3 million as of December 31,
1999. We may continue to incur operating losses in the future while we expand
and build our business. If these operating losses continue, we may not have
enough money to grow our business or execute our strategy.
We Have A Limited Operating History
Although we have been in existence since 1987, our business operations were
immaterial before our reorganization. We have had no material assets or
operations, except for the interests in AxisTel, e.Volve, Innovative Calling
Technologies and PhoneFree.com obtained in the reorganization, the November 1999
and
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January 2000 investments in Fonbox, the January 2000 investment in Launch Center
39 and the February 2000 investment in Callrewards. All of these companies were
recently formed and have limited operating histories.
Our Success Depends On Our Implementation Of An Unproven Business Model
Our Econet strategy is a relatively new and unproven strategy. We may not
be able to accurately predict the effects of synergies among our subsidiaries
and affiliates, and we may not be able to maximize the synergies that do exist.
Creating an Econet can be difficult because our degree of influence over the
businesses of wholly or majority owned subsidiaries is much stronger than our
influence over affiliates that are not majority owned, and we may not be able to
structure appropriate strategic relationships due to this potential conflict of
interest. Furthermore, our network business is based primarily on our ability to
provide services to other communications providers. If we cannot implement those
relationships, we will have to develop other distribution channels for our
services, which could prove difficult or impossible.
We Depend On Two Suppliers And One Principal Customer
We depend on a select group of suppliers and customers. If we cannot
maintain these relationships on favorable terms, or if these relationships
terminate, we would have to enter into new relationships. We may not be able to
replace any of our suppliers or customers on reasonable terms, if at all. Our
customers may discontinue their use of our services at any time, and without
notice. Therefore, in any given quarter, we would lose a significant amount of
revenue if we were to lose a major customer. For example, since a majority of
our business is dependent on Qwest, we would suffer adverse financial
consequences should we lose our business with Qwest. Additionally, our dispute
with Qwest over the IRU agreement could result in the termination of all of our
business relationships with Qwest. If we cannot replace these important
relationships, we could lose business, which may adversely affect our revenues.
Even if we replace any relationships or enter into new relationships, these new
relationships may have terms that are not as favorable to us.
These other parties may not regard their relationship with us as important
to their business. Therefore, they could elect to terminate their relationship
with us in the future or develop competitive services and have no further need
of our services.
A substantial portion of our revenues related to India were derived from
our joint venture with Uni-Tel. If we do not reach an understanding with
Uni-Tel, or if we are not able to replace Uni-Tel's services on the same or more
favorable terms, we may not be able to continue our Indian operations.
We Will Not Control Some Of The Companies In Which We Invest
We hold approximately 16% of the outstanding stock of PhoneFree.com, 31% of
the outstanding equity interests in Fonbox, 30% of Callrewards, 50% of
Innovative Calling Technologies and 2% of Launch Center 39. We do not control
the management or policies of these companies. Although we have representation
on the board of directors of PhoneFree.com, Fonbox, Innovative Calling
Technologies and Callrewards, no assurance can be given that our representatives
will be able to influence their future directions in a manner which results in
increased value to us through achieving operating synergies or from our minority
ownership interests.
We May Not Be Able To Obtain Financing For Our Capital Needs
Unless we are able to generate cash from operations or raise capital from
outside investors, we may exhaust our existing cash resources for capital
expenditures, investments and working capital within twelve months. Even if we
do generate cash from operations and/or raise additional capital, we may not
have enough money to continue operations, primarily because, due to our limited
operating history and the nature of the
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Internet industry, our future capital needs are difficult to predict. In any
event, we may require additional capital to fund any of the following:
- continued operating losses;
- sales, marketing and advertising;
- maintenance and expansion;
- research and development;
- unanticipated opportunities;
- strategic investments; and
- strategic alliances.
We cannot assure our investors that adequate levels of additional financing
will be available at all or on acceptable terms. Any additional financing could
involve the issuance of securities with rights superior to those of our common
stockholders. The issuance of additional securities could also result in
significant dilution to our existing stockholders. If we are unable to raise
additional capital, our growth and development could be impeded. If we do not
have sufficient capital, we may not be able to take advantage of growth
opportunities, respond to competitive pressures or pursue our business strategy.
We May Not Have Opportunities To Acquire Interests In Additional Companies
We may be unable to identify companies that complement our Econet strategy
of acquiring or taking strategic minority positions in other Internet and
communications companies. If we cannot acquire interests in attractive
companies, our strategy to build a collaborative network of partner companies
may not succeed.
Our Success Depends On Our Management Of Growth And Our Integration Of The
Businesses We Acquire
We are a new company formed by the combination of two separate and distinct
businesses with separate and distinct management teams: AxisTel and e.Volve. We
are faced with significant integration issues with respect to these businesses
and their management teams. We may not be successful in integrating these
management teams, and we may not be able to hire and retain the quality of
personnel we need to sustain our business. To the extent that we continue to
grow internally or through strategic alliances, we will be faced with many
risks, including risks associated with the establishment of new operations,
Websites and personnel; the diversion of resources from our existing businesses;
and our management's ability to manage increased traffic on our networks.
The reorganization has resulted in significant growth of our operations.
This growth has and will continue to place a significant strain on our
managerial, operational and financial resources. This strain will only increase
as we continue to implement our strategy of creating a communications Econet. To
manage this growth, we will be required to implement and improve our operating
and financial systems and controls, and to expand, train and manage our employee
base. We will be dependent upon our management to assume and perform the
management functions formerly performed by management of each of the parties to
the reorganization. To the extent that our management is unable to assume or
perform these combined duties, our business, results of operations and financial
condition could be adversely affected. There can be no assurance that the
management, systems and controls currently in place or any steps taken to
improve such management, systems and controls will be adequate in the future. In
addition, the integration of the acquired entities and their operations will
require our management to make and implement a number of strategic and
operational decisions. The timing and manner of the implementation of these
decisions will materially impact our business operations.
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RISK FACTORS RELATED TO OUR INDUSTRY
Our Business May Be Impeded By Proposed Governmental Regulations Regarding The
Internet
The legal and regulatory environment that pertains to the Internet is
uncertain and is changing rapidly as the use of the Internet increases. For
example, in the United States, the Federal Communications Commission is
considering whether to impose surcharges or additional regulations upon certain
providers of Internet Protocol telephony.
In addition, regulatory treatment of Internet Protocol telephony outside
the United States varies from country to country. There can be no assurance that
there will not be interruptions in Internet Protocol telephony in these and
other foreign countries or that we will be able to return to the level of
service we had in each of these countries prior to any interruptions.
New regulations could increase our costs of doing business and prevent us
from delivering our products and services over the Internet, which could
adversely affect our customer base and our revenue. The growth of the Internet
may also be significantly slowed. In addition to new regulations being adopted,
existing laws may be applied to the Internet. See "Business -- Government
Regulation."
We Must Recruit And Retain Key Management And Technical Personnel To Be
Competitive
Our success depends to a significant extent on the continued contributions,
experience and knowledge of our senior management team and key technical and
marketing personnel. In particular, we must retain and recruit new senior
management personnel who are familiar with Internet telephony and Internet
Protocol and Asynchronous Transfer Mode technology. Additionally, our Econet
strategy is highly dependent upon the management and financial skills of our
President and Chief Executive Officer, Barrett Wissman. We do not have an
employment agreement with Mr. Wissman. Our success also depends upon our ability
to identify, attract, hire, train, retain and motivate highly skilled technical,
managerial, sales and marketing personnel both at the holding company and for
our subsidiaries. Competition for these types of personnel is intense. No
assurance can be given that we will be able to successfully attract, assimilate
or retain a sufficient number of qualified personnel. If we cannot attract and
retain these key personnel, we may not be able to effectively operate our
business or oversee our investments, which could impair our ability to create
value for our stockholders and other investors.
We Must Successfully Adapt To Evolving Technology Trends And Industry
Standards
Our success depends upon our ability to develop and provide new services
that meet our customers' changing requirements. The Internet service industry
has been characterized by significant technological changes, frequent new system
and product enhancements, evolving industry standards and changes in customer
needs that have had and will continue to have a significant impact on the
industry and industry participants. While the communications industry has moved
at a relatively moderate pace, we believe that most carriers are adopting new
technologies and that the communications industry will take on characteristics
similar to the Internet service industry in the near future. New technologies
and standards could render our existing systems obsolete and ultimately result
in lost revenues. If we fail to anticipate and adapt to technological changes
and evolving industry standards, we will not be able to grow our share of the
market for Internet communications services, including Internet Protocol
telephony, and our revenues will fall. Our future success will depend, in part,
on our ability to effectively use leading technologies, continue to develop our
Internet Protocol and Asynchronous Transfer Mode technology, expertise, enhance
our current and planned services, develop and implement new services that meet
changing customer needs, anticipate changes and influence and respond to
emerging industry standards and other technological changes on a timely and cost
effective basis.
We Must Successfully Counter Strong Competition From Anticipated And
Unforeseen Competitors
We believe that the primary competitive factors in providing communication
products and services via the Internet include name recognition, variety of
value-added products and services, ease of use, pricing,
22
<PAGE> 23
quality of service, availability of customer support, reliability, technical
expertise and experience. Our failure to compete successfully could have a
material adverse effect on our business, results of operations and financial
condition. Many of our potential competitors in the Internet and communication
businesses have longer operating histories, significantly greater financial,
technical and marketing resources, greater name recognition and larger existing
customer bases than we do. Our competitors fall into three major categories:
- Relatively new Internet-focused companies which are establishing Econets,
such as CMGI, Inc. Internet Capital Group, Rare Medium Group, idealab,
eCompanies and Divine Interventures;
- More traditional telecommunications companies and long-distance
providers, such as British Telecom, Deutsche Telecom, MCI Worldcom, Level
3 and Qwest Communications; and
- Internet Telephony Service Providers, such as AT&T Clearinghouse, GRIC
Communications, IXC Communications, Net2Phone, deltathree.com and
PhoneFree.com.
These competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements and devote greater resources
to the development, promotion and sale of their products or services.
Additionally, since our Econet strategy envisions acquisitions and
investments as an ongoing component, competition for acquisition and investment
opportunities presents a substantial risk. We cannot be certain that enough
attractive companies exist, that if they exist they will come to our attention,
or that, if they come to our attention, one of our competitors will not seize
the opportunity and prevent us from completing a transaction. If we cannot
effectively compete in the market for acquisitions and venture capital
investments we may not be able to execute our Econet strategy.
Our International Operations Expose Us To Fluctuations In Foreign Currencies
And Political Instability
We intend to build on our current relationships in Syria, Mexico, India,
Sri Lanka and other countries and to expand our existing operations outside of
the United States. International operations are subject to inherent risks,
including:
- potentially weaker protection of intellectual property rights;
- political instability
- unexpected changes in regulations and tariffs
- varying tax consequences; and
- fluctuations in exchange rates.
In particular, because our agreements with our Mexican suppliers are
denominated in Mexican pesos, we may be exposed to fluctuations in the Mexican
peso, as well as to downturns in the Mexican economy, all of which may adversely
affect our profitability.
We Are Subject To Downward Pricing Pressures And A Continuing Need To
Renegotiate Overseas Rates Which Could Delay Or Prevent Our Profitability
As a result of numerous factors, including increased competition and global
deregulation of telecommunications services, prices for international long
distance calls have been decreasing. This downward trend of prices to end-users
has caused us to lower the prices we charge communications service providers for
call completion on our network. If this downward pricing pressure continues, we
cannot assure you that we will be able to offer Internet Protocol telephony
services at costs that are lower than the costs of traditional voice network
services with which we compete. Moreover, in order for us to lower our prices,
we have to renegotiate rates with our overseas local service providers who
complete calls for us. We may not be able to renegotiate these terms favorably
enough, or fast enough, to allow us to continue to offer services in a
particular country would have a material adverse effect on our ability to
operate our network and business profitably.
23
<PAGE> 24
If The Internet Does Not Continue To Grow As A Medium For Communications, Our
Business Will Suffer
The technology that allows communications over the Internet is still in its
early stages of development. Historically, the sound quality of Internet calls
was poor. However, as the industry has grown, sound quality has improved, but
the technology requires continual refinement. Additionally, the Internet's
capacity constraints may impede the acceptance of Internet Protocol telephony.
Callers could experience delays, errors in transmissions or other interruptions
in service. Placing telephone calls over the Internet must also be accepted as
an alternative to traditional telephone service. Since the Internet Protocol
telephony market is new and evolving, predicting the size of this market and its
growth rate is difficult. If our market fails to develop, then we will be unable
to grow our customer base and our opportunity for profitability will be harmed.
Our Computer Systems And Operations May Be Vulnerable To Security Breaches
Our computer infrastructure is potentially vulnerable to physical or
electronic computer viruses, break-ins and similar disruptive problems and
security breaches which could cause interruptions, delays or loss of services to
our users. We believe that the secure transmission of confidential information
over the Internet, such as credit card numbers, is essential in maintaining user
confidence in our services. We rely on licensed encryption and authentication
technology to effect secure transmission of confidential information, including
credit card numbers. It is possible that advances in computer capabilities, new
technologies or other developments could result in a compromise or breach of the
technology we use to protect user transaction data. A party that is able to
circumvent our security systems could misappropriate proprietary information or
cause interruptions in our operations. Security breaches also could damage our
reputation and expose us to a risk of loss or litigation and possible liability.
As of this date, we have not experienced security breaches of which we are
aware. However, we cannot guarantee you that our security measures will prevent
security breaches in the future.
Our Network May Not Be Able To Accommodate Our Capacity Needs
We expect the volume of traffic we carry over our network to increase
significantly as we expand our operations and service offerings. Our network may
not be able to accommodate this additional volume. In order to ensure that we
are able to handle additional traffic, we may have to enter into long-term
agreements for leased capacity. To the extent that we overestimate our capacity
needs, we may be obligated to pay for more transmission capacity than we
actually use, resulting in costs without corresponding revenues. Conversely, if
we underestimate our capacity needs, we may be required to obtain additional
transmission capacity from more expensive sources. If we are unable to maintain
sufficient capacity to meet the needs of our users, our reputation could be
damaged and we could lose users.
We Face A Risk Of Failure Of Computer And Communications Systems Used In Our
Business
Our business depends on the efficient and uninterrupted operation of our
computer and communications systems as well as those that connect to our
network. We maintain communications systems in Jersey City, New Jersey, Kansas
City, Kansas, Miami, Florida and Mexico City, Mexico. Our systems and those that
connect to our network are subject to disruption from natural disasters or other
sources of power loss, communications failure, hardware or software malfunction,
network failures and other events both within and beyond our control. Any system
interruptions that cause our services to be unavailable, including significant
or lengthy telephone network failures or difficulties for users in communicating
through our network or portal, could damage our reputation and result in a loss
of users.
RISK FACTORS RELATED TO OUR COMMON STOCK
Our Common Stock Has A Limited Trading History And An Illiquid Market
There has only been a limited public market for our common stock. We cannot
predict the extent to which an active trading market will develop or how liquid
that market might become. Due to these potential issues, it may be difficult for
you to resell your stock at or above the price at which you purchased it.
24
<PAGE> 25
The Infinity Entities Own A Majority Of Our Common Stock And May Have Plans
For The Company That May Be Different From Those Of Other Holders Of Our Stock
The Infinity Entities own a majority of our shares of capital stock. The
Infinity Entities, therefore, may exercise significant control over our
business, policies and affairs and, in general, determine the outcome of any
corporate transaction or other matters submitted to the stockholders for
approval, all in a manner that could conflict with the interests of other
shareholders.
Shares Of Our Common Stock Eligible For Future Sale May Decrease The Price Of
Our Common Stock
As of March 7, 2000, we had a total of 50,152,910 shares of common stock
eligible for future sale, consisting of:
- 45,799,832 shares of common stock outstanding;
- 507,246 shares of common stock issuable upon conversion of our Series B
convertible preferred stock;
- 869,832 shares of common stock issuable upon conversion of our Series C
convertible preferred stock; and
- 2,976,000 shares of common stock issuable upon the exercise of stock
options.
Out of these shares, 1,633,645 are freely tradeable. Of the remaining
48,519,265 shares of common stock and shares issuable upon conversion of our
preferred stock or exercise of our stock options, which are not freely
tradeable, 44,154,002 shares are subject to a lock-up agreement under our
registration rights agreement dated September 22, 1999 that expires on September
23, 2001. The resale restrictions governing the remaining 4,365,263 shares
expire at various times between November, 2000 and February, 2001. If our
shareholders sell substantial amounts of their common stock in the public
market, including shares issued upon the conversion of convertible preferred
stock or the exercise of outstanding options, then the market price of our
common stock could fall.
The holders of shares received in the reorganization and the September 1999
private placement of our common and preferred stock have agreed not to sell in
the public market any of our shares for two years after the reorganization
without the prior written consent of our principal stockholders. These principal
stockholders may, in their discretion, release all or any portion of the
securities subject to the lock-up agreements.
Our Right To Issue Preferred Stock And Anti-Takeover Provisions Under Delaware
Law Could Make A Third Party Acquisition Of Us Difficult
Our certificate of incorporation provides that our board of directors may
issue preferred stock without shareholder approval. The issuance of preferred
stock could make it more difficult for a third-party to acquire us without the
approval of its board. Additionally, Delaware corporate law imposes certain
restrictions on corporate control transactions that could make it more difficult
for a third-party to acquire us without the approval of our board.
Our Stock Price Is Highly Volatile
The market price for our common stock has been highly volatile and is
likely to continue to be highly volatile. The trading prices of many technology
and Internet-related company stocks, including ours, have experienced
significant price and volume fluctuations in recent months. These fluctuations
often have been unrelated or disproportionate to the operating performance of
these companies. Any negative change in the public's perception of the prospects
of Internet or communications companies could depress our stock price regardless
of our results.
In the past, companies in our industry have been the subject of class
action litigation by investors following periods of volatility in the price of
their publicly traded securities. We will incur substantial legal costs if the
market value of our common stock experiences adverse fluctuations and we become
the subject of similar litigation which may further affect the price of our
common stock.
25
<PAGE> 26
AVAILABLE INFORMATION
We are subject to the information reporting requirements of the Securities
Exchange Act of 1934, as amended and in accordance therewith files reports and
other information with the Securities and Exchange Commission, as amended. Such
filings can be inspected and copied at the Public Reference Section of the
commission located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, DC 20549 and at regional public reference facilities maintained by
the Commission located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and at Seven World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission at prescribed rates. Such material may also
be accessed electronically by means of the commission's home page on the
Internet (http://www.sec.gov).
ITEM 2. FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
eVentures Group, Inc. ("eVentures" or the "Company") was incorporated in
the state of Delaware on June 24, 1987 and had no material operations prior to
the transactions consummated on September 22, 1999, which are described below.
The Company was formerly known as Adina, Inc.
On September 22, 1999, the Company acquired all of the outstanding shares
of AxisTel, approximately 66.7% of the outstanding shares of e.Volve,
approximately 17% of the outstanding shares of PhoneFree.com (collectively the
"Acquired Entities"), and $8.5 million of notes receivable from e.Volve
including accrued interest held by certain of the Infinity Entities. All the
acquisitions and the purchase of the notes were settled through issuance of our
common stock. As a result of this portion of the reorganization, approximately
77% of our common stock outstanding after the September 22, 1999 transaction was
owned by the Infinity Entities. In October 1999, we acquired the remaining 33.3%
of e.Volve.
As of June 30, 1999, the end of our last fiscal year, the Infinity Entities
had directly and indirectly held interests in the Acquired Entities, as follows:
66.7% of e.Volve, 21% of PhoneFree.com, and 0.7% of AxisTel plus options to
purchase a further 49.3% of AxisTel. In August of 1999, the interest in
PhoneFree.com held by the Infinity Entities was diluted to 17%. Immediately
after exercising the options in AxisTel, these interests, along with the
Infinity Entities' notes receivable from e.Volve, were directly and indirectly
transferred to eVentures in exchange for the our common stock. The remaining 50%
of AxisTel was then purchased from AxisTel's founding shareholders.
As part of the September 22, 1999 transaction, eVentures acquired the
remaining 33.3% of e.Volve on October 19, 1999. This purchase was settled
through an issuance of 5,831,253 shares of eVentures' Common Stock.
The financial statements presented through June 30, 1999 represent the
Infinity Entities' interest in the Acquired Entities and is deemed to be the
"Accounting Acquirer". The financial statements as of and for the six months
ended December 31, 1999 reflect the consummation of the reorganization, and
therefore are consolidated financial statements of eVentures and subsidiaries as
of December 31, 1999 and for the period from September 22, 1999 through December
31, 1999.
Since eVentures had no material operations prior to the September 22, 1999
transaction, the acquisitions of the Infinity Entities' interests were accounted
for as a recapitalization of eVentures.
The acquisitions of the remaining 50% of AxisTel and 33.3% of e.Volve were
treated as purchases for accounting purposes.
On June 11, 1998, Infinity Investors Limited and Infinity Emerging
Opportunities Limited acquired a 66.7% interest in e.Volve. Subsequently,
through a corporate reorganization, IEO Holdings Limited acquired Infinity
Emerging Opportunities' interests in e.Volve, AxisTel and PhoneFree. When IEO
Holdings Limited merged with our wholly-owned subsidiary eVentures Holdings,
L.L.C. in our reorganization, its shareholders, IEO Investments Limited and
Infinity Emerging Subsidiaries, became shareholders of Company. This transaction
was accounted for by e.Volve as a purchase. The operations of e.Volve between
June 11, 1998 and
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<PAGE> 27
June 30, 1998 were immaterial, and, therefore the date used for the effective
date of the purchase was July 1, 1998. The financial statements through June 30,
1998 are described as "Predecessor Information", and those subsequent to June
30, 1998 are described as "The Company". The cost basis of The Company was
assigned to the assets acquired based on their estimated fair values at the
acquisition date. As a result, the financial statements for the period
subsequent to the change of control are presented on a different cost basis than
those for prior periods and, therefore, are not comparable.
"Pro Forma" results are unaudited and reflect the results of AxisTel for
the year ended June 30, 1999 and the six months ended December 31, 1999, as
though the reverse merger and acquisition of AxisTel had occurred on July 1,
1998 (the transaction closed on September 22, 1999). The unaudited pro forma
results are not necessarily indicative of future results, or actual results of
operations that would have occurred had the acquisitions been made on July 1,
1998.
<TABLE>
<CAPTION>
PREDECESSOR INFORMATION THE COMPANY PRO FORMA
------------------------ ----------------------------------------- ---------------------------
6 MONTHS 6 MONTHS 6 MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31,
1997 1998 1999 1998 1999 1999 1999
---------- ----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA
Revenues................. $ 921,599 $ 1,713,403 $27,248,273 $ 13,013,700 $ 22,661,838 $ 35,215,916 $ 28,403,640
Direct costs............. 578,944 1,944,073 23,311,584 9,745,604 21,759,782 29,692,819 27,660,066
--------- ----------- ----------- ------------ ------------ ------------ ------------
Gross profit............. 342,655 (230,670) 3,936,689 3,268,096 902,056 4,907,199 743,573
Selling, general and
administrative
expenses............... 718,362 4,505,798 7,551,131 3,442,347 10,354,808 12,690,917 12,252,636
--------- ----------- ----------- ------------ ------------ ------------ ------------
Loss from operations
before other (income)
expense and provision
for taxes.............. (375,707) (4,736,468) (3,614,442) (174,251) (9,452,752) (7,783,718) (11,265,844)
--------- ----------- ----------- ------------ ------------ ------------ ------------
Other (income) expenses
Interest expense,
net.................... -- 105,099 1,704,459 735,878 598,062 473,675 281,978
Write off of
unamortized debt
discount............. -- -- -- -- 917,615 2,000,000 --
Equity in loss of
affiliate............ -- -- 33,776 -- 31,819 33,776 31,819
Foreign currency (gain)
loss................. -- -- 126,575 8,631 (2,032) 126,575 (2,032)
Other.................. 12,604 (16,930) (17,851) 1,074 83,370 1,074
--------- ----------- ----------- ------------ ------------ ------------ ------------
-- 117,703 1,847,880 726,658 1,546,538 2,717,396 312,839
--------- ----------- ----------- ------------ ------------ ------------ ------------
Net loss................. $(375,707) $(4,854,171) (5,462,322) (900,909) (10,999,290) $(10,501,114) $(11,821,902)
========= =========== =========== ============ ============ ============ ============
Imputed preferred
dividend............... -- -- (1,115,943)
----------- ------------ ------------
Net Income (loss)
available to common
shareholders........... $(5,462,322) $ (900,909) $(12,115,233)
=========== ============ ============
Net loss per
share -- (basic and
diluted)............... $ (0.48) $ (0.08) $ (0.40) $ (0.25) $ (0.27)
Weighted average shares
outstanding -- (basic
and diluted)........... 11,365,614 11,365,614 30,428,296 42,787,863 44,372,309
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR INFORMATION THE COMPANY
----------------------- --------------------------
AS OF AS OF
JUNE 30, DECEMBER 31,
AS OF JUNE 30, 1998 1999 1999
----------------------- ----------- ------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents................................... $ 2,417,216 $ 39,379 $ 6,269,893
Working (deficit) capital................................... (715,832) (6,590,569) 609,233
Total assets................................................ 4,305,175 15,661,317 58,035,718
Capital lease obligations, net of current portion........... 487,665 2,031,513 5,250,370
Long term debt.............................................. 5,410,000 6,828,948 --
Total stockholders' (deficit) equity........................ (5,121,478) (2,859,313) 42,965,469
</TABLE>
27
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and the notes thereto.
OVERVIEW
The financial information and other statistical data set out below
represent the financial condition and results of operations of (i) all periods
prior to July 1, 1998 and (ii) the accounting acquirer pursuant to a series of
reorganization transactions completed on September 22, 1999 and October 19, 1999
(the "Reorganization") described herein for all periods from July 1, 1998
through September 30, 1999. As a result, throughout this Form 10/A, our
financial statements as of any date and for any period beginning July 1, 1998
and ending on or prior to September 30, 1999 reflect the financial condition and
results of operations of e.Volve as if we had acquired the interest of the
Infinity Entities in e.Volve on July 1, 1998, except that (a) our balance sheet
as of June 30, 1999 reflects the acquisition of our minority interest in
PhoneFree.com and (b) our balance sheet as of September 30, 1999 reflects the
acquisition of Axistel. Financial information and other data as of any date
after September 30, 1999 is financial information and other data of eVentures.
For accounting purposes prior to July 1, 1998, the accounting acquiror had
no interest in e.Volve.
Revenues. Revenues are generated through the sale of international and
domestic Internet Protocol telephony minutes on a wholesale basis to other U.S.
long-distance providers and to distributors of prepaid calling cards. In
addition, we sell data bandwidth to other carriers and corporate customers.
Historically, we have derived substantially all of our revenues from the sale of
Internet telephony wholesale services and data communications bandwidth. Our
agreements with our wholesale customers are short term in duration and the rates
are subject to change from time to time. Due to increasing competition,
management expects these rates to decline, which could result in lower revenues
and increased losses. Our three largest customers accounted for 79.3% of our net
revenues during the six months ended December 31, 1999. Management anticipates
that our dependence on these three customers will decline as our wholly owned
subsidiaries broaden their sales and marketing initiatives to include additional
potential customers and expand their product and service offerings of prepaid
calling cards, colocation services and Internet access. Additionally, we
anticipate making further acquisitions of businesses, such as our acquisition of
iGlobal, which will allow us to further diversify the customers and services
from which we derive revenue.
Direct Costs. Direct costs include per minute termination charges and lease
payments and fees for fiber optic cable. Historically, the call termination
expense component of these direct costs has declined as measured on a cost per
minute basis. The direct costs incurred for leasing communications network
capacity has also declined. However, the agreements we enter into for leasing
such capacity are generally at fixed rates for periods of more than one year. We
anticipate that our aggregate direct costs, as measured on a cost per minute
basis, will continue to decline.
Prior to September 1999, we provided international telecommunication
services only from the United States to Mexico. The majority of our termination
fees and certain fiber optic lease payments were payable in Mexican pesos. As a
result, we were exposed to exchange rate risk due to the fluctuation of the
Mexican peso compared to the U.S. dollar. Continued fluctuation in the exchange
rate may make it cheaper or more expensive for us to purchase pesos to meet our
peso denominated expenses. Two vendors in Mexico provide substantially all of
our terminating capabilities in Mexico. If either of these vendor relationships
were terminated, our ability to conduct operations in Mexico would be limited.
Selling, General and Administrative Expenses. These expenses include
general corporate expenses, management salaries, depreciation and amortization
expenses, professional fees, sales and marketing expenses, travel and
development expenses, benefits, occupancy costs, and administrative expenses. We
maintain a corporate office and several switch facilities. Due to the
international nature of our business, travel and development costs have been
significant and could continue to increase as we seeks to expand our network.
Additionally, we are rapidly expanding the size of our corporate office and
anticipates the related overhead
28
<PAGE> 29
costs to significantly increase. We also expect depreciation and amortization
costs to increase as a result of our recent acquisitions and our continued
investment in our wholly-owned subsidiaries' communications networks.
SUMMARY OF OPERATING RESULTS
The table below summarizes our operating results:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
----------------------------------------------------------------
PREDECESSOR INFORMATION THE COMPANY
----------------------------------------- -------------------
1997 % 1998 % 1999 %
--------- ----- ----------- ------ ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues................. $ 921,599 100.0% $ 1,713,403 100.0% $27,248,273 100.0%
Direct costs............. 578,944 62.8% 1,944,073 113.5% 23,311,584 85.6%
--------- ----- ----------- ------ ----------- -----
Gross profit (loss)...... 342,655 37.2% (230,670) (13.5)% 3,936,689 14.4%
Selling, general and
administrative
expenses................ 718,362 77.9% 4,505,798 263.0% 7,551,131 27.7%
--------- ----- ----------- ------ ----------- -----
Loss from operations..... (375,707) (40.7)% (4,736,468) (276.5)% (3,614,442) (13.3)%
--------- ----- ----------- ------ ----------- -----
Other (income) expenses
Interest expense, net... -- 0.0% 105,099 6.1% 1,704,459 6.3%
Write off of
unamortized debt
discount............ -- 0.0% -- 0.0% -- 0.0%
Equity in loss of
affiliate........... -- 0.0% -- 0.0% 33,776 0.1%
Foreign currency
loss................ -- 0.0% -- 0.0% 126,575 0.5%
Other................. -- 0.0% 12,604 0.7% (16,930) (0.1)%
--------- ----- ----------- ------ ----------- -----
-- 0.0% 117,703 6.8% 1,847,880 6.8%
--------- ----- ----------- ------ ----------- -----
Net loss................. $(375,707) (40.7)% $(4,854,171) (283.3)% $(5,462,322) (20.0)%
========= ===== =========== ====== =========== =====
Imputed preferred
dividend................ --
-----------
Net loss available to
common shareholders..... $(5,462,322)
===========
Net loss per
share -- (basic and
diluted)................ $ (0.48)
Weighted average shares
outstanding -- (basic
and diluted)............ 11,365,614
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
-------------------------------------------
THE COMPANY
-------------------------------------------
1998 % 1999 %
----------- ----- ------------ -----
<S> <C> <C> <C> <C>
Revenues................. $13,013,700 100.0% $ 22,661,838 100.0%
Direct costs............. 9,745,604 74.9% 21,759,782 96.0%
----------- ----- ------------ -----
Gross profit (loss)...... 3,268,096 25.1% 902,056 4.0%
Selling, general and
administrative
expenses................ 3,442,347 26.5% 10,354,808 45.7%
----------- ----- ------------ -----
Loss from operations..... (174,251) (1.3)% (9,452,752) (41.7)%
----------- ----- ------------ -----
Other (income) expenses
Interest expense, net... 735,878 5.7% 598,062 2.6%
Write off of
unamortized debt
discount............ -- 0.0% 917,615 4.0%
Equity in loss of
affiliate........... -- 0.0% 31,819 0.1%
Foreign currency
loss................ 8,631 0.1% (2,032) (0.0)%
Other................. (17,851) (0.1)% 1,074 0.0%
----------- ----- ------------ -----
726,658 5.6% 1,546,538 6.8%
----------- ----- ------------ -----
Net loss................. $ (900,909) (6.9)% $(10,999,290) (48.5)%
=========== ===== ============ =====
Imputed preferred
dividend................ -- (1,115,943)
----------- ------------
Net loss available to
common shareholders..... $ (900,909) $(12,115,233)
=========== ============
Net loss per
share -- (basic and
diluted)................ $ (0.08) $ (0.40)
Weighted average shares
outstanding -- (basic
and diluted)............ 11,365,614 30,428,296
</TABLE>
Six Months Ended December 31, 1999 Compared To Six Months Ended December 31,
1998
Revenues. Revenues increased to $22.7 million during the six months ended
December 31, 1999 from $13.0 million during the six months ended December 31,
1998, an increase of 74.6%. The increase during the six months ended December
31, 1999 primarily resulted from the acquisition of AxisTel in September 1999
which increased revenues by $5.6 million. In addition, an increase in traffic
contributed to the remainder of the increase in revenues, offset by a decrease
in the average price per minute that we charged. During the six months ended
December 31, 1999 we transmitted 218.3 million minutes versus 64.4 million
minutes during the six months ended December 31, 1998, an increase of 239.0%.
Excluding the 47.3 million minutes added as a result of the acquisition of
AxisTel, we increased minutes during the six months ended December 31, 1999, as
compared to the comparable period in 1998, by 106.6 million minutes, an increase
of 165.5%. The average price per minute we charged for these minutes decreased
to $0.10 during the six months ended December 31, 1999 from $0.20 during the
comparable period in 1998.
Direct Costs. Direct costs increased to $21.8 million during the six months
ended December 31, 1999 from $9.7 million during the six months ended December
31, 1998, an increase of 123.3%. The increase in direct costs during the six
months ended December 31, 1999 resulted from a $5.2 million increase in direct
costs attributable to the operations of AxisTel during our second quarter of
1999. In addition, direct costs increased during the six months ended December
31, 1999 by $6.8 million, as a result of the increased traffic volumes discussed
above, offset by lower per minute termination costs. The average cost per minute
to
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<PAGE> 30
terminate calls decreased to $0.09 during the six months ended December 31,
1999, from $0.12 during the comparable periods in 1998. Direct costs also
increased during the six months ended December 31, 1999 by approximately
$300,000 as a result of fixed circuit cost increases to add capacity. As a
percentage of revenues, direct costs during the six months ended December 31,
1999 increased to 96.0% from 74.9% during the six months ended December 31,
1998. The increase in direct costs as a percentage of revenues results primarily
because the average price per minute decreased faster than the cost per minute
for termination.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $10.4 million during the six months ended
December 31, 1999 from $3.4 million during the six months ended December 31,
1998, an increase of 200.8%. These increases in selling, general and
administrative expenses during the six months ended December 31, 1999 resulted
primarily from (i) expenses related to termination of a marketing agreement of
$1.7 million, (ii) the incurrence of severance costs of $0.3 million, (iii) an
increase in goodwill expense related to the purchase of AxisTel and 33.3% of
e.Volve of $0.7 million, (iv) an increase in professional and printing fees
related to the auditing of our Company for three years and legal work related to
the Reorganization and purchase of 33.3% of e.Volve of $0.8 million, (v) an
increase in depreciation expense of $0.5 million, (vi) an increase in payroll of
$0.2 million, (vii) the recording of a compensation charge of $1.2 million
related to the issuance of options below the market value of our stock and
(viii) $0.6 million of charges related to consulting and professional fees in
Mexico. In addition, the acquisition of AxisTel increased expenses by $1.4
million in our second quarter and corporate overhead added an additional $0.2
million. These increases in expenses were offset by a decrease of $0.4 million
in travel and other consulting expenses during the six months ended December 31,
1999.
Interest Expense, Net. Interest expense, net decreased to $0.6 million
during the six months ended December 31, 1999 from $735,878 during the six
months ended December 31, 1998. This decrease was a result of the elimination of
$8.0 million of debentures as a result of our acquisition of e.Volve's
outstanding debentures on September 22, 1999 and the resulting consolidation of
accounts, and due to interest income on higher cash balances maintained out of
proceeds of private placements completed during our second quarter, offset by
higher charges related to capital leases for equipment leased after December 31,
1998.
Write Off Of Unamortized Debt Discount and Recognition of Imputed Preferred
Stock Dividend. The $0.9 million write off of unamortized debt discount during
the six months ended December 31, 1999 resulted from our purchase of e.Volve's
outstanding debentures and the subsequent elimination of these debentures in our
consolidated balance sheet.
We reported an imputed dividend during the six months ended December 31,
1999 of $1.1 million as a result of the difference between the closing prices
for our common stock on the dates on which we issued convertible preferred stock
during the six months ended December 31, 1999 and the price per share at which
such preferred stock is convertible into common shares.
Fiscal Year Ended June 30, 1999 Compared To Fiscal Year Ended June 30, 1998
Revenues. Revenues increased to $27.2 million during the year ended June
30, 1999 from $1.7 million during the year ended June 30, 1998, an increase of
1,490.3%. This primarily resulted from a successful launch in July 1998 of our
enhanced communications services and an increase in the traffic transmitted,
primarily to Mexico. During the year ended June 30, 1999, we transmitted over
165.0 million minutes, compared with approximately 8.5 million minutes during
the year ended June 30, 1998.
Direct Costs. Direct costs increased to $23.3 million during the year ended
June 30, 1999 from $1.9 million during the year ended June 30, 1998, an increase
of 1,099.1%. This increase in direct costs resulted from an increase in
termination fees associated with the increase in traffic transmitted of $18.2
million and an increase in the fees for the fiber optic connections between our
Points of Presence of $3.1 million. As a percentage of revenues, direct costs
during the year-ended June 30, 1999 decreased to 85.6% from 113.5% during the
year-ended June 30, 1998.
Selling, General And Administrative. Selling, general and administrative
expenses increased to $7.6 million during the year ended June 30, 1999 from $4.5
million during the year ended June 30, 1998, an increase of
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67.6%. This increase resulted primarily from an increase in (i) the operating
staff of $0.8 million, (ii) general operating activities of $1.1 million, (iii)
travel expenses of $0.4 million, (iv) professional and consulting fees of $1.4
million and (v) an increase in depreciation costs of $1.1 million.
Interest Expense, Net. Interest expense, net increased to $1.7 million
during the year ended June 30, 1999 from $105,099 during the year ended June 30,
1998, a increase of 1,521.8%. This increase was a result of higher charges
related to new equipment capital leases and interest on the debentures.
Equity In Loss Of Subsidiaries. Equity in loss of subsidiaries was $33,776
during the year ended June 30, 1999. These losses occurred at Innovative Calling
Technologies.
Foreign Currency Loss. Foreign currency loss during the year ended June 30,
1999 was a loss of $126,575.
Other. Other income was $16,930 during the year ended June 30, 1999
compared with an expense of $12,604 during the year ended June 30, 1998.
Fiscal Year Ended June 30, 1998 Compared To Fiscal Year Ended June 30, 1997
Revenues. Revenues increased to $1.7 million during the year ended June 30,
1998 from $0.9 million during the year ended June 30, 1997, an increase of
85.9%. This primarily resulted from an increase in the minutes transmitted.
Direct Costs. Direct costs increased to $1.9 million during the year ended
June 30, 1998 from $0.6 million during the year ended June 30, 1997, an increase
of 235.8%. This increase in direct costs resulted from an increase in the total
minutes transmitted. As a percentage of revenues, direct costs during the year-
ended June 30, 1998 increased to 113.5% from 62.8% during the year-ended June
30, 1997.
Selling, General And Administrative Expenses. Selling, general and
administrative expenses increased to $4.5 million during the year ended June 30,
1998 from $0.7 million during the year ended June 30, 1997, an increase of
527.2%. This increase resulted primarily from an increase in the operating staff
and general operating activities, and an increase in depreciation costs.
Interest Expense, Net. Interest expense, net was $0.1 million during the
year ended June 30, 1998. This expense was a result of charges related to
capital leases of new equipment.
Other. Other expense was $12,604 during the year ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
General
Our strategy of creating a communications Econet will continue to require a
substantial amount of capital. As part of this strategy we continue to make
strategic acquisitions and investments. Such strategic investments and
acquisitions, if realized, could require expenditure of a material portion of
our financial resources and would accelerate the need for raising additional
capital. Sources of funding for our financing requirements may include vendor
financing, bank loans and public offerings or private placements of equity
and/or debt securities. There can be no assurance that additional financing will
be available or, if available, that financing can be obtained on a timely basis
and on acceptable terms. The failure to obtain such financing on acceptable
terms could significantly reduce our ability to fund our expenses, development,
acquisitions and operations.
Since July 1, 1999, we have funded our operations primarily through the
proceeds from private placements of common stock, preferred stock and warrants
to purchase common stock and from capital leases. During the six months ended
December 31, 1999, we raised a total $12.9 million through private placements of
common stock and preferred stock, $0.3 million from the exercise of options and
$5.2 million through capital leases to finance operations and to fund capital
expenditures. Since December 31, 1999, we have raised approximately $15.6
million of additional funds through private placements of preferred stock.
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We have used, or plan to use the proceeds of $28.6 million from stock
offerings as follows:
- approximately $14.5 million for investments, including future commitments
of $3.5 million;
- approximately $5 million to fund operating losses and working capital;
and
- the balance of proceeds for general corporate purposes and capital
expenditures.
Our principal uses of cash are to fund (i) the expansion of the operations
of our subsidiaries and affiliates; (ii) working capital requirements; (iii)
capital expenditures, primarily for our network; (iv) operating losses; and (v)
acquisitions. As of December 31, 1999, we had capital commitments of $13.8
million, consisting of ($'s in millions):
<TABLE>
<S> <C>
Capital Lease Payments (payable over terms ranging from 29
to 60 months)............................................. $10.3
Investments................................................. $ 3.5
</TABLE>
The capital lease payments of $10.3 million are payable over the next
months.
We also expect to make approximately $2.7 million of capital expenditures
during the next twelve months.
As of December 31, 1999, we had current assets of $10.4 million, including
cash, cash equivalents and short-term investments of $6.2 million, and a working
capital surplus of $0.6 million. Current assets included a tax refund receivable
of $1.8 million. Our cash and short-term investments are expected to provide
sufficient liquidity to meet our capital requirements for approximately the next
twelve months.
Qwest IRU
On September 30, 1999 e.Volve and Qwest Communications Corporation entered
into an Indefeasible Right of Use ("IRU") agreement in which Qwest granted
e.Volve an indefeasible right of use to a fiber optic circuit operated by Qwest
between New York, New York and Los Angeles, California for a period of twenty
years. In consideration for this indefeasible right of use, e.Volve agreed to
pay Qwest a total of $15.0 million in four installments between October 1, 1999
and September 30, 2001. In addition, e.Volve has been required to pay Qwest a
monthly operation and maintenance charge of $25,000 per month since January 1,
2000.
Pursuant to the IRU agreement, e.Volve must separately arrange for a
colocation space in the Qwest terminal facilities or obtain from a local
telecommunications distributor the telecommunications transmission facilities
required in order to extend each route from a cross-connect panel at Qwest's
terminal facility to a location outside of the Qwest terminal facility. As of
March 7, 2000, we have not utilized our right to use the fiber optic circuit.
However, e.Volve has not entered into any colocation agreement with Qwest or any
other local telecommunications distributor as required under the IRU agreement
and has not obtained the telecommunications transmission necessary to extend
each route to a location outside of the Qwest terminal facility.
On December 23, 1999, Qwest made a demand for payment of the first
installment of $3.75 million. Thereafter, Qwest has sent invoices to e.Volve
requesting payment of the full $15.0 million. e.Volve has not made this payment
and e.Volve, eVentures and Qwest have commenced negotiations for a restructuring
of the terms of the IRU agreement. As of March 7, 2000, e.Volve and Qwest have
not reached an agreement regarding this dispute. Our financial statements do not
include any adjustment or provision related to the above transaction.
India Joint Venture
On August 31, 1999, e.Volve entered into a an agreement with Uni-Tel, Inc.,
a Texas corporation that operates in the United States and India and provides
international telecommunications services. The purpose of the agreement is to
form a strategic alliance in which Uni-Tel would manage telecommunications
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<PAGE> 33
equipment and software owned by e.Volve in the United States and India and
deliver telecommunications traffic carried by e.Volve from the United States
terminating in India.
Under the terms of the agreement, e.Volve paid Uni-Tel $800,000 for the
purchase of five systems of telecommunications equipment and software and has
been invoiced for an additional $450,000, payable in shares of our common stock,
to complete the payment for these systems. In addition, we agreed to pay
$250,000 for the purchase of each of up to seven additional telecommunications
termination systems. The $250,000 to be paid by e.Volve for each new termination
system is to be paid in two installments. The first $100,000 of each installment
is due upon seven days notice of the proposed installation of a new termination
system, and the remaining $150,000 is payable in shares of our common stock and
is due upon the completion of two weeks' testing and acceptance of the
termination system by e.Volve.
In addition to the purchase of the termination systems, within a month of
commencing operations, e.Volve is to supply a minimum of 300,000 minutes of
usage per location per month and within ninety days of commencing operations is
to increase such usage to a monthly minimum of 450,000 minutes per location. In
exchange for Uni-Tel's termination of the traffic supplied to India, e.Volve
pays Uni-Tel a termination fee of $0.14 per minute to cover operating costs in
India. In addition, Uni-Tel, at its sole expense, is responsible for the overall
daily management of the system sites in Dallas and in India, whereas e.Volve
pays Uni-Tel for managing systems located in sites other than Dallas and India.
All adjusted gross profits of the business arrangements contemplated in the
agreement are shared equally between e.Volve and Uni-Tel.
e.Volve believes that Uni-Tel has breached its agreements by failing to
adequately manage its network and pay its expenses related to operations in
India, and has stopped making certain payments to Uni-Tel. e.Volve and Uni-Tel
are negotiating a settlement agreement in order to resolve this dispute.
Cash Flows From Operating Activities
Our operating activities generated cash of $26,000 during the period
between inception and June 30, 1997 and used cash of $1.8 million during the
year ended June 30, 1998, $1.4 million during the year ended June 30, 1999, and
$2.5 million during the six months ended December 31, 1999. During the period
between inception and June 30, 1997 cash flows from operating activities
primarily resulted from a combination of increases in accounts payable, non-cash
expenses, and increases in other accrued expenses, offset by net losses and
increases in accounts receivable and other receivables. During the year ended
June 30, 1998 cash used in operating activities primarily resulted from a net
loss, offset by non-cash expenses, increases in accounts payable and customer
deposits. During the year ended June 30, 1999 cash used in operating activities
primarily resulted from a net loss, an increase in tax refund receivable and the
securing of two letters of credit with restricted cash, offset by increases in
accounts payable and customer deposits, and depreciation and amortization.
During the six months ended December 31, 1999 cash flow used by operating
activities primarily resulted from net losses, the reduction of customer
deposits, and an increase in accounts receivable, offset by depreciation and
amortization charges, a decrease in restricted cash, and a decrease in accounts
payable (funded through the issuance of our common stock to vendors of $5.4
million) and an increase in other accrued liabilities.
Cash Flows From Investing Activities
Our cash flow used by investing activities was $13,363 during the period
between inception and June 30, 1997, $1.8 million during the year ended June 30,
1998, $1.3 million during the year ended June 30, 1999, and cash flow used by
investing activities totaled $2.8 million during the six months ended December
31, 1999. During the period between inception and June 30, 1997 cash used by
investing activities primarily resulted from deposits. During the year ended
June 30, 1998 cash used by investing activities primarily resulted from
investments in affiliates, purchases of fixed assets and the purchase of
securities. During the year ended June 30, 1999 cash used by investing
activities primarily resulted from purchases of fixed assets and deposits,
offset by proceeds from the sale of securities. During the six months ended
December 31, 1999 cash used by investing activities primarily consisted of cash
used to purchase equipment ($1.7 million), fund affiliates, and make other long
term investments, off-set by net cash acquired in our reorganization.
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<PAGE> 34
Cash Flows From Financing Activities
Our cash flow from financing activities was $100 between the period between
inception and June 30, 1997, $6.0 million during the year ended June 30, 1998,
$322,408 during the year ended June 30, 1999, and $11.6 million during the six
months ended December 31, 1999. During the period between inception and June 30,
1997 cash provided by financing activities was immaterial. During the year ended
June 30, 1998 cash provided by financing activities was generated primarily
through the issuance of $6.0 million of debentures. During the year ended June
30, 1999 cash provided by financing activities was generated through the
issuance of $2.0 million of debentures, offset by capital lease payments. During
the six months ended December 31, 1999 cash provided by financing activities was
attributable to the issuance of common stock and preferred stock ($13.2
million), offset by the repayment of a bridge loan and capital lease payments.
Private Placements
On September 28, 1999, we completed a private placement of 2,470,000 shares
of common stock and 1,000 shares of Series A Convertible Preferred Stock with
aggregate proceeds of approximately $5.9 million. Proceeds from these issuances
were used for general corporate purposes and for use as capital for new
investments and projects. All of the outstanding shares of Series A Convertible
Preferred Stock were converted into an aggregate of 200,000 shares of our common
stock on December 21, 1999.
On November 19 and 26, 1999, we completed two private placements of 2,500
shares and 3,725 shares of our Series B Convertible Preferred Stock,
respectively, with aggregate proceeds of approximately $6.2 million. Proceeds
from these issuances are for general corporate purposes and for use as capital
for new investments and projects. Shares of our Series B Convertible Preferred
Stock is convertible into shares of our common stock under certain conditions.
For a description of the terms of the Series B Convertible Preferred Stock,
please see the discussion in Item 11 below under the caption "Authorized Capital
Stock -- Preferred Stock -- Series B Convertible Preferred Stock."
On December 15, 1999, we completed a private placement of 775 shares of our
Series B Convertible Preferred Stock with aggregate proceeds of approximately
$775,000. Proceeds from this issuance are for general corporate purposes and for
use as capital for new investments and projects. The Shares of our Series B
Convertible Preferred Stock are convertible into shares of our common stock
under certain conditions. For a description of the terms of the Series B
Convertible Preferred Stock, please see the discussion in Item 11 below under
the caption "Authorized Capital Stock -- Preferred Stock -- Series B Convertible
Preferred Stock."
The Series B Convertible Preferred Stock was issued at a discount to the
market value of our common stock on the date that investors committed to
purchase shares of Series B Convertible Preferred Stocks. The market value of
our common stock at the time of the commitment was $16.00 per share. We have
recognized this discount by accounting for it as an imputed preferred stock
dividend of $1.1 million in our second quarter.
Since December 31, 1999, we have raised additional funds through subsequent
private placements of preferred stock. In a series of transactions between
January 6 and February 10, 2000, we completed a private placement of 15,570
shares of our Series C Convertible Preferred Stock to eight accredited
investors, with aggregate proceeds of approximately $15.6 million. Proceeds from
this issuance are for general corporate purposes and for use as capital for new
investments and projects. The shares of Series C Convertible Preferred Stock are
convertible into shares of our common stock at a price of $17.90 per share,
subject to certain anti-dilution adjustments. The conversion price was
determined using the average of the closing bid prices per share of our common
stock for the 20 trading days ended December 10, 1999. Proceeds of the offering
were used to fund operating losses and working capital, make investments and for
general corporate purposes. The effect of the favorable conversion rate will be
recorded as an imputed preferred stock dividend in our third fiscal quarter. For
a description of the terms of the Series C Convertible Preferred Stock, please
see the discussion in Item 11 below under the caption "Authorized Capital
Stock -- Preferred Stock -- Series C Convertible Preferred Stock."
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<PAGE> 35
Equipment Leasing and Financing
We have leased equipment manufactured by various equipment manufacturers
including Siemens A.G., Network Equipment Technologies, Inc. and Harris
Corporation. As of December 31, 1999, we have entered into an aggregate of
approximately $10.3 million of capital leases with (i) Telecommunications
Finance Group, a subsidiary of Siemens A.G., (ii) BA Capital Corp., (iii) Ascend
Credit Corporation, a subsidiary of Lucent Corporation and (iv) Arrendadora
BankAmerica, S.A.
RECENT EVENTS
On January 28, 2000, we acquired for $10 million 100,000 Series A Preferred
Units of Launch Center 39, representing approximately 2.1% of the equity and
voting interests of Launch Center 39.
On January 31, 2000, pursuant to an option granted in connection with our
initial investment in Fonbox, we purchased 1,000,000 newly issued shares of
Series A preferred stock of Fonbox for $1.0 million cash. In addition, in
connection with our exercise of this option, we acquired 350,000 shares of
common stock of Fonbox from each of Spydre Zeta L.L.C. and NetProvide Ltd. in
exchange for an aggregate of 27,860 shares of our common stock. As of February
29, 2000, the Company owns approximately 31% of the capital stock of Fonbox.
On February 11, 2000, we acquired 750,000 shares of Series A-1 convertible
preferred stock of Callrewards, for $750,000 which represents 30% of the
outstanding capital stock of Callrewards on a fully-diluted basis. Under our
agreement with Callrewards, we are obligated to purchase shares of Series A-2
convertible preferred stock of Callrewards, which on the date of purchase will
be convertible into 20% of the ownership interest in Callrewards on a
fully-diluted basis, for $1.0 million when Callrewards has at least 100,000
active users. We are obligated to purchase shares of Series A-3 convertible
preferred stock of Callrewards, which on the date of purchase will be
convertible into 20% of Callrewards on a fully-diluted basis, for $2.5 million
when Callrewards has at least 250,000 active users.
On March 3, 2000, we loaned $3.0 million to PhoneFree.com under a
promissory note dated March 2, 2000. The promissory note is due on September 1,
2000 and bears interest at 7%. PhoneFree.com may repay this promissory note at
any time, subject to our right to convert it into PhoneFree.com common stock. We
can convert the promissory note into PhoneFree.com common stock:
(i) if PhoneFree.com raises equity capital from other investors on or
before August 31, 2000, in which case our conversion price will be equal to
95% of the per share subscription or conversion price in such equity
capital raise; or
(ii) if PhoneFree.com does not raise equity capital from other
investors on or before August 31, 2000, we can convert the promissory note
on or after September 1, 2000, at a per share conversion price that values
all the common and preferred stock of PhoneFree.com at $50.0 million.
In connection with the loans made under the promissory note, we also
received a four-year warrant to purchase 240,000 shares of PhoneFree.com at a
price equal to 110% of the conversion price of the promissory note. The warrant
may not be called by PhoneFree. If we include this warrant, but not the
promissory note, we would beneficially own approximately 18% of the outstanding
shares of common stock of PhoneFree.com.
On March 7, 2000, we entered into an agreement to acquire all of the
outstanding shares of stock of iGlobal in exchange for approximately 2,588,000
shares of our common stock. This transaction remains subject to customary
closing conditions and we expect to close this transaction during our third
quarter.
RECENTLY ADOPTED ACCOUNTING STANDARDS
See Note 3 to the Consolidated Financial Statements.
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IMPACT OF THE YEAR 2000
The "year 2000 issue" generally describes the various problems that may
result from the improper processing of dates and date-sensitive calculations by
computers and other equipment as a result of computer hardware and software
using two digits to identify the year in a date. If a computer program or other
piece of equipment fails to properly process dates including and after the year
2000, date-sensitive calculations may be inaccurate as a result of those
computers and software failing to distinguish dates in the 2000's from dates in
the 1900's. The failure to process dates could result in system failures or
miscalculations causing disruptions in operations including, among other things,
a temporary inability to process transactions, send invoices or engage in
similar normal business activities.
State Of Readiness. We reviewed two areas: (i) internal issues, including
our information technology ("IT") assets and non-IT systems and (ii) external
issues (including third-party manufactured products sold by us, and issues with
customers, vendors and suppliers). We contacted manufacturers and suppliers of
IT and non-IT assets used internally by us for services such as customer
billing, customer service and financial reporting, including manufacturers and
suppliers of computer equipment, software programs, telephone systems, data
systems, systems comprising our enterprise networks and equipment used to
provide services to customers. These contacts helped us to determine the extent
to which these systems could cause a material adverse effect on our operations
in the event that the systems failed to properly process date-sensitive
calculations following the year 2000. We also tried to identify potential
external issues that could have had an impact on our operations. These included
issues with (i) significant customer systems, including customer-owned and
operated systems and systems that are connected to our networks and (ii) vendors
and suppliers such as credit facility providers, third-party service providers
such as local and long distance wholesale providers and interconnection
providers, and employee benefit plan providers such as 401(k) plan
administrators.
As of March 7, 2000, we have not had any material year 2000 issues. We may
in the future identify a significant internal or external year 2000 issue which,
if not remediated in a timely manner, could have a material adverse effect on
our business, financial condition and results of operations.
Costs. Other than time spent by our personnel which could be spent on other
matters, we have not incurred any significant costs in identifying year 2000
issues. We do not anticipate any significant further costs. Because no material
year 2000 issues have occurred or been identified, we cannot reasonably estimate
further costs relating to remediation of any year 2000 issues at this time, or
costs of contingency plans. There can be no assurance that as additional year
2000 issues are addressed, our costs to correct such issues will be consistent
with historical costs.
Risks Of Year 2000 Issues. Because no material year 2000 issues have
occurred or been identified, we cannot reasonably ascertain the extent of the
risks involved in the event that any one system fails to process date-sensitive
calculations accurately. Potential risks include the inability to process
customer billing accurately or in a timely manner, the inability to provide
accurate financial reporting to management, auditors, investors and others,
litigation costs associated with potential suits from customers and investors,
delays in implementing other IT projects as a result of work by internal
personnel on year 2000 issues, and delays in receiving payment or equipment from
customers or suppliers as a result of their systems' failure. Any one of these
risks, if they materialize, could individually have a material adverse effect on
our business, financial condition or results of operations.
As almost all of our IT and non-IT systems and products relating to our
internal and external issues are manufactured or supplied by third parties which
are outside of our control, there can be no assurance that all of those third
parties' systems will continue to operate free of year 2000 problems. If some or
all of our internal and external systems fail, or if any critical IT or non-IT
systems are overlooked or are not year 2000 ready, there could be a material
adverse effect on our business, financial condition or results of operations.
Contingency Plans. Because no material year 2000 issues have occurred or
been identified, we have not made any contingency plans.
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EFFECTS OF INFLATION
Management does not believe that its business is impacted by inflation to a
significantly different extent than is the general economy. However, there can
be no assurances that inflation will not have a material effect on the Company's
operations in the future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of political instability, foreign currency,
and other risks.
Political Instability Risks. We have relationships with foreign suppliers
in Syria, Mexico, India, Sri Lanka and other countries. We have not experienced
any negative economic consequences as a result of relationships with foreign
suppliers in these countries, but may be negatively affected should political
instability in any of these countries develop.
Foreign Currency Risks. Since the agreements we have entered into with
foreign suppliers in Syria, India, Sri Lanka and other countries are denominated
in U.S. dollars, we are not exposed to risks associated with fluctuations in
these foreign currencies. However, because our agreements with Mexican suppliers
are denominated in Mexican pesos, we may be exposed to fluctuations in the
Mexican peso, as well as to downturns in the Mexican economy, all of which may
affect profitability. During the six months ended December 31, 1999, $13.7
million of our direct costs were denominated in Mexican pesos.
Other Market Risks. We are also exposed to potential risks in dealing with
foreign suppliers in foreign countries associated with potentially weaker
protection of intellectual property rights, unexpected changes in regulations
and tariffs, and varying tax consequences.
ITEM 3. PROPERTIES
Our headquarters are located at One Evertrust Plaza in Jersey City, NJ. We
also utilize office space occupied by HW Partners for certain of our executive
officers and maintain facilities as described in the following chart. We believe
that our existing facilities are adequate for our current needs and that
suitable additional or alternative space will be available in the future on
commercially reasonable terms.
<TABLE>
<CAPTION>
SQUARE MONTHLY
LOCATION FEET RENT DESCRIPTION OF USE LEASE EXPIRATION
- -------- ------ ------- ------------------ ----------------
<S> <C> <C> <C> <C>
Jersey City, New Jersey...... 10,800 $23,400 Switch and network operations March 2009
center
Executive and administrative
offices
Mexico City, Mexico.......... 2,324 4,949 Switch and network operations November 2002
center
Kansas City, Kansas.......... 3,573 4,761 Switch and network operations January 2005
center
Miami, Florida............... 4,959 8,885 Switch and network operations January 2013
center
</TABLE>
37
<PAGE> 38
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of our outstanding common stock as of March 7, 2000 by:
- each person who is the beneficial owner of more than 5% of our capital
stock;
- each of our directors;
- each of our named executive officers; and
- all of our named executive officers and directors as a group.
All of the shares indicated in the table are shares of common stock.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF SHARES BENEFICIALLY
HOLDERS BENEFICIALLY OWNED OWNED(1)
- ------- ------------------ ------------
<S> <C> <C>
IEO Investments, Limited(2)................................. 11,816,200 24.8%
Infinity Emerging Subsidiary Limited(3)..................... 8,683,800 18.2
Infinity Investors Limited(4)............................... 8,500,000 17.9
Clark K. Hunt(5)............................................ 8,872,713 18.6
Barrett N. Wissman(6)....................................... 19,062,713 40.1
Fred A. Vierra(7)........................................... 125,000 *
Mark Graham(8).............................................. 225,000 *
Stuart Subotnik(9).......................................... 300,000 *
Olaf Guerrand-Hermes(10).................................... 50,000 *
David Leuschen(11).......................................... 250,000 *
Jan Robert Horsfall(12)..................................... 50,000 *
Stuart Chasanoff(13)........................................ 57,500 *
John Stevens Robling, Jr.(14)............................... 120,000 *
Samuel Litwin(15)........................................... 2,000,000 4.2
Mitchell Arthur(16)......................................... 2,000,000 4.2
Officers and Directors as a Group (11 Persons).............. 25,667,713 53.9
</TABLE>
- ---------------
* Represents less than one percent.
(1) Percentage of beneficial ownership is based on 45,799,832 shares of common
stock outstanding at March 7, 2000, 507,246 shares of common stock issuable
upon conversion of 7,000 outstanding shares of our Series B Convertible
Preferred Stock and 869,832 shares of common stock issuable upon conversion
of 15,570 outstanding shares of our Series C Convertible Preferred Stock
and 400,000 shares of common stock issuable upon stock options that have
vested. If all of such shares had been issued, we would have had 47,576,910
shares of common stock outstanding. All percentage calculations include
shares of common stock issuable upon the exercise of vested stock options
and assume that all shares of our Series B Convertible Preferred Stock and
Series C Convertible Preferred Stock have been converted into shares of our
common stock.
(2) The address of IEO Investments Limited is Hunkins Waterfront Plaza, Main
Street P.O. Box 556, Charlestown, Nevis, West Indies.
(3) The address of Infinity Emerging Subsidiary Limited is Hunkins Waterfront
Plaza, Main Street P.O. Box 556, Charlestown, Nevis, West Indies.
(4) The address of Infinity Investors Limited is Hunkins Waterfront Plaza, Main
Street P.O. Box 556, Charlestown, Nevis, West Indies.
(5) Represents 8,683,800 shares of common stock owned by Infinity Emerging
Subsidiary Limited, 103,913 shares of common stock owned by HW Capital and
35,000 shares of common stock owned by Mr. Hunt and options to purchase
50,000 shares of common stock that vested on September 22, 1999. Mr. Hunt
disclaims beneficial ownership of the shares of common stock held by IEO
Investments,
38
<PAGE> 39
Limited and Infinity Emerging Subsidiary Limited. Mr. Hunt's address is
4000 Thanksgiving Tower, 1601 Elm Street, Dallas, Texas 75201.
(6) Represents 8,683,800 shares of common stock owned by Infinity Emerging
Subsidiary Limited, 8,500,000 shares of common stock owned by Infinity
Investors Limited, 103,913 shares of common stock owned by HW Capital,
200,000 shares of common stock owned by the Sienna Trust, 1,500,000 shares
of common stock issuable upon exercise of an option granted to Sienna Trust
by IEO Investments Limited on September 22, 1999, 25,000 shares of common
stock owned by Mr. Wissman and options to purchase 50,000 shares of common
stock that vested on September 22, 1999. Mr. Wissman disclaims beneficial
ownership of the shares of common stock held by Infinity Emerging
Subsidiary Limited and Infinity Investors Limited. Mr. Wissman's address is
4000 Thanksgiving Tower, 1601 Elm Street, Dallas, Texas 75201.
(7) Represents 25,000 shares of common stock owned by Mr. Vierra and his wife
as joint tenants and options to purchase 100,000 shares of common stock
that vested on September 22, 1999. Mr. Vierra's address is 6400 W.
Fiddler's Green Circle, Suite 710, Englewood, Colorado 80111.
(8) Represents 125,000 shares of common stock owned by Pinnacle Investments,
Ltd., 50,000 shares of common stock owned by Mr. Graham and options to
purchase 50,000 shares of common stock that vested on September 22, 1999.
Mr. Graham's address is 700 S. Henderson Rd., Suite 300, King of Prussia,
Pennsylvania 19406.
(9) Includes options to purchase 50,000 shares of common stock that vested on
October 14, 1999. Mr. Subotnik's address is 215 East 67th Street, 7th
Floor, New York, New York 10021.
(10) Includes options to purchase 50,000 shares of common stock that vested in
October 14, 2000. Mr. Guerrand-Hermes' address is 509 Madison Avenue, Suite
602, New York, NY 10022.
(11) Includes options to purchase 50,000 shares of common stock that vested on
February 4, 2000. Mr. Leuschen's address is 237 Park Avenue, Suite 2124,
New York, NY 10017.
(12) Includes options to purchase 50,000 shares of common stock that vested on
October 14, 1999. Mr. Horsfall's address is 200 Church Street, Suite 401,
New York, NY 10013.
(13) Mr. Chasanoff's address is 4000 Thanksgiving Tower, 1601 Elm Street,
Dallas, Texas 75201.
(14) Mr. Robling's address is 1 Evertrust Plaza, 8th Floor, Jersey City, NJ
07302.
(15) Mr. Litwin's address is 1 Evertrust Plaza, 8th Floor, Jersey City, NJ
07302.
(16) Mr. Arthur's address is 1 Evertrust Plaza, 8th Floor, Jersey City, NJ
07302.
39
<PAGE> 40
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The following persons are our directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Fred A. Vierra......................... 68 Chairman of the Board
Barrett N. Wissman..................... 37 President and Chief Executive Officer,
Director
Clark K. Hunt.......................... 35 Director
Mark R. Graham......................... 41 Director
Olaf Guerrand-Hermes................... 36 Director
Stuart Subotnick....................... 58 Director
Jan Robert Horsfall.................... 39 Chief Internet Strategist, Director
David Leuschen......................... 48 Director
Stuart Chasanoff....................... 34 Vice President of Business Development,
General Counsel and Secretary
John Stevens Robling, Jr. ............. 49 Vice President, Chief Financial
Officer, Treasurer and Assistant
Secretary
Samuel Litwin.......................... 44 Managing Director of Communications
Holdings
Mitchell Arthur........................ 32 Managing Director of Communications
Holdings
</TABLE>
DIRECTORS
Fred A. Vierra, 68, has been our Chairman of the Board and one of our
directors since September 22, 1999. He was Chief Executive Officer of
Tele-Communications International, Inc., the international arm of
Tele-Communications, Inc., from 1994 to 1997. He was also Vice Chairman of the
Board of Directors until November 1998. Prior to joining Tele-Communications,
Mr. Vierra was President and Chief Operating Officer of United Artists
Entertainment Company, where he was in charge of all day-to-day operations and
ongoing strategies for the corporation. In this position, Mr. Vierra also
directed the activities of both United Artists' cable television and theater
division presidents. He also served as President of United Cable Television
Corporation, which was merged into United Artists in 1989. Mr. Vierra began his
career in the cable industry as Executive Vice President, Investment Banking,
for Daniels & Associates, the leading financial services company for the cable
industry. Mr. Vierra has served on the Boards of Turner Broadcasting, Discovery
Channel, Princes Holdings Ltd., Australas Media Ltd., Torneos y Competencias
S.A., Tele-Communications International, Inc., and Telewest plc. Currently, Mr.
Vierra is Chairman of the Board of VeloCom Inc., and a Board member of Flextech
plc, Formus Communications, Inc., and Jones International Networks, Ltd.
Barrett N. Wissman, 37, has been our President and Chief Executive Officer
and one of our directors since September 22, 1999. He has been the sole manager
of HW Partners, a Co-Manager of HW Capital and a manager of related investment
advisory companies which he co-founded in 1993. From October, 1987 to September,
1993, Mr. Wissman served as Chief Executive Officer of Athena Products
Corporation, a manufacturer and marketer of chemicals, fertilizers and household
consumer products and its subsidiaries and affiliates. He oversaw all aspects of
Athena's operations, including administration, finance, marketing and
production. Mr. Wissman ultimately orchestrated the sale of Athena's assets,
including the licensing of several of Athena's manufacturing processes and
trademarks. From 1985 to 1987, Mr. Wissman was an analyst at Lazard Freres &
Co., L.L.C. in the areas of international mergers and acquisitions and
international project finance. Mr. Wissman holds Bachelor of Arts degrees, cum
laude, in economics and political science from Yale University and a Master of
Arts degree in music from Southern Methodist University.
Clark K. Hunt, 35, has been one of our directors since September 22, 1999.
He is President of Hunt Financial Group, L.L.C., a Dallas, Texas based financial
service firm, and is a Co-Manager of HW Capital and related investment advisory
companies which he co-founded in 1991. From June of 1987 to August of 1989 Mr.
Hunt was an analyst at Goldman, Sachs & Co. in New York and Los Angeles. At
Goldman Sachs,
40
<PAGE> 41
he participated in mergers, acquisitions, initial public offerings,
cross-currency swaps and leveraged buy-outs. Mr. Hunt is also involved with
several family controlled enterprises including venture capital investor Hunt
Capital Group, real estate and mining conglomerate, Hunt Midwest Enterprises,
and Hunt Sports Group. Hunt Sports Group is the management company responsible
for overseeing the Hunt family's investments in the Kansas City Chiefs of the
National Football League, the Chicago Bulls of the National Basketball
Association and two franchises in the newly launched Major League Soccer. Mr.
Hunt serves as a director of United Petroleum Corporation and Granite Golf
Corporation. Mr. Hunt attended Southern Methodist University, where he graduated
first in his class with a Bachelor of Business Administration and was a two-
time recipient of the University's highest academic award, the Provost Award for
Outstanding Scholar.
Mark R. Graham, 41, has been one of our directors since September 22, 1999.
Mr. Graham has been a principal of Catalyst Asset Management, since December of
1999. He was a private investor based in Philadelphia, Pennsylvania from 1997
until forming Catalyst. Mr. Graham co-founded Drake Goodwin & Graham, a private
equity investment firm, in 1992 and served as a director until 1997. Prior to
co-founding Drake Goodwin & Graham, Mr. Graham was employed with Morgan Stanley
in its Mergers & Acquisitions department, serving as an associate and thereafter
as a Vice President from 1987 to 1992. Mr. Graham served as an associate with
E.F. Hutton LBO Inc., the leveraged buyout group of E.F. Hutton & Co. from 1984
to 1987. From 1983 to 1984, Mr. Graham was an associate attorney with Bracewell
& Patterson, Houston, Texas. Mr. Graham received a Bachelor of Arts in History,
cum laude, from the University of Michigan and a Juris Doctor degree from
Georgetown University Law Center.
Olaf Guerrand-Hermes, 36, has been one of our directors since September 22,
1999. He has been investing privately in Europe and in the United States since
the early 1990s. He is a Managing Partner at Blue Growth Capital, LLC, an
investment partnership. Prior to organizing Blue Growth Capital, Mr. Guerrand-
Hermes was Managing Director of International Equities at The Athena Group, a
private international investment management company. At The Athena Group, Mr.
Guerrand-Hermes was primarily responsible for international projects as well as
raising equity capital for proposed investments. Prior to joining The Athena
Group, Mr. Guerrand-Hermes was Vice President at Nomura Securities
International, Inc., specializing in structured finance products such as
commercial mortgage backed securities. In addition to his experience in the
field of finance, Mr. Guerrand-Hermes was an associate with Sullivan & Cromwell,
a New York law firm, where he was involved in a variety of international
transactions, including public offerings and private placements in the United
States by European and other foreign companies and governments. Mr. Guerrand-
Hermes is a member of the New York bar, a graduate of New York University School
of Law and holds two masters from the University of Pantheon-Assas (Paris II) in
Paris, France. Mr. Guerrand-Hermes is a member of the board of directors of
Hermes-Sellier.
Stuart Subotnik, 58, has been one of our directors since January 1, 2000.
Mr. Subotnik has been retained as a consultant to eVentures for the period prior
to his joining our board as of the special meeting held by the Board of
Directors dated October 14, 1999. He is a general partner and an owner of
Metromedia Company. He is also Chief Executive Officer of Metromedia
International Group, Chairman of Big City Radio, Inc. and a director of Carnival
Cruise Lines, Inc. and Metromedia Fiber Network, Inc., a provider of high
bandwidth, fiber optic transmission capacity. Since 1981, Mr. Subotnick has
operated investments in businesses such as long distance providers, motion
picture companies, restaurant chains, hotels, a diesel pump manufacturer,
medical equipment research groups, software developers, Internet providers,
laser disc distributors and Major League Soccer.
Jan Robert Horsfall, 39, has been one of our directors since January 1,
2000. Mr. Horsfall is also our Chief Internet Strategist as of the special
meeting held by the Board of Directors dated October 14, 1999. Mr. Horsfall is
Chief Executive Officer and President of PhoneFree.com. Prior to his position
with PhoneFree.com and eVentures and between 1996 and 1999, Mr. Horsfall was
Vice President of Marketing for Lycos Inc., where he was responsible for all
marketing, public relations, database marketing, product management, advertising
and promotion. Prior to joining Lycos, Mr. Horsfall was Vice President of
Consumer Brands at The Valvoline Company, a division of Ashland, Inc. Mr.
Horsfall has a Bachelor of Science degree from Colorado State University.
41
<PAGE> 42
David Leuschen, 48, has been one of our directors since February 4, 2000.
From 1977 to the present, Mr. Leuschen has been employed by Goldman, Sachs & Co.
in various capacities. From 1986 to 1999, he was a partner of Goldman, Sachs in
charge of the firm's Energy and Power Department within Investment Banking,
which is responsible for the firm's activities (both agency- and
principal-based) related to oil and gas, pipeline and electric utility, and
other power companies worldwide. He is also a member of the Energy Investment
Committee, which oversees direct investment activity in the energy and power
arenas. David joined the Goldman Sachs in 1977 and became head of the
predecessor Oil and Gas Group in 1985. He has been a Director of Cambridge
Energy Research Associates; a leading energy consulting firm headquartered in
Cambridge, Massachusetts and the Cross Timbers Oil Company of Ft. Worth, Texas.
He is also owner and President of Switchback Ranch Company of Cody, Wyoming and
Roscoe, Montana. He is currently a Director of J. Aron Resources Company of
Calgary, Alberta; a Director of Beartooth Energy Partners of Ft. Worth, Texas;
and a Director of Keystone Energy Group, a national energy policy-making
organization based in Washington, D.C. He received his M.B.A. and A.B. degrees
from Dartmouth College in 1977 and 1974, respectively.
EXECUTIVE OFFICERS THAT ARE NOT DIRECTORS
Stuart Chasanoff, 34, has been our Vice President of Business Development,
General Counsel and Secretary as of September 22, 1999. Prior to joining
eVentures, Mr. Chasanoff was Senior Vice President and General Counsel to HW
Partners, a Texas limited partnership that manages pooled investment vehicles
for high net worth and institutional investors. At HW Partners, Mr. Chasanoff
assisted the principals of HW Partners in developing investments in a portfolio
of publicly held microcap companies and privately held start up companies in a
variety of fields, including telecommunications, high technology manufacturing,
entertainment and retailing. Mr. Chasanoff also oversaw the development of
various investment vehicles and was involved in HW Partners' day to day
operations. Between 1990 and 1994, and again in 1996, Mr. Chasanoff was an
associate corporate attorney with the New York office of White & Case, LLP
specializing in mergers and acquisitions, capital markets, corporate
reorganizations and financial services. Additionally, he served as in-house
counsel at PepsiCo., Inc. from 1994 to 1995, practicing in the areas mergers and
acquisitions, capital markets, international joint ventures and derivative
transactions. Mr. Chasanoff has been a director of United Petroleum Corporation,
a Florida based chain of convenience stores, since November 1999, a director of
Granite Golf Group, Inc., a Scottsdale, Arizona based golf course management
company, since November 1998 and a director of Tamboril Cigar Company, a Miami
based manufacturer of cigars, since December 1998. Mr. Chasanoff is a member of
the New York bar, a 1990 cum laude graduate of the Fordham University School of
Law and a 1987 graduate of the University of Virginia with a Bachelor of Arts
degree in Political and Social Thought.
John Stevens Robling, Jr., 49 has been our Vice President, Chief Financial
Officer and Assistant Secretary since September 22, 1999 and our Treasurer since
September 22, 1999. Mr. Robling is also currently serving as Chief Financial
Officer of PhoneFree.com. Prior to his appointment in these positions, Mr.
Robling was Chief Financial Officer of Axistel, and he continues to hold this
position. Before joining Axistel in 1998, Mr. Robling was an independent
financial advisor and specialized in offering private equity investment services
to various clients. From 1992 to 1997, Mr. Robling was a principal, board
member, and member of the investment committee of Hamilton Lane Advisors, Inc.
Hamilton Lane is a private equity consulting firm headquartered in Philadelphia,
Pennsylvania. Prior to joining Hamilton Lane, Mr. Robling was a Vice President
at Lazard Freres & Co. in its International and Mergers and Acquisitions
departments. In these capacities, he assisted clients in 18 financial advisory
or capital markets assignments which had an overall transaction value in excess
of $3 billion dollars. He was also a member of the Country Advisory Group, an
informal partnership among Lazard Freres & Co., S.G. Warburg and Lehman Brothers
which advised the sovereign governments of developing countries. In connection
with these engagements, Mr. Robling provided financial advisory services to
national telecommunications authorities and multi-national telecommunications
companies. Mr. Robling received an MBA from the University of Chicago and
graduated with distinction from Georgetown University, where he majored in
economics.
42
<PAGE> 43
Samuel Litwin, 44, has been our Managing Director of Communications
Holdings since September 22, 1999. He is also Chief Executive Officer of
AxisTel. Prior to his appointment, Mr. Litwin was a Senior Account Manager for
multi-national accounts at LDDS Worldcom. He held various management positions
from 1986 to 1993 at Bell Atlantic, including Senior Account Manager. Mr. Litwin
received a BS in Business Administration from Brooklyn College.
Mitchell Arthur, 32, has been our Managing Director of Communications
Holdings since September 22, 1999. He is also President and Chief Operating
Officer of AxisTel. From 1994 to 1998, Mr. Arthur was Global Account Manager for
U.S. and international accounts at MFS Communications, where he was involved in
the development of MFS's New York/New Jersey fiber-optic network. From 1991 to
1994, Mr. Arthur was a Major Account Manager at Worldcom, where he was
responsible for large commercial accounts. Mr. Arthur received an BS in Business
Administration and Marketing from Dominican College.
COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors has established an audit committee consisting of
Messrs. Vierra, Guerrand-Hermes and Subotnick, a compensation committee
consisting of Messrs. Hunt, Wissman, Guerrand-Hermes, Leuschen and Graham, and
an option subcommittee of the compensation committee consisting of Messrs.
Leuschen and Graham.
ITEM 6. EXECUTIVE COMPENSATION
COMPENSATION FOR FISCAL YEAR 1999 AND FISCAL YEAR 2000 UNTIL SEPTEMBER 22, 1999
In connection with our reorganization, the end of our fiscal year was
changed from April 30 to June 30 in order to align our fiscal year with the
fiscal year of e.Volve, one of the wholly owned subsidiaries that was acquired
in our reorganization. Consequently, the information presented below with
respect to fiscal year 1999 is with respect to the fiscal year of eVentures
ended April 30, 1999 and the information with respect to fiscal year 2000 is
with respect to the fiscal year of eVentures ending June 30, 2000.
During fiscal year 1999, the transition period between April 30, 1999, and
prior to September 22, 1999 in fiscal year 2000, Daniel L. Wettriech served as
our President, and we did not have any other employees or officers. During each
of these periods, Daniel L. Wettriech did not receive any salary, bonuses, stock
awards, options or other compensation from us. Daniel L. Wettriech resigned as
our President on September 22, 1999.
43
<PAGE> 44
Summary Compensation Table for Fiscal Year 2000
The following table identifies the officers who we believe will be our most
highly compensated executive officers during fiscal year 2000. All of the named
executive officers listed below have served as executive officers of eVentures
since September 22, 1999. In addition, all of the named executive officers
listed below are being compensated by eVentures during fiscal 2000, except for
Barrett N. Wissman who receives a salary of $120,000 from HW Partners. We are
obligated to reimburse HW Partners for Mr. Wissman's salary pursuant to the
Management Services Agreement, dated as of September 22, 1999, between eVentures
and HW Partners. For a description of the other services provided to us by HW
Partners under the management services agreement, see Item 7. "Certain
Relationships and Related Transactions."
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------------
SECURITIES
ANNUAL COMPENSATION RESTRICTED UNDERLYING LTIP ALL OTHER
FISCAL ------------------------- STOCK OPTIONS/SARS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARD(S)($) (#) ($) ($)
- --------------------------- ------ --------- ------------- ----------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Barrett N. Wissman........ 2000 $120,000 None None 100,000 None None
President and Chief
Executive Officer
Stuart Chasanoff.......... 2000 $160,000 discretionary None 500,000 None None
Vice President of
Business Development,
General Counsel
and Secretary
John Stevens Robling
Jr. .................... 2000 $180,000 discretionary None 425,000 None None
Vice President, Chief
Financial Officer,
Treasurer and
Assistant Secretary
Samuel Litwin............. 2000 $180,000 discretionary None 425,000 None None
Managing Director of
Communications
Holdings
Mitchell Arthur........... 2000 $180,000 discretionary None 425,000 None None
Managing Director of
Communications
Holdings
</TABLE>
44
<PAGE> 45
Option Grants During Fiscal Year 2000
Prior to September 22, 1999, we did not grant any stock options. We have
never granted any stock appreciation rights ("SARs"). The following table
describes the options to acquire shares of our common stock granted to the
individuals named above during fiscal year 2000 to date. All of the named
executive officers listed below have served as our executive officers since
September 22, 1999:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS/SARS STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION FOR
EVENTURES EMPLOYEES EXERCISE OF OPTION TERM(1)
OPTIONS/SARS IN FISCAL YEAR BASE PRICE EXPIRATION -----------------------
NAME GRANTED(#) (%)(2) ($/SH) DATE 5%($) 10%($)
- ---- ------------ -------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Barrett N. Wissman......... 100,000 3.36% $ 10 9/22/2009 $ 0 $ 136,000
President and Chief
Executive Officer
Stuart Chasanoff........... 500,000 16.80% $2.50 9/22/2009 $1,067,000 $3,180,000
Vice President of $5.00
Business Development $7.50
General Counsel and
Secretary
John Stevens Robling
Jr. ..................... 425,000 14.28% $ 10 9/22/2009 $ 0 $ 578,000
Vice President, Chief
Financial Officer,
Treasurer and Assistant
Secretary
Samuel Litwin.............. 425,000 14.28% $ 10 9/22/2009 $ 0 $ 578,000
Managing Director of
Communications Holdings
Mitchell Arthur............ 425,000 14.28% $ 10 9/22/2009 $ 0 $ 578,000
Managing Director of
Communications Holdings
</TABLE>
- ---------------
(1) Assumes that the fair market value of our common stock on the date of each
grant was $4.38 per share, which was the average of the closing bid and asked
price of the common stock on that date.
(2) Percentage of total options granted to employees in fiscal year 2000 is
based on 2,976,000 options:
- 800,000 granted to our directors;
- 150,000 options received by Jan Robert Horsfall as part of the
consideration for his employment as our Chief Internet Strategist and
100,000 options as consideration for his agreement to serve as one of our
directors;
- 1,350,000 granted to certain of our employees in accordance with
employment agreements entered into in connection with our reorganization;
- 425,000 granted to our Chief Financial Officer in connection with our
reorganization;
- 75,000 granted to certain employees of AxisTel in connection with our
reorganization in replacement of outstanding options of AxisTel; and
- 76,000 granted to certain of our non-executive employees.
45
<PAGE> 46
Aggregated Option Exercises and Year-End Option Values in Fiscal Year 2000
During fiscal year 2000, we granted options to each of the executive
officers named in the Summary Compensation Table above. The following table
describes the value of our options exercised by our executive officers during
fiscal year 2000 and the value of unexercised options held by our officers at
March 7, 2000. The table covers the period between September 22, 1999 and March
7, 2000, which is the period during which these persons were officers. None of
the individuals named in the Summary Compensation Table for fiscal year 2000
were granted options to purchase our shares prior to September 22, 1999.
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED ON VALUE UNDERLYING UNEXERCISED OPTION IN-THE-MONEY OPTIONS AT
NAME EXERCISE(#) REALIZED($) AT MARCH 7, 2000(#) MARCH 7, 2000
- ---- ---------------- ----------- ----------------------------- -------------------------
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
----------------------------- -------------------------
<S> <C> <C> <C> <C>
Barrett N. Wissman......... -- -- 50,000/50,000 $1,125,000/$1,125,000
President and Chief
Executive Officer
Stuart Chasanoff........... -- -- 0/500,000 0/$13,750,000
Vice President of
Business
Development General
Counsel and Secretary
John Stevens Robling
Jr. ..................... -- -- 0/425,000 0/$9,562,500
Vice President, Chief
Financial Officer,
Treasurer
and Assistant Secretary
Samuel Litwin.............. -- -- 0/425,000 0/$9,562,500
Managing Director of
Communications Holdings
Mitchell Arthur............ -- -- 0/425,000 0/$9,562,500
Managing Director of
Communications Holdings
</TABLE>
COMPENSATION OF DIRECTORS
On September 22, 1999, pursuant to our 1999 Omnibus Securities Plan
described below, we granted a total of 600,000 options to purchase shares of our
common stock to our newly appointed directors. On October 14, 1999, we granted
100,000 options to purchase shares of our common stock to each of Jan Robert
Horsfall and Stuart Subotnik, respectively, in connection with their agreements
to serve as our directors. On February 4, 2000, we granted 100,000 options to
purchase shares of our common stock to David Leuschen in connection with his
agreement to serve as our director. Other than as provided by our 1999 Omnibus
Securities Plan described below and the reimbursement of reasonable expenses
incurred with attending board and committee meetings, we have not yet adopted
specific policies on directors' compensation and benefits as of the date of this
filing.
EMPLOYMENT AGREEMENTS
Barrett N. Wissman provides services and receives compensation as our
President and Chief Executive Officer from HW Partners pursuant to a Management
Services Agreement between eVentures and HW Partners. We are obligated to
reimburse HW Partners for Mr. Wissman's salary of $120,000. For a description of
the other services provided to us by HW Partners under the management services
agreement, see Item 7 -- "Item 7. Certain Relationships and Related
Transactions."
Stuart Chasanoff, our Vice President of Business Development, General
Counsel and Secretary, is employed pursuant to an employment agreement that was
entered into on September 22, 1999. The agreement commenced on September 22,
1999 and will expire on September 21, 2002, and will automatically be extended
for additional terms of successive one year periods unless either we or Mr.
Chasanoff notifies the
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<PAGE> 47
other in writing at least sixty days prior to the expiration of the then current
term that the extension will not take effect. Mr. Chasanoff will receive the
following annual base salary:
- $160,000 for the period October 1, 1999 through September 21, 2000;
- $172,800 for the period September 22, 2000 through September 21, 2001;
and
- $186,624 for the period September 22, 2001 through September 21, 2002.
Mr. Chasanoff's employment agreement provides him with the eligibility to
receive discretionary bonuses payable by us on such terms and conditions as
determined by the board of directors or the compensation committee of such
board. In addition, Mr. Chasanoff's employment agreement also grants him an
option to purchase 500,000 shares of our common stock, pursuant to our 1999
Omnibus Securities Plan described below. These options have an exercise price
and shall vest as follows:
- $2.50 per share for 166,666 shares which shall vest on September 21,
2000;
- $5.00 per share for $166,667 shares which shall vest on September 21,
2001; and
- $7.50 per share for 166,667 shares which shall vest on September 21,
2002.
In addition, these options will vest immediately if we terminate Mr.
Chasanoff's employment without cause, if Mr. Chasanoff terminates his employment
for good reason or the options are accelerated upon a change of control of our
company. Mr. Chasanoff's employment may be terminated for cause, without cause,
by voluntary resignation, death or disability. If at least thirty days prior to
the expiration of the employment term we have failed to offer to extend the term
for a period of at least one year on substantially identical terms as set forth
in the agreement, then Mr. Chasanoff shall be entitled to receive payments of an
amount equal to his then monthly rate of base salary for a period of six months
following the date of termination.
Mitchell Arthur, one of our Managing Directors of Communications Holdings
and President and Chief Operating Officer of AxisTel, is employed by AxisTel
pursuant to an employment agreement that was entered into on October 28, 1998
and amended and restated on September 22, 1999. The amended and restated
employment agreement commenced on September 22, 1999 and shall continue for
twenty-four months, expiring on September 21, 2001. Upon the end of this initial
term, AxisTel has agreed to offer to extend the term of employment for one
additional year ending September 21, 2002 on substantially identical terms and
base salary applicable at the time of expiration of the initial term of
employment, but without the requirement for the issuance of any additional stock
options. In addition, the employment agreement may be renewed by mutual
agreement of the parties at the end of each term for additional one year
periods. Under the amended and restated employment agreement, Mr. Arthur will
receive an annual base salary of $180,000 during each fiscal year of the term of
employment. This compensation shall be reviewed at least annually by our board
of directors, and any appropriate increases to this base salary may be made at
the sole discretion of our board. Mr. Arthur's employment agreement provides him
with the eligibility to receive discretionary bonuses payable by us on such
terms and conditions as determined by our board of directors or the compensation
committee of such board. In addition, Mr. Arthur's employment agreement also
grants him an option to purchase 425,000 shares of our common stock, pursuant to
our 1999 Omnibus Securities Plan described below. These options have an exercise
price of $10 per share and shall vest as follows:
- 141,166 shares (1/3) shall vest on September 21, 2000;
- 141,167 shares (1/3) shall vest on September 21, 2001; and
- 141,167 shares (1/3) which shall vest on September 21, 2002.
These options will vest immediately if we terminate Mr. Arthur's employment
without cause, if we fail to extend, as agreed, Mr. Arthur's term of employment
for an additional year after the expiration of the initial term or if the
options are accelerated upon a change of control of our company. Mr. Arthur's
employment may be terminated for cause, without cause, by voluntary resignation,
death or disability. If AxisTel terminates Mr. Arthur's employment during the
term of the agreement without cause, then Mr. Arthur shall be entitled
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<PAGE> 48
to receive his base salary then in effect for the remainder of the term and the
contractual restriction on Mr. Arthur's ability to sell any shares of our common
stock set forth in the registration rights agreement executed on September 22,
1999 shall terminate and cease to apply to Mr. Arthur.
Mr. Samuel Litwin, one of our Managing Directors of Communications Holdings
and Chief Executive Officer of AxisTel, is employed by AxisTel pursuant to an
employment agreement that was entered into on October 28, 1998 and amended and
restated on September 22, 1999. The amended and restated employment agreement
commenced on September 22, 1999 and shall continue for twenty-four months,
expiring on September 21, 2001. Upon the end of this initial term, AxisTel has
agreed to offer to extend the term of employment for one additional year ending
September 21, 2002 on substantially identical terms and base salary applicable
at the time of expiration of the initial term of employment, but without the
requirement for the issuance of any additional stock options. In addition, the
employment agreement may be renewed by mutual agreement of the parties at the
end of each term for additional one year periods. Under the amended and restated
employment agreement, Mr. Litwin will receive an annual base salary of $180,000
during each fiscal year of the term of employment. This compensation shall be
reviewed at least annually by our board of directors, and any appropriate
increases to this base salary may be made at the sole discretion of our board.
Mr. Litwin's employment agreement provides him with the eligibility to receive
discretionary bonuses payable by us on such terms and conditions as determined
by our board of directors or the compensation committee of such board. In
addition, Mr. Litwin's employment agreement also grants him a stock option to
purchase 425,000 shares of our common stock, pursuant to our 1999 Omnibus
Securities Plan described below. These options have an exercise price of $10 per
share and shall vest as follows:
- 141,166 shares (1/3) shall vest on September 21, 2000;
- 141,167 shares (1/3) shall vest on September 21, 2001; and
- 141,167 shares (1/3) which shall vest on September 21, 2002.
These options will vest immediately if we terminate Mr. Litwin's employment
without cause, if we fail to extend, as agreed, Mr. Litwin's term of employment
for an additional year after the expiration of the initial term or if the
options are accelerated upon a change of control of our company. Mr. Litwin's
employment may be terminated for cause, without cause, by voluntary resignation,
death or disability. If AxisTel terminates Mr. Litwin's employment during the
term of the agreement without cause, then Mr. Litwin shall be entitled to
receive his base salary then in effect for the remainder of the term and the
contractual restriction on Mr. Litwin's ability to sell any shares of our common
stock set forth in the registration rights agreement executed on September 22,
1999 shall terminate and cease to apply to Mr. Litwin.
At present, none of the other named executive officers or key employees is
party to an employment agreement with us.
1999 OMNIBUS SECURITIES PLAN
The Board of Directors and our stockholders adopted and approved our 1999
Omnibus Securities Plan (the "Omnibus Plan") as of September 22, 1999. Under the
Omnibus Plan, our officers, directors, key employees and consultants, together
with those of our subsidiaries, are eligible to receive stock options,
restricted and unrestricted stock awards, dividend equivalent rights, interest
equivalents, stock appreciation rights, and performance stock awards. No person
can be granted in any calendar year awards under the Omnibus Plan covering more
than 500,000 shares of our common stock.
We have authorized and reserved 15 percent of our issued and outstanding
shares of common stock, at any time, for delivery upon the exercise of stock
options, or under other awards, granted pursuant to the Omnibus Plan, as that
number of shares is determined in calculating our fully diluted earnings per
share for our fiscal year immediately preceding such time; however, we may not
deliver more than a total of 4,000,000 shares of our common stock upon the
exercise of "incentive stock options." The shares of our common stock that may
be issued under the Omnibus Plan may be either authorized and unissued shares or
previously issued shares held as treasury shares.
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<PAGE> 49
Options to purchase 2,450,000 shares of our common stock were granted on
September 22, 1999 in connection with our reorganization, and options to
purchase 425,000, 1,000 and 100,000 shares were granted to eligible individuals
on October 14, 1999, January 24, 2000 and February 4, 2000, respectively. All
options granted in connection with our reorganization, except for the options
granted to Annette Dickson and William Carroll, were granted to eligible
individuals who were appointed as either executive officers or directors of our
Company. Annette Dickson and William Carroll are AxisTel employees who held
AxisTel options prior to our reorganization and who, in connection with our
reorganization, received eVentures options in exchange for the AxisTel options
they held. See Item 1 -- "The Reorganization Transaction."
As of March 7, 2000, no options granted under the Omnibus Plan have been
exercised, and no types of awards other than options have been granted under the
Omnibus Plan. These options granted under the Omnibus Plan have a weighted
average exercise price of $9.56 per share. The following table summarizes, for
each option granted and outstanding under the Omnibus Plan as of March 7, 2000,
the date of grant, recipient, vesting schedule, exercise price and total number
of shares covered by such option.
<TABLE>
<CAPTION>
VESTING SCHEDULE
-----------------------------------------------
TOTAL NUMBER NUMBER
OF SHARES OF SHARES
GRANT DATE NAME GRANTED VESTING VESTING DATE EXERCISE PRICE
- ---------- ---- ------------ --------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
September 22, 1999 Stuart Chasanoff 500,000 166,666 September 22, 2000 $ 2.50
166,667 September 22, 2001 $ 5.00
166,667 September 22, 2002 $ 7.50
September 22, 1999 Samuel L. Litwin 425,000 141,166 September 22, 2000 $10.00
141,167 September 22, 2001 $10.00
141,167 September 22, 2002 $10.00
September 22, 1999 Mitchell Arthur 425,000 141,166 September 22, 2000 $10.00
141,167 September 22, 2001 $10.00
141,167 September 22, 2002 $10.00
September 22, 1999 John Stevens Robling, 425,000 141,166 September 22, 2000 $10.00
Jr.
141,167 September 22, 2001 $10.00
141,167 September 22, 2002 $10.00
September 22, 1999 Annette Dickson 15,000 5,000 September 22, 2000 $ 2.50
5,000 September 22, 2001 $ 2.50
5,000 September 22, 2002 $ 2.50
September 22, 1999 William Carroll 60,000 20,000 September 22, 2000 $ 2.50
20,000 September 22, 2001 $ 2.50
20,000 September 22, 2002 $ 2.50
September 22, 1999 Fred Vierra 200,000 100,000 September 22, 1999 $10.00
100,000 September 22, 2000 $10.00
September 22, 1999 Clark Hunt 100,000 50,000 September 22, 1999 $10.00
50,000 September 22, 2000 $10.00
September 22, 1999 Barrett N. Wissman 100,000 50,000 September 22, 1999 $10.00
50,000 September 22, 2000 $10.00
September 22, 1999 Mark Graham 100,000 50,000 September 22, 1999 $10.00
50,000 September 22, 2000 $10.00
September 22, 1999 Olaf Guerrand-Hermes 100,000 50,000 September 22, 1999 $10.00
50,000 September 22, 2000 $10.00
October 14, 1999 Jan Robert Horsfall 100,000 50,000 October 14, 1999 $10.00
50,000 October 14, 2000 $10.00
150,000 50,000 October 14, 2000 $10.00
50,000 October 14, 2001 $10.00
50,000 October 14, 2002 $10.00
October 14, 1999 Stuart Subotnik 100,000 50,000 October 14, 1999 $10.00
50,000 October 14, 2000 $10.00
</TABLE>
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<PAGE> 50
<TABLE>
<CAPTION>
VESTING SCHEDULE
-----------------------------------------------
TOTAL NUMBER NUMBER
OF SHARES OF SHARES
GRANT DATE NAME GRANTED VESTING VESTING DATE EXERCISE PRICE
- ---------- ---- ------------ --------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
October 14, 1999 John Logan 60,000 20,000 October 14, 2000 $15.00
20,000 October 14, 2001 $15.00
20,000 October 14, 2002 $15.00
October 14, 1999 John Reyes 10,000 3,333 October 14, 2000 $15.00
3,333 October 14, 2001 $15.00
3,334 October 14, 2002 $15.00
October 14, 1999 Jorge Sesma 5,000 1,666 October 14, 2000 $15.00
1,667 October 14, 2001 $15.00
1,667 October 14, 2002 $15.00
January 24, 2000 Leanne Redding 1,000 333 January 24, 2001 $25.00
333 January 24, 2002 $25.00
334 January 24, 2003 $25.00
February 4, 2000 David Leuschen 100,000 50,000 February 4, 2000 $23.50
50,000 February 4, 2001 $23.50
</TABLE>
The Omnibus Plan is administered by the Board of Directors. Subject to the
provisions of the Omnibus Plan, the Board of Directors has the authority to
determine the type of award, when and to whom awards will be granted, the number
of shares covered by each award and the terms and conditions of each such award.
The Board of Directors interprets the Omnibus Plan and may at any time adopt the
rules and regulations for the Omnibus Plan as it deems advisable. The Board of
Directors may accelerate the vesting or right to exercise a previously granted
award, in accordance with the terms of the Omnibus Plan. The Omnibus Plan grants
the Board of Directors the authority to appoint a stock plan committee,
comprised of at least two members of the Board of Directors, and delegate to
such committee the administration of the Omnibus Plan, subject to the right of
the Board of Directors to exercise duties and responsibilities delegated to the
stock plan committee under the Omnibus Plan. At the discretion of the Board of
Directors, this stock plan committee may be the same as the compensation
committee of the Board of Directors.
Stock Options. Stock options may be granted and will become exercisable
under the terms and conditions determined by the Board of Directors in
accordance with the Omnibus Plan. Options granted under the Omnibus Plan may be
"incentive stock options," within the meaning of Section 422 of the Internal
Revenue Code, or "non-qualified stock options," which are not intended to
receive the special income tax treatment accorded incentive stock options under
the Internal Revenue Code. The Board of Directors may impose such restrictions
on the ownership and transferability of the shares purchasable upon the exercise
of an option as it deems appropriate. Options granted under the Omnibus Plan
have an exercise price per share at least equal to the fair market value of a
share of our common stock on the date of grant. However, the Board of Directors
may, subject to certain limitations in the Omnibus Plan, amend the exercise
price of an outstanding option to be not less than the fair market value of our
common stock on the date of such amendment. Once vested, options granted under
the Omnibus Plan may be exercised for a period of up to ten years from the date
of grant. Options (and other awards requiring payment by the holder) under the
Omnibus Plan may be paid by the recipient in cash or any other consideration
permitted by law and authorized by the Board of Directors (including, without
limitation, using shares of our capital stock previously purchased by the
recipient or a broker-assisted or similar exercise procedure). Furthermore, the
Board of Directors may authorize loans to individuals to finance their exercise
of vested options.
Restricted Stock Awards. The Board of Directors has the authority to grant
restricted stock awards entitling the recipient to acquire shares of our common
stock at par value or such other purchase price, and subject to such
restrictions and conditions, as the Board of Directors may determine at the time
of grant. Upon delivery of the shares of restricted stock, a recipient shall
have all the rights of a stockholder with respect to such shares, subject to the
restrictions established by the Board of Directors at the time of grant, as
described below. All shares of restricted stock shall be subject to such
restrictions as the Board of Directors shall provide
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<PAGE> 51
and may include restrictions concerning voting rights and transferability and
restrictions based on duration of employment or engagement with us or our
affiliates. The Board of Directors may also impose such restrictions and
conditions on shares of restricted stock granted under the Omnibus Plan as it
deems appropriate, which may be based on continuing employment or other business
relationships with us or one of our affiliates or the achievement of
pre-established, objective performance goals that are determined over a
measurement period established by the Board of Directors and relate to one or
more performance criteria described in the Omnibus Plan. Restricted stock
awarded under the Omnibus Plan may not be sold, transferred, assigned or
encumbered and may not be disposed of, except by will or the laws of descent and
distribution, for a period of time determined by the Board of Directors until
all restrictions lapse. If the recipient of a restricted stock award under the
Omnibus Plan fails to satisfy applicable conditions established by the Board of
Directors in the award, the restricted stock may be forfeited and revert back to
us or we may repurchase such shares of restricted stock at a cash price per
share equal to the price paid by the recipient for such shares. Restricted stock
shall vest and become free of restrictions on the date, and/or by satisfaction
of conditions, specified by the Board of Directors on the date of grant.
Unrestricted Stock Awards. The Board of Directors also has the authority to
grant or sell an unrestricted stock award to any eligible person, pursuant to
which such person may receive shares of our common stock free of any vesting
restrictions under the Omnibus Plan. Unrestricted stock awards may be granted or
sold as a bonus in respect to past services or other valid consideration or in
lieu of any cash compensation to such an eligible person.
Performance Stock Awards. The Board of Directors may grant performance
stock awards to eligible individuals under the Omnibus Plan. Performance stock
awards entitle the recipient to acquire shares of our common stock upon the
attainment of objective performance goals, established in advance by the Board
of Directors, based on performance criteria set forth in the Omnibus Plan.
Dividend Equivalent Rights and Interest Equivalents. The Board of Directors
may grant to eligible individuals dividend equivalent rights with other awards
under the Omnibus Plan or independent of any other awards. Dividend equivalent
rights entitle the recipient to receive cash or additional shares of our common
stock based on cash dividends that would be paid on a specified number of shares
of our common stock. Settlement of certain awards may, if permitted by the Board
of Directors, be deferred under the Omnibus Plan, and, during the period of such
deferral, such awards may be credited with interest equivalents as specified in
the award agreement.
Stock Appreciation Rights. The Omnibus Plan also permits the Board of
Directors to grant stock appreciation rights with respect to all or any portion
of the shares of common stock covered by options granted under the Omnibus Plan,
or, independent of options, with respect to a specified number of shares of
common stock. A stock appreciation right may be exercised only when the related
option is exercisable (or, in the case of an independent stock appreciation
right, as specified in the applicable award agreement). Upon exercise of a stock
appreciation right, the recipient will receive for each share for which such
stock appreciation right is exercised, an amount, in cash or common stock, as
determined by the Board of Directors, equal to the excess of the fair market
value of a share of common stock on the date the stock appreciation right is
exercised over the exercise price per share of the option to which the stock
appreciation right relates (or, in the case of an independent stock appreciation
right, the exercise price stated in the applicable award agreement).
Other Provisions of the Plan. Except in the event of his or her death, the
recipient of an award under the Omnibus Plan may not transfer such award until
shares of our common stock have been issued to such recipient and all
restrictions applicable to such shares have lapsed, unless such transfer is
approved by the Board of Directors in accordance with the terms of the Omnibus
Plan. Incentive stock options granted under the Omnibus Plan may not be
transferred if such transfer would disqualify the option from "incentive stock
option" treatment under the Internal Revenue Code.
The Board of Directors will make appropriate adjustments in the maximum
number and kind of shares available for issuance under the Omnibus Plan, the
maximum number of shares that can be covered by awards granted to an individual
in any one year under the Omnibus Plan, and the number and kind of shares, and
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<PAGE> 52
price per share, subject to awards outstanding under the Omnibus Plan in the
event of certain changes in our capital, such as a stock dividend, merger,
recapitalization, spin-off, or extraordinary dividend.
The Omnibus Plan and awards granted, whether or not vested, will
automatically terminate in the event that there is a reorganization or a
transaction involving a "change in control" of our company (as defined in the
Omnibus Plan), unless a provision is made in writing for the continuance of the
Omnibus Plan and for the assumption or substitution of such awards in connection
with such transaction, or the Board of Directors provides for the acceleration
of vesting or exercisability of outstanding awards and/or conversion of such
awards into a right to receive cash or other consideration that could be
received in such change in control with respect to the shares of common stock
underlying such award (net of any exercise price). If the Omnibus Plan and any
outstanding awards granted thereunder shall terminate by reason of such a change
in control without provision for assumption or substitution, or acceleration, or
conversion of outstanding awards, then any holder of an outstanding award shall
have the immediate right, as the Board of Directors may designate, to exercise,
claim or convert his or her award to the full extent not theretofore exercised,
claimed or converted. In the event we consummate any merger, consolidation or
other reorganization not involving such a "change in control," outstanding
awards under the Omnibus Plan may thereafter be exercised or claimed only for
the kind and amount of securities, cash and/or other consideration that could
have been received in such transaction by a holder of the number of shares of
common stock covered by such award.
The Board of Directors may amend or terminate the Omnibus Plan and may
amend any award previously granted under the Omnibus Plan. However, if required
by any law, regulation or stock exchange rule, no such change in the Omnibus
Plan shall be effective without the approval of our stockholders. In addition,
no such change may materially impair an award previously granted, except with
the written consent of the recipient of such award.
No awards may be granted under the Omnibus Plan after September 22, 2009;
however, awards granted prior to such date will remain in effect thereafter,
until they are exercised or terminate or expire in accordance with their terms.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We did not have a compensation committee during the fiscal year ended June
30, 1999.
On December 15, 1999, our Board of Directors created a compensation
committee composed of Messrs. Hunt, Wissman and Graham. On February 4, 2000, Mr.
Guerrand-Hermes and Mr. Leuschen were appointed members of the compensation
committee. The compensation committee reviews, recommends and approves
compensation arrangements for executive officers, key employees and other senior
personnel, and administers certain and compensation plans and arrangements. As
of March 7, 2000, our compensation committee has not adopted formal guidelines
to consider when making these determinations.
Prior to December 15, 1999, compensation decisions relating to our
executive officers, key employees and other senior personnel were primarily made
by our Board of Directors.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH e.VOLVE.
Investment by Infinity Entities
On June 11, 1998, e.Volve entered into a securities purchase agreement with
Infinity Investors Limited pursuant to which:
- e.Volve agreed to issue debentures to Infinity Investors Limited in an
amount up to $6.0 million. Approximately $2.7 million aggregate principal
amount of the e.Volve debentures were issued in exchange for debentures
that Infinity Investors had purchased from Touch Tone America, Inc. Touch
Tone had agreed to merge with e.Volve in August of 1997, but the merger
agreement had been terminated in May of 1998. Infinity Investors Limited
agreed to allow e.Volve to assume the Touch
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<PAGE> 53
Tone debentures because Touch Tone had previously advanced funds to
e.Volve and Infinity decided to provide funding to e.Volve to construct
its network and operations. The balance of the debentures were purchased
by Infinity Investors Limited for cash.
- e.Volve pledged all of its assets to Infinity Investors Limited to secure
the e.Volve debentures.
- e.Volve issued and sold 2,400 shares of its common stock, representing
two-thirds of the outstanding capital stock of e.Volve, to Infinity
Investors Limited for $0.01 per share.
- Infinity Investors Limited sold a 12.1% interest in the debentures and
shares of e.Volve common stock to IEO Holdings Limited for approximately
$750,000.
As a result of these transactions, Infinity Investors Limited acquired
control of e.Volve. Prior to those transactions, Kerry Rogers was the Chief
Executive Officer of e.Volve. Following this transaction, Steven Loglisci was
appointed President of e.Volve, and Kerry Rogers was appointed Chief Technology
Officer, which was not an executive officer position at e.Volve.
Interest on the e.Volve debentures was payable monthly and e.Volve was
required to make monthly installments of principal, beginning on January 31,
1999 in an amount equal to $50,000 plus any available cash flow of e.Volve. Any
amounts of principal not paid were to be due on June 11, 2000. No payments of
principal were paid on the e.Volve debentures. The proceeds of this financing
were used to purchase equipment and for making capital and general corporate
expenses. e.Volve decided to issue debt and equity as a result of arms-length
negotiations with representatives of Infinity Investors.
On August 19, 1998, pursuant to the terms of a letter agreement between
e.Volve and Infinity Investors Limited, e.Volve issued debentures in the
principal amount of $850,000 to Infinity Investors Limited and amended the June
11 securities purchase agreement and the related security documents to provide
the benefits of those agreements to Infinity Investors Limited with respect to
the August 19 debentures.
Interest on the August 19 debentures was 8% per annum, payable monthly, and
e.Volve was required to make monthly installments of principal, beginning on
August 31, 1998 in an amount equal to $50,000 plus any available cash flow of
e.Volve. Any amounts of principal not paid were to be due on June 11, 2000. No
payments of principal were paid on the August 19 debenture. The proceeds of the
August 19 debentures were used to fund a cash deposit securing a letter of
credit supporting contractual arrangements between e.Volve and Avantel, S.A.
Under the letter agreement, the August 19 debentures became convertible into 340
shares of e.Volve common stock because the principal of the August 19 debentures
was not repaid in full on or prior to November 19, 1998. e.Volve decided to
issue debt and equity as a result of arms-length negotiations with
representatives of Infinity Investors and because other financing alternatives
would have created an undue strain on its cash flow.
On December 9, 1998, IEO Holdings Limited purchased 909 shares of e.Volve
common stock from Infinity Investors Limited. After the sale, Infinity Investors
Limited and IEO Holdings Limited each owned 33.3% of the outstanding common
stock of e.Volve.
On February 9, 1999, pursuant to the terms of a letter agreement between
e.Volve and Infinity Investors Limited, e.Volve issued debentures in the
principal amount of $390,000 to Infinity Investors Limited and amended the June
11 securities purchase agreement and the related security documents to provide
the benefits of those agreements to Infinity Investors Limited with respect to
the February 9 debentures.
Interest at 8% per annum and principal on the February 9 debentures was due
on February 17, 1999. No payment of principal has been paid on the February 9
debenture. The proceeds of the February 9 debentures were used to fund working
capital needs of e.Volve. e.Volve decided to issue debt and equity as a result
of arms-length negotiations with representatives of Infinity Investors and
because other financing alternatives would have created an undue strain on its
cash flow.
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<PAGE> 54
On April 15, 1999, pursuant to the terms of a letter agreement between
e.Volve, Infinity Investors Limited and IEO Holdings Limited:
- e.Volve issued amended and restated debentures in the principal amount of
$7,050,000 to Infinity Investors Limited in exchange for the June 11
debentures, the August 19 debentures and the April 15 debentures;
- e.Volve and Infinity Investors Limited amended the February 9 debentures:
- to extend its maturity date to the earlier to occur of an event of
default and June 30, 1999,
- to provide that interest on the February 9 debentures would be payable
at the same time as interest on the amended and restated debentures,
and
- to provide that the February 9 debentures would be convertible into
shares of e.Volve common stock, at a conversion price of $2,778 per
share, if the principal of the amended and restated debentures was not
repaid in full on or prior to maturity date of the February 9
debenture;
- e.Volve agreed to pay all outstanding interest on the amended and
restated debentures and the February 9 debentures on April 30, 1999;
- e.Volve issued warrants expiring on April 15, 2004 to purchase 170 shares
of e.Volve common stock at a purchase price of $2,778 per share to each
of Infinity Investors Limited and IEO Holdings Limited; and
- amended the June 11 securities purchase agreement and the related
security documents to provide the benefits of those agreements to
Infinity Investors Limited with respect to the amended and restated
debentures.
Interest on the amended and restated debentures was 8% per annum, payable
monthly, and e.Volve was required to make monthly installments of principal,
beginning on April 30, 1999 in escalating amounts beginning at $50,000 on April
30, 1999 and increasing to $250,000 on December 31, 1999 and thereafter until
repaid in full, plus any available cash flow of e.Volve. No payments of
principal have been paid on the amended and restated debentures. Any amounts of
principal not paid were to be due on June 30, 2000. The debenture was not
converted. e.Volve decided to issue debt and equity as a result of arms-length
negotiations with representatives of Infinity Investors and because other
financing alternatives would have created an undue strain on its cash flow.
On April 29, 1999, pursuant to the terms of a letter agreement between
e.Volve, Infinity Investors Limited and IEO Holdings Limited, e.Volve issued
debentures in the aggregate principal amount of $500,000 to Infinity Investors
Limited and amended the June 11 securities purchase agreement and the related
security documents to provide the benefits of those agreements to Infinity
Investors Limited with respect to the April 29 debentures. IEO Holdings Limited
participated in the April 29 debentures pursuant to the terms of the
participation agreement.
Interest on the April 29 debentures was payable monthly beginning on May
31, 1999 and e.Volve was required to make monthly installments of principal,
beginning on May 31, 1999, in an amount equal to any available cash flow of
e.Volve plus any amounts received by e.Volve or its subsidiaries with respect to
any tax refunds, including an anticipated refund on previously paid Mexican
value added taxes. No payments of principal have been paid on the April 29
debentures. Any amounts of principal not paid were to be due on August 27, 1999.
The proceeds of this loan were used to fund working capital. e.Volve decided to
issue debt and equity as a result of arms-length negotiations with
representatives of Infinity Investors and because other financing alternatives
would have created an undue strain on its cash flow.
On April 30, 1999, pursuant to the terms of a letter agreement between
e.Volve, Infinity Investors Limited and IEO Holdings Limited, e.Volve issued
debentures in the aggregate principal amount of $100,000 to Infinity Investors
Limited and amended the June 11 securities purchase agreement and the related
security documents to provide the benefits of those agreements to Infinity
Investors Limited with respect to the
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April 30 debentures. IEO Holdings Limited participated in the April 30
debentures pursuant to the terms of the participation agreement.
Interest on the April 30, debentures was payable monthly beginning on May
31, 1999 and e.Volve was required to make monthly installments of principal,
beginning on May 31, 1999, in an amount equal to any available cash flow of
e.Volve plus any amounts received by e.Volve or its subsidiaries with respect to
any tax refunds, including an anticipated refund on previously paid Mexican
value added taxes. No payments of principal have been paid on the April 30
debentures Any amounts of principal not paid were to be due on August 28, 1999.
The proceeds of this loan were used to fund working capital. e.Volve decided to
issue debt and equity as a result of arms-length negotiations with
representatives of Infinity Investors and because other financing alternatives
would have created an undue strain on its cash flow.
On May 1, 1999, Infinity Investors Limited and IEO Holdings Limited
executed an assignment agreement. Pursuant to the assignment agreement, IEO
Holdings Limited acquired a 50% interest in the amended and restated debentures
and the warrants. The warrants were subsequently canceled in connection with our
reorganization.
Because the principal amount of the February 9 debenture was not paid on or
prior to June 30, 1999, the February 9 debenture became convertible into shares
of e.Volve common stock at the option of the holders, at a conversion price of
$2,778 per share, which was the deemed fair value of shares at the issue date.
Infinity Investors Limited and IEO Holdings Limited have never taken action
to enforce their rights under these debentures. On September 22, 1999, in
connection with our reorganization, eVentures acquired the e.Volve common stock
and e.Volve debentures held by Infinity Investors Limited in exchange for
5,682,807 shares of eVentures common stock and acquired IEO Holdings Limited,
the holder of, among other assets, the 1,200 shares of e.Volve common stock and
the remaining debentures, for 14,562,193 shares of eVentures common stock.
Following our reorganization the debentures were restructured into a single
debenture with a maturity date of December 31, 1999. On December 31, 1999, the
debentures were restructured as an intercompany loan.
Transactions with Mr. Rogers
Prior to and during fiscal year 1999, e.Volve made advances to Mr. Rogers,
the former majority shareholder of e.Volve. The advances were non-interest
bearing and were due on demand. As of June 30, 1998 and 1999, advances due from
Mr. Rogers totaled $60,920 and $0, respectively.
During fiscal years 1998 and 1999, e.Volve shared office space, payroll and
certain other administrative expenses with Orix Systems, which during those
periods was controlled by Mr. Rogers, the former majority shareholder of
e.Volve. During such periods, e.Volve paid Orix Systems $676,227 and $156,597,
respectively, with respect to such expenses.
On April 15, 1999, e.Volve entered into a consulting agreement with Mr.
Rogers that replaced all previous employment agreements made between them. The
term of the consulting agreement commenced on April 15, 1999 and was to
terminate on June 11, 2000. Under the terms of the consulting agreement, e.Volve
engaged Mr. Rogers to perform such general consulting and related duties and
services associated with e.Volve's ongoing and future business operations as
would be determined by the president or chief executive officer of e.Volve. In
consideration for these duties and services, e.Volve was obligated to pay Mr.
Rogers an honorarium of $140,000 for his services in each fiscal year of the
term and an additional fee of $10,000 for each fiscal year of the term for
performing his obligations under the covenant not to compete, the non-
solicitation clause, and the confidentiality provision found in the consulting
agreement. In addition to the honorarium and additional fee, Mr. Rogers was also
entitled to earn a bonus payment which depended on the gross revenue generated
by e.Volve and its subsidiaries on a consolidated basis. In addition to the
compensation and benefits received by Kerry Rogers under the consulting
agreement, Kerry Rogers was entitled to severance payments in the case that the
consulting agreement was terminated without "cause."
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On February 24, 2000, e.Volve terminated the consulting agreement pursuant
to a letter agreement with Mr. Rogers. Under this letter agreement, e.Volve paid
Kerry Rogers a lump sum of $105,000, and agreed to pay $31,000 to Nextlink, Inc.
in settlement of a disputed amount among e.Volve, Mr. Rogers and Nextlink. Kerry
Rogers is no longer a consultant of e.Volve and has no link to us other than as
a shareholder of eVentures.
TRANSACTIONS WITH AXISTEL
Infinity Entities Investments
On October 28, 1998, AxisTel issued notes to IEO Holdings Limited in an
aggregate principal amount of $2.0 million pursuant to a note agreement. The
note bears interest at 8% per annum, payable monthly. The notes were due on
October 28, 2000. The notes were secured by all assets and equity interests of
AxisTel.
In connection with the note agreement, AxisTel issued one share of Class B
common stock of AxisTel to IEO Holdings Limited at a purchase price of $1.00.
Such share of Class B common stock carries voting rights entitling IEO Holdings
Limited to vote 50% of all issued and outstanding shares of the common stock of
AxisTel.
In connection with the note agreement, AxisTel issued warrants to purchase
1,499 shares of Class B common stock, par value $.01 per share, of AxisTel at an
exercise price of $2,333.33 per share to IEO Holdings Limited. The warrants were
valued at approximately $274,000 using the Black-Scholes model and AxisTel
recorded the amount as a debt discount, with a related credit to additional
paid-in capital. The debt discount is being amortized over the life of the loan.
We calculated the value of the warrants utilizing publicly available
software capable of performing the Black-Scholes model. The Black-Scholes
valuation model was developed for use in estimating the fair value of traded
options and warrants, which have no vesting restrictions and are fully
transferable. In addition, the Black-Scholes valuation model requires the input
of highly subjective assumptions including the expected stock price volatility.
Because the AxisTel warrants have characteristics significantly different from
those of traded options and warrants, and because changes in the subjective
input assumptions can materially affect the fair value estimate, the
Black-Scholes model does not necessarily provide a reliable single measure of
the fair value of these warrants.
Pursuant to the note agreement, AxisTel issued additional notes to IEO
Holdings Limited in the amounts of $500,000 and $1.0 million on March 10, 1999
and April 19, 1999, respectively. As of December 31, 1998, AxisTel had not met,
but was subsequently granted waivers with respect to, certain reporting
requirements under such notes.
On September 22, 1999, IEO Holdings Limited exercised its warrants to
purchase 1,499 Class B shares of AxisTel. The notes were surrendered as payment
of the purchase price for such shares. Such shares, in addition the share of
Class B common stock owned by IEO Holdings Limited, represent 50% of the
outstanding shares of AxisTel. IEO Holdings Limited exchanged its shares in
AxisTel for 6,000,000 shares of eVentures.
On August 20, 1999, Infinity Energing Holdings Subsidiary Limited issued a
note in the aggregate principal amount of $750,000 to AxisTel. The note bears
interest at the rate of 10% per annum, payable monthly. The note matured on
December 30, 1999. AxisTel repaid this note with part of the proceeds of our
private placement of preferred and common stock on September 28, 1999.
Transactions with Other Stockholders
AxisTel had notes payable to Samuel Litwin aggregating $10,000 at December
31, 1997 and Samuel Litwin and Mitchell Arthur aggregating $25,000 at December
31, 1998. Interest is calculated at 5% per annum. The outstanding principal
balance and any unpaid interest was due and payable on October 28, 1999, and the
notes were therefore classified as short term. Such notes were outstanding as of
December 31, 1999 and were forgiven and cancelled effective January 1, 2000.
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Revenues for AxisTel included revenues for the year ended December 31, 1998
from Debit Card Technologies, Inc. totaling approximately $264,000. Debit Card
Technologies is wholly owned by an employee's spouse. All revenues for the
period August 28, 1997 (inception) to December 31, 1997 were received from Debit
Card.
TRANSACTIONS WITH eVENTURES
Transactions with Affiliates of Infinity Entities
On September 27, 1999, we entered into a Management Services Agreement with
HW Partners. Barrett Wissman, our President and Chief Executive Officer, is sole
manager of HW Partners, which has investment discretion over Infinity Investors
Limited, one of the Infinity Entities.
Under the management services agreement, HW Partners has agreed to perform
various management, operational and administrative services for eVentures.
Whenever eVentures wishes to engage HW Partners to perform services with respect
to a particular project, eVentures and HW Partners negotiate the terms and
conditions of a work order with respect to that particular project, specifying,
among other things, the management services to be rendered and the fee
arrangements for that specific project. Each work order must be approved by a
majority of the directors of eVentures who are not employees, directors or
affiliates of HW Partners. As of March 7, 2000, the board of directors of
eVentures had approved work orders in the aggregate monthly amount of
approximately $19,500 for services to be performed by employees of HW Partners
under the management services agreement.
On September 22, 1999, we entered into a space sharing agreement with Unity
Hunt, Inc., an affiliate of Clark Hunt. Under this agreement, Unity Hunt has
agreed to allow us to use office space located at 1600 Elm Street, Suite 4000,
Dallas, Texas. In addition to the use of these premises, we may request Unity
Hunt to provide various services that are incidental to the use of the office
space, such as accounting and/or administrative services. However, Unity Hunt
does not provide services related to employees or employee costs. The fees paid
to Unity Hunt pursuant to this agreement must be approved by a majority of the
directors of eVentures who are not employees, directors or affiliates of Unity
Hunt, and the fees do not, and will not, exceed $60,000 per year.
Transactions with Employees
During the six month period ended December 31, 1999 we granted options to
Stuart Chasanoff, Jan Robert Horsfall and Stuart Subotnick that caused us to
record deferred compensation of $3.3 million. The amount of the deferred
compensation was based upon the intrinsic value of options granted to those
directors and employees and which had an exercise price lower than the market
price of the underlying stock on the date of the grant. The deferred
compensation will be amortized over the vesting period of the related options
and recorded as compensation expense in the statement of operations.
Transactions with Portfolio Companies
On March 3, 2000, we loaned $3.0 million to PhoneFree.com under a
promissory note dated March 2, 2000. The promissory note is due on September 1,
2000 and bears interest at 7%. PhoneFree.com may repay this promissory note at
any time, subject to our right to convert it into PhoneFree.com common stock. We
can convert the promissory note into PhoneFree.com common stock:
(i) if PhoneFree.com raises equity capital from other investors on or
before August 31, 2000, in which case our conversion price will be equal to
95% of the per share subscription or conversion price in such equity
capital raise; or
(ii) if PhoneFree.com does not raise equity capital from other
investors on or before August 31, 2000, we can convert the promissory note
on or after September 1, 2000, at a per share conversion price that values
all the common and preferred stock of PhoneFree.com at $50.0 million.
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In connection with the loans made under the promissory note, we also
received a four-year warrant to purchase 240,000 shares of PhoneFree.com at a
price equal to 110% of the conversion price of the promissory note. The warrant
may not be called by PhoneFree. If we include this warrant, but not the
promissory note, we would beneficially own approximately 18% of the outstanding
shares of common stock of PhoneFree.com.
ITEM 8. LEGAL PROCEEDINGS
In March 1998, e.Volve filed a lawsuit against Eltrax, Inc. in Clark County
District Court for the State of Nevada for breach of contract and other related
claims, alleging that Eltrax failed to deliver equipment and services pursuant
to an agreement between the parties. Eltrax counterclaimed for breach of
contract and damages of $381,802. The matter is currently before the United
States District Court for the District of Nevada for pre-trial motions.
In November 1999, IXC Communications, Inc. threatened to filed a lawsuit
against e.Volve alleging a breach of contract and damages in the amount of
$330,153.50 if payment or payment arrangements for said amount are not made
within thirty (30) days. No lawsuit has yet been filed.
In November 1998, representatives of Mexico's Federal Telecommunications
Commission, commonly referred to as COFETEL, entered the premises of the
Company's wholly owned subsidiary, e.Volve Technology Group de Mexico, and
attempted to confiscate e.Volve Technology Group de Mexico's equipment pursuant
to a visitation order under a verification administrative proceeding
(procedimiento administrativo de verificacion). e.Volve Technology Group de
Mexico filed a Federal constitutional court action known as juicio de amparo
against COFETEL in a Mexican Federal district court (juzgado de distrito),
principally alleging that the visitation order failed to comply with Mexican
constitutional requirements and that the search and seizure were illegal under
Mexican law. A juicio de amparo has two stages: the suspension of the acts of
authority complained of and a constitutional review. The former stage has two
phases: temporary restraining order (suspension provisional) and a final
restraining order (suspension definitiva). The purpose of the constitutional
review is to determine whether the acts of authority complained of are
constitutional. Should the court determine that the acts of authority complained
of are unconstitutional, a final judgment (sentencia final) is rendered, the
principal effect of which is the granting of the protection of the Federal
courts against such acts. On November 24, 1998, e.Volve Technology Group de
Mexico obtained a temporary restraining order which preserved the status quo of
the e.Volve Technology Group de Mexico equipment and suspended the
administrative proceeding, therefore prohibiting COFETEL from re-entering
e.Volve Technology Group de Mexico's premises. On December 21, 1998, e.Volve
Technology Group de Mexico obtained a final restraining order (suspension
definitiva). On May 24, 1999, a final judgment was rendered by the district
court in favor of e.Volve Technology Group de Mexico, which judgment declared
COFETEL's acts unconstitutional and, as a consequence, granted e.Volve
Technology Group de Mexico the protection of the Federal courts. On July 7,
1999, COFETEL appealed, through a recurso de revision, to a higher court
(tribunal colegiado de circuito) seeking the review of the district court
judgment. It is anticipated that a ruling with respect to such appeal would be
rendered sometime in late January 2000. As of February 29, 2000, no ruling had
been issued. It may not be possible to ascertain the definitive outcome of this
matter but e.Volve Technology Group de Mexico continues to defend itself in
Mexican courts. The loss of e.Volve Technology Group de Mexico's equipment might
have an adverse effect on the Company's financial condition. The cost of
litigation, regardless of the outcome, may have an adverse effect on the
Company's financial condition.
In September 1999, Yurie Systems Inc. filed a lawsuit in the United States
District Court of Maryland against e.Volve, claiming e.Volve owed Yurie Systems
approximately $283,497 arising from a previous sale of telecommunications
equipment from Yurie Systems to e.Volve in June and July of 1997. e.Volve denies
the claim because it never agreed to accept the equipment. The equipment has
failed field testing and did not meet either e.Volve's or Yurie Systems'
standards. e.Volve filed a counterclaim for lost business opportunities and lost
profits in an amount to be determined at trial. On February 3, 2000, we reached
an agreement with Yurie Systems to settle this litigation in exchange for a
payment by us of $140,000.
On February 7, 2000, Star Telecommunications, Inc. filed a lawsuit against
AxisTel International, Inc., a subsidiary of AxisTel. Star's complaint alleges
that AxisTel International failed to pay for amounts allegedly
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owed by AxisTel International to Star as a result of Star's acquisition of PT-1
Communications, and under an August 9, 1999 carrier services agreement between
Star and AxisTel International. Star is alleging damages in the amount of
$416,590.36, plus late fees and interests. AxisTel International has not
responded to this complaint, but believes that it has valid defenses to a
portion of Star's claims. AxisTel has established a reserve of approximately
$330,000 against the claim.
ITEM 9.MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Our common stock is traded on the NASDAQ OTC Bulletin Board under the
symbol EVNT. Prior to August 25, 1999, our common stock traded on the OTC
Bulletin Board under the symbol ADII and our former name, Adina, Inc. Until
recently, the market for the stock has been relatively inactive. The range of
high and low bid quotations for the quarters since April, 1997 are taken from
the "pink sheets" of the National Quotation Bureau. They reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
BID PRICE
------------------
QUARTER ENDING LOW HIGH
- -------------- -------- -------
<S> <C> <C>
December 31, 1999........................................... 12.00 32.75
September 30, 1999.......................................... 1.38 12.50
June 30, 1999(1)............................................ 1.50 1.50
April 30, 1999.............................................. 0.02734 0.625
January 31, 1999............................................ 0.02734 0.02734
October 31, 1998............................................ 0.02734 0.02734
July 31, 1998............................................... 0.02734 0.02734
April 30, 1998.............................................. 0.015625 0.25
January 31, 1998............................................ 0.015625 0.25
October 31, 1997............................................ 0.015625 0.25
July 31, 1997............................................... 0.015625 0.25
</TABLE>
- ---------------
(1) Represents the transition period between April 30, 1999 and June 30, 1999.
The last sale price reported for the common stock on the OTCBB on March 7,
2000 was $32.50. As of March 7, 2000, there were approximately 890 shareholders
of record of our common stock.
DIVIDEND POLICY
The holders of our common stock are entitled to receive dividends at such
time and in such amounts as may be determined by our Board of Directors.
However, we have not paid any dividends in the past and do not intend to pay
cash dividends on our capital stock for the foreseeable future. Instead, we
intend to retain all earnings for use in the operation and expansion of our
business.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
In the past three years, eVentures has issued and sold unregistered
securities in the transactions described below.
On May 15, 1997, we issued 42,450,000 shares of common stock to Daniel L.
Wettreich, then the President of eVentures, in exchange for a majority of the
outstanding common shares of Alexander Mark Investments (USA), Inc. in a
transaction exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) of the Securities Act. Pursuant to a series of
subsequent transactions, we no longer own the common shares of Alexander Mark
Investments.
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On September 22, 1999, in connection with our reorganization, we issued and
sold:
(i) an aggregate of 14,562,193 shares of common stock to IEO
Investments, Limited and Infinity Emerging Subsidiary Limited as merger
consideration for all of the equity interests in IEO Holdings Limited;
(ii) an aggregate of 6,381,000 shares of common stock to certain
shareholders of AxisTel in exchange for the outstanding shares of capital
stock of AxisTel not owned by IEO Holdings Limited; and
(iii) 5,682,807 shares of common stock to Infinity Investors Limited
in exchange for shares of capital stock of e.Volve representing
approximately one-third of the outstanding capital stock of e.Volve.
The issuance of such shares was exempt from the registration requirements
of the Securities Act pursuant to Rule 506 of Regulation D promulgated pursuant
to the Securities Act. No general solicitations were made in connection with
this transaction, and three accredited, eight non-accredited and three foreign
investors participated in this transaction. All non-accredited investors were
represented in connection with this transaction by purchaser representatives.
On September 28, 1999, we issued and sold 1,000 shares of Series A
Convertible Preferred stock to an accredited investor for $1.0 million in a
transaction exempt from the registration requirements of the Securities Act
pursuant to Rule 506 of Regulation D promulgated pursuant to the Securities Act.
No general solicitations were made in connection with this transaction.
On September 28, 1999, we issued and sold an aggregate of 2,470,000 shares
of common stock to 25 investors for $4.9 million in a transaction exempt from
the registration requirements of the Securities Act pursuant to Rule 506 of
Regulation D promulgated pursuant to the Securities Act. No general
solicitations were made in connection with this transaction, and only accredited
investors participated in this transaction.
On October 14, 1999, we issued 239,229 shares of our common stock to
Avantel S.A. to settle accounts payable due to Avantel in the amount of $3.2
million in a transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) of the Securities Act. These shares were
issued for consideration of $13.125 per share, which was 75% of the closing
price of our common stock on the date of issuance, and which represented the
fair market value of our common stock. The price per share was determined
following negotiations with Avantel.
On October 19, 1999, in connection with our reorganization, we issued and
sold an aggregate of 5,831,253 shares to 27 shareholders of e.Volve in exchange
for the outstanding shares of capital stock of e.Volve not owned by eVentures in
a transaction exempt from the registration requirements of the Securities Act
pursuant to Rule 506 of Regulation D under the Securities Act. No general
solicitations were made in connection with this transaction, and 22 accredited
and 5 non-accredited investors participated in this transaction. All
non-accredited investors were represented in connection with this transaction by
purchaser representatives.
On November 19, 1999, we issued and sold 2,500 shares of our Series B
preferred stock to an accredited investor for $2.5 million in a transaction
exempt from the registration requirements of the Securities Act pursuant to Rule
506 of Regulation D under the Securities Act. No general solicitations were made
in connection with this transaction.
On November 26, 1999, we issued and sold 3,725 shares of our Series B
preferred stock to an accredited investor for $3.7 million in a transaction
exempt from the registration requirements of the Securities Act pursuant to Rule
506 of Regulation D under the Securities Act. No general solicitations were made
in connection with this transaction.
On November 30, 1999, we issued 137,500 shares of our common stock to
Corpovision, S.A. to settle a note payable due to Corpovision in the amount of
$1.1 million in a transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) of the Securities Act. These shares were
issued for consideration of $8.00 per share, which was below the market price of
our common stock on the date of
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issuance. We took a charge of $1.1 million during our second fiscal quarter in
connection with this transaction. The price per share was determined following
negotiations with Corpovision.
On December 15, 1999, we issued and sold 775 shares of our Series B
preferred stock to an aggregate of 14 accredited investors for $775,000 in a
transaction exempt from the registration requirements of the Securities Act
pursuant to Rule 506 of Regulation D promulgated pursuant to the Securities Act.
No general solicitations were made in connection with this transaction.
On December 21, 1999, we issued 200,000 shares of our common stock upon
conversion of 1,000 shares of our Series A preferred stock in a transaction
exempt from the registration requirements of the Securities Act pursuant to
Section 3(a)(9) of the Securities Act.
In a series of transactions closed between January 6 and February 10, 2000,
we issued 15,570 shares of our Series C Convertible Preferred Stock, par value
$0.00002 per share, to eight accredited investors, at a price of $1,000 per
share in a transaction exempt from the registration requirements of the
Securities Act pursuant to Rule 506 of Regulation D under the Securities Act. No
general solicitations were made in connection with this transaction.
On January 31, 2000, we issued and sold an aggregate of 27,860 shares to
two shareholders of Fonbox in exchange for 700,000 shares of Fonbox common stock
in a transaction exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) of the Securities Act.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
AUTHORIZED CAPITAL STOCK
The Certificate of Incorporation authorizes 80,000,000 shares of capital
stock consisting of:
- 75,000,000 shares of common stock, $0.00002 par value; and
- 5,000,000 shares of preferred stock, $0.00002 par value, of which:
- 1,200 shares have been designated as Series A Convertible Preferred
Stock;
- 25,000 shares have been designated as Series B Convertible Preferred
Stock; and
- 30,000 shares have been designated Series C Convertible Preferred Stock.
Common Stock
General. As of March 7, 2000, there were 45,799,863 shares of common stock
outstanding. An additional 507,246 and 869,832 shares of common stock are
issuable upon conversion of our outstanding Series B Convertible Preferred Stock
and Series C Convertible Preferred Stock, respectively.
Voting Rights. The holders of common stock are entitled to one vote per
share. Stockholders are not entitled to vote cumulatively for the election of
directors, and no other class of outstanding capital stock is entitled to vote
in any election of directors. The Infinity Entities hold 61.4% of our common
stock and have effective control of us through the voting power of their shares
of our outstanding capital stock. Therefore, the Infinity Entities have the
ability to elect all of our directors and to effect or prevent certain corporate
transactions which require majority approval of the common stock, including
mergers and other business combinations.
Dividends and Liquidation. Holders of common stock have an equal right to
receive dividends when and if declared by the board of directors out of legally
available funds after payment of all preferential dividends on our preferred
stock. In the event of a liquidation, dissolution or winding up, holders of the
shares of common stock are entitled to share equally, share-for-share, in the
assets available for distribution after payment of all creditors and the
liquidation preferences of our preferred stock.
Other Provisions. Holders of common stock have no preemptive rights to
subscribe to any additional securities of any class which we may issue and there
are no redemption provisions or sinking fund provisions
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applicable to the common stock, nor is the common stock subject to calls or
assessments by us. The rights, preferences, and privileges of the holders of
common stock are subject to and may be adversely affected by, the rights of the
holders of any series of preferred stock.
Preferred Stock
General. The Certificate of Incorporation provides that eVentures may issue
up to 5,000,000 shares of preferred stock in one or more series as may be
determined by the board of directors of eVentures who may establish the number
of shares to be included in each such series, fix the designation, powers,
preferences and relative rights of the shares of each such series and any
qualifications, limitations, or restrictions thereof, and increase or decrease
the number of shares of any such series without any further vote or action by
the stockholders. The board of directors may authorize, without stockholder
approval, the issuance of preferred stock with voting and conversion rights that
could adversely affect the voting power and other rights of holders of common
stock. Preferred stock could be issued quickly with terms designated to delay or
prevent a change in control of eVentures or to make the removal of management
more difficult. This could have the effect of decreasing the market price of the
common stock.
Series A Convertible Preferred Stock. The holders of our Series A
Convertible Preferred Stock are not entitled to vote, except as provided by law.
Holders of our Series A Convertible Preferred Stock are not entitled to receive
any dividends. In the event that we liquidate, dissolve or wind up, holders of
the shares of our Series A Convertible Preferred Stock are entitled to receive
$1,000 per share out of the assets available for distribution to our
stockholders.
The shares of our Series A Convertible Preferred Stock are redeemable at
any time at a redemption price equal to $1,000 per share. Each share of our
Series A Convertible Preferred Stock is convertible into 200 shares of our
common stock by us at any time that the price of our common stock has exceeded
$10 per share for five consecutive trading days. In addition, each outstanding
share of our Series A Convertible Preferred Stock will mandatorily convert into
200 shares of our common stock on June 30, 2001 and is convertible into 200
shares of our common stock by its holder at any time prior to the date on which
such share is redeemed or converted into common stock by us or according to its
terms. None of the shares of Series A Convertible Preferred Stock that are
redeemed or converted may be reissued.
Holders of our Series A Convertible Preferred Stock have no preemptive
rights to subscribe to any additional securities of any class which we may issue
and there are no redemption provisions or sinking fund provisions applicable to
our Series A Convertible Preferred Stock, nor is our Series A Convertible
Preferred Stock subject to calls or assessments by us. The rights, preferences,
and privileges of the holders of our Series A Convertible Preferred Stock are
subject to and may be adversely affected by, the rights of the holders of other
series of preferred stock that we issue, including, our Series B Convertible
Preferred Stock and our Series C Convertible Preferred Stock. We issued 1,000
shares of our Series A Convertible Preferred Stock on September 28, 1999 all of
which were converted into shares of our common stock on December 21, 1999.
Series B Convertible Preferred Stock. The holders of our Series B
Convertible Preferred Stock are not entitled to vote, except as provided by law.
Holders of our Series B Convertible Preferred Stock are not entitled to receive
any dividends. In the event that we liquidate, dissolve or wind up, holders of
the shares of our Series B Convertible Preferred Stock are entitled to receive
$1,000 per share out of the assets available for distribution to our
stockholders pari passu with the holders of any outstanding shares of Series A
Convertible Preferred Stock.
The shares of our Series B Convertible Preferred Stock are redeemable at
any time at a redemption price equal to $1,000 per share. Each share of our
Series B Convertible Preferred Stock is convertible into 72.46377 shares of our
common stock by us at any time that the trading volume of our common stock has
equaled or exceeded 700,000 shares per month for three consecutive calendar
months and the price of our common stock has equaled or exceeded $34.50 for five
consecutive trading days. In addition, each outstanding share of our Series B
Convertible Preferred Stock will mandatorily convert into 72.46377 shares of our
common stock upon completion by us of an underwritten offering with proceeds of
no less than $50 million at a price per share of no less than $27.60 and the
trading volume of our common stock has equaled or exceeded
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700,000 shares per month for three consecutive calendar months. Each outstanding
share of our Series B Convertible Preferred Stock is also convertible into
72.46377 shares of our common stock by its holder at any time prior to the date
on which such share is redeemed or converted into common stock by us or
according to its terms. None of the shares of Series B Convertible Preferred
Stock that are redeemed or converted may be reissued.
Holders of our Series B Convertible Preferred Stock have no preemptive
rights to subscribe to any additional securities of any class which we may issue
and there are no redemption provisions or sinking fund provisions applicable to
our Series B Convertible Preferred Stock, nor is our Series B Convertible
Preferred Stock subject to calls or assessments by us. The rights, preferences,
and privileges of the holders of our Series B Convertible Preferred Stock are
subject to and may be adversely affected by, the rights of the holders of other
series of preferred stock that we issue, including, our Series C Convertible
Preferred Stock. We issued a total of 7,000 shares of our Series B Convertible
Preferred Stock in a series of private placements on November 19, 1999, November
26, 1999 and December 15, 1999, all of which remain outstanding as of February
29, 1999.
Series C Convertible Preferred Stock. The holders of our Series C
Convertible Preferred Stock are not entitled to vote, except as provided by law.
Holders of our Series C Convertible Preferred Stock are not entitled to receive
any dividends. In the event of that we liquidate, dissolve or wind up, holders
of the shares of our Series C Convertible Preferred Stock are entitled to
receive $1,000 per share out of the assets available for distribution to our
stockholders pari passu with the holders of any outstanding shares of Series B
Convertible Preferred Stock.
The shares of our Series C Convertible Preferred Stock are redeemable at
any time at a redemption price equal to $1,000 per share. Each share of our
Series C Convertible Preferred Stock is convertible into 55.865922 shares of our
common stock by us at any time that the trading volume of our common stock has
equaled or exceeded 700,000 shares per month for three consecutive calendar
months and the price of our common stock has equaled or exceeded $44.75 for 10
consecutive trading days. In addition, each outstanding share of our Series C
Convertible Preferred Stock will mandatorily convert into 55.865922 shares of
our common stock upon completion by us of an underwritten offering with proceeds
of no less than $50 million at a price per share of no less than $35.80 and the
trading volume of our common stock has equaled or exceeded 700,000 shares per
month for three consecutive calendar months. Each outstanding share of our
Series B Convertible Preferred Stock is also convertible into 55.865922 shares
of our common stock by its holder at any time prior to the date on which such
share is redeemed or converted into common stock by us or according to its
terms. None of the shares of Series C Convertible Preferred Stock that are
redeemed or converted may be reissued.
Holders of our Series C Convertible Preferred Stock have no preemptive
rights to subscribe to any additional securities of any class which we may issue
and there are no redemption provisions or sinking fund provisions applicable to
our Series C Convertible Preferred Stock, nor is our Series C Convertible
Preferred Stock subject to calls or assessments by us. The rights, preferences,
and privileges of the holders of our Series C Convertible Preferred Stock are
subject to and may be adversely affected by, the rights of the holders of other
series of preferred stock that we issue. We issued 15,750 shares of our Series C
Convertible Preferred Stock in a series of private placements between January 6
and February 10, 2000, all of which remain outstanding as of March 7, 2000.
FUTURE ISSUANCES OF PREFERRED STOCK
We believe that the ability of the board to issue one or more series of
preferred stock will provide us with flexibility in structuring possible future
financings and acquisitions, and in meeting other corporate needs that might
arise. The authorized shares of preferred stock, as well as shares of common
stock, will be available for issuance without further action by our
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which our securities may be
listed or traded.
Although the board has no intention at the present time of doing so, it
could issue a series of preferred stock that could, depending on the terms of
such series, impede the completion of a merger, tender offer or
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other takeover attempt. The board will make any determination to issue such
shares based on its judgment as to our best interests and the best interests of
our stockholders. The board could issue preferred stock having terms that could
discourage an acquisition attempt through which an acquirer may be able to
change the composition of the board, including a tender offer or other
transaction that some, or a majority, of our stockholders might believe to be in
their best interests or in which stockholders might receive a premium for their
stock over the then current market price.
REGISTRATION RIGHTS
General
As of March 7, 2000, the holders of approximately 44.1 million shares of
common stock will have the right, subject to certain conditions, to require us
to register their shares with the Securities and Exchange Commission so that
those shares may be publicly resold or to include their shares in certain
registration statements we file. In addition, the holders of the 7,000 shares of
Series B Preferred Convertible Stock and the 15,750 shares of Series C Preferred
Convertible Stock will have the right, subject to certain conditions, to require
us to include their shares in certain registration statements we file. We
granted such rights under the terms of the agreements outlined below to the
investors that participated in the transactions set forth below:
- Registration Rights Agreement, dated as of September 22, 1999, to the
stockholders of AxisTel and e.Volve who participated in and acquired
shares of common stock of eVentures Group under the Agreement and Plan of
Reorganization, dated September 22, 1999.
- Addendum, dated October 19, 1999, to the Registration Rights Agreement
dated September 22, 1999, to investors that participated in the first
private placement of our common stock and to the stockholders of e.Volve
who participated in and acquired shares of our common stock under the
Plan of Exchange, dated October 19, 1999.
- Registration Rights Agreement, dated November 24, 1999, to investors that
participated in the private placement of our Series B Convertible
Preferred Stock.
- Letter Agreement, dated December 15, 1999, to investors that acquired
shares of our common stock from various of our stockholders.
- Registration Rights Agreement, dated December 31, 1999, to investors that
participated in our private placement of Series C Convertible Preferred
Stock.
Common Stock
Under the Registration Rights Agreement, dated September 22, 1999, the
Addendum, dated October 19, 1999, to the Registration Rights Agreement dated
September 22, 1999, and the Letter Agreement, dated December 15, 1999, the
signatories to each of these agreements received the following rights with
respect to the shares of our common stock held by them.
Right to Demand Registration. At any time three months after the date of
the Registration Rights Agreement, these stockholders, subject to the thresholds
described below, can request that we file a registration statement under the
Securities Act of 1933, as amended, so they can publicly sell their shares.
However, we have the right to limit the number of shares to be included in that
registration statement if the managing underwriter of any such public offering
believes the number of securities to be included in such registration exceeds
the number which can be sold in an orderly manner within a price range
acceptable to the majority of the holders requesting registration.
Who May Make a Demand. Holders owning at least thirty-five percent of the
aggregate number of registrable shares may request a registration of their
shares in an offering having an anticipated net aggregate price of at least $5
million. In addition, holders owning at least fifty percent of the aggregate
number of registrable shares may request a registration of their shares in an
offering having an anticipated net aggregate price that is less than $5 million.
However, if the reasonably anticipated net aggregate price of the offering is at
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least $1.5 million, holders of at least 35% of the aggregate number of
registrable shares can require that we file a registration statement on a Form
S-3.
Number of Times Holders Can Make Demands. We can be required to effect up
to three registration statements. In addition, we can be required to effect up
to two registration statements on Form S-3.
Postponement. We are not obligated to effect any registration within ninety
days after the effective date of a previous registration statement in which the
holders of the registrable shares participated or were given an opportunity to
participate and declined to do so. In addition, we can postpone the filing or
the effectiveness of a registration statement for up to 90 days on any two
occasions in a twelve-month period if our board of directors determines that the
filing might have an adverse effect on any of our proposals or plans, such as a
plan or proposal to engage in any acquisition, merger, consolidation, tender
offer, or similar transaction, or if any other material, nonpublic development
or transaction is pending and the filing of such registration would require
disclosure of such development or transaction at a time when we would not
otherwise have a duty to disclose.
Piggyback Registration Rights. If we register any securities for public
sale (other than pursuant to a demand registration, a registration solely in
connection with an employee benefit or stock ownership plan on a Form S-8, a
registration solely in connection with an acquisition consummated in a manner
which would permit registration of such securities to the public on Form S-4, or
a "shelf" or similar registration for use solely in connection with future
acquisitions), any holder of shares of our common stock with the registration
rights described above will have the right to include all or any portion of
their shares in the registration statement. However, we have the right to limit
the number of shares to be included in that registration statement if the
managing underwriter of any such public offering believes the number of
securities to be included in such registration exceeds the number which can be
sold in an orderly manner within a price range acceptable, in the case of a
primary registration, to us, or in the case of a secondary registration, to the
majority of the holders requesting registration.
Expenses of Registration. We will pay for the expenses relating to any
demand registration, any and all registrations on Form S-3, and any and all
piggyback registrations.
Expiration of Registration Rights. The registration rights described above
will expire on September 22, 2003, the fourth anniversary of the date of the
Registration Rights Agreement.
Preferred Stock
Under the Registration Rights Agreements, dated November 24, 1999 and
December 31, 1999, the signatories to each of these agreements received the
following rights with respect to the shares of our Series B or our Series C
Convertible Preferred Stock held by them.
Piggyback Registration Rights. If we register any securities for public
sale (other than pursuant to a demand registration, a registration solely in
connection with an employee benefit or stock ownership plan on a Form S-8, a
registration solely in connection with an acquisition consummated in a manner
which would permit registration of such securities to the public on Form S-4, or
a "shelf" or similar registration for use solely in connection with future
acquisitions), any holder of shares of our Series B or our Series C Convertible
Preferred Stock who are signatories to the registration rights agreements
described directly above will have the right to include all or any portion of
their shares in the registration statement. However, we have the right to limit
the number of shares to be included in that registration statement if the
managing underwriter of any such public offering believes the number of
securities to be included in such registration exceeds the number which can be
sold in an orderly manner within a price range acceptable, in the case of a
primary registration, to us, or in the case of a secondary registration, to the
majority of the holders requesting registration.
Expenses of Registration. We will pay for the expenses relating to any and
all piggyback registrations.
CERTAIN ANTI-TAKEOVER EFFECTS
Certain provisions of the certificate of incorporation and bylaws,
summarized in the following paragraphs, may be considered to have an
anti-takeover effect and may delay, deter or prevent a tender offer, proxy
contest
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or other takeover attempt that a stockholder might consider to be in such
stockholder's best interest, including such an attempt that might result in
payment of a premium over the market price for shares held by stockholders.
The Amended and Restated Bylaws provide that a special meeting of
stockholders may be called by the Chief Executive Officer or the Board of
Directors. In addition, a special meeting of stockholders must be called by the
Chief Executive Officer or Secretary at the written request of the stockholders
owning ten percent (10%) of our capital stock issued and outstanding and
entitled to vote.
Section 203 of the Delaware General Corporation Law provides that, subject
to certain exceptions specified therein, an "interested stockholder" of a
Delaware corporation shall not engage in any business combinations, including
mergers or consolidations or acquisitions of additional shares of the
corporation, with the corporation for a three-year period following the date
that such stockholder becomes an interested stockholder unless:
prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
upon consummation of the transaction that resulted in the stockholder
becoming an "interested stockholder," the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced (excluding certain shares); or
on or subsequent to such date, the business combination is approved by
the board of directors of the corporation and authorized at an annual or
special meeting of stockholders by the affirmative vote of at least 66.67%
of the outstanding voting stock that is not owned by the interested
stockholder.
Except as otherwise specified in Section 203 of the Delaware General
Corporation Law, an interested stockholder is defined to include (x) any person
that owns (or, within the prior three years, did own) 15% or more of the
outstanding voting stock of the corporation, or is an affiliate or associate of
the corporation and was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within three years immediately prior to the date
of determination and (y) the affiliates and associates of any such person.
Under certain circumstances, Section 203 of the Delaware General
Corporation Law makes it more difficult for a person who would be an interested
stockholder to effect various business combinations with a corporation for a
three-year period. We have not elected to be exempt from the restrictions
imposed under Section 203 of the Delaware General Corporation Law. The
provisions of Section 203 of the Delaware General Corporation Law may encourage
persons interested in acquiring us to negotiate in advance with the board, since
the stockholder approval requirement would be avoided if a majority of the
directors then in office approves either the business combination or the
transaction which results in any such person becoming an interested stockholder.
Such provisions also may have the effect of preventing changes in our
management. It is possible that such provisions could make it more difficult to
accomplish transactions that our stockholders may otherwise deem to be in their
best interests.
TRANSFER AGENT AND REGISTRAR
The Stock Transfer Company of America, Inc., an affiliate of Daniel L.
Wettreich, is the transfer agent and registrar for our common stock. The address
of The Stock Transfer Company of America, Inc. is 6959 Arapaho Road, Suite 122,
Dallas, Texas 75248.
On February 15, 2000, we notified our stock transfer agent and registrar
that its services were being terminated as of the close of business on March 31,
2000. Following that date, our stock transfer agent and registrar will be
American Stock Transfer & Trust Company. The address of American Stock Transfer
& Trust Company is 40 Wall Street, New York, New York 10005.
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ITEM 12. LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Certificate of Incorporation contains a provision that is designed to
limit directors' liability to the extent permitted by the Delaware General
Corporation Law. Specifically, directors will not be held liable to eVentures or
its stockholders for monetary damages for any breach of fiduciary duty as a
director, except for liability as a result of:
any breach of the duty of loyalty to eVentures or eVentures
stockholders;
actions or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
payment of an improper dividend or improper repurchase of eVentures
stock under Section 174 of the Delaware General Corporation Law; or
actions or omissions pursuant to which the director received an
improper personal benefit.
Section 102 of the Delaware General Corporation Law, as amended, allows a
corporation to eliminate the personal liability of directors of a corporation to
the corporation or its stockholders for monetary damages for a breach of
fiduciary duty as a director, except where the director breached his duty of
loyalty, failed to act in good faith, engaged in intentional misconduct or
knowingly violated a law, authorized the payment of a dividend or approved a
stock repurchase in violation of Delaware corporate law or obtained an improper
personal benefit.
The principal effect of the limitation of liability provision is that a
stockholder is unable to prosecute an action for monetary damages against a
director of eVentures unless the stockholder can demonstrate one of the
specified bases for liability. The provision, however, does not eliminate or
limit director liability arising in connection with causes of action brought
under the federal securities laws. The Certificate of Incorporation does not
eliminate a director's duty of care. The inclusion of this provision in the
Certificate of Incorporation may discourage or deter stockholders or management
from bringing a lawsuit against directors for a breach of their fiduciary
duties, even though such an action, if successful, might otherwise have
benefited eVentures and its stockholders. This provision should not affect the
availability of equitable remedies such as injunction or rescission based upon a
director's breach of the duty of care.
Also, Section 174 of the Delaware General Corporation Law provides, among
other things, that a director, who willfully or negligently approves of an
unlawful payment of dividends or an unlawful stock purchase or redemption, may
be held liable for such actions. A director who was either absent when the
unlawful actions were approved or dissented at the time, may avoid liability by
causing his or her dissent to such actions be entered in the books containing
the minutes of the meetings of the board of directors at the time such action
occurred or immediately after such absent director receives notice of the
unlawful acts.
In addition, the Certificate of Incorporation and the Amended and Restated
By-Laws also provide that eVentures will indemnify its directors and officers,
and may indemnify any of its employees and agents, to the fullest extent
permitted by Delaware law. eVentures is generally required to indemnify its
directors and officers for all judgments, fines, penalties, settlements, legal
fees and other expenses incurred in connection with pending, threatened or
completed legal proceedings because of the director's or officer's position with
eVentures or another entity that the director or officer serves at eVentures's
request, subject to certain conditions, and to advance funds to its directors
and officers to enable them to defend against such proceedings.
Section 145 of the Delaware General Corporation Law after payment of all
preferential dividends on our preferred stock provides, among other things, that
the Company may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding (other than an action by or in the right of the Company) by reason of
the fact that the person is or was a director, officer, agent or employee of the
Company or is or was serving at the Company's request as a director, officer,
agent or employee of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including attorneys' fees, judgment, fines
and amounts paid in settlement actually and reasonably
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incurred by the person in connection with such action, suit or proceeding. The
power to indemnify applies (a) if such person is successful on the merits or
otherwise in defense of any action, suit or proceeding, or (b) if such person
acted in good faith and in a manner he reasonably believed to be in the best
interest, or not opposed to the best interest, of the Company, and with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The power to indemnify applies to actions brought by or in
the right of the Company as well but only to the extent of defense expenses
(including attorneys' fees but excluding amounts paid in settlement) actually
and reasonably incurred and not to any satisfaction of judgment or settlement of
the claim itself, and with the further limitation that in such actions no
indemnification shall be made in the event of any adjudication of negligence or
misconduct in the performance of his duties of the Company, unless the court
believes that in light of all the circumstances indemnification should apply.
At present, there is no pending or threatened litigation or proceeding
involving any director or officer, employee or agent of eVentures where such
indemnification will be required or permitted.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-1 to F-36 and P-1 to P-3 of this Form 10.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements.
The following financial statements are Exhibits to Amendment No. 1 to the
Form 10:
(i) Consolidated Financial Statements of eVentures Group, Inc. as of
June 30, 1998 and 1999 and as of December 31, 1999 and for the years ended
June 30, 1997, 1998 and 1999 and for the six months ended December 31, 1998
and 1999;
(ii) Audited Financial Statements of AxisTel Communications, Inc. as
of December 31, 1997 and 1998 and for the period from August 28, 1997
(inception) to December 31, 1997 and the year ended December 31, 1998, and
unaudited Financial Statements as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999; and
(iii) Unaudited Pro Forma Consolidated Statement of Operations of
eVentures Group, Inc. for the year ended June 30, 1999 and for the six
months ended December 31, 1999.
(b) Exhibits
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2.1 -- Agreement and Plan of Reorganization, dated as of
September 22, 1999, among the Registrant, eVentures
Holdings, L.L.C., IEO Holdings Limited, Infinity
Investors Limited, Mick Y. Wettreich, the purchasers
listed on Schedule 1-A thereto and the Contributing
Persons listed on Schedule 1-B thereto (incorporated by
reference to Exhibit 2.1 to the report filed on Form 8-K
on October 7, 1999).
2.2 -- Agreement and Plan of Exchange, dated as of October 19,
1999, among eVentures Group, Inc., and the persons set
forth on Schedule 1 thereto (incorporated by reference to
Exhibit 2.1 to the report filed on Form 8-K on November
3, 1999).
2.3 -- Share Exchange Agreement, dated as of February 22, 2000,
among eVentures Group, Inc., IGS Acquisition Corporation
and the stockholders of Internet Global Services, Inc.
parties thereto.**
3.1 -- Certificate of Incorporation of eVentures, dated November
19, 1987.*
</TABLE>
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<TABLE>
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3.2 -- Certificate of Amendment, dated April 27, 1994, to the
Certificate of Incorporation.*
3.3 -- Certificate of Amendment, dated as of October 20, 1997,
to the Certificate of Incorporation.*
3.4 -- Certificate of Renewal dated August 19, 1999 for
eVentures Group, Inc.*
3.5 -- Certificate of Amendment, dated September 17, 1999, to
the Certificate of Incorporation (incorporated by
reference to Exhibit 3.2 to the report filed on Form 8-K
on October 7, 1999).
3.6 -- Amended and Restated Certificate of Designation of
Rights, Preferences and Privileges of Series A
Convertible Preferred Stock, dated October 14, 1999.*
3.7 -- Certificate of Designation of Rights, Preferences and
Privileges of Series B Convertible Preferred Stock, dated
as of November 10, 1999.*
3.8 -- Certificate of Amendment, dated as of December 15, 1999,
to the Certificate of Designation of Rights, Preferences
and Privileges of Series B Convertible Preferred Stock.*
3.9 -- Certificate of Designation, Preferences and Rights of
Series C Convertible Preferred Stock, dated as of
February 22, 2000.**
3.10 -- Amended and Restated By-Laws of eVentures Group, Inc.
(incorporated by reference to Exhibit 3.1 to the report
filed on Form 8-K on October 7, 1999).
4.1 -- Registration Rights Agreement, dated as of September 22,
1999, among the Registrant and the persons and entities
set forth on Schedule 1 thereto (the "First Registration
Rights Agreement") (incorporated by reference to Exhibit
4.1 to the report filed on Form 8-K on October 7, 1999).
4.2 -- Addendum to the First Registration Rights Agreement,
dated as of October 19, 1999, among eVentures Group,
Inc., the persons set forth on Schedule 1 thereto and the
other parties to the First Registration Rights
Agreement.**
4.3 -- Registration Rights Agreement, dated as of November 24,
1999, between eVentures Group, Inc. and the person and
entities signatories thereto, as holders of shares of
Series B Convertible Preferred Stock.**
4.4 -- Letter Agreement, dated December 15, 1999, to the parties
to the Registration Rights Agreement dated as of
September 27, 1999.**
4.5 -- Registration Rights Agreement, dated as of December 31,
1999, between eVentures Group, Inc. and the persons and
entities signatories thereto, as holders of shares of
Series C Convertible Preferred Stock.**
10.1 -- Securities Purchase Agreement, dated as of June 11, 1998,
among Orix Global Communications, Inc., certain of its
shareholders and the purchasers named thereunder and
Exhibits thereto.**
10.2 -- Debenture, dated as of June 11, 1998.*
10.3 -- Letter Agreement, dated as of August 19, 1998 between
Orix Global Communications and Infinity Investors
Limited.*
10.4 -- Debenture, dated as of August 19, 1998.*
10.5 -- Letter Agreement, dated as of February 9, 1999 between
Orix Global Communications and Infinity Investors
Limited.*
10.6 -- Debenture, dated as of February 9, 1999.*
10.7 -- Letter Agreement, dated as of April 15, 1999 among Orix
Global Communications, Inc., Infinity Investors Limited
and the Founders (as defined therein).*
</TABLE>
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<TABLE>
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10.8 -- Amended and Restated Debenture, dated as of April 15,
1999.*
10.9 -- Letter Agreement, dated as of April 29, 1999 between Orix
Global Communications and Infinity Investors Limited.*
10.10 -- Debenture, dated as of April 29, 1999.*
10.11 -- Letter Agreement, dated as of April 30, 1999, between
Orix Global Communications, Inc. and Infinity Investors
Limited.*
10.12 -- Debenture, dated as of April 30, 1999.*
10.13 -- Note, dated as of August 20, 1999.**
10.14 -- Promissory Note, dated as of March 2, 2000.**
10.15 -- Warrant Agreement, dated as of March 2, 2000, between
i2v2.com Inc. and eVentures Group, Inc.**
10.16 -- Lease Agreement, dated December, 1998, between AxisTel
International, Inc. and Evergreen America Corporation.*
10.17 -- Lease Agreement, dated November 24, 1997, between Orix
Global Communications, Inc. and Trust F/3959 of Banco del
Atlantico.*
10.18 -- Assignment Agreement, dated April 1, 1998, among Orix
Global Communications, Inc., Latin Gate de Mexico S.A. de
C.V. and Trust F/3959 of Banco del Atlantico.*
10.19 -- Office Lease, dated January 23, 1998, between Orix Global
Communications, Inc. and 2526 Investment Co.*
10.20 -- Sublease Agreement, dated January 31, 2000, between
Totaltel Florida, Inc. and AxisTel Global Network
Services, Inc.**
10.21 -- Guaranty Agreement by eVentures Group, Inc. as inducement
to Telecommunications Finance Group to provide a lease to
AxisTel Communications, Inc., dated as of October 13,
1999.*
10.22 -- Management Services Agreement, dated as of September 22,
1999, between eVentures Group, Inc. and HW Partners,
L.P.*
10.23 -- Amended and Restated 1999 Omnibus Securities Plan, dated
as of September 22, 1999.**
10.24 -- Employment Agreement, dated as of September 22, 1999,
between eVentures Group, Inc. and Stuart J. Chasanoff.*
10.25 -- Amended and Restated Employment and Noncompetition
Agreement, dated as of September 21, 1999, between
AxisTel Communications, Inc. and Samuel L. Litwin.*
10.26 -- Amended and Restated Employment and Noncompetition
Agreement, dated as of September 22, 1999, between
AxisTel Communications, Inc. and Mitchell Arthur.*
21.1 -- Subsidiaries of eVentures Group, Inc.**
27.1 -- Financial Data Schedule**
</TABLE>
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* Previously filed as an exhibit to the Registration Statement on Form 10 filed
by the registrant on December 20, 1999.
** Previously filed as an exhibit to Amendment No. 1 to the Registration
Statement on Form 10 filed by the registrant on March 8, 2000.
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Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this amendment to its registration
statement on Form 10/A to be signed on its behalf by the undersigned, thereunto
duly authorized.
eVentures Group, Inc.
By /s/ JOHN STEVENS ROBLING, JR.
----------------------------------
Name: John Stevens Robling, Jr.
Title: Chief Financial Officer
May 19, 2000
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eVENTURES GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
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Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheets as of June 30, 1998 and 1999 and
December 31, 1999 (Unaudited)............................. F-3
Consolidated Statements of Operations for the years ended
June 30, 1997, 1998 and 1999 and for the six months ended
December 31, 1998 and 1999 (Unaudited).................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended June 30, 1997, 1998 and 1999 and for
the six months ended December 31, 1998 and 1999
(Unaudited)............................................... F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 1997, 1998 and 1999 and for the six months ended
December 31, 1998 and 1999 (Unaudited).................... F-6
Notes to Consolidated Financial Statements.................. F-8
Report of Independent Certified Public Accountants
(AxisTel)................................................. F-27
AxisTel Balance Sheets as of December 31, 1997 and 1998 and
June 30, 1999 (Unaudited)................................. F-28
AxisTel Statements of Operations for the period from August
28, 1997 (inception) to December 31, 1997 ("the 1997
Period"), the year ended December 31, 1998 and for the six
months ended June 30, 1998 and 1999 (Unaudited)........... F-29
AxisTel Statements of Stockholders' equity (deficit) for the
1997 Period, the year ended December 31, 1998 and the six
months ended June 30, 1999 (Unaudited).................... F-30
AxisTel Statements of Cash Flows for the 1997 Period, the
year ended December 31, 1998 and for the six months ended
June 30, 1998 and 1999 (Unaudited)........................ F-31
AxisTel Notes to Financial Statements....................... F-34
Unaudited Pro Forma Consolidated Financial Information...... P-1
Unaudited Pro Forma Consolidated Statements of Operations
for the Year Ended June 30, 1999.......................... P-2
Unaudited Pro Forma Statements of Operations for the six
months ended December 31, 1999............................ P-3
</TABLE>
F-1
<PAGE> 73
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders
eVentures Group, Inc.
Jersey City, NJ
We have audited the accompanying balance sheet of eVentures Group, Inc.
(the "Company") as of June 30, 1999 and the related statements of operations,
shareholders' equity (deficit) and cash flows for the year then ended ("Company
Period"). We have also audited the balance sheet as of June 30, 1998 and the
statements of operations, shareholders' equity (deficit) and cash flows of
Predecessor (see Note 1) for each of the years in the two-year period ended June
30, 1998 ("Predecessor Periods"). These financial statements are the
responsibility of the Company's and Predecessor's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, the Predecessor
business was acquired in a transaction accounted for as a purchase. As a result
of this transaction, the financial information for the period after the sale is
presented on a different cost basis than that for the period before the sale
and, therefore, is not comparable.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at June 30,
1999, and the results of its operations and its cash flows for the Company
Period in conformity with generally accepted accounting principles. Further, in
our opinion, the Predecessor financial statements referred to above present
fairly, in all material respects, the financial position at June 30, 1998 and
the results of its operations and its cash flows for the Predecessor Periods in
conformity with generally accepted accounting principles.
BDO Seidman, LLP
New York, New York
November 30, 1999
F-2
<PAGE> 74
eVENTURES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
INFORMATION -----------------------------
-------------- AS OF
AS OF JUNE 30, AS OF JUNE 30, DECEMBER 31,
1998 1999 1999
-------------- -------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $ 2,417,216 $ 39,379 $ 6,269,893
Accounts receivable....................................... 104,422 6,129 1,574,165
Other receivables......................................... 5,821 11,164 63,124
Prepaid expenses and other................................ -- 13,250 136,814
Deposits.................................................. 35,141 242,310 603,752
VAT tax receivable........................................ -- 2,757,368 1,781,354
Available-for-sale securities............................. 250,556 -- --
----------- ----------- ------------
2,813,156 3,069,600 10,429,102
----------- ----------- ------------
LONG-TERM ASSETS
Restricted cash........................................... -- 1,107,437 750,000
Property and equipment, net............................... 1,447,244 6,219,874 12,880,498
VAT receivable............................................ 44,775 -- --
Investments............................................... -- 2,191,498 2,758,531
Goodwill, net............................................. -- 3,072,908 30,695,787
Other..................................................... -- -- 521,800
----------- ----------- ------------
1,492,019 12,591,717 47,606,616
----------- ----------- ------------
$ 4,305,175 $15,661,317 $ 58,035,718
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable.......................................... $ 1,831,863 $ 4,609,806 $ 4,228,708
Accrued other............................................. 525,297 1,477,757 1,423,101
Accrued interest payable.................................. 13,412 383,163 569,042
Advances from shareholder................................. 60,920 -- --
Customer deposits and deferred revenues................... 200,000 1,272,682 634,532
Notes payable............................................. -- -- 26,875
Debentures, current portion............................... 590,000 -- --
Capital leases, current portion........................... 307,496 1,916,761 2,937,621
----------- ----------- ------------
3,528,988 9,660,169 9,819,879
----------- ----------- ------------
LONG-TERM LIABILITIES
Debentures, net of current portion........................ 5,410,000 6,828,948 --
Capital leases, net of current portion.................... 487,665 2,031,513 5,250,370
----------- ----------- ------------
5,897,665 8,860,461 5,250,370
----------- ----------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock.............................................. 25,100 36 917
Preferred stock........................................... -- -- --
Additional paid-in capital................................ 83,300 4,310,144 64,339,007
Accumulated deficit....................................... (5,229,878) (7,169,493) (19,284,726)
Deferred compensation..................................... -- -- (2,089,729)
----------- ----------- ------------
(5,121,478) (2,859,313) 42,965,469
----------- ----------- ------------
$ 4,305,175 $15,661,317 $ 58,035,718
=========== =========== ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE> 75
eVENTURES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR INFORMATION -----------------------------------------
------------------------ SIX MONTHS SIX MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1998 1999 1998 1999
---------- ----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues..................... $ 921,599 $ 1,713,403 $27,248,273 $13,013,700 $ 22,661,838
Direct costs................. 578,944 1,944,073 23,311,584 9,745,604 21,759,782
--------- ----------- ----------- ----------- ------------
Gross profit (loss).......... 342,655 (230,670) 3,936,689 3,268,096 902,056
Selling, general, and
administrative expenses.... 718,362 4,505,798 7,551,131 3,442,347 10,354,808
--------- ----------- ----------- ----------- ------------
Loss from operations, before
other (income) expense..... (375,707) (4,736,468) (3,614,442) (174,251) (9,452,752)
--------- ----------- ----------- ----------- ------------
Other (income) expense
Interest expense, net...... -- 105,099 1,704,459 735,878 598,062
Write off of unamortized
debt discount........... -- -- -- -- 917,615
Equity in loss of
affiliate............... -- -- 33,776 -- 31,819
Foreign currency (gain)
loss.................... -- -- 126,575 8,631 (2,032)
Other...................... -- 12,604 (16,930) (17,851) 1,074
--------- ----------- ----------- ----------- ------------
-- 117,703 1,847,880 726,658 1,546,538
--------- ----------- ----------- ----------- ------------
Net loss..................... $(375,707) $(4,854,171) (5,462,322) (900,909) (10,999,290)
========= ===========
Imputed preferred dividend... -- -- (1,115,943)
----------- ----------- ------------
Net loss available to common
shareholders............... $(5,462,322) $ (900,909) $(12,115,233)
=========== =========== ============
Net loss per share (basic and
diluted)................... $ (0.48) $ (0.08) $ (0.40)
=========== =========== ============
Weighted average number of
shares outstanding......... 11,365,614 11,365,614 30,428,396
=========== =========== ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE> 76
eVENTURES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
--------------- -------------------- PAID-IN ACCUMULATED DEFERRED STOCKHOLDERS'
SHARES AMOUNT SHARES(1) AMOUNT CAPITAL DEFICIT COMPENSATION EQUITY/(DEFICIT)
------ ------ ---------- ------- ----------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR INFORMATION
Balance July 1, 1996...... -- $ -- 1,000 $ 100 $ -- $ -- $ -- $ 100
Issuance of shares for
fixed assets, at book
value................... -- -- 200 25,000 -- -- -- 25,000
Net loss.................. -- -- -- -- -- (375,707) -- (375,707)
------ ----- ---------- ------- ----------- ------------ ----------- ------------
Balance, June 30, 1997.... -- -- 1,200 25,100 -- (375,707) -- (350,607)
Gift of stock to
employees............... -- -- -- -- 83,300 -- -- 83,300
Net loss.................. -- -- -- -- -- (4,854,171) -- (4,854,171)
------ ----- ---------- ------- ----------- ------------ ----------- ------------
Balance, June 30, 1998.... -- $ -- 1,200 $25,100 $ 83,300 $ (5,229,878) $ -- $ (5,121,478)
====== ===== ========== ======= =========== ============ =========== ============
THE COMPANY
Issuance of common stock,
July 1, 1998 and
resulting change in
ownership
(control) -- (Note 1)... -- $ -- 1,800,000 $ 36 $ -- $ (1,707,171) $ -- $ (1,707,135)
Fair value of shares
issued in connection
with debentures......... -- -- -- -- 2,000,000 -- -- 2,000,000
Fair value of warrants
granted in connection
with debentures......... -- -- -- -- 210,000 -- -- 210,000
Cost investment in i2v2... -- -- -- -- 2,100,144 -- -- 2,100,144
Net loss.................. -- -- -- -- -- (5,462,322) -- (5,462,322)
------ ----- ---------- ------- ----------- ------------ ----------- ------------
Balance, June 30, 1999.... -- -- 1,800,000 36 4,310,144 (7,169,493) -- (2,859,313)
Period ended December 31,
1999 is Unaudited:
Acquisition of AxisTel.... -- -- 12,381,000 248 17,110,929 -- -- 17,111,177
Acquisition of
eVentures............... -- -- 10,330,610 207 (2,980) -- -- (2,773)
Acquisition of 66.67% of
e.Volve................. -- -- 9,565,614 190 8,540,159 -- -- 8,540,349
Contribution of i2v2 cost
investment from Major
Shareholders............ -- -- 2,879,386 58 -- -- -- 58
Issuance of Series A
Preferred
Stock................... 1,000 -- -- -- 1,000,000 -- -- 1,000,000
Issuance of Common
Stock................... -- -- 2,470,000 49 4,939,951 -- -- 4,940,000
Conversion of Series A
Preferred Stock......... (1,000) -- 200,000 4 -- -- -- 4
Intrinsic value of stock
options................. -- -- -- -- 3,265,500 -- (3,265,500) --
Amortization of deferred
compensation............ -- -- -- -- -- -- 1,175,771 1,175,771
Net effect of the purchase
of remaining 1/3 of
e.Volve................. -- -- 5,831,253 117 11,662,389 -- -- 11,662,506
Issuance of preferred
stock................... 7,000 -- -- -- 6,997,500 -- -- 6,997,500
Imputed preferred
dividend................ -- -- -- -- 1,115,943 (1,115,943) -- --
Issuance of common stock
as payment for accounts
payable................. -- -- 376,799 8 5,399,472 -- -- 5,399,480
Net loss.................. -- -- -- -- -- (10,999,290) -- (10,999,290)
------ ----- ---------- ------- ----------- ------------ ----------- ------------
Balance, December 31, 1999
(Unaudited)............. 7,000 $ -- 45,834,662 $ 917 $64,339,007 $(19,284,726) $(2,089,729) $ 42,965,469
====== ===== ========== ======= =========== ============ =========== ============
</TABLE>
- ---------------
(1) The change in the par value of the shares which occurred on September 22,
1999 has been retroactively applied to all periods beginning July 1, 1998.
See accompanying notes to the consolidated financial statements.
F-5
<PAGE> 77
eVENTURES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR INFORMATION -----------------------------------------
------------------------ SIX MONTHS SIX MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1998 1999 1998 1999
---------- ----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss............................ $(375,707) $(4,854,171) $(5,462,322) $ (900,909) $(10,999,289)
Adjustments to reconcile net income
to net cash (used in) provided by
net operating activities:
Depreciation and amortization..... -- 105,544 2,283,505 882,882 3,187,038
Other expenses.................... 148,381 171,259 932,509 370,689 852,204
Write-off accounts receivable --
Touchtone....................... -- 615,232 -- -- --
Write-off certain intangible
assets.......................... -- 420,000 -- -- --
Bad debt.......................... -- -- -- -- 23,895
Foreign currency (gain) loss...... -- -- 126,575 11,162 (2,032)
Equity in loss of unconsolidated
affiliate....................... -- -- 33,776 -- 31,819
Change in operating assets and
liabilities:
Accounts receivable............. (73,587) (30,835) 98,293 (488,189) (582,920)
Other receivables............... (47,200) 41,379 (5,343) (89,318) (51,960)
Prepaid expenses and other...... -- -- (13,250) (26,315) (30,257)
VAT receivable.................. -- (44,775) (2,611,318) (1,347,608) 976,014
Restricted cash................. -- -- (1,107,437) (1,080,806) 1,107,437
Accounts payable................ 306,113 1,525,750 2,550,093 1,124,102 3,760,810
Accrued other................... 68,000 75,495 301,695 (450) 220,647
Accrued interest payable........ -- 13,412 369,751 33,063 185,879
Customer deposits............... -- 200,000 1,072,682 (200,000) (1,214,650)
--------- ----------- ----------- ----------- ------------
Net cash (used in) provided by
operating activities................ 26,000 (1,761,710) (1,430,791) (1,711,697) (2,535,365)
--------- ----------- ----------- ----------- ------------
CASH FLOWS USED IN INVESTING
ACTIVITIES:
Deposits............................ (13,000) (22,141) (207,169) 4,728 (361,442)
Proceeds from sale of
available-for-sale securities..... -- 26,000 246,580 246,580 --
Purchase of available-for-sale
securities........................ -- (277,057) -- -- --
Purchases of property and
equipment......................... (363) (518,944) (1,183,735) (993,394) (1,667,894)
Net cash acquired in acquisitions... -- -- -- -- 299,687
Long term investments............... -- -- -- -- (475,000)
Investment in affiliates............ -- (1,035,232) (125,130) (25,000) (598,852)
--------- ----------- ----------- ----------- ------------
Net cash (used in) provided by
investing activities................ (13,363) (1,827,374) (1,269,454) (767,086) (2,803,501)
--------- ----------- ----------- ----------- ------------
</TABLE>
F-6
<PAGE> 78
eVENTURES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR INFORMATION -----------------------------------------
------------------------ SIX MONTHS SIX MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1998 1999 1998 1999
---------- ----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances -- shareholders............ -- 60,920 (60,920) (60,920) (246,560)
Issuance of common stock and
preferred stock................... 100 -- -- -- 13,224,850
Proceeds from issuance of
debenture......................... -- 6,000,000 2,040,000 850,000 --
Repayment of loan................... -- -- -- -- (823,278)
Payments on capital leases.......... -- (67,357) (1,656,672) (240,993) (585,632)
--------- ----------- ----------- ----------- ------------
Net cash provided by financing
activities.......................... 100 5,993,563 322,408 548,087 11,569,380
--------- ----------- ----------- ----------- ------------
NET CHANGE IN CASH.................... 12,737 2,404,479 (2,377,837) (1,930,696) $ 6,230,514
CASH AND CASH EQUIVALENTS, beginning
of year............................. -- 12,737 2,417,216 2,417,216 39,379
--------- ----------- ----------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of
year................................ $ 12,737 $ 2,417,216 $ 39,379 $ 486,520 $ 6,269,893
========= =========== =========== =========== ============
Supplemental disclosure of cash flows
information:
Cash paid for:
Interest.......................... $ -- $ 98,000 $ 376,000 $ 192,000 $ 258,000
========= =========== =========== =========== ============
Taxes............................. $ -- $ -- $ -- $ -- $ --
========= =========== =========== =========== ============
Supplemental schedule of non-cash
investing and financing activities
Issuance of common stock for
property and equipment............ $ 25,000 $ -- $ -- $ -- $ --
========= =========== =========== =========== ============
Non cash purchases of equipment..... $ 170,462 $ -- $ -- $ -- $ --
========= =========== =========== =========== ============
Purchases of equipment under capital
leases............................ $ -- $ 862,518 $ 4,809,785 $ 1,808,683 $ 5,206,790
========= =========== =========== =========== ============
Fair value of original issue
discount on warrants granted
pursuant to certain of the
debentures........................ $ -- $ -- $ 210,000 $ -- $ --
========= =========== =========== =========== ============
Fair value of original issue
discount on revaluation of Company
at July 1, 1998, arising from
change in ownership............... $ -- $ -- $ 2,000,000 $ 2,000,000 $ --
========= =========== =========== =========== ============
Goodwill arising from change in
ownership and acquisitions settled
through the issuance of stock..... $ -- $ -- $ 3,414,343 $ 3,414,343 $ 28,824,974
========= =========== =========== =========== ============
Net assets of subsidiaries acquired
through an issue of stock......... $ -- $ -- $ -- $ -- $ 196,169
========= =========== =========== =========== ============
Stock issued for settlement of
accounts payable.................. $ -- $ -- $ -- $ -- $ 5,399,480
========= =========== =========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 79
eVENTURES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED DECEMBER 31, 1998 AND
1999 IS UNAUDITED)
1. ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
Organization
eVentures Group, Inc., ("eVentures" or the "Company") was incorporated in
the state of Delaware on June 24, 1987 and was a public Company with no material
operations prior to the transactions consummated on September 22, 1999, which
are described below. The Company was formerly known as Adina, Inc.
On September 22, 1999, the Company acquired all of the outstanding shares
of AxisTel Communications, Inc., ("AxisTel"), approximately 66.67% of the
outstanding shares of e.Volve Technology Group, Inc., ("e.Volve"), and
approximately 17% of the outstanding shares of i2v2.com, Inc. ("i2v2.com"),
(collectively the "Acquired Entities") and $8,540,159 Notes Receivable including
accrued interest ("Notes") from e.Volve held by Major Shareholders as defined
below. All the acquisitions and the purchase of the Notes were settled through
issuance of stock of eVentures. (the "Transaction"). As a result of the
Transaction, approximately 77% of the Common Stock of the Company was owned by
three shareholders that are affiliated with each other (the "Major
Shareholders").
Prior to the Transaction, the Major Shareholders had directly and
indirectly held interests in the Acquired Entities, as follows: 66.67% of
e.Volve, 21% of i2v2.com, and 0.7% of AxisTel plus options to purchase a further
49.3% of AxisTel. In August of 1999, the interest in i2v2.com held by the Major
Shareholders was diluted to 17%. Immediately after exercising the options in
AxisTel, these interests, along with the Major Shareholders' Notes receivable
from e.Volve, were directly and indirectly transferred to eVentures in exchange
for the Company's stock. The remaining 50% of the common shares of AxisTel were
then purchased from AxisTel's founding shareholders.
On October 19, 1999, eVentures acquired the remaining 33.3% of e.Volve,
through an extension of its original offer at the time of the Transaction. This
purchase was settled through an issuance of 5,831,253 shares of eVentures'
Common Stock.
Allocation of consideration given during the six months ended December 31,
1999 to the acquired assets is as follows:
<TABLE>
<S> <C>
Purchase of 66.67% of e.Volve on June 11, 1998
Cost of investment........................................ $ --
Net liabilities acquired.................................. (5,121,514)
-----------
5,121,514
Carryover basis charged to accumulated deficit............ (1,707,171)
-----------
Excess attributed to Goodwill............................. $ 3,414,343
===========
Conversion of the Major shareholders options in AxisTel on
September 22, 1999
Cost of investment........................................ $ 3,497,662
Net liabilities acquired.................................. (1,002,338)
-----------
Excess attributed to Goodwill............................. $ 4,500,000
===========
Purchase of 50% of AxisTel from AxisTel's founding
shareholders on September 22, 1999
Cost of investment........................................ $12,762,000
Net assets acquired....................................... 99,532
-----------
Excess attributed to Goodwill............................. $12,662,468
===========
Purchase of 1/3 of e.Volve on October 19, 1999
Cost of investment........................................ $11,662,506
Net assets acquired....................................... --
-----------
Excess attributed to Goodwill............................. $11,662,506
===========
</TABLE>
The above represent the final purchase price allocations. Consideration
given was recorded at the fair value of eVentures common stock.
F-8
<PAGE> 80
eVENTURES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Basis of Presentation
The financial statements presented through June 30, 1999 represent the
interests of the Major Shareholders in each of the Acquired Entities prior to
the Transaction. The Major Shareholders' interest in the Acquired Entities is
deemed to be the "Accounting Acquirer". The financial statements as of and for
the six months ended December 31, 1999 reflect the consummation of the
Transaction, and therefore are consolidated financial statements of eVentures
and Subsidiaries as of December 31, 1999 and for the period from September 22,
1999 through December 31, 1999.
Since eVentures was a shell company with no operations prior to the
Transaction, the acquisitions by eVentures of the Major Shareholders' interests
were accounted for as a recapitalization of e.Volve.
The acquisitions of the remaining 50% of AxisTel and 33% of e.Volve were
treated as purchases for accounting purposes.
On June 11, 1998, Infinity Investors Limited and Infinity Emerging
Opportunities Limited acquired their 66.67% interest in e.Volve. Subsequently
through a corporate reorganization, IEO Holdings Limited acquired Infinity
Emerging Opportunities' interests in e.Volve, AxisTel and PhoneFree. When IEO
Holdings Limited merged with our wholly-owned subsidiary eVentures Holdings,
L.L.C. in the Transaction, its shareholders, IEO Investments Limited and
Infinity Emerging Subsidiaries, became shareholders of the Company and two of
the three Major Shareholders. This transaction was accounted for by e.Volve as a
purchase. The operations of e.Volve between June 11, 1998 and June 30, 1998 were
immaterial, and, therefore the date used for the effective date of the purchase
was July 1, 1998. The financial statements through June 30, 1998 are described
as "Predecessor Information", and those subsequent to June 30, 1998 are
described as "The Company". The cost basis of The Company was assigned to the
assets acquired based on their estimated fair values at the acquisition date. As
a result, the financial statements for the period subsequent to the change of
control are presented on a different cost basis than those for prior periods
and, therefore, are not comparable.
Business
The Company operates a private communications network which consists of
digital switching, routing and signal management equipment, as well as digital
fiber optic cable lines. The network incorporates software, programming and
switching technology which was originally developed for or in relation to the
Internet.
During the three years ended June 30, 1999, the Company's operations were
primarily those of e.Volve and its wholly owned subsidiary, e.Volve Technology
Group de Mexico, S.A. de C.V. (f/k/a Latin Gate de Mexico, S.A. de C.V.).
e.Volve was incorporated on June 26, 1996 as Orix Global Communications, Inc.
Through June 30, 1999, its services included the provision of international
voice and data applications over its fiber optic network, primarily to Mexico.
The network is scalable, built around digital packet switching equipment and
incorporates Asynchronous Transfer Mode and Internet Protocol technologies. As
part of the Transaction, the Company acquired AxisTel. AxisTel is developing
international and domestic voice and data applications similar to those of
e.Volve. AxisTel has the additional business of retail communications services,
including prepaid telephony.
During the year ended June 30, 1999, the Company acquired a minority
interest in i2v2.com (doing business as PhoneFree.com). The Company also entered
into a joint venture to form Innovative Calling Technologies, LLC ("ICT") -- See
Note 3. The degree of involvement of the Company in management varies for each
strategic investment. During the six months ended December 31, 1999, the Company
acquired a minority interest in Fonbox, Inc ("Fonbox").
F-9
<PAGE> 81
eVENTURES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. RISKS AND UNCERTAINTIES
Concentrations of Credit Risks
The Company has concentrations of credit risk related to cash, customers
and vendors, as follows:
Cash Concentrations
The Company places its cash with high credit quality institutions. Accounts
at each institution are insured by the Federal Deposit Insurance Corporation
("FDIC") up to $100,000. From time to time, the Company maintains cash balances
in excess of the FDIC limit.
Customer Concentrations
During the year ended June 30, 1997, e.Volve received a significant portion
of its business from Star Communication, Inc. ("Star") and Total Communications,
Inc. ("Total"). During the year ended June 30, 1997, sales to these customers
totaled 87% and 10% of e.Volve's revenues, respectively.
During Fiscal 1998, e.Volve received a significant portion of its business
from Star and Total. During Fiscal 1998, sales to these customers totaled 65%
and 25% of e.Volve's revenues, respectively. As of June 30, 1998, amounts due
from Star and Total totaled 96% and 0% of e.Volve's accounts receivables,
respectively.
During Fiscal 1999, e.Volve received a significant portion of its business
from Qwest Communications, Inc. ("Qwest"), RSL Communications, Inc. ("RSL") and
Star. During Fiscal 1999, sales to these customers totaled 65%, 18% and 16% of
e.Volve's revenues, respectively. As of June 30, 1999, there were no significant
amounts due from these customers. As of June 30, 1999, deposits from Qwest
totaled 100% of e.Volve's customer deposits.
If the relationship between the Company and these customers were altered,
the future results of operations and financial condition could be adversely
affected.
Vendor Concentrations
During the year ended June 30, 1997, e.Volve purchased a significant
portion of its carrier and termination costs ("Direct Costs") from four major
vendors. During the year ended June 30, 1997, purchases from these four vendors
totaled 45%, 22%, 12% and 10% of e.Volve's Direct Costs, respectively.
During Fiscal 1998 and 1999, e.Volve purchased a significant portion of its
Direct Costs from one vendor. During Fiscal 1998 and 1999, purchases from this
vendor totaled 75% and 92% of Direct Costs, respectively. As of June 30, 1998
and 1999, amounts due to this vendor totaled 54% and 62% of e.Volve's accounts
payable, respectively.
If the relationship between the Company and these vendors was altered, the
future results of operations and financial condition could be adversely
affected.
Geographic Concentration
The Company provides data transport and conversion services from the United
States to Mexico over the e.Volve Network. Although the Company plans to further
expand data transport and conversion services to other destination countries,
the Company's operations may remain concentrated between the United States and
Mexico. The data transport and conversion market for Mexico is highly
competitive and is occupied by industry participants which are much larger than
the Company and have greater financial resources and may have lower costs than
the Company. There can be no assurance that the Company will be able to compete
effectively against such larger and better-capitalized industry participants or
that the Company will be successful in pursuing other destination countries with
existing and potential customers.
F-10
<PAGE> 82
eVENTURES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Regulatory Environment
The Company provides "enhanced" or "value-added" services to its
international customers and therefore is not subject to regulation by the
Federal Communications Commission or other international telecommunication
regulatory bodies within its target markets. However, the use of the Internet
protocols to provide telephone services is a recent market development.
Currently, the Federal Communications Commission is considering whether or not
to impose surcharges or additional regulations upon certain providers of
Internet Protocol telephony. On April 10, 1998, the Federal Communications
Commission issued its Report to Congress concerning its implementation of the
universal service provisions of the Telecommunications Act.
In the Report, the Federal Communications Commission indicated that it
would examine the question of whether certain forms of "phone-to-phone" Internet
telephony are information services or telecommunications services. It noted that
the Federal Communications Commission did not have, as of the date of the
Report, an adequate record on which to make any definitive pronouncements, but
that the record before it suggested that certain forms of phone-to-phone
Internet Protocol telephony appear to have the same functionality as
non-Internet Protocol telecommunications services and lack the characteristics
that would render them information services. If the Federal Communications
Commission were to determine that certain services are subject to Federal
Communications Commission regulations as telecommunications services, the
Federal Communications Commission noted that it may find it reasonable to
require Internet Service Providers to make universal service contributions, pay
access charges or to be subject to traditional common carrier regulation.
To the Company's knowledge, there are currently no domestic and few foreign
laws or regulations that prohibit voice communications over the Internet.
Several efforts have been made to enact federal legislation that would either
regulate or exempt from regulation services provided over the Internet. State
public utility commissions may also retain jurisdiction to regulate the
provision of intrastate Internet Protocol telephony services, and could initiate
proceedings to do so. A number of countries that currently prohibit competition
in the provision of voice telephony have also prohibited Internet telephony.
Other countries permit but regulate Internet Protocol telephony. If Congress,
the Federal Communications Commission, state regulatory agencies or foreign
governments begin to regulate Internet Protocol telephony, there can be no
assurances that any such regulations will not materially adversely affect the
Company's business, financial conditions or results of operations.
Telecommunications Market and Industry Competition
Currently, the Company competes with (a) long distance resellers and
providers, including large carriers such as AT&T, MCI/WorldCom, Qwest, and
Sprint; (b) foreign PTTs (Post Telephone and Telegraph administrations); (c)
other providers of international long distance services such as STAR
Telecommunications, Inc., Pacific Gateway Exchange, Inc., RSL Communications
Ltd. and Telegroup, Inc.; (d) alliances that provide wholesale carrier services,
such as "Global One" (Sprint, Deutsche Telekom AG, and France Telecom S.A.) and
Uniworld (AT&T, Unisource-Telecom Netherlands, Telia AB, Swiss Telecom PTT and
Telefonica de Espana S.A.); (e) new entrants to the domestic long distance
market such as RBOCs (Regional Bell Operating Companies) in the U.S., who have
entered or have announced plans to enter the U.S. interstate long distance
market pursuant to recent legislation authorizing such entry, and utilities such
as RWE Aktiengesellschaft in Germany; and (f) small long distance resellers.
Many of the Company's competitors are significantly larger and have
substantially greater market presence, as well as greater financial, technical,
operational, marketing, and other resources and experience than the Company. The
Company competes for customers in the telecommunications markets primarily based
on price and, to a lesser extent, the type and quality of service offered.
Increased competition could force the Company to reduce its prices and profit
margins if its competitors are able to procure rates or enter into service
agreements that are comparable to or better than those the Company obtains, or
are able to offer other
F-11
<PAGE> 83
eVENTURES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
incentives to existing and potential customers. Similarly, the Company has no
control over the prices set by its competitors in the long distance resale
carrier-to-carrier market.
The Company could also face significant pricing pressure if it experiences
a decrease in the volume of minutes that it carries on its network, as the
Company's ability to obtain favorable rates and tariffs from its carrier
suppliers depends, to a significant extent, on the Company's total volume of
international long distance call traffic. There is no guarantee that the Company
will be able to maintain the volume of international and domestic long distance
traffic necessary to obtain favorable rates and tariffs. Although the Company
has no reason to believe that its competitors will adopt aggressive pricing
policies that could adversely affect the Company, there can be no assurance that
such price competition will not occur or that the Company will be able to
compete successfully in the future. In addition, the Company is aware that its
ability to market its long distance resale services depends upon the existence
of spreads between the rates offered by the Company and those offered by the
IXC's with which it competes, as well as those from which it obtains service. A
decrease in such spreads could have a material adverse effect on the Company's
business, financial condition or results of operations.
Foreign Currency
The Company currently provides data transport and conversion services to
certain foreign countries and regions, primarily to Mexico and India. The direct
costs, profit margins and competitive position of the Company are consequently
affected by the strength of the currencies in countries where it provides
services relative to the strength of the currencies in the countries where its
services are performed. The Company's results of operations and financial
condition may be adversely affected by fluctuations in foreign currencies and by
translations of the financial statement of the Latin Gate from local currencies
into U.S. dollars. Further, the Company's international operations are generally
subject to various risks that are not present in domestic operations, including
restrictions on dividends and repatriation of funds.
Accounts Receivable
The Company sells its data transport and conversion services to customers
throughout the United States and in some foreign countries. The Company performs
periodic credit evaluations of its customers and does not obtain collateral with
which to secure its accounts receivables. The Company maintains reserves for
potential credit losses based upon the Company's historical experience related
to credit losses. Although the Company expects to collect amounts due, actual
collections may differ. As of June 30, 1998 and 1999, the Company has not
recorded a reserve for potential credit losses, since accounts receivable for
such periods were insignificant.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all wholly owned and majority-owned subsidiaries. Investments in companies
in which (i) ownership interests range from 20 to 50 percent and (ii) the
Company exercises significant influence over operating and financial policies
are accounted for using the equity method. Other investments are accounted for
using the cost method. All significant intercompany accounts and transactions
have been eliminated.
Unaudited Interim Consolidated Financial Statements
The consolidated financial statements as of December 31, 1999 and for the
six months ended December 31, 1998 and 1999 are unaudited, and have been
prepared on the same basis as the audited financial statements included herein.
In the opinion of management, such unaudited financial statements include all
F-12
<PAGE> 84
eVENTURES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adjustments consisting of normal recurring accruals necessary to present fairly
the information set forth therein. Results for interim periods are not
necessarily indicative of results to be expected for an entire year.
Deposits
Deposits represent security deposits for facility leases, advance payments
to vendors for the purchases of property and equipment and Direct Costs.
Available-For-Sale Securities
The Company accounts for its available-for-sale securities in accordance
with Statement of Financial Accounting Standards No. 115 ("SFAS 115"),
"Accounting for Certain Investments in Debt and Equity Securities." SFAS 115
addresses the accounting and reporting for investments in equity securities
which have readily determinable fair values and all investments in debt
securities.
The Company's marketable equity securities are classified as
available-for-sale under SFAS 115 and are reported at fair value, with changes
in the unrealized holding gain or loss included in shareholders' deficit. As of
June 30, 1998, available-for-sale securities consisted of a 5% Treasury Bill, in
the amount of $250,556. During Fiscal 1999, the Company sold the Treasury Bill
and recognized a loss of $3,420. There were no unrealized gains or loss on
available-for-sale securities during any period presented.
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from five to seven years. Maintenance and repairs are charged to expense
as incurred. Significant renewals and betterments are capitalized. As of the
time of retirement or other disposition of property and equipment, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in operations.
The Company assesses the recoverability of property and equipment by
determining whether the depreciation and amortization of property and equipment
over its remaining life can be recovered through projected undiscounted future
cash flows. The amount of property and equipment impairment, if any, is measured
based on fair value and is charged to operations in the period in which property
and equipment impairment is determined by management. During the years ended
June 30, 1997 and 1998, the Company recorded impairment losses on certain
property and equipment totaling $25,000 and $278,324, respectively. The amount
of the impairment was the book value of assets which were taken out of use
during the related periods. The impairment is recorded as a component of
selling, general and administrative expenses.
Goodwill
Goodwill arising from a change in ownership on July 1, 1998 and certain
elements of the Transaction (see Note 1) is amortized on a straight-line basis
over a ten-year life.
The Company assesses the recoverability of goodwill by determining whether
the amortization over its remaining life can be recovered through projected
undiscounted future cash flows. The amount of impairment, if any, is measured
based on fair value and is charged to operations in the period in which
impairment is determined by management. As of June 30, 1999 and December 31,
1999, the Company's management has not identified any material impairment of
goodwill.
Revenue Recognition and Customer Deposits
Revenues from Voice, Data, Fax, E-mail and Video transmission services are
recognized upon rendering of services to customers.
F-13
<PAGE> 85
eVENTURES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Internet access subscription service revenues are recognized over the
period that services are provided.
Server Co-location service revenues are recognized ratably over the
contractual period.
Deposits received from customers are deferred as customer deposits and are
recorded as current liabilities. The related revenue is recognized when the
related services are rendered.
Prepaid phone card revenues are earned when the cards are used. Revenues
related to unused cards are recorded as deferred revenue.
Foreign Currency Gain or Loss
The financial statements of the Latin Gate are remeasured into the U.S.
dollar functional currency for consolidation and reporting purposes. Current
rates of exchange are used to remeasure monetary assets and liabilities and
historical rate of exchange are used for nonmonetary assets and related elements
of expense. Revenue and other expense elements are remeasured at rates which
approximate the rates in effect on the transaction dates. Gains and losses
resulting from this remeasurement process are recognized currently in the
consolidated statement of operations. During fiscal 1998 and 1999, there were no
significant gains or losses with respect to this remeasurement process.
Mexican-based vendors invoice e.Volve in Mexican pesos. Certain of these
transactions are remeasured at the time in which the services are rendered to
the Company and are settled in US dollars at the time of payment for such
services, which results in foreign currency gain or loss. During fiscal 1998 and
1999, foreign currency gains and losses totaled $0 and $126,575, respectively.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Under the asset and liability method of SFAS 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statements carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on the deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is provided for significant
deferred tax assets when it is more likely than not that such assets will not be
recovered.
Stock Based Compensation
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 ("SFAS#123"), "Accounting for Stock Based
Compensation," which defines a fair value based method of accounting for
stock-based compensation. However, SFAS#123 allows an entity to continue to
measure compensation cost related to stock and stock options issued to employees
using the intrinsic method of accounting prescribed by Accounting Principles
Board Opinion No. 25 ("APB#25"), "Accounting for Stock Issued to Employees".
Entities electing to remain with the accounting method of APB#25 must make pro
forma disclosures of net income and earnings per share, as if the fair value
method of accounting defined in SFAS#123 had been applied. The Company has
elected to account for its stock-based compensation to employees under APB#25.
Earnings Per Share
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS#128"), Earnings Per Share ("EPS"). SFAS#128 requires
dual presentation of basic EPS and
F-14
<PAGE> 86
eVENTURES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
diluted EPS on the face of all income statements issued after December 15, 1997
for all entities with complex capital structures. Basic EPS is computed as net
income divided by the weighted average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur from
common shares issuable through stock options, warrants and convertible
debentures. Diluted EPS has not been presented for the effects of stock options,
warrants and convertible debentures as the effect would be antidilutive.
Accordingly, basic and diluted EPS did not differ for any period presented. EPS
is not presented for the Predecessor Information. For purposes of computation of
EPS, the shares issued for the acquisition of e.Volve (11,365,614 shares) are
deemed to have been in existence for the entire period.
Comprehensive Income (Loss)
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS#130"), "Reporting Comprehensive Income." This
statement establishes standards for reporting the components of comprehensive
income and requires that all items that are required to be recognized under
accounting standards as components of comprehensive income(loss) be included in
a financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income includes net income(loss) as well as
certain items that are reported directly within a separate component of
stockholders' deficit and bypass net loss. The Company adopted the provisions of
this statement in Fiscal 1998. These disclosure requirements had no impact on
the Company's financial statements.
Accounting Estimates
The preparation of financial statements in conformity 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 financial
statements, and the reported amounts of revenues and expenses during the
reported periods. Actual results could materially differ from those estimates.
Fair Value of Financial Instruments
The carrying value of financial instruments approximated fair value as of
June 30, 1998 and 1999 due to either short maturity or terms similar to those
available to similar companies in the open market.
Segment Information
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" for fiscal 1999. The statement requires
disclosure of certain financial information related to operating segments. The
Company has determined that it operates in one reportable segment (see Note 1).
Effect of New Accounting Pronouncements
The American Institute of Certified Public Accountants has issued Statement
of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up Activities."
This SOP defines start-up activities as those one-time activities related to
opening a new facility, introducing a new product or service, conducting
business in a new territory, conducting business with a new class of customers,
initiating a new process in an existing facility, or commencing some new
operation. SOP 98-5 requires that these start-up costs be expensed as incurred.
This SOP is effective for financial statements for fiscal years beginning after
December 15, 1998, and therefore was adopted on July 1, 1999 for the Company.
The adoption of SOP 98-5 has not materially impacted the results of operations,
financial position, and financial statement disclosures, and is not expected to
have a significant impact on future financial statements.
F-15
<PAGE> 87
eVENTURES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1998, the Financial Accounting Standards Board, issued Statement of
Financial Accounting Standards No. 133 ("SFAS#133"); "Accounting for Derivative
Instruments and Hedging Activities," SFAS#133 requires companies to recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS#133 is effective for
fiscal years beginning after June 15, 2000. The Company does not presently enter
into any transactions involving derivative financial instruments and,
accordingly, does not anticipate the new standard will have any effect on its
financial statements for the foreseeable future.
4. RESTRICTED CASH
As of June 30, 1999, restricted cash consists of two certificates of
deposits (including accrued interest) that serve as collateral on a certain
letter of credit totaling $1,061,000. As of June 30, 1999, no amounts were drawn
down on such letter of credit. The full amount of the letter of credit was drawn
down on October 5, 1999 and repaid by December 31, 1999.
As of December 31, 1999, restricted cash consists of one certificate of
deposit that serves as collateral on a certain letter of credit totaling
$750,000. As of December 31, 1999, no amounts were drawn down on such letter of
credit.
5. INVESTMENTS
The Company has made investments in the following companies:
<TABLE>
<CAPTION>
INVESTMENT INVESTMENT
BALANCE @ BALANCE @
JUNE 30, DECEMBER 31,
ACCOUNTING COMPANY NAME % OWNERSHIP METHOD 1999 1999
- ----------------------- ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Innovative Calling Technologies,
LLC............................... 50.0% equity basis $ 91,354 $ 158,387
i2v2.com (d/b/a PhoneFree.com)...... 16.0% cost basis 2,100,144 2,100,144
FonBox, Inc. ....................... 8.0% cost basis -- 500,000
</TABLE>
On April 19, 1999, the Company entered into a joint venture with Dataten
Technologies to form Innovative Calling Technologies, LLC ("ICT") with each
party owning 50% of ICT. The Company does not exercise control of the joint
venture and thus accounts for its investments pursuant to the equity method.
During Fiscal 1999, the Company recorded an investment of $125,130, reduced by
equity in loss of unconsolidated subsidiary of $33,776.
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------------------- ------------
1998 1999 1999
---------- ---------- ------------
<S> <C> <C> <C>
Leasehold Improvements.......................... $ 182,308 $ 257,217 $ 334,559
Network equipment under capital leases.......... 862,518 5,985,121 11,146,106
Other equipment................................. 497,375 751,512 3,047,440
Furniture and fixtures.......................... 10,086 10,552 27,862
---------- ---------- -----------
1,552,287 7,004,402 14,555,967
Accumulated depreciation and amortization..... (105,043) (784,528) (1,675,469)
---------- ---------- -----------
$1,447,244 $6,219,874 $12,880,498
========== ========== ===========
</TABLE>
F-16
<PAGE> 88
eVENTURES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the years ended June 30, 1997, 1998 and 1999, depreciation and
amortization expense totaled $0, $105,043 and $957,966, respectively. During the
six months ended December 31, 1998 and 1999, depreciation and amortization
expense totaled $374,619 and $775,016, respectfully.
Property and equipment included assets under capital leases at December 31,
1999, June 30, 1999 and 1998 with a cost of $11,146,106, $5,985,121 and
$862,518, respectively, and accumulated amortization of $1,141,131, $664,905,
and $35,642, respectively.
7. VAT RECEIVABLE
VAT is a tax similar in nature to a sale and/or use tax. VAT is assessed by
vendors operating in foreign countries, specifically Mexico. The tax is paid by
e.Volve directly to the assessing vendor who remits the tax to the Mexican
taxing authority ("MTA"). Based on an injunction received from the MTA, e.Volve
is exempt from incurring this tax. As of June 30, 1998 and 1999, VAT receivable
consists of amounts due and payable to e.Volve by either the assessing vendor or
MTA (as applicable). Subsequent to year-end, all such amounts due at year-end
have been refunded to e.Volve.
8. DEBENTURES
During Fiscal 1998 and 1999, the Company issued debentures aggregating
$8,040,000 to the Major Stockholders. The debentures bear interest at 8% per
annum, and generally mature within a two year period. The debenture agreement
was amended with each additional issue, in some instances resulting in extended
maturity dates. The issues (as amended) were as follows:
<TABLE>
<CAPTION>
ISSUANCE DATE MATURITY DATE AMOUNT
- ------------- --------------- ----------
<S> <C> <C>
June 11, 1998 June 30, 2000 $6,000,000
August 19, 1998 June 30, 2000 850,000
April 15, 1999 June 30, 2000 200,000
----------
April 15, 1999 June 30, 2000 7,050,000
February 9, 1999 June 30, 1999 390,000
April 29, 1999 August 27, 1999 500,000
April 30, 1999 August 28, 1999 100,000
----------
$8,040,000
==========
</TABLE>
In connection with the June 11, 1998 debenture, the Company issued a total
of 2400 common shares to one of the Major Stockholders or predecessors in
interest, which gave such Major Stockholder a 66.7% interest in the common
shares of the Company. (See Note 1). The value of the shares issued was recorded
at estimated fair value, and a debt discount of $2,000,000 was recorded, with an
offsetting credit to Additional Paid In Capital. The debt discount is amortized
over the contractual period of the related debentures as a component of interest
expense.
The June 11, 1998, August 19, 1998 and April 15, 1999 debentures are
repayable monthly with accrued interest at various amounts, with all unpaid
principal and interest due upon maturity. At June 30, 1999 the Company was in
default of its payment obligations in connection with these debentures. The
Major Stockholders or predecessors in interest that owned such debenture waived
its right to demand immediate repayment of these debentures and subsequently
sold its Notes Receivable (see below).
The February 9, 1999 debenture is payable in full (including interest) on
the maturity date. In the event the amount is not paid in full by that date, the
balance is convertible into common stock of e.Volve at the option of the lender,
at a conversion price of $2,778 per share, which was the deemed fair value of
shares at the issue date.
F-17
<PAGE> 89
eVENTURES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The April 29 and 30, 1999 debentures are repayable on the maturity date.
On September 22, 1999, as part of the Transaction (see Note 1), the Major
Stockholders or predecessors in interest that owned such debentures sold their
related notes receivable from e.Volve to eVentures and, as a result, debentures
are reflected as long term liabilities on the June 30, 1998 and 1999 balance
sheets. At the time of the Transaction, the unamortized debt discount of
$917,615 on June 11, 1998 debenture was written off. In addition, as part of
this transaction, the debentures were restructured into a single debenture with
a maturity date of December 31, 1999. At December 31, 1999, e.Volve's debentures
and eVentures' notes receivable eliminate on consolidation.
9. OBLIGATIONS UNDER CAPITAL LEASES
The Company is a lessee under certain noncancelable capital leases, which
are secured by certain property and equipment (see Note 5). Terms of the leases
call for monthly payments ranging from $1,601 to $32,711, including implicit
rates ranging from 10.0% to 13.6% per annum. Future minimum lease payments under
these capital leases are as follows:
<TABLE>
<CAPTION>
1999
-----------
<S> <C>
FOR THE YEAR ENDED JUNE 30,
2000........................................................ $ 2,140,641
2001........................................................ 1,313,304
2002........................................................ 937,570
-----------
4,391,515
Amount representing interest................................ (443,241)
-----------
Present value............................................... 3,948,274
Current portion............................................. (1,916,761)
-----------
$ 2,031,513
===========
</TABLE>
Subsequent to June 30, 1999, the Company had entered into two additional
noncancelable capital leases for a total of $4,825,349, which are secured by
certain property and equipment. Terms of these leases call for 39 and 60 monthly
payments of $45,365 and $84,162, including implicit interest rates of 15.4% and
11.5%, respectively.
10. STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
Common stock consisted of the following:
December 31, 1999
Common Stock ($.00002 par value, 75,000,000 shares authorized,
45,834,662 issued and outstanding)
June 30, 1999
Common Stock ($.01 par value, 3,600 shares authorized, issued and
outstanding)
June 30, 1998
Common Stock ($.1 par value, 3,600 shares authorized, issued and
outstanding)
F-18
<PAGE> 90
eVENTURES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Preferred Stock
Preferred Stock consisted of the following:
December 31, 1999
Series A Convertible Preferred Stock ($.00002 par value, 5,000 shares
authorized, 0 shares issued and outstanding)
Series B Convertible Preferred Stock ($.00002 par value, 25,000 shares
authorized, 7,000 shares issued and outstanding)
7,000 shares of Series B convertible Preferred Stock with a par value of
$.00002 per share were issued on November 19, 1999, November 26, 1999 and
December 15, 1999 at a price of $1,000 per share. The shares are
convertible into common shares at a price of $13.80 per share, subject to
certain anti-dilution adjustments. As a result of the beneficial conversion
rates applied to the above securities, a preferred dividend of $1,115,943
has been recorded during the six months ended December 31, 1999.
Stock Options
e.Volve had a non-formalized stock option plan (the "Plan"), whereby
incentive stock options could be granted to certain employees, directors,
officers and others to purchase shares of e.Volve's common stock. Options
granted pursuant to the Plan vested at various percentages within two years of
the date of grant and expired within five years from the date of grant or upon
termination of employment (as defined).
During Fiscal 1999, the Company granted 90 stock options to an officer of
the Company with an exercise price of $2,778, of which 45 options vested
immediately and the remaining 45 options will become fully vested on December
31, 1999. During Fiscal 1999, pursuant to an employment agreement (see Note 12),
the Company granted 90 stock options to an Officer of the Company with an
exercise price of $7,077 (the deemed fair value of the stock), of which 45
options vested on March 8, 1999 and the remaining 45 options became fully vested
on March 23, 1999. During Fiscal 1999, the Company granted 600 stock options to
certain officers and employees of the Company with an exercise prices of $2,778,
of which 301 options vested on April 30, 1999 and the remaining 299 options
becoming fully vested on April 1, 2000. As of June 30, 1999, 436 of such options
were exercisable.
In accordance with APB#25, no compensation expense was recorded in relation
to the above options. However, pro forma information regarding net income (loss)
is required by SFAS 123, and has been determined as if the Company had accounted
for its 780 stock options granted during Fiscal 1999 under the fair value
method. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following assumptions: stock
price of $2,778 per share; risk-free interest rates ranging from 5.1% to 5.4%
(depending on the expected term of the option and the date of grant); dividend
yield of 0.0%; volatility factor of the expected market price of the Company's
common stock of 0.0% (due to no significant market for trading of the Company's
common stock, volatility has been assessed at 0.0%; the result of excluding
volatility in estimating an option's value is an amount commonly termed minimum
value); and expected terms of 5 years.
The Black-Scholes valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-19
<PAGE> 91
eVENTURES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information relative to e.Volve's option plan is as follows:
<TABLE>
<CAPTION>
FISCAL 1999
-----------
<S> <C>
PRO FORMA NET LOSS:
Net loss as reported........................................ $(5,462,322)
Additional compensation expense under SFAS#123.............. (453,000)
-----------
$(5,915,322)
===========
</TABLE>
During the years ended June 30, 1997 and 1998, no options were granted and
therefore pro forma information has only been presented for fiscal 1999.
On September 22, 1999, the Company terminated the share option plans of
e.Volve and AxisTel and adopted a new share option plan (the "Plan") for its
employees, officers, directors and consultants (whether or not employees) as
part of the Agreement and Plan of Reorganization entered into in connection with
the Transaction (see Note 1). The Plan provides for the grant of incentive stock
options and non-qualified stock options. The terms of the options are set by the
Company's board of directors, with the ability to accelerate vesting at its
discretion at any time. The options expire no later than ten years after the
date the stock option is granted.
On October 14, 1999, the Company granted an additional 425,000 options to
directors and employees. These options vest over various periods, as noted in
chart below. The number of shares authorized for grants under the Share Option
Plan is 15% of outstanding, provided that no more than 4 million options can be
"incentive" stock options. As of December 31, 1999, no options had been
exercised.
The following options were granted during the six months ended December 31,
1999:
<TABLE>
<CAPTION>
VESTING PERIOD
EXERCISE FROM DATE
DATE OF ISSUE OPTIONS PRICE OF ISSUE
- ------------- --------- -------- --------------
<S> <C> <C> <C>
September 22, 1999 300,000 $10.00 At Issuance
October 14, 1999 100,000 $10.00
September 22, 1999 191,666 $ 2.50 One Year
September 22, 1999 724,998 $10.00
October 14, 1999 150,000 $10.00
October 14, 1999 24,999 $15.00
September 22, 1999 25,000 $ 2.50 Two Years
September 22, 1999 166,667 $ 5.00
September 22, 1999 425,001 $10.00
October 14, 1999 50,000 $10.00
October 14, 1999 25,000 $15.00
September 22, 1999 25,000 $ 2.50 Three Years
September 22, 1999 166,667 $ 7.50
September 22, 1999 425,001 $10.00
October 14, 1999 50,000 $10.00
October 14, 1999 25,001 $15.00
---------
2,875,000
=========
</TABLE>
F-20
<PAGE> 92
eVENTURES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the above, the Company recorded deferred compensation of
$453,000 on September 22, 1999 and $2,812,500 on October 14, 1999 with related
credits to additional paid in capital. The amount of the deferred compensation
was based upon the intrinsic value of options granted to employees which had an
exercise price lower than the market price of the underlying stock on the day of
the grant. The deferred compensation will be amortized over the related vesting
periods and recorded as compensation expense in the statement of operations.
Warrants
In connection with the issuance of the Amended and Restated Debenture
Agreement dated April 15, 1999 (see Note 7), the Company issued common stock
purchase warrants (the "Warrants") to the Debenture Holder granting the right to
acquire 340 shares of Common Stock. The Warrants have an exercise price of
$2,778 per share and expire within five years of the date of grant (as defined).
As of June 30, 1999, none of the Warrants have been exercised.
The Company has accounted for its 340 common stock debenture warrants
granted during Fiscal 1999 at fair value. The Company has estimated the fair
value of the Warrants, original issue discount ("OID"), at $210,000. The OID has
been reflected as an increase in additional paid-in capital and as a reduction
of the February Debenture and is being amortized to interest expense utilizing
the effective interest method over the term of the Note. During Fiscal 1999,
amortization of OID on the February Debentures totaled $40,281. The fair value
for these warrants was estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions: stock price of $2,778 per
share; risk-free interest rate of 5.0% (based on the expected term of the option
and the date of grant); dividend yield of 0.0%; volatility factor of the
expected market price of the Company's common stock of 0.0% (due to no
significant market for trading of the Company's common stock, volatility has
been assessed at 0.0%; the result of excluding volatility in estimating an
option's value is an amount commonly termed minimum value); and expected terms
of 5 years.
11. INCOME TAXES
There is no provision for income tax expense since the Company incurred net
losses for all periods presented.
Deferred tax assets of approximately $1,015,000 and $2,226,000 as at June
30, 1998 and 1999 result primarily from Net Operating Losses ("NOL's") and have
been fully offset by valuation allowances due to the lack of certainty as to the
ultimate realization of any benefits resulting from such NOLs.
As at June 30, 1999, e.Volve had NOLs of approximately $6,547,000. Due to
restrictions on use of NOLs following a change in ownership, these NOLs may not
be used by the Company prior to their expiration, which is in various years
through 2018.
12. RELATED PARTY TRANSACTIONS
Administrative Expenses
During the years ended June 30, 1997, 1998 and 1999, the Company shared
office space, payroll and certain other administrative expenses with a related
party ("Orix Systems"). The Company paid Orix Systems $408,734, $676,227 and
$156,597, for the years ended June 30, 1997, 1998, and 1999 respectively, with
respect to such expenses.
Advances From Shareholder
Advances due from shareholder relate to advances made by the majority
shareholder of the Predecessor. The advances are non-interest bearing and are
due on demand. As of June 30, 1998 and 1999, advances due from shareholder
totaled $60,920 and $0, respectively.
F-21
<PAGE> 93
eVENTURES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Sales to Affiliates
Sales to PhoneFree.com and ICT totaled $44,100 and $37,500, respectively,
for the six months ended December 31, 1999.
13. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company is a lessee under certain noncancelable operating leases. Terms
of the leases call for monthly payments ranging from $400 to $168,000. Future
minimum lease payments under these noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
1999
--------
<S> <C>
FOR THE YEAR ENDED JUNE 30,
2000........................................................ $249,920
2001........................................................ 165,358
2002........................................................ 147,168
2003........................................................ 114,137
2004........................................................ 66,101
Thereafter.................................................. 38,556
--------
$781,240
========
</TABLE>
During the years ended June 30, 1997, 1998 and 1999, the Company incurred
rent expense of $73,211, $1,346,968 and $4,555,513 respectively. (see Note 11)
During the six months ended December 31, 1999, the Company entered into a
three year noncancelable operating lease for a fiber optic cable calling for
monthly payments of $94,972.
Litigation
The Company is a defendant in two lawsuits arising out of the ordinary
course of business. In each case the plaintiff is seeking damages against the
Company primarily for breach of contract. As of June 30, 1998 and 1999, the
Company has expensed and accrued a total of $381,802 and $665,299, respectively,
pursuant to these claims, which is expected to be the Company's total exposure.
The related costs are included as a component of selling, general and
administrative expenses.
In November 1998, representatives of Mexico's Federal Telecommunications
Commission ("COFETEL") entered the premises of the Company's wholly owned
subsidiary, Latin Gate, and attempted to confiscate Latin Gate's equipment
pursuant to a visitation order under a verification administrative proceeding
(procedimiento administrativo de verificacion). Latin Gate filed a Federal
constitutional court action known as juicio de amparo against COFETEL in a
Mexican Federal district court (juzgado de distrito), principally alleging that
the visitation order failed to comply with Mexican constitutional requirements
and that the search and seizure were illegal under Mexican law. A juicio de
amparo has two stages: the suspension of the acts of authority complained of and
a constitutional review. The former stage has two phases: temporary restraining
order (suspension provisional) and a final restraining order (suspension
definitiva). The purpose of the constitutional review is to determine whether
the acts of authority complained of are constitutional. Should the court
determine that the acts of authority complained of are unconstitutional, a final
judgment (sentencia final) is rendered, the principal effect of which is the
granting of the protection of the Federal courts against such acts. On November
24, 1998, Latin Gate obtained a temporary restraining order which preserved the
status quo of the Latin Gate equipment and suspended the administrative
proceeding, therefore prohibiting COFETEL from re-entering Latin Gate's
premises. On December 21, 1998, Latin Gate
F-22
<PAGE> 94
eVENTURES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
obtained a final restraining order (suspension definitiva). On May 24, 1999, a
final judgment was rendered by the district court in favor of Latin Gate, which
judgment declared COFETEL's acts unconstitutional and, as a consequence, granted
Latin Gate the protection of the Federal courts. On July 7, 1999, COFETEL
appealed, through a recurso de revision, to a higher court (tribunal colegiado
de circuito) seeking a review of the district court judgment. As of March 7,
2000, the appeal is still pending. It may not be possible to ascertain the
definitive outcome of this matter but Latin Gate continues to defend itself in
Mexican courts. The loss of Latin Gate's equipment might have an adverse effect
on the Company's financial condition. The cost of litigation, regardless of the
outcome, may have an adverse effect on the Company's financial condition. As of
June 30, 1999, no amounts have been accrued for this matter.
The Company is involved in other litigation arising out of the ordinary
course of business. Management believes, based in part on the advice of outside
counsel, that these matters will not have a material adverse effect on the
accompanying consolidated financial statements.
Employment Agreements
The Company has entered into multi-year employment agreements or management
contracts with six of its senior executives. These agreements mature at various
times beginning in June 2000 and ending in September 2002. These agreements
provide for annual salaries ranging between $100,000 and $200,000. In addition,
certain of these employees were granted options to purchase common stock under
the Company's Share Option Plan. These options, if exercised, would represent
the right to purchase 1,850,000 shares of common stock at various exercise
prices ranging from $2.50 to $10.00 per option (See Note 9).
Marketing Agreements
On January 1, 1999, the Company entered into an agreement with Corpovision
S.A. de C.V. ("Corpovision") to provide marketing services to locate and develop
clients for telecommunications services. As long as e.Volve conducts business
with the clients listed in the agreement, the Company must pay a minimum
compensation amount of $100,000 per month in any month sales are made, within
thirty days after the end of each period. The payment must be in the form of
cash or a subordinated, non-recourse promissory note to be paid with any
available cash flow. The term of the agreement is for thirty years. As of June
30, 1999, the Company had paid compensation amounting to $200,000 and had a note
outstanding for the remaining months of $300,000. During Fiscal 1999, the
Company incurred compensation expense related to such agreement totaling
$500,000. On November 30, this agreement was terminated. The Company settled its
liability to Corpovision and terminated the agreement through an issue of
137,500 shares of eVentures. As a result, the Company recorded a charge in the
statement of operations of approximately $1,600,000 during the six months ended
December 31, 1999 for the difference between the value of the shares issued and
the book value of the note payable to Corpovision.
Agreements with Vendors
On October 9, 1996, the Company entered into an agreement with a vendor to
provide sundry telecom services which expired on October 9, 1999.
On April 29, 1998, the Company entered into an agreement with Qwest for
telecommunication services. The agreement can be terminated at any time by
either party upon a thirty-day notice and can be automatically renewed for
successive one-year periods. Rates for services disclosed in the agreement are
subject to change at any time.
On September 30, 1999, e.Volve and Qwest Communications Corporation entered
into an Indefeasible Right of Use ("IRU") agreement in which Qwest granted
e.Volve an indefeasible right of use to a fiber optic circuit operated by Qwest
between New York, New York and Los Angeles, California for a period of twenty
F-23
<PAGE> 95
eVENTURES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
years. In consideration for this indefeasible right of use, e.Volve agreed to
pay Qwest a total of $15.0 million in four installments between October 1, 1999
and September 30, 2001. In addition, e.Volve has been required to pay Qwest a
monthly operation and maintenance charge of $25,000 per month since January 1,
2000.
Pursuant to the IRU agreement, e.Volve must separately arrange for a
collocation space in the Qwest terminal facilities or obtain from a local
telecommunications distributor the telecommunications transmission facilities
required in order to extend each route from a cross-connect panel at Qwest's
terminal facility to a location outside of the Qwest terminal facility. As of
March 7, 2000, e.Volve had not utilized its right to use the fiber optic
circuit. However, e.Volve has not entered into any collocation agreement with
Qwest or any other local telecommunications distributor as required under the
IRU agreement and has not obtained the telecommunications transmission necessary
to extend each route to a location outside of the Qwest terminal facility.
Consequently, the route from New York to Los Angeles lies inactive and has not
received any traffic from e.Volve.
On December 23, 1999, Qwest made a demand for payment of the first
installment of $3.75 million. Thereafter, Quest has sent invoices to e.Volve
requesting payment of the full $15.0 million. e.Volve has not made this payment
and e.Volve, eVentures and Qwest have commenced negotiations for a restructuring
of the terms of the IRU agreement. As of March 7, 2000, e.Volve and Qwest have
not reached an agreement regarding this dispute. The accompanying financial
statements do not include any adjustments which may be necessary related to the
above transaction.
On August 31, 1999, the Company entered into a joint venture agreement with
Uni-Tel, Inc., a Texas corporation that operates in the United States and India
and provides international telecommunications services. The agreement formed a
strategic alliance in which Uni-Tel would manage telecommunications equipment
and software owned by the Company, which was located in the United States and
India and deliver telecommunications traffic carried by the Company from the
United States terminating in India.
Under the terms of the agreement, the Company paid Uni-Tel $800,000 for the
purchase of five systems of telecommunications equipment and software and has
been invoiced for an additional $450,000, payable in shares of eVentures' common
stock, to complete the payment for these systems. In addition, the Company
agreed to pay $250,000 for the purchase of each of up to seven additional
telecommunications termination systems. The $250,000 to be paid by the Company
for each new termination system is to be paid in two installments. The first
$100,000 of each installment is due upon seven days notice of the proposed
installation of a new termination system, and the remaining $150,000 is payable
in shares of the Company's common stock and is due upon the completion of two
weeks' testing and acceptance of the termination system by the Company.
In addition to the purchase of the termination systems, within a month of
commencing operations, the Company is to supply a minimum of 300,000 minutes of
usage per location per month and within ninety days of commencing operations
increase such usage to a monthly minimum of 450,000 minutes per location. In
exchange for Uni-Tel's termination of the traffic supplied to India, the Company
pays Uni-Tel a termination fee of $0.14 per minute to cover operating costs in
India. In addition, Uni-Tel, at its sole expense, is responsible for the overall
daily management of the system sites in Dallas and in India, whereas the Company
pays Uni-Tel for managing systems located in sites other than Dallas and India.
All adjusted gross profits of the business arrangements contemplated in the
agreement are shared equally between the Company and Uni-Tel.
The Company believes that Uni-Tel has breached its agreements by failing to
adequately manage its network, and pay its expenses related to operations in
India and has stopped making certain payments to Uni-Tel. The Company and
Uni-Tel are negotiating a settlement agreement in order to resolve this dispute.
F-24
<PAGE> 96
eVENTURES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. PRO FORMA FINANCIAL DATA (UNAUDITED)
On September 22, 1999, the Company acquired all of the outstanding shares
of AxisTel, approximately 66.67% of the outstanding shares of e.Volve, and
approximately 17% of the outstanding shares of i2v2.com. All of the acquisitions
were settled through the issuance of stock of eVentures.
Set forth below is the Company's unaudited pro forma condensed statement of
operations for the year ended June 30, 1999 and the six months ended December
31, 1999 as though the Transaction had occurred on July 1, 1998, after
adjustments related to goodwill, amortization of intangible assets and debt
discount and interest expense relating to the e.Volve debentures. The unaudited
pro forma results are not necessarily indicative of either actual results of
operations that would have occurred had the Transaction occurred on July 1,
1998, respectively, or of future results.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1999 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
Revenues............................................... $ 35,215,916 $ 28,403,640
Net loss............................................... $(10,501,114) $(11,821,902)
Net loss per share..................................... $ (0.25) $ (0.27)
</TABLE>
15. GOODWILL
Goodwill of $3,414,319 arose upon the change of control on July 1, 1998
(see Note 1). Goodwill of $17,162,468 arose upon the acquisition of AxisTel on
September 22, 1999 as part of the Transaction (see Note 1). Goodwill of
$11,662,506 arose upon the acquisition of 33.3% of e.volve on October 19, 1999
(See Note 1). Accumulated amortization as of June 30, 1999 and December 31, 1999
was $341,434 and $1,543,506, respectively.
16. SUBSEQUENT EVENTS
In a series of transactions closed between January 6 and February 4, 2000,
the Company issued 15,570 shares of Series C Convertible Preferred Stock, par
value $0.00002 per share, to eight accredited investors, at a price of $1,000
per share. The shares are convertible into shares of eVentures' common stock at
a price of $17.90 per share, subject to certain anti-dilution adjustments. The
conversion price was determined using the average of the closing bid prices per
share of eVentures' common stock for the 20 trading days ended December 10,
1999. The effect of the favorable conversion rate will be recorded as an imputed
preferred dividend in the third quarter of fiscal 2000.
On January 31, 2000, pursuant to an option granted in connection with the
Company's initial investment in Fonbox, the Company purchased 1,000,000 newly
issued shares of Series A preferred stock of Fonbox for $1.0 million cash. In
addition, in connection with the exercise of this option, the Company acquired
350,000 shares of common stock of Fonbox from each of Spydre Zeta L.L.C. and
NetProvide Ltd. in exchange for an aggregate of 27,860 shares of eVentures'
common stock. As of March 7, 2000, the Company owns approximately 31% of the
capital stock of Fonbox. Accordingly, the investment in Fonbox will be accounted
for on the equity basis after January 31, 2000.
On January 28, 2000, the Company acquired 100,000 Series A Preferred Units
of LC39 Venture Group LLC ("LC39"), representing less than 5% of the equity and
voting interests of LC39, for $1.0 million. LC39 is the legal name of Launch
Center 39.
On February 11, 2000, the Company acquired 750,000 shares of Series A-1
convertible preferred stock of Televant, Inc. ("Televant"), a Texas Corporation
(d/b/a Callrewards), for $750,000 which represents 30% of the outstanding
capital stock of Televant on a fully-diluted basis. Under the agreement with
Televant, the Company is obligated to purchase shares of Series A-2 convertible
preferred stock of Televant, which on the
F-25
<PAGE> 97
eVENTURES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
date of purchase will be convertible into 20% of the ownership interest in
Televant on a fully-diluted basis, for $1,000,000 when Televant has at least
100,000 active users. In addition the Company is obligated to purchase shares of
Series A-3 convertible preferred stock of Televant, which on the date of
purchase will be convertible into 20% of Televant on a fully-diluted basis, for
$2,500,000 when Televant has at least 250,000 active users.
On March 3, 2000, the Company loaned $3.0 million to PhoneFree.com under a
promissory note dated March 2, 2000. The promissory note is due on September 1,
2000 and bears interest at 7%. PhoneFree.com may repay this promissory note at
any time, subject to the Company's right to convert it into common stock of
PhoneFree.com. The Company can convert the promissory note into common stock of
PhoneFree.com:
(i) if PhoneFree.com raises equity capital from other investors on or
before August 31, 2000, in which case the Company's conversion price will
be equal to 95% of the per share subscription or conversion price in such
equity capital raise; or
(ii) if PhoneFree.com does not raise equity capital from other
investors on or before August 31, 2000, the Company can convert the
promissory note on or after September 1, 2000, at a per share conversion
price that values all the common and preferred stock of PhoneFree.com at
$50.0 million.
In connection with the loans made under the promissory note, the Company
also received a four-year warrant to purchase 240,000 shares of PhoneFree.com at
a price equal to 110% of the conversion price of the promissory note. The
warrant may not be called by PhoneFree. If the Company included this warrant,
but not the promissory note, the Company would beneficially own approximately
18% of the outstanding shares of common stock of PhoneFree.com.
On March 7, 2000, the Company entered into an agreement to acquire
approximately 5,970,000 shares of Internet Global Services, Inc.("IGS"),
representing approximately 92.6% of the issued and outstanding equity interests
of IGS, in exchange for approximately 2,588,000 shares of eVentures' common
stock. Under this agreement, following the Company's purchase of the IGS shares,
IGS will merge with and into the Company's wholly-owned subsidiary IGS
Acquisition Corporation, with IGS being the surviving corporation. The per share
consideration under the merger will be substantially the same as the
consideration paid under the agreement. This transaction remains subject to
customary closing conditions and the Company expects to close this transaction
during the third quarter of fiscal 2000.
F-26
<PAGE> 98
INDEPENDENT AUDITORS' REPORT
To the Stockholders
AxisTel Communications, Inc.
Jersey City, New Jersey
We have audited the accompanying balance sheets of AxisTel Communications,
Inc. as of December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the period from August 28,
1997 (inception) to December 31, 1997 and the year ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements 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 are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AxisTel Communications, Inc.
at December 31, 1997 and 1998, and the results of its operations and its cash
flows for the period from August 28, 1997 (inception) to December 31, 1997 and
the year ended December 31, 1998, in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
New York, New York
October 29, 1999
F-27
<PAGE> 99
AXISTEL COMMUNICATIONS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1998 1999
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT:
Cash................................................. $31,712 $1,418,070 $ 630,571
Accounts receivable -- net of allowances for doubtful
accounts of $-0-, $25,000 and $75,000,
respectively...................................... 38,250 302,100 1,054,563
Prepaid expenses and other current assets............ 2,443 35,898 217,300
------- ---------- -----------
TOTAL CURRENT ASSETS......................... 72,405 1,756,068 1,902,434
RESTRICTED CASH........................................ -- -- 750,000
PROPERTY, EQUIPMENT, AND CERTAIN INTANGIBLES AT COST,
NET OF ACCUMULATED DEPRECIATION...................... -- 1,693,055 394,583
LOAN ORIGINATION COSTS -- NET OF ACCUMULATED
AMORTIZATION OF $5,000 AND $55,000, RESPECTIVELY..... -- 55,000 --
OTHER ASSETS........................................... -- 46,800 46,800
------- ---------- -----------
$72,405 $3,550,923 $ 3,093,817
======= ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of notes payable -- Eraatel Corp..... $ -- $ 427,600 $ --
Notes payable -- stockholders........................ 10,000 25,000 25,625
Accounts payable and accrued expenses................ 47,204 369,604 1,203,760
Deferred revenue..................................... -- 110,000 176,230
------- ---------- -----------
TOTAL CURRENT LIABILITIES.................... 57,204 932,204 1,405,615
NOTES PAYABLE:
Eraatel Corp......................................... -- 1,072,400 --
Stockholder.......................................... -- 1,748,925 3,317,425
------- ---------- -----------
TOTAL LIABILITIES............................ 57,204 3,753,529 4,723,040
------- ---------- -----------
COMMITMENTS AND CONTINGENCY STOCKHOLDERS' EQUITY
(DEFICIT):
Common stock......................................... 15 15 15
Additional paid-in capital........................... 985 312,395 312,395
Retained earnings (deficit).......................... 14,201 (515,016) (1,941,633)
------- ---------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)......... 15,201 (202,606) (1,629,223)
------- ---------- -----------
$72,405 $3,550,923 $ 3,093,817
======= ========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-28
<PAGE> 100
AXISTEL COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 28, 1997
(INCEPTION) TO YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -------------------------
1997 1998 1998 1999
--------------- ------------ --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUES.......................... $69,250 $2,304,887 $ 529,241 $ 6,191,997
CARRIER CHARGES....................... 49,042 1,853,873 659,709 5,187,071
--------- -----------
20,208 451,014 (130,468) 1,004,926
------- ---------- --------- -----------
OTHER OPERATING EXPENSES:
Selling, general and
administrative................... 5,707 648,943 56,431 1,615,783
Line charges........................ -- 199,977 44,149 460,070
Cellular phones..................... -- 47,463 -- --
Printing............................ -- 38,780 -- --
------- ---------- --------- -----------
TOTAL OTHER OPERATING
EXPENSES.................. 5,707 935,163 100,580 2,075,853
------- ---------- --------- -----------
OPERATING INCOME (LOSS)..... 14,501 (484,149) (231,048) (1,070,927)
OTHER EXPENSES:
Interest expense, net............... -- 44,768 -- 255,690
Other expense....................... -- -- -- 100,000
------- ---------- --------- -----------
INCOME (LOSS) BEFORE TAXES
ON INCOME................. 14,501 (528,917) (231,048) (1,426,617)
TAXES ON INCOME....................... 300 300 -- --
------- ---------- --------- -----------
NET INCOME (LOSS)..................... $14,201 $ (529,217) $(231,048) $(1,426,617)
======= ========== ========= ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-29
<PAGE> 101
AXISTEL COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM AUGUST 28, 1997 (INCEPTION) TO DECEMBER 31, 1997, YEAR ENDED
DECEMBER 31, 1998 AND SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK, COMMON STOCK,
CLASS A CLASS B ADDITIONAL RETAINED
------------------ ------------------ PAID-IN EARNINGS STOCKHOLDERS'
SHARES PAR VALUE SHARES PAR VALUE CAPITAL (DEFICIT) EQUITY (DEFICIT)
------ --------- ------ --------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, AUGUST 28, 1997................ -- $-- -- $ -- $ -- $ -- $ --
Issuance of common stock.............. 1,500 15 -- -- 985 -- 1,000
Net income............................ -- -- -- -- -- 14,201 14,201
----- --- -- ----- -------- ----------- -----------
BALANCE, DECEMBER 31, 1997.............. 1,500 15 -- -- 985 14,201 15,201
Issuance of common stock.............. -- -- 1 -- -- -- --
Officer's salary-imputed.............. -- -- -- -- 12,000 -- 12,000
Options granted....................... -- -- -- -- 25,510 -- 25,510
Warrants granted...................... -- -- -- -- 273,900 -- 273,900
Net loss.............................. -- -- -- -- -- (529,217) (529,217)
----- --- -- ----- -------- ----------- -----------
BALANCE, DECEMBER 31, 1998.............. 1,500 15 1 -- 312,395 (515,016) (202,606)
Net loss (Unaudited).................. -- -- -- -- -- (1,426,617) (1,426,617)
----- --- -- ----- -------- ----------- -----------
BALANCE, JUNE 30, 1999 (UNAUDITED)...... 1,500 $15 1 $ -- $312,395 $(1,941,633) $(1,629,223)
===== === == ===== ======== =========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-30
<PAGE> 102
AXISTEL COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(NOTE 9)
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 28,
1997
(INCEPTION)
TO YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, --------------------------
1997 1998 1998 1999
------------ ------------ ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $ 14,201 $ (529,217) $(231,048) $(1,426,617)
-------- ---------- --------- -----------
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................ -- 15,564 -- 20,627
Amortization of loan origination costs....... -- 27,825 -- 123,500
Other expense................................ -- -- -- 100,000
Stock options issued in lieu of payment for
services................................... -- 25,510 -- --
Officer's salary -- imputed.................. -- 12,000 -- --
Decrease (increase) in:
Accounts receivable........................ (38,250) (278,100) 30,992 (752,463)
Prepaid expenses and other assets.......... (2,443) (72,697) (4,492) (181,402)
Restricted cash............................ -- -- -- (750,000)
Increase in:
Accounts payable and accrued expenses...... 47,204 329,092 174,419 834,156
Deferred revenue........................... -- 110,000 25,000 66,230
-------- ---------- --------- -----------
Total adjustments....................... 6,511 169,194 225,919 (539,352)
-------- ---------- --------- -----------
Net cash provided by (used in) operating
activities............................ 20,712 (360,023) (5,129) (1,965,969)
-------- ---------- --------- -----------
Cash flows from investing activities:
Capital expenditures............................ -- (208,619) -- (322,155)
-------- ---------- --------- -----------
Cash flows from financing activities:
Proceeds from:
Issuance of common stock..................... 1,000 -- -- --
Notes payable, net of loan origination
costs...................................... -- 1,940,000 -- 1,500,000
Loans from stockholders...................... 10,000 15,000 25,000 625
-------- ---------- --------- -----------
Net cash provided by financing
activities............................ 11,000 1,955,000 25,000 1,500,625
-------- ---------- --------- -----------
Net increase (decrease) in cash................... 31,712 1,386,358 19,871 (787,499)
Cash, beginning of period......................... -- 31,712 31,712 1,418,070
-------- ---------- --------- -----------
Cash, end of period............................... $ 31,712 $1,418,070 $ 51,583 $ 630,571
======== ========== ========= ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-31
<PAGE> 103
AXISTEL COMMUNICATIONS, INC.
SUMMARY OF ACCOUNTING POLICIES
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1999 IS UNAUDITED)
DESCRIPTION OF BUSINESS
AxisTel Communications, Inc. (the "Company") was incorporated in the State
of Delaware on August 28, 1997. Its services include the provision of
international and domestic voice and data applications over Company leased and
third party fiber optic networks and retail communication services, including
prepaid telephony.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The financial statements as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 are unaudited, and have been prepared on the same basis
as the audited financial statements included herein. In the opinion of
management, such unaudited financial statements include all adjustments
consisting of normal recurring accruals necessary to present fairly the
information set forth therein. Results for interim periods are not necessarily
indicative of results to be expected for an entire year.
PROPERTY, EQUIPMENT AND CERTAIN INTANGIBLES
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives.
LOAN ORIGINATION COSTS
Loan origination costs are amortized based on the interest method over the
contractual period of the loan (see Note 5).
INCOME TAXES
Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." SFAS No. 109 requires a company to recognize deferred tax
liabilities and assets for the expected future tax consequences of events that
have been recognized in a company's financial statements or tax returns. Under
this method, deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax basis of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. Deferred tax assets are reduced by a
valuation allowance to the extent realization is uncertain.
REVENUE RECOGNITION
Prepaid phone card revenues are earned when the prepaid phone cards are
used. Deferred revenues of $-0- and $110,000 at December 31, 1997 and 1998,
respectively, represent unused prepaid phone cards.
USE OF ESTIMATES
The preparation of financial statements in conformity 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-32
<PAGE> 104
AXISTEL COMMUNICATIONS, INC.
SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED)
LONG-LIVED ASSETS
Long-lived assets, such as property and equipment, are evaluated for
impairment when events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable through the estimated undiscounted
future cash flows from the use and sale of these assets. When any such
impairment exists, the related assets will be written down to fair value. No
impairment losses have been recognized through June 30, 1999.
F-33
<PAGE> 105
AXISTEL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1999 IS UNAUDITED)
1. TRANSACTIONS WITH RELATED PARTIES
Included in revenues for the year ended December 31, 1998 were revenues
from Debit Card Technologies Inc. totaling approximately $264,000. Debit Card
Technologies Inc. is wholly owned by an employee's spouse. All revenues for the
period August 28, 1997 (inception) to December 31, 1997 were received from Debit
Card Technologies, Inc.
2. PROPERTY AND EQUIPMENT AND CERTAIN INTANGIBLES
Major classes of property and equipment and certain intangibles are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- ESTIMATED
1997 1998 USEFUL LIVES
---------- ---------- ------------
<S> <C> <C> <C>
Indefeasible Right of Use of phone line........... $ -- $1,600,000 25 years
Equipment......................................... -- 108,619 3-4 years
---------- ----------
-- 1,708,619
Less: Accumulated depreciation.................... -- (15,564)
---------- ----------
$ -- $1,693,055
========== ==========
</TABLE>
3. NOTES PAYABLE -- ERAATEL CORP.
On December 3, 1998, the Company entered into an Indefeasible Right of Use
("IRU") agreement with Eraatel Corporation which provides for the use of a phone
line for 25 years. The Company leased the phone line between New York City, New
York and Miami, Florida for a one-time IRU fee of $1,600,000. The Company paid
$100,000 upon the execution of the agreement. The balance due of $1,500,000 is
payable in equal monthly installments over a term of 36 months with interest
accruing at 15%. As of December 31, 1998, $427,600 was classified as current and
$1,072,400 was classified as long-term debt.
In April 1999, the Company was notified that Eraatel Corporation had misled
the Company and, in fact, only had rights to the IRU for four months. As a
result, the above agreement was terminated and the related asset and notes
payable were written off. The $100,000 payment has been recorded as other
expense.
4. MAJOR CUSTOMERS
Two customers accounted for approximately 40% of accounts receivable at
December 31, 1998. Revenues from these customers accounted for approximately 6%
of revenues for the year ended December 31, 1998.
5. NOTES PAYABLE -- STOCKHOLDERS
On October 28, 1998, the Company issued notes to Infinity Emerging
Opportunities Limited ("IEOL") in an aggregate amount of $2,000,000. As of
December 31, 1998, the aggregate principal balance due was $2,000,000. The note
agreement provides for a further $1,500,000, of which $500,000 was received on
March 10, 1999 and $1,000,000 was received on April 19, 1999, and is subject to
certain conditions as set forth in the agreement. Interest is calculated at 8%
per annum and is payable monthly. The outstanding principal balance and any
unpaid interest shall be due and payable on October 28, 2000. The notes are
secured by all assets and equity interests of the Company.
As of December 31, 1998, the Company had not met, but was subsequently
granted waivers with respect to, certain reporting requirements under the above
notes.
In connection with the notes, the Company issued warrants to purchase 1,499
shares of Class B common stock, par value $.01 per share, of the Company at an
exercise price of $2,333.33 per share. The warrants were
F-34
<PAGE> 106
AXISTEL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
valued at approximately $274,000 using the Black-Scholes model and the Company
recorded the amount as a debt discount, with a related credit to additional
paid-in capital. The debt discount is being amortized over the life of the loan.
As of December 31, 1998, the balance of the debt discount, net of amortization,
was $251,075.
As additional consideration for the notes payable, the Company issued one
share of Class B common stock of the Company to IEOL at a purchase price of $1
(approximate fair value), with voting rights as set forth in the Certificate of
Incorporation of the Company entitling the purchasers to vote 50% of all issued
and outstanding shares of the common stock of the Company.
The Company had notes payable to one of its stockholders aggregating
$10,000 at December 31, 1997. The Company had notes payable to two of its
stockholders aggregating $25,000 at December 31, 1998. Interest is calculated at
5% per annum. The outstanding principal balance and any unpaid interest was due
and payable on October 28, 1999 and the notes were therefore classified as short
term.
6. COMMON STOCK
Common stock is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1998
---- ----
<S> <C> <C>
Class A shares; par value $.01, 45,000 shares authorized,
1,500 shares issued and outstanding....................... $15 $15
Class B shares; par value $.01, 45,000 shares authorized, 1
share issued and outstanding.............................. -- --
Class C shares; nonvoting par value $.01, 10,000 shares
authorized, none issued and outstanding................... -- --
--- ---
$15 $15
=== ===
</TABLE>
7. STOCK OPTIONS
On November 18, 1998, IEOL retained a consultant to perform services for
the Company. The consultant was granted stock options to purchase 30 shares of
Class C, nonvoting common stock, par value $.01, of the Company at an exercise
price of $2,333.33 per share. The stock options vest on May 18, 1999. The
options were valued at $25,510 using the Black-Scholes model and the Company
recorded the amount as compensation expense with a related credit to additional
paid-in capital.
8. COMMITMENTS
Leases
Minimum annual commitments under all noncancellable operating leases with
terms in excess of one year approximate:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C>
1999........................................................ $ 210,600
2000........................................................ 280,800
2001........................................................ 280,800
2002........................................................ 280,800
2003........................................................ 280,800
Thereafter.................................................. 1,582,200
----------
Total minimum lease payments................................ $2,916,000
==========
</TABLE>
F-35
<PAGE> 107
AXISTEL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense for the period from August 28, 1997 (inception) to December
31, 1997 and the year ended December 31, 1998 was approximately $1,000 and
$12,000, respectively.
9. STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 28,
1997 SIX MONTHS ENDED
(INCEPTION) TO YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ----------------
1997 1998 1998 1999
-------------- ------------ ----- --------
<S> <C> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest...................................... $ -- $ 13,333 $ -- $90,000
Taxes......................................... -- -- -- 1,100
Noncash investing and financing activities:
Capital leases entered into during the period.... -- 1,500,000 -- --
Warrants and options issued during the period.... -- 299,410 -- --
</TABLE>
10. INCOME TAXES
The Company has a deferred tax asset amounting to approximately $197,000 at
December 31, 1998, principally relating to net operating loss carryforwards and
a basis difference in the carrying amount of trade accounts receivable for
financial reporting purposes and the amount used for income tax purposes. The
Company recorded a valuation allowance amounting to the entire deferred tax
asset balance due to the Company's financial condition and its lack of a history
of consistent earnings, giving rise to uncertainty as to whether the deferred
tax asset is realizable. No amount of deferred Federal or state income tax is
therefore presented. Deferred income taxes are not material for the period ended
December 31, 1997.
As of December 31, 1998, the Company had net operating loss income tax
carryforwards of approximately $529,000, which expire in the years 1999 through
2018.
11. SUBSEQUENT EVENTS
On September 22, 1999, the following significant transactions occurred:
IEOL exercised its warrants to purchase 1,499 Class A shares of the Company,
which gave it 50% of the total outstanding shares of the Company. IEOL exchanged
its shares in the Company for shares of eVentures Group, Inc. ("eVentures").
eVentures acquired the other 50% of the Company's Class A shares from the
founding shareholders of the Company, settled through an issue of shares of
eVentures. These transactions consummated the acquisition of all of the
outstanding shares of the Company by eVentures.
F-36
<PAGE> 108
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information (the
"Unaudited Pro Forma Consolidated Financial Information") has been derived from
the application of pro forma adjustments to eVentures' consolidated historical
audited statement of operations for the year ended June 30, 1999 and the six
months ended December 31, 1999 included elsewhere herein.
The Unaudited Pro Forma Consolidated Financial Information gives effect to
the acquisition of AxisTel and the acquisition of the remaining 33.3% of e.Volve
as if each had occurred on July 1, 1998. There is no adjustment to minority
interest relative to the purchase of the remaining 33.3% of e.Volve since 100%
of the losses were already recorded in the historical financial statements. A
pro forma balance sheet has not been presented since these events are already
reflected in the historical balance sheet as of December 31, 1999 presented
elsewhere herein. The pro forma adjustments are described in the accompanying
notes.
The Unaudited Pro Forma Consolidated Financial Information is presented for
informational purposes only and does not purport to represent what eVentures'
results of operations would actually have been if the aforementioned events had
occurred on the date specified or to project eVentures' results of operations
for any future periods. The Unaudited Pro Forma Consolidated Financial
Information should be read in conjunction with eVentures' consolidated
historical financial statements, and the notes thereto, included elsewhere
herein.
P-1
<PAGE> 109
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
SEPTEMBER 22, 1999 EVENTS PURCHASE OF
------------------------- THE REMAINING
(1) PRO FORMA 33.3% OF
HISTORICAL AXISTEL ADJUSTMENTS SUBTOTAL E.VOLVE PRO FORMA
----------- ----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues....................... $27,248,273 $ 7,967,643 $ -- $35,215,916 $ -- $ 35,215,916
Direct costs................... 23,311,584 6,997,133 -- 30,308,717 -- 29,692,819
----------- ----------- ----------- ----------- ----------- ------------
Gross profit................... 3,936,689 970,510 -- 4,907,199 -- 4,907,199
Selling, general &
administrative expenses...... 7,551,131 2,309,538 1,213,997(2) 11,524,666 1,166,251(7) 12,690,917
450,000(3)
----------- ----------- ----------- ----------- ----------- ------------
Less from operations, before
other (income) expense....... (3,614,442) (1,339,028) (1,663,997) (6,617,467) (1,166,251) (7,783,718)
Other (income) expense
Interest expense, net........ 1,704,459 285,457 (557,574)(4) 473,675 -- 473,675
(958,667)(5)
Equity in loss of
affiliate.................. 33,776 -- -- 33,776 -- 33,776
Foreign currency (gain)
loss....................... 126,575 -- -- 126,575 -- 126,575
Debt discount................ -- -- 2,000,000(6) 2,000,000 -- 2,000,000
Other........................ (16,930) 100,000 -- 83,070 -- 83,070
----------- ----------- ----------- ----------- ----------- ------------
1,847,880 385,457 483,759 2,717,096 -- 2,717,096
----------- ----------- ----------- ----------- ----------- ------------
Net loss before provision for
taxes........................ (5,462,322) (1,724,485) (2,147,756) (9,334,563) (1,166,251) (10,500,814)
Provision for taxes............ -- 300 -- 300 -- 300
----------- ----------- ----------- ----------- ----------- ------------
Net loss....................... $(5,462,322) $(1,724,785) $(2,147,756) $(9,334,863) $(1,166,251) $(10,501,114)
=========== =========== =========== =========== =========== ============
</TABLE>
- ---------------
(1) Reflects the consolidation of the results of operations of AxisTel for the
period July 1, 1998 to June 30, 1999.
(2) Reflects the amortization of the goodwill arising from the purchase of 50%
of AxisTel from the founding shareholders on September 22, 1999, over a
period of 10 years.
(3) Reflects the amortization of the goodwill arising from the conversion of the
Major Shareholders' 1,499 options in AxisTel on September 22, 1999, over a
period of 10 years.
(4) Reflects the reversal of the interest expense relating to the e.Volve
debentures for which the related Notes Receivable were exchanged for stock
of eVentures by one of the Major Shareholders on September 22, 1999.
(5) Reflects the reversal of amortization relating to the Original Issue
Discount on the e.Volve debentures for which the related Notes Receivable
were exchanged for stock of eVentures by one of the Major Shareholders on
September 22, 1999.
(6) Reflects the write off of the Original Issue Discount on the e.Volve
debentures for which the related Notes Receivable were exchanged for stock
of eVentures by one of the Major Shareholders on September 22, 1999.
(7) Reflects the amortization of the goodwill arising from the purchase of the
remaining 1/3 of e.Volve on October 19, 1999 over a period of 10 years.
P-2
<PAGE> 110
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
SEPTEMBER 22, 1999 EVENTS PURCHASE OF THE
----------------------------------------- REMAINING
(1) PRO FORMA 33.3%
HISTORICAL AXISTEL ADJUSTMENTS SUBTOTAL OF E.VOLVE PRO FORMA
------------ ----------- ------------ ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................... $ 22,661,838 $ 5,741,802 $ -- $ 28,403,640 $ -- $ 28,403,640
Direct costs............... 21,759,782 5,900,284 -- 27,660,066 -- 27,660,066
------------ ----------- ------------ ------------ ---------- ------------
Gross profit (loss)........ 902,056 (158,483) -- 743,573 -- 743,573
Selling, general &
administrative
expenses................. 10,354,808 1,226,737 276,891(2) 11,961,073 291,563(7) 12,252,636
102,637(3)
------------ ----------- ------------ ------------ ---------- ------------
Loss from operations,
before other (income)
expense.................. (9,452,752) (1,385,220) (379,528) (11,217,500) (291,563) (11,509,063)
Other (income) expense
Interest expense, net.... 598,062 138,153 (160,800)(4) 281,978 -- 281,978
(293,437)(5)
Write off of unamortized
debt discount.......... 917,615 -- (917,615)(6) -- -- --
Equity in loss of
affiliate.............. 31,819 -- -- 31,819 -- 31,819
Foreign currency
(gain) loss............ (2,032) -- -- (2,032) -- (2,032)
Other.................... 1,074 -- -- 1,074 -- 1,074
------------ ----------- ------------ ------------ ---------- ------------
1,546,538 138,153 (1,371,852) 312,839 -- 312,839
------------ ----------- ------------ ------------ ---------- ------------
Net loss before provision
for taxes................ (10,999,290) (1,523,373) 992,324 (11,530,339) (291,563) (11,821,902)
Provision for taxes........ -- -- -- -- -- --
------------ ----------- ------------ ------------ ---------- ------------
Net income (loss).......... $(10,999,290) $(1,523,373) $ 992,324 $(11,530,339) $ (291,563) $(11,821,902)
============ =========== ============ ============ ========== ============
</TABLE>
- ---------------
(1) Reflects the consolidation of the results of operations of AxisTel for the
period July 1, 1999 to September 22, 1999.
(2) Reflects the amortization of the goodwill arising from the purchase of 50%
of AxistTel from the founding shareholders on September 22, 1999, over a
period of 10 years.
(3) Reflects the amortization of the goodwill arising from the conversion of the
Major Shareholders' 1,499 options in AxisTel on September 22, 1999, over a
period of 10 years.
(4) Reflects the reversal of the interest expense relating to the e.Volve
debentures for which the related Notes Receivable were exchanged for stock
of eVentures by one of the Major Shareholders on September 22, 1999.
(5) Reflects the reversal of amortization relating to the Original Issue
Discount on the e.Volve debentures for which the related Notes Receivable
were exchanged for stock of eVentures by one of the Major Shareholders on
September 22, 1999.
(6) Reflects the write off of the Original Issue Discount on the e.Volve
debentures for which the related Notes Receivable were exchanged for stock
of eVentures by one of the Major Shareholders on September 22, 1999.
(7) Reflects the amortization of the goodwill arising from the purchase of the
remaining 1/3 of e.Volve on October 19, 1999 over a period of 10 years.
P-3
<PAGE> 111
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
2.1 -- Agreement and Plan of Reorganization, dated as of
September 22, 1999, among the Registrant, eVentures
Holdings, L.L.C., IEO Holdings Limited, Infinity
Investors Limited, Mick Y. Wettreich, the purchasers
listed on Schedule 1-A thereto and the Contributing
Persons listed on Schedule 1-B thereto (incorporated by
reference to Exhibit 2.1 to the report filed on Form 8-K
on October 7, 1999).
2.2 -- Agreement and Plan of Exchange, dated as of October 19,
1999, among eVentures Group, Inc., and the persons set
forth on Schedule 1 thereto (incorporated by reference to
Exhibit 2.1 to the report filed on Form 8-K on November
3, 1999).
2.3 -- Share Exchange Agreement, dated as of February 22, 2000,
among eVentures Group, Inc., IGS Acquisition Corporation
and the stockholders of Internet Global Services, Inc.
parties thereto.**
3.1 -- Certificate of Incorporation of eVentures, dated November
19, 1987.*
3.2 -- Certificate of Amendment, dated April 27, 1994, to the
Certificate of Incorporation.*
3.3 -- Certificate of Amendment, dated as of October 20, 1997,
to the Certificate of Incorporation.*
3.4 -- Certificate of Renewal dated August 19, 1999 for
eVentures Group, Inc.*
3.5 -- Certificate of Amendment, dated September 17, 1999, to
the Certificate of Incorporation (incorporated by
reference to Exhibit 3.2 to the report filed on Form 8-K
on October 7, 1999).
3.6 -- Amended and Restated Certificate of Designation of
Rights, Preferences and Privileges of Series A
Convertible Preferred Stock, dated October 14, 1999.*
3.7 -- Certificate of Designation of Rights, Preferences and
Privileges of Series B Convertible Preferred Stock, dated
as of November 10, 1999.*
3.8 -- Certificate of Amendment, dated as of December 15, 1999,
to the Certificate of Designation of Rights, Preferences
and Privileges of Series B Convertible Preferred Stock.*
3.9 -- Certificate of Designation, Preferences and Rights of
Series C Convertible Preferred Stock, dated as of
February 22, 2000.**
3.10 -- Amended and Restated By-Laws of eVentures Group, Inc.
(incorporated by reference to Exhibit 3.1 to the report
filed on Form 8-K on October 7, 1999).
4.1 -- Registration Rights Agreement, dated as of September 22,
1999, among the Registrant and the persons and entities
set forth on Schedule 1 thereto (the "First Registration
Rights Agreement") (incorporated by reference to Exhibit
4.1 to the report filed on Form 8-K on October 7, 1999).
4.2 -- Addendum to the First Registration Rights Agreement,
dated as of October 19, 1999, among eVentures Group,
Inc., the persons set forth on Schedule 1 thereto and the
other parties to the First Registration Rights
Agreement.**
4.3 -- Registration Rights Agreement, dated as of November 24,
1999, between eVentures Group, Inc. and the person and
entities signatories thereto, as holders of shares of
Series B Convertible Preferred Stock.**
4.4 -- Letter Agreement, dated December 15, 1999, to the parties
to the Registration Rights Agreement dated as of
September 27, 1999.**
</TABLE>
<PAGE> 112
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
4.5 -- Registration Rights Agreement, dated as of December 31,
1999, between eVentures Group, Inc. and the persons and
entities signatories thereto, as holders of shares of
Series C Convertible Preferred Stock.**
10.1 -- Securities Purchase Agreement, dated as of June 11, 1998,
among Orix Global Communications, Inc., certain of its
shareholders and the purchasers named thereunder and
Exhibits thereto.**
10.2 -- Debenture, dated as of June 11, 1998.*
10.3 -- Letter Agreement, dated as of August 19, 1998 between
Orix Global Communications and Infinity Investors
Limited.*
10.4 -- Debenture, dated as of August 19, 1998.*
10.5 -- Letter Agreement, dated as of February 9, 1999 between
Orix Global Communications and Infinity Investors
Limited.*
10.6 -- Debenture, dated as of February 9, 1999.*
10.7 -- Letter Agreement, dated as of April 15, 1999 among Orix
Global Communications, Inc., Infinity Investors Limited
and the Founders (as defined therein).*
10.8 -- Amended and Restated Debenture, dated as of April 15,
1999.*
10.9 -- Letter Agreement, dated as of April 29, 1999 between Orix
Global Communications and Infinity Investors Limited.*
10.10 -- Debenture, dated as of April 29, 1999.*
10.11 -- Letter Agreement, dated as of April 30, 1999, between
Orix Global Communications, Inc. and Infinity Investors
Limited.*
10.12 -- Debenture, dated as of April 30, 1999.*
10.13 -- Note, dated as of August 20, 1999.**
10.14 -- Promissory Note, dated as of March 2, 2000.**
10.15 -- Warrant Agreement, dated as of March 2, 2000, between
i2v2.com Inc. and eVentures Group, Inc.**
10.16 -- Lease Agreement, dated December, 1998, between AxisTel
International, Inc. and Evergreen America Corporation.*
10.17 -- Lease Agreement, dated November 24, 1997, between Orix
Global Communications, Inc. and Trust F/3959 of Banco del
Atlantico.*
10.18 -- Assignment Agreement, dated April 1, 1998, among Orix
Global Communications, Inc., Latin Gate de Mexico S.A. de
C.V. and Trust F/3959 of Banco del Atlantico.*
10.19 -- Office Lease, dated January 23, 1998, between Orix Global
Communications, Inc. and 2526 Investment Co.*
10.20 -- Sublease Agreement, dated January 31, 2000, between
Totaltel Florida, Inc. and AxisTel Global Network
Services, Inc.**
10.21 -- Guaranty Agreement by eVentures Group, Inc. as inducement
to Telecommunications Finance Group to provide a lease to
AxisTel Communications, Inc., dated as of October 13,
1999.*
10.22 -- Management Services Agreement, dated as of September 22,
1999, between eVentures Group, Inc. and HW Partners,
L.P.*
10.23 -- Amended and Restated 1999 Omnibus Securities Plan, dated
as of September 22, 1999.**
</TABLE>
<PAGE> 113
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
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<C> <S>
10.24 -- Employment Agreement, dated as of September 22, 1999,
between eVentures Group, Inc. and Stuart J. Chasanoff.*
10.25 -- Amended and Restated Employment and Noncompetition
Agreement, dated as of September 21, 1999, between
AxisTel Communications, Inc. and Samuel L. Litwin.*
10.26 -- Amended and Restated Employment and Noncompetition
Agreement, dated as of September 22, 1999, between
AxisTel Communications, Inc. and Mitchell Arthur.*
21.1 -- Subsidiaries of eVentures Group, Inc.**
27.1 -- Financial Data Schedule.**
</TABLE>
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* Previously filed as an exhibit to the Registration Statement on Form 10 filed
by the registrant on December 20, 1999.
** Previously filed as an exhibit to Amendment No. 1 to the Registration
Statement on Form 10 filed by the registrant on March 8, 2000.
