SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Commission File
Ended Number
September 30, 1998 1-10210
EXECUTIVE TELECARD, LTD.
(Exact name of registrant as specified in its charter)
Delaware 13-3486421
(State or other (I.R.S. Employer
jurisdiction of Identification
incorporation of No.)
organization)
1720 South Bellaire Street, Denver, Colorado 80222
(Address of principal executive offices)
Registrant's telephone number, including area code:
(303) 691-2115
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares outstanding of each of the registrant's
classes of common stock, as of November 1, 1998 is 17,725,466
shares, all of one class of $.001 par value Common Stock.
EXECUTIVE TELECARD, LTD.
d/b/a eGlobe
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
Page
Part Item Condensed Consolidated Financial
I 1 Statements
Condensed Consolidated Balance Sheets as 3 - 4
of September 30, 1998 and March 31, 1998
Condensed Consolidated Statements of 5
Operations for the three months ended
September 30, 1998 and 1997
Condensed Consolidated Statements of 6
Operations for the six months ended
September 30, 1998 and 1997
Condensed Consolidated Statements of Cash 7
Flows for the six months ended September
30, 1998 and 1997
Notes to Condensed Consolidated Financial 8 - 12
Statements
Item Management's Discussion and Analysis of 13 - 18
2 Financial Condition and Results of
Operations
Part Item Legal Proceedings 19
II 1
Item Changes in Securities 19
2
Item Defaults Upon Senior Securities 19
3
Item Submission of Matters to a Vote of 19
4 Security Holders
Item Other Information 19
5
Item Exhibits and Reports on Form 8-K 19
6
Signatures 20
Executive TeleCard, Ltd.
d/b/a eGlobe
Condensed Consolidated Balance Sheets
As of September 30, 1998 and March 31, 1998
<TABLE>
<S> <C> <C>
September 30, March 31,
1998 1998
(Unaudited)
ASSETS
Current:
Cash and cash equivalents $ 939,765 $2,391,206
Trade accounts receivable, less
allowance of $1,808,455 and
$1,472,197 for doubtful
accounts. 8,005,894 7,719,853
Other current assets 373,188 376,604
Total current assets 9,318,847 10,487,663
Property and equipment,
net of accumulated
depreciation and amortization 11,993,859 11,911,310
Other:
Advances to companies being 1,996,000 -
acquired (Note 2)
Total other assets 1,050,175 501,483
Total assets 24,358,881 22,900,456
</TABLE>
See notes to condensed consolidated financial statements.
Executive TeleCard, Ltd.
d/b/a eGlobe
Condensed Consolidated Balance Sheets
As of September 30, 1998 and March 31, 1998
<TABLE>
<S> <C> <C>
September 30, March 31,
1998 1998
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Accounts payable $ 2,714,440 $ 1,135,800
Accrued expenses 5,130,127 4,222,806
Income taxes payable 2,009,690 2,004,944
Other current liabilities 230,483 436,545
Current portion of long-term 7,455,657 244,020
debt (Note 5)
Total current liabilities 17,540,397 8,044,115
Long-term debt, less current 1,482,839 7,735,581
maturities (Note 5)
Total liabilities 19,023,236 15,779,696
Stockholders' equity: (Note 7)
Preferred stock, $.001 par
value, 5,000,000 shares - -
authorized; none issued
Common stock, $.001 par value,
100,000,000 shares authorized;
17,725,466 and 17,346,766
outstanding, respectively 17,725 17,347
Additional paid-in capital 28,659,912 25,046,830
Stock to be subscribed (350,000
shares) - 3,500,000
Accumulated deficit (23,341,992) (21,443,417)
Total stockholders' equity 5,335,645 7,120,760
Total liabilities and
stockholders' equity $24,358,881 $22,900,456
</TABLE>
See notes to condensed consolidated financial statements.
Executive TeleCard, Ltd.
d/b/a eGlobe
Condensed Consolidated Statements of Operations
Three Months Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<S> <C> <C>
Three Month Three Months
Ended Ended
September 30, September 30,
1998 1997
Revenue $ 7,926,461 $ 8,891,328
Cost of revenue 4,328,989 4,855,848
Gross profit 3,597,472 4,035,480
Costs and expenses:
Selling, general and
administrative 3,571,703 3,580,163
Corporate realignment expense - 1,259,657
Depreciation and amortization 671,313 595,188
Total costs and expenses 4,243,016 5,435,008
Income (loss) from operations (645,544) (1,399,528)
Other expense:
Proxy related litigation (4,051) (53,017)
expense
Other, principally interest
expense (240,880) (315,024)
Total other expense (244,931) (368,041)
Loss before taxes on income (890,475) (1,767,569)
Income taxes - 105,000
Net loss (890,475) $ (1,872,569)
Net loss per share:
Basic $(0.05) $(0.11)
Diluted $(0.05) $(0.11)
</TABLE>
See notes to condensed consolidated financial statements.
Executive TeleCard, Ltd.
d/b/a eGlobe
Condensed Consolidated Statements of Operations
Six Months Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<S> <C> <C>
Six Months Six Months
Ended Ended
September 30, September 30,
1998 1997
Revenue $ 15,612,796 $ 17,450,879
Cost of revenue 8,369,472 9,301,344
Gross profit 7,243,324 8,149,535
Costs and expenses:
Selling, general and
administrative 7,197,225 6,950,435
Corporate realignment expense - 1,259,657
Depreciation and amortization 1,358,639 1,229,810
Total costs and expenses 8,555,864 9,439,902
Income (loss) from operations (1,312,540) (1,290,367)
Other expense:
Proxy related litigation
expense (4,051) (252,904)
Other, principally interest
expense (581,984) (687,219)
Total other expense (586,035) (940,123)
Loss before taxes on income (1,898,575) (2,230,490)
Income taxes - 140,000)
Net loss $(1,898,575) $(2,370,490)
Net loss per share:
Basic $(0.11) $(0.14)
Diluted $(0.11) $(0.14)
</TABLE>
See notes to condensed consolidated financial statements.
Executive TeleCard, Ltd.
d/b/a eGlobe
Condensed Consolidated Statements of Cash Flows
Six Months Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Six Months Six Months
Ended Ended
September 30, September 30,
1998 1997
Operating activities:
Net loss (1,898,575) (2,370,490)
Adjustments to reconcile net loss
to net cash flows provided by
(used in) operating activities:
Depreciation and amortization 1,358,639 1,175,554
Provision for bad debts 339,842 205,268
Other, net 190,686 216,942
Changes in operating assets and
liabilities:
Accounts receivable (622,299) (1,020,493)
Other assets (111,634) 21,722
Accounts payable 1,583,386 (886,493)
Accrued expenses 907,267 1,280,961
Other liabilities (206,008) (37,537)
Cash provided by (used in)
operating activities 1,541,304 1,414,566
Investing activities:
Acquisitions of property and
equipment (1,420,377) (1,689,366)
Gain on sale of property and
equipment 127,002 -
Advances to companies being
acquired (1,996,000) -
Other assets (583,630) 227,322
Cash used in investing activities (3,873,005) (1,462,044)
Financing activities:
Proceeds from long-term debt 1,000,000 812,213
Proceeds from issuance of common
stock - 7,482,500
Principal payments on long-term
debt (119,740) (3,199,952)
Cash provided by financing
activities 880,260 5,094,761
Net increase (decrease) in cash and
cash equivalents (1,451,441) 2,218,151
Cash and cash equivalents,
beginning of period 2,391,206 2,172,480
Cash and cash equivalents, end of $ 939,765 $ 4,390,631
</TABLE>
See notes to condensed consolidated financial statements.
Executive TeleCard, Ltd.
d/b/a eGlobe
Notes To Condensed Consolidated Financial Statements
September 30, 1998
Note 1 - Basis of Presentation
The accompanying condensed consolidated financial
statements have been prepared in accordance with United
States generally accepted accounting principles for
interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes
required by generally accepted accounting principles for
complete financial statements. In the opinion of
management, all adjustments considered necessary for a
fair presentation have been included. Operating results
for the three and six months ended September 30, 1998 are
not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. For
further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's
Form 10-K for the year ended March 31, 1998. (On February
26, 1998, the stockholders of the Company approved a
change in the Company's fiscal year from March 31, to a
fiscal year ending December 31, commencing April 1, 1998,
so that the Company will have a nine month transition
period from April 1, 1998 through December 31, 1998).
The accompanying condensed financial statements include
the accounts of the Company and its wholly owned
subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation.
Note 2 - Advances To Companies Being Acquired
This amount consists of funds advanced to two companies
that are in the process of being acquired. It is
contemplated that one acquisition will be consummated
during the fourth quarter of calendar 1998. Advances to
this company of $1,275,000 will be allocated to the
purchase price. In the event that the transaction is not
completed (an event management believes is unlikely), the
Company will need to pursue collection of amounts advanced
and it may be necessary for the Company to establish a
reserve for this amount. The Company believes that if the
second acquisition is not consummated due to any reason
other than breach by the Company, the Company has the
right to be reimbursed for $571,000 of the total amount
advanced of $721,000.
Executive TeleCard, Ltd.
d/b/a eGlobe
Notes To Condensed Consolidated Financial Statements
September 30, 1998
Note 3 - Basic Net Income (Loss) Per Share
Earnings per share are calculated in accordance with
Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share". The weighted average shares
outstanding for calculating basic earnings (loss) per
share were 17,718,854 and 17,533,827 for the three and six
months ended September 30, 1998, respectively, and
17,350,153 and 16,820,150 for the three and six months
ended September 30, 1997, respectively. Common stock
options and warrants of 51,280 and 124,075 for the three
and six months ended September 30, 1998, respectively, and
223,316 and 233,757 for the three and six months ended
September 30, 1997, respectively, were not included in
diluted earnings (loss) per share as the effect was
antidilutive due to the Company recording a loss for the
periods.
Options and warrants to purchase 3,284,048 shares of
common stock at exercise prices from $2.63 to $7.05 per
share were outstanding at September 30, 1998 but were not
included in the computation of diluted earnings per share
for the three months ended September 30, 1998 because the
exercise prices were greater than the average market price
of the common shares during that period. Options and
warrants to purchase 2,800,735 shares of common stock at
exercise prices from $3.00 to $7.05 per share were
outstanding at September 30, 1998 but were not included in
the computation of diluted earnings per share for the six
months ended September 30, 1998 because the exercise
prices were greater than the average market price of the
common shares during that period. Options and warrants to
purchase 337,641 shares of common stock at exercise prices
from $7.00 to $10.89 per share were outstanding at
September 30, 1997 but were not included in the
computation of diluted earnings per share for the three
and six months ended September 30, 1997 because the
exercise prices were greater than the average market price
of the common shares for the periods.
Note 4 - Comprehensive Income
Effective April 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This statement requires
the reporting of comprehensive income in addition to net
income. Comprehensive income is a more inclusive
financial reporting methodology that includes disclosure
of certain financial information that historically has not
been recognized in the calculation of net income. The
impact of other comprehensive income items was immaterial
for the three and six months ended September 30, 1998 and
1997.
Executive TeleCard, Ltd.
d/b/a eGlobe
Notes To Condensed Consolidated Financial Statements
September 30, 1998
Note 5 - Long Term Debt
At September 30, 1998 and March 31, 1998, long-
term debt consisted of the following:
<TABLE>
<S> <C> <C>
September 30 March 31,
1998 1998
8.875% unsecured term note
payable to a $ 7,234,168 $ 7,062,392
telecommunications company,
net of unamortized discount
of $265,832, interest and
principal payable in August
1999. (1)
8% mortgage note, payable
monthly, including interest
through March 2010, with an
April 2010 balloon payment;
secured by deed of trust on
the related land and building 306,793 310 000
8.875% unsecured term note
payable to a stockholder, net
of unamortized discount of
$94,550, interest and
principal payable in December
1999 (2) 905,450 -
Capitalized lease 493,085 607,209
obligations.
Total 8,938,496 7,979,601
Less current maturities 7,455,657 244,020
Total long-term debt 1,482,839 7,735,581
</TABLE>
Executive TeleCard, Ltd.
d/b/a eGlobe
Notes To Condensed Consolidated Financial Statements
September 30, 1998
In connection with this transaction, the lender was
(1) granted warrants to purchase 500,000 shares of the
Company's common stock at a price of $3.03 per share.
The warrants expire on February 23, 2001. At September
30, 1998, these warrants have not been exercised.
(2) In June 1998, the Company borrowed $1.0 million from an
existing stockholder. In connection with this
transaction, the lender was granted warrants to purchase
67,000 shares of the Company's common stock at a price
of $3.03 per share. The warrants expire in June 2001.
The stockholder also received as consideration for the
loan the repricing and extension of a warrant for 55,000
shares which is now exercisable on or before February
2001 at a price of $3.75 per share. At September 30,
1998, these warrants have not been exercised.
Note 6 - Acquisitions
The Company has entered into a definitive agreement with
United Communications International (UCI) to acquire UCI's
calling card business in Greece, Cyprus and the Middle
East. The acquisition will extend the Company's network of
calling card platforms to Cyprus. The Company is making
the purchase for an initial cash payment of $75,000 with
additional cash payments of up to $2.4 million over 18
months. After the initial payment, $1.9 million of the
cash is in the form of an earnout and the payments may be
less depending upon the revenue and profit performance of
the business. The purchase price also includes the
issuance of 125,000 shares of the Company's common stock,
all of which is subject to earnout.
On October 9, 1998, the Company, entered into a Memorandum
of Understanding with IDX International, Inc. and the
shareholders of IDX which adjusted the terms of the Merger
Agreement with respect to the consummation of the proposed
transaction. The Memorandum of Understanding replaces the
$5.0 million cash portion of the purchase price with three
notes: $1.0 million payable on December 31, 1998; $1.5
million payable on June 30, 1999; and $2.5 million payable
on October 31, 1999, each note bearing interest at LIBOR
plus 250 basis points. In the event that the Company
defaults on any of these notes, the principal and accrued
interest may, at the Company's option, be converted into
the Company's common stock at the closing market price per
share at the
Executive TeleCard, Ltd.
d/b/a eGlobe
Notes To Condensed Consolidated Financial Statements
September 30, 1998
date of default. In addition, the Company agrees to pay
penalty interest at LIBOR plus 450 basis points until the
notes are converted plus an amount equal to 10% of the
default amount payable in the form of warrants to purchase
common stock of the Company. The price of the warrants, if
issued, will be set at the market price on the date of
default.
Note 7 - Subsequent Event
In November 1998, the Company reached an agreement with its
former chairman, Mr. Ronald Jensen, who is also the
Company's largest shareholder. The agreement concerned
unreimbursed costs and other potential claims.
Mr. Jensen purchased $7.5 million of eGlobe's common stock
in a private placement in June, 1997 and later was elected
Chairman of the Board of Directors. After approximately
three months, Mr. Jensen resigned his position citing both
other business demands and the demands presented by the
challenges of the Company. During his tenure as Chairman,
Mr. Jensen incurred staff and other costs which were not
billed to the company. Also, Mr. Jensen subsequently
communicated with the company's current management
indicating that there were a number of issues raised during
his involvement with the company relating to the provisions
of his share purchase agreement which could result in
claims against the company.
In order to resolve all current and potential issues, Mr.
Jensen and the company have agreed to the exchange of his
current holding of 1,425,000 shares of common stock for 75
shares of 8% series C Cumulative Convertible Preferred
Stock, which management estimates to have a fair market
value of approximately $3.8 million and a face value of
$7.5 million. The terms of the preferred stock permit Mr.
Jensen to convert the face value of the preferred stock to
common stock at 90% of market price, subject to a minimum
conversion price of $4.00 per share and a maximum of $6.00
per share. The difference between the estimated fair value
of the preferred stock to be issued and the current market
value of the common stock to be surrendered is $900,000.
This difference, once determined more precisely, will
result in a non-cash charge to the company's income
statement in the quarter ending December 31, 1998 with a
corresponding credit to shareholder's equity.
Executive TeleCard, Ltd.
d/b/a eGlobe
September 30, 1998
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Statements included in Management's Discussion and Analysis
of Financial Condition and Results of Operations which are
not historical in nature are intended to be, and are hereby
identified as, "forward-looking statements" for purposes of
the safe harbor provided by the Private Securities
Litigation Reform Act of 1995. Forward-looking statements
may be identified by words including "believes,"
"anticipates," "expects" and similar expressions. The
Company cautions readers that forward-looking statements,
including without limitation, those relating to the
Company's business operations, revenues, working capital,
liquidity, and income, are subject to certain risks and
uncertainties that would cause actual results to differ
materially from those indicated in the forward-looking
statements, due to several important factors such as the
rapid technological and market changes that create
significant business risks in the market for the Company's
services, the intensely competitive nature of the Company's
industry and the possible adverse effects of such
competition, the Company's need for significant additional
financing and the Company's dependence on strategic
relationships, among others, and other risks and factors
identified from time to time in the Company's reports filed
with the Securities and Exchange Commission, including the
risk factors set forth under the caption "The Business -
Risk Factors" in the Company's Annual Report on Form 10-K
for the year ended March 31, 1998.
Results of Operations
Overview. For the quarter ended September 30, 1998, the
Company incurred an operating loss of $0.6 million (1997 -
$1.4 million) on revenues of $7.9 million (1997 - $8.9
million). The operating loss included non-cash charges for
depreciation, amortization and provision for bad debts of
$0.9 million (1997 - $0.7 million). The net loss for the
quarter was $0.9 million (1997 - $1.9 million). For the six
months ended September 30, 1998, the Company incurred an
operating loss of $1.3 million (1997 - $1.3 million) on
revenues of $15.6 million (1997 - $17.4 million). The
operating loss included non-cash charges for depreciation,
amortization and provision for bad debts of $1.7 million
(1997 - $1.4 million). The net loss for the first six
months of fiscal 1998 was $1.9 million (1997 - $2.4
million).
Executive TeleCard, Ltd.
d/b/a eGlobe
September 30, 1998
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Revenue. The continuing economic crisis in Asia has had a
substantial and negative impact on the Company's revenues.
While new revenues appear to be beginning to offset that
decline, they have not yet done so. The decline in revenue
for the quarter ended September 30, 1998 of $1.0 million
was primarily due to a 34% decrease in activity by the
Company's Asian customers. Revenue from a new prepaid
calling card contract was $0.4 million in the current
quarter with no comparable revenue in the prior year.
Revenue from this contract plus revenue from several new
customer contracts in the Company's traditional postpaid
calling card business is expected to have a positive impact
on the Company's total revenues for the fourth calendar
quarter of 1998. The decline in revenue for the six months
ended September 30, 1998 of $1.8 million was primarily due
to a decrease in activity by the Company's Asian customers.
Gross Profit. Gross profit was 45% in each of the quarters
ended September 30, 1998 and 1997. Included in the results
for the quarter ended September 30, 1998 is a prepaid
calling card contract where the initial revenues recognized
are billable to the customer principally on a cost
reimbursable basis. Excluding the effect of this contract,
gross profit on the Company's traditional business was 48%
which represents an improving trend due to an ongoing
program implemented in early 1998 to reduce transmission
costs. Cost of revenue may be expected to fluctuate in the
next few quarters as new pricing and contractual
arrangements are put in place and as the Company continues
to improve its network structure. For the six months ended
September 30, 1998 gross profit was 46% versus 47% for the
comparable period in 1997.
Other Costs and Expenses. Selling, general and
administrative expenses were $3.6 million in both the
quarter ended September 30, 1998 and in the prior year
quarter. The current quarter reflects a $0.4 million
increase in marketing and sales expenses compared to the
prior year quarter. In the comparable quarter and six
months of 1997, expenses for employee severance and
consulting and legal fees aggregated $1.3 million relating
to the commencement of a restructuring program. For the six
months ended September 30, 1998 selling, general and
administrative expenses were $7.2 versus $7.0 million in
the prior year six month period.
Other Expenses - Net. Interest expense of $0.3 million in
the quarter ended September 30, 1998 (1997 - $0.3 million)
was offset by a $0.1 million gain on the sale of office
property in New York.
Executive TeleCard, Ltd.
d/b/a eGlobe
September 30, 1998
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Liquidity and Capital Resources
Cash and cash equivalents were $0.9 million at September
30, 1998 compared to $2.4 million at March 31, 1998.
Accounts receivable, net, at September 30, 1998 totaled
$8.0 million compared to $7.7 million at March 31, 1998.
Subsequent to September 30, 1998, through aggressive
collection efforts the Company has received or is expected
to receive past due accounts receivable in the amount of
$2.1 million. Accounts payable and accrued expenses
totaled $7.8 million at September 30, 1998 compared to $5.4
million at March 31, 1998. The increase is principally due
to deferral of payments to certain providers of
telecommunications and professional services. Current
liabilities at September 30, 1998 exceeded current assets
by $8.2 million, principally due to a reclassification from
long-term to short-term debt of a loan by IDT Corporation
("IDT") of $7.2 million (face amount of $7.5 million) which
is due in August, 1999. (See Existing Obligations below).
During the six months ended September 30, 1998 cash used in
investing activities, principally advances on acquisitions
and capital expenditures was $3.9 million. Offsetting
these uses of cash was a borrowing of $1.0 million from an
existing shareholder in June 1998.
Beginning in May and extending through November 15, 1998,
the Company has advanced $2.2 million to two companies
which the Company is in the process of acquiring. Because
it has not yet raised substantial new financing, the
Company discontinued its bridge funding of one of these
companies in September. Additionally, the Company is
preparing a plan that, absent a significant cash infusion
into the Company from debt or equity financing by the first
quarter 1999, will result in a reduction in the Company's
current level of spending relating to the expansion of the
business and delay of its plan to grow its business through
new service offerings.
Current Funding Requirements. Management estimates that
based upon current expectations the Company will require
additional funding of up to $30 million for the execution
of its entire business plan, the principal requirements
being the financing of its acquisition program and capital
expenditures for new service offerings. To assist it in
raising the required capital, the Company has engaged two
investment-banking firms.
Executive TeleCard, Ltd.
d/b/a eGlobe
September 30, 1998
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
The Company's financing plan consists of: (i) raising a
significant amount of equity capital through a private
placement principally with institutional investors; (ii)
establishing a credit facility to finance capital equipment
needs; and (iii) obtaining a loan facility secured by
accounts receivable. Although the Company is actively
pursuing these sources of capital, there can be no
assurance that it will be successful in these efforts.
Should the Company be unsuccessful in securing addiional
capital, it will be required to modify or curtail its plans
for growth. Management estimates that, in order to
maintain its current level of operations, it will require a
near-term infusion of cash of $2.5 million. It has focused
its efforts on the collection of one significant past due
receivable and has reached an agreement with this customer
which will provide $1.5 million in the near term. The
Company, through its financing subsidiary, is also
negotiating a short-term loan of up to $1.0 million.
Should this latter effort be unsuccessful, a plan to cut
costs related to expansion will be implemented.
In June 1998, the Company entered into an Agreement and
Plan of Merger (the "IDX Merger Agreement") to acquire 100%
of the stock of IDX, International Inc. in return for
500,000 shares of Series B Convertible Preferred Stock of
the Company and warrants plus $5.0 million in cash (subject
to certain deductions and adjustments). As described in
Note 7, to the Condensed Consolidated Financial Statements
the proposed transaction has been modified to replace the
$5.0 million cash requirement with notes payable in three
installments subsequent to closing. The notes can be
discharged by issuance of common stock at the option of the
Company.
The Company has also executed a definitive agreement to
acquire, subject to obtaining financing, substantially all
of the assets of ConnectSoft, a unified messaging company.
The purchase price for this potential acquisition is
liabilities to be assumed, principally long-term, of
approximately $4.5 million.
Existing Obligations. In February 1998, the Company
entered into a loan agreement with IDT, a U.S.
international telecommunications carrier, the principal
amount of which is $7.5 million. The loan matures in
August 1999 and bears interest at the rate of 8 7/8%, which
is due at maturity. As part of this agreement, the Company
also issued to IDT warrants to purchase 500,000 shares of
the Company's common stock at $3.03 per share, exercisable
for a period of three years. The proceeds of this loan
were used to repay in
Executive TeleCard, Ltd.
d/b/a eGlobe
September 30, 1998
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
full, term loans in the amount of $7.0 million and balances
of certain capital leases totaling $0.4 million.
In June 1998, the Company borrowed $1.0 million from an
existing stockholder. The loan bears interest at 8 7/8%
and is payable upon maturity in December 1999. Under the
terms of the agreement, the stockholder received warrants
to purchase 67,000 shares of common stock at a price of
$3.03 per share, exercisable for a period of three years.
The stockholder also received as consideration for the loan
the repricing and extension of a warrant for 55,000 shares
which is now exercisable on or before February 29, 2001 at
a price of $3.75 per share.
"Y2K" Issue. The Company is aware of the issues associated
with the programming code in existing computer systems as
the year 2000 approaches. The "Year 2000 Issue" arises
because many computer and hardware systems use only two
digits to represent the year. As a result, these systems
and programs may not process dates beyond the year 1999,
which may cause errors in information or system failures.
Assessments of the potential effects of the Y2K issue vary
markedly among different companies, governments,
consultants, economists and commentators, and it is not
possible to predict what the actual impact may be. Because
the Company uses Unix-based systems for its platforms and
operating systems to deliver service to customers, it is
estimated that material modifications will not be required
to ensure Y2K compliance. The Company is continuing its
analysis, assessment and planning, and is using internal
and external resources to identify, correct or reprogram,
and test the computer system for Y2K compliance. It is
anticipated that all reprogramming efforts, including
testing, will be completed by March 1999. Management is
currently evaluating the financial impact for Y2K
compliance and expects that total costs for the Company
will not exceed $0.5 million. The Company has recently
hired an external consulting firm to assess the state of
readiness of all its systems which could be affected by the
Year 2000 issue and expects that this assessment will be
completed by December 1998. No material costs have been
incurred during the six months ended September 30, 1998 and
management estimates that the Company will incur most of
the costs during 1999. In the event that it is unable to
correct the "Year 2000" problem, the Company will prepare a
contingency plan by April 1999.
Executive TeleCard, Ltd.
d/b/a eGlobe
September 30, 1998
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
The Company is also in the process of assessing Year 2000
readiness of its key suppliers, and customers. This
project has been undertaken with a view toward assuring
that the Company has adequate resources to cover its
various telecommunications requirements. A failure of the
Company's suppliers or customers to address adequately
their Year 2000 readiness could affect the Company's
business adversely. As part of its contingency planning
efforts, the Company will identify alternative sources or
strategies where necessary. In addition, the Company is
aware of the potential for claims against it for damages
arising from products and services that are not Year 2000
ready. The Company believes that such claims against it
would be without merit. Finally, the Year 2000 presents a
number of risks and uncertainties that could affect the
Company, including utilities failures, competition for
personnel skilled in the resolution of Year 2000 issues and
the nature of government responses to the issues among
others. The Company's expectations as to the extent and
timeliness of modifications required in order to achieve
Year 2000 compliance is a forward-looking statement subject
to risks and uncertainties. Actual results may vary
materially as a result of a number of factors, including,
among others, those described in this paragraph. There can
be no assurance however, that the Company will be able to
successfully modify on a timely basis such products,
services and systems to comply with Year 2000 requirements,
which failure could have a material adverse effect on the
Company's operating results.
Executive TeleCard, Ltd.
d/b/a eGlobe
September 30, 1998
Item 1 Legal Proceedings
The Company has been sued in the County of Denver Courts by
a Colorado reseller of transmission services. The lawsuit
arises out of a transaction wherein the plaintiff and the
Company contemplated forming a limited liability company
for purposes of developing sales opportunities generated by
the plaintiff. The Company committed itself to this
transaction and relied upon the arrangement which it had
entered into. After the Company had committed itself to
the acquisition of equipment, financing, and entered into a
services contract with the customer, the plaintiff claimed
that it was entitled to a confiscatory amount of money for
the introduction and, at the same time, the plaintiff
failed to provide those items of financing, transmission
services and connectivity, as well as the exclusivity
agreement which it had promised. For these reasons, the
Company and the plaintiff were unable to arrive at a
definitive agreement on their arrangement and the plaintiff
has sued, claiming breach of a noncircumvention agreement,
notwithstanding the fact that the plaintiff agreed to and
was a part of the transaction between the Company and its
new customer. The Company believes this claim is without
merit and plans to defend this action vigorously.
Item 2 Changes in Securities
None
Item 3 Defaults upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
a) Exhibits
27. Financial Data Schedule
b) Reports on Form 8-K
(i) A report on Form 8-K dated August 12,
1998 under Item 2 was filed with the
Commission on August 12, 1998 to report the
signing of a definitive agreement to acquire
Connectsoft Communications Corporation.
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed in its behalf by the undersigned,
thereunto duly authorized.
EXECUTIVE TELECARD, LTD.
(Registrant)
Date: October 16, 1998 By /S/
Anne Haas
Controller, Treasurer
(Principal Accounting Officer)
Date: October 16, 1998 By /S/
John E. Koonce, III
Chief Financial Officer
Date: October 16, 1998 By /S/
Christopher J. Vizas
Chairman of the Board of
Directors, and
Chief Executive Officer
(Principal Executive Officer)
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