SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Commission File Number:
earliest event reported):
DECEMBER 2, 1998 1-10210
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
(Exact name of registrant as specified in its charter)
DELAWARE 13-3486421
(State or other jurisdiction of (IRS Employer Identification
incorporation) Number)
2000 PENNSYLVANIA AVENUE, NW, SUITE 4800
WASHINGTON, D.C. 20006
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(202) 822-8981
(Former name or former address, if changed since last report)
4260 EAST EVANS AVENUE
DENVER, COLORADO 80222
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EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
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EXPLANATORY NOTE
----------------
Pursuant to Items 7(a)(4) and 7(b)(2) of the Securities and Exchange
Commission's (the "Commission") General Instructions for Form 8-K, Executive
TeleCard, Ltd., d/b/a eGlobe, Inc. (the "Company") hereby amends Items 7(a) and
7(b) of its Current Report on Form 8-K, filed with the Commission on December
17, 1998 (the "IDX Form 8-K"), and its Current Report on Form 8-K, filed with
the Commission on March 1, 1999 (the "Telekey Form 8-K" and together with the
IDX Form 8-K, the "Form 8-Ks"), to add financial statements of IDX
International, Inc. ("IDX") and Telekey, Inc. ("Telekey") and pro forma
financial information for the Company reflecting the acquisitions of IDX and
Telekey.
In addition, the Company has included in this Form 8-K/A voluntary
disclosure relating to the Company's acquisition of UCI Tele Networks, Ltd.
("UCI"). The Company previously has not disclosed its acquisition of UCI in a
Current Report on Form 8-K. Such disclosure is not required in this Form 8-K/A
by Commission rules; however, the Company believes that providing such
disclosure in conjunction with the above referenced disclosure relating to the
acquisitions of IDX and Telekey will promote the public's understanding of the
Company's recent acquisition activity. The Company has included brief
descriptions of each of the acquisitions of IDX, Telekey and UCI with the pro
forma information for the Company. UCI was acquired on December 31, 1998 and had
minimal operations which have not been reflected in the Pro Forma Condensed
Consolidated Statement of Operations for the year ended December 31, 1998.
However, the recurring effect of the goodwill amortization related to the UCI
acquisition has been included in the Pro Forma Condensed Consolidated Statement
of Operations.
2
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EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
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ITEM 5 OTHER EVENTS
On December 31, 1998, the Company acquired all of
the common stock issued and outstanding of UCI Tele
Networks, Ltd. ("UCI"), a privately-held corporation
established under the laws of the Republic of
Cyprus, for 125,000 shares of common stock (50%
delivered at the acquisition date and 50% to be
delivered February 1, 2000, subject to adjustment as
described below), and $2.1 million payable as
follows: (a) $75,000 payable in cash in January
1999; (b) $0.5 million in the form of a note, with
8% interest payable monthly due June 30, 1999; (c)
$0.5 million in the form of a note, with 8% interest
payable monthly due no later than June 30, 2000; and
(d) $1.0 million in the form of a non-interest
bearing note ("Anniversary Payment") to be paid on
February 1, 2000 or December 31, 2000, depending on
the percentage of projected revenue achieved,
subject to adjustment. In connection with the $0.5
million note payable due in June 1999, a warrant to
purchase 50,000 shares of common stock was issued
with an exercise price of $1.63 per share. The
warrant was valued at $43,000 and recorded as a
discount to the note payable to be amortized as
additional interest expense over the term of the
note payable. The 62,500 shares of common stock
issued at the acquisition date were valued at
$101,563. The Company has agreed to register for
resale the shares of common stock and UCI warrants.
This acquisition has been accounted for under the
purchase method of accounting. The 1998 financial
statements of the Company reflect the preliminary
purchase price allocation. The purchase price
allocation has not been finalized pending resolution
of several purchase price elements, which are
contingent upon the following:
(a) If the closing sales price on NASDAQ of
the Company's common stock on February 1,
2000 is less than $8.00, additional
shares will be issued determined by
subtracting from 125,000 the amount
calculated by dividing $1.0 million by
the closing sales price on February 1,
2000. These shares as well as the 62,500
shares to be delivered are subject to
adjustment as discussed below.
(b) If UCI does not achieve 100% of its $3.0
million projected revenue target as of
February 1, 2000, for each 10% by which
the projected revenue is less than 100%
of the projected revenue target, there
will be a 10% reduction in the
Anniversary Payment and the number of
shares issuable pursuant to (a).
(c) If UCI achieves more than 100% of its
$3.0 million projected revenue target as
of December 31, 1999, there will be a 10%
increase in the Anniversary Payment, not
to exceed $0.3 million due, and payable
as of December 31, 2000.
3
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EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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(d) If the Company completes a private
financing and receives between $10
million to $19.9 million or $20 million,
it will be required to repay 50% or 100%,
respectively, of the outstanding
principal and interest of the first note
as discussed above.
(e) If after the date of acquisition, a
contract with a major customer of UCI is
cancelled and it is not reinstated or
replaced by June 30, 1999, the principal
amount of the first and second note as
discussed above will be adjusted.
Based on the contingent purchase price elements as
listed above, goodwill associated with the
acquisition may increase when these contingencies
are resolved. UCI had minimal operations prior to
the acquisition and the aggregate value of the
non-contingent consideration of $1.2 million has
been recorded as goodwill and will be amortized, on
a straight-line basis, over seven years.
4
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EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
ITEM 7(A). FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
---------- -------------------------------------------
Filed herewith as a part of this report are the
following financial statements; IDX International,
Inc. and Subsidiaries (i) Reports of Independent
Certified Public Accountants, (ii) Consolidated
Balance Sheets as of December 31, 1996 and 1997 and
November 30, 1998, (iii) Consolidated Statements of
Operations for the period from April 17, 1996
(Inception) to December 31, 1996 and for the year
ended December 31, 1997 and for the eleven months
ended November 30, 1998, (iv) Consolidated Statement
of Changes in Stockholders' Equity (Deficit) for the
period from April 17, 1996 (Inception) to December
31, 1996 and for the year ended December 31, 1997
and Consolidated Statement of Stockholders' Deficit
and Comprehensive Loss for the eleven months ended
November 30, 1998, (v) Consolidated Statements of
Cash Flows for the period from April 17, 1996
(inception) to December 31, 1996 and for the year
ended December 31, 1997 and for the eleven months
ended November 30, 1998, (vi) Summary of Accounting
Policies for the eleven months ended November 30,
1998, (vii) Notes to Consolidated Financial
Statements for the year ended December 31, 1997 and
for the eleven months ended November 30, 1998, and:
Telekey, Inc. and Subsidiary and Travelers
Teleservices, Inc. (viii) Report of Independent
Certified Public Accountants, (ix) Combined
Consolidated Balance Sheets as of December 31, 1997
and 1998, (x) Combined Consolidated Statements of
Operations for the years ended December 31, 1997 and
1998, (xi) Combined Consolidated Statements of
Stockholders' Deficit for the years ended December
31, 1997 and 1998, (xii) Combined Consolidated
Statements of Cash Flows for the years ended
December 31, 1997 and 1998, (xiii) Summary of
Accounting Policies for the years ended December 31,
1997 and 1998, and (xiv) Notes to Combined
Consolidated Financial Statements for the years
ended December 31, 1997 and 1998.
ITEM 7(B). PRO FORMA FINANCIAL INFORMATION
Filed herewith as a part of this report are the
Company's Pro Forma Condensed Consolidated Balance
Sheet as of December 31, 1998 (unaudited) and the
Company's Pro Forma Condensed Consolidated Statement
of Operations for the twelve months ended December
31, 1998 (unaudited) and the notes thereto.
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
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ITEM 7 (C). EXHIBITS
----------- --------
Exhibit Agreement and Plan of Merger, dated June 10, 1998, by
2.1 and among Executive TeleCard, Ltd., IDX
International, Inc., EXTEL Merger Sub No. 1, Inc. and
the stockholders of IDX International, Inc.
(Incorporated by reference to Exhibit 2.1 in Current
Report on Form 8-K of Executive TeleCard, Ltd. dated
June 24, 1998).
2.2 Consent and Extension, dated August 27, 1998, by and
among Executive TeleCard, Ltd., IDX International,
Inc., EXTEL Merger Sub No. 1, Inc. and Jeffey Gee, as
representative of the stockholders of IDX
International, Inc. (Incorporated by reference to
Exhibit 2.2 in Current Report on Form 8-K of
Executive TeleCard, Ltd. dated December 17, 1998).
2.3 Amendment No. 2 to Agreement and Plan of Merger,
dated October 1998, by and among Executive TeleCard,
Ltd., IDX International, Inc., EXTEL Merger Sub No.
1, Inc. and the stockholders of IDX International,
Inc. (Incorporated by reference to Exhibit 2.3 in
Current Report on Form 8-K of Executive TeleCard,
Ltd. dated December 17, 1998).
2.4 Agreement and Plan of Acquisition, dated September
30, 1998, by and among Executive TeleCard, Ltd., UCI
Tele Networks, Ltd. and United Communications
International LLC (Incorporated by reference to
Exhibit 2.4 in Annual Report on Form 10-K of
Executive TeleCard, Ltd. for the fiscal year ended
December 31, 1998).
2.5 Agreement and Plan of Merger, dated February 3, 1999,
by and among Executive TeleCard, Ltd., Telekey, Inc.,
eGlobe Merger Sub No. 2, Inc. and the stockholders of
Telekey, Inc. (Incorporated by reference to Exhibit
2.1 in Current Report on Form 8-K of Executive
TeleCard, Ltd. dated March 1, 1999).
4.1 Certificate of Designations, Rights and Preferences
of Series B Convertible Preferred Stock of Executive
TeleCard, Ltd. (Incorporated by reference to Exhibit
4.1 in Current Report on Form 8-K of Executive
TeleCard, Ltd. dated December 17, 1998).
4.2 Form of Warrant by and between Executive TeleCard,
Ltd. and each of the stockholders of IDX
International, Inc. (Incorporated by reference to
Exhibit 4.2 in Current Report on Form 8-K of
Executive TeleCard, Ltd. dated June 24, 1998).
4.3 Forms of Convertible Subordinated Promissory Notes
payable to the stockholders of IDX International,
Inc. in the aggregate principal amount of $5,000,000
(Incorporated by reference to Exhibit 4.3 in Current
Report on Form 8-K of Executive TeleCard, Ltd. dated
December 17, 1998).
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EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
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4.4 Form of Convertible Subordinated Promissory Note
payable to the preferred stockholders of IDX
International, Inc. in the aggregate principal
amount of $418,024 (Incorporated by reference to
Exhibit 4.4 in Current Report on Form 8-K of
Executive TeleCard, Ltd. dated December 17, 1998).
4.5 Forms of Promissory Notes payable to United
Communications International LLC in the aggregate
principal amount of $2,025,000 (Incorporated by
reference to Exhibit 4.7 in Annual Report on Form
10-K of Executive TeleCard, Ltd. for the fiscal year
ended December 31, 1998).
4.6 Certificate of Designations, Rights and Preferences
of Series F Convertible Preferred Stock of Executive
TeleCard, Ltd. (Incorporated by reference to Exhibit
4.1 in Current Report on Form 8-K of Executive
TeleCard, Ltd. dated March 1, 1999).
4.7 Form of Promissory Note payable to the former
stockholders of Telekey, Inc. in the aggregate
principal amount of $150,000. (Incorporated by
reference to Exhibit 4.2 in Current Report on Form
8-K of Executive TeleCard, Ltd. dated March 1,
1999).
7
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EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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The following unaudited pro forma condensed consolidated financial
statements give effect to the acquisitions by the Company for the
entities detailed below and are based on the estimates and
assumptions set forth herein and in the notes to such financial
statements. This pro forma presentation has been prepared utilizing
historical financial statements and notes thereto, certain of which
are included herein as well as pro forma adjustments as described
in the Notes to Pro Forma Condensed Consolidated Financial
Statements. The pro forma financial data does not purport to be
indicative of the results which actually would have been obtained
had the acquisitions been effected on the dates indicated or the
results which may be obtained in the future.
The pro forma condensed consolidated balance sheet as of December
31, 1998 assumes the acquisition of Telekey was consummated at such
date. The pro forma condensed consolidated statement of operations
for the year ended December 31, 1998 includes the operating results
of the Company, IDX International, Inc. and Subsidiaries ("IDX"),
and Telekey, Inc. and Subsidiary and Travelers Teleservices, Inc.
("Telekey") assuming the acquisitions occurred January 1, 1998. UCI
was acquired on December 31, 1998 and had minimal operations which
have not been reflected in the Pro Forma Condensed Consolidated
Statement of Operations for the year ended December 31, 1998.
However, the recurring effect of the goodwill amortization related
to the UCI acquisition has been included in the Pro Forma Condensed
Consolidated Statement of Operations.
The unaudited pro forma condensed consolidated financial statements
are presented for illustrative purposes only and do not purport to
represent what the Company's results of operations or financial
position would have been had the acquisitions described herein
occurred on the dates indicated for any future period or at any
future date, and are therefore qualified in their entirety by
reference to and should be read in conjunction with the historical
consolidated financial statements of the Company and the historical
financial statements of IDX and Telekey, contained elsewhere
herein.
ACQUISITIONS
IDX INTERNATIONAL, INC AND SUBSIDIARIES
On December 2, 1998, the Company acquired all of the common and
preferred stock of IDX, a privately-held IP based fax and telephony
company, for (a) 500,000 shares of the Company's Series B
Convertible Preferred Stock ("Series B Preferred") valued at $3.5
million which are convertible into 2,500,000 shares (2,000,000
shares until stockholder approval is obtained and subject to
adjustment as described below) of common stock; (b) warrants ("IDX
Warrants") to purchase up to an additional 2,500,000 shares of
common stock (subject to stockholder approval as well as adjustment
as described below); (c) $5.0 million in 7.75% convertible
subordinated promissory notes ("IDX Notes") (subject to adjustment
as described below); (d) $1.5 million in bridge loan advances to
IDX made by the Company prior to the acquisition which were
converted into part of the purchase price plus associated accrued
interest of $0.04 million; (e) $0.4 million for IDX dividends
accrued and unpaid on IDX's Preferred Stock under a convertible
subordinated promissory note and (f) direct costs associated with
the acquisition of $0.4 million. The Company also advanced
approximately $0.4 million to IDX prior to acquisition under an
agreement to provide IDX up to $2.3 million for working capital
purposes over the next twelve months. These pre-acquisition
advances were not considered part of the purchase price.
8
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EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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The Company plans to include these requests for the
approval of the warrants and additional stock as matters
to be voted upon by the stockholders at the next annual
meeting. If these matters are not approved by the
stockholders, the Company has no obligation to provide
additional consideration to the IDX stockholders. This
acquisition has been accounted for under the purchase
method of accounting. The financial statements of the
Company reflect the preliminary allocation of the
purchase price. The preliminary allocation has resulted
in acquired goodwill of $10.9 million that is being
amortized on a straight-line basis over seven years. The
Company has not completed the review of the purchase
price allocation and will determine the final allocation
based on approvals and other information. To the extent
that the estimated useful lives of other identified
intangibles are less than seven years, the related
amortization expense as reflected to in the accompanying
Pro Forma Condensed Consolidated Statement of Operations
could be greater. In addition, the purchase price
allocation has not been finalized pending resolution of
several purchase price elements, which are contingent
upon the following:
(a) The amounts of Series B Preferred
Stock and IDX Warrants to be issued
are subject to stockholder approval
subsequent to the date of acquisition.
(b) IDX's ability to achieve certain
revenue and EBITDA (EBITDA represents
income (loss) before interest expense,
income taxes, depreciation and
amortization) objectives twelve months
after the acquisition date may limit
the amount of warrants to be granted
as well as eliminate the Company's
price guarantee as discussed in (d)
below.
(c) The shares of Series B Preferred stock
are convertible at the holders' option
at any time at the then current
conversion rate. The shares of Series
B Preferred stock will automatically
convert into shares of common stock on
the earlier to occur of (a) the first
date that the 15 day average closing
sales price of common stock is equal
to or greater than $8.00 or (b) 30
days after the later to occur of (i)
December 2, 1999 or (ii) the receipt
of any necessary stockholder approval
relating to the issuance of the common
stock upon such conversion. The
Company has guaranteed a price of
$8.00 per share on December 2, 1999,
subject to IDX's achievement of
certain revenue and EBITDA objectives.
If the market price of the common
stock is less than $8.00 on December
2, 1999, and IDX has met its
performance objectives, the Company
will issue additional shares of common
stock upon conversion of the Series B
Preferred stock (subject to the
receipt of any necessary stockholder
approval) based on the ratio of $8.00
to the market price (as defined, but
not less than $3.3333 per share), but
not more than 3.5 million additional
shares of common stock will be issued.
9
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EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(d) The Company has guaranteed a price of
$8.00 per common stock share relative
to the warrants issuable as of
December 2, 1999, subject to IDX's
achievement of certain revenue and
EBITDA objectives. If these objectives
are achieved and the market price of
the common stock is less than $8.00 on
December 2, 1999, the Company will
issue additional shares of common
stock upon exercise of the IDX
Warrants based on the ratio of $8.00
to the market price (as defined, but
not less than $3.3333 per share), up
to a maximum of 3.5 million additional
shares of common stock. However, if
the average closing sales price of the
common stock for any 15 consecutive
days equals or is greater than $8.00
per share prior to December 2, 1999
there is no price guarantee upon
exercise of the warrants. The IDX
warrants cannot be issued until
stockholder approval is obtained.
(e) IDX must meet certain working capital
levels at the date of acquisition. To
the extent that IDX has a working
capital deficiency, as defined, as of
the date of acquisition, the Company
may reduce the number of shares of the
Series B Preferred Stock currently
held by the stockholders and may in
some circumstances reduce the amount
outstanding on the principal balance
of the third IDX note referred to
below.
(f) The Company is obligated to pay
accrued but unpaid dividends ("Accrued
Dividends") on IDX's previously
outstanding preferred stock under an
interest bearing convertible
subordinated promissory note in the
principal amount of approximately $0.4
million due May 31, 1999. The Company,
however, is entitled to reduce the
$2.5 million principal balance of the
third IDX Note as discussed below and
certain defined amounts unless offset
by proceeds from the sale of an IDX
subsidiary and a note issued to IDX by
an option holder. The Company may also
elect to pay this obligation in cash
or in shares of common stock.
(g) The IDX Notes consist of four separate
notes and are payable in cash or
common stock at the Company's sole
discretion. The notes have varying
maturity dates through October 31,
1999.
Based on the contingent purchase price elements as
listed above, goodwill associated with the
acquisition may materially increase when these
contingencies are resolved.
10
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EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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The holders of the Series B Preferred Stock are not
entitled to dividends unless declared by the Board
of Directors. The shares of Series B Preferred Stock
are not redeemable. Further, the Company has agreed
to register for resale the shares of common stock
underlying the conversion rights of the holders of
the Series B Preferred Stock, the IDX warrants and
the IDX Notes.
At the acquisition date, the stockholders of IDX
received Series B Preferred Stock and warrants as
discussed above, which are ultimately convertible
into common stock subject to IDX meeting its
performance objectives. These stockholders in turn
granted preferred stock and warrants, each of which
is convertible into a maximum of 240,000 shares of
the Company's common stock, to IDX employees. The
underlying common stock granted by the IDX
stockholders to certain employees has been initially
valued as $420,000 of compensation. The actual
number of common shares issued upon conversion of
the preferred stock and warrants will ultimately be
determined by stockholder approval, the achievement,
by IDX, of certain performance goals and the market
price of the Company's stock over the contingency
period of up to twelve months from the date of
acquisition. The stock grants are performance based
and will be adjusted each reporting period (but not
below zero) for the changes in stock price until the
shares and/or warrants (if and when) issued are
converted to common stock.
UCI TELE NETWORKS, LTD
The acquisition of UCI Tele Networks, Ltd. is
described in Item 5. OTHER EVENTS.
11
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EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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TELEKEY, INC. AND SUBSIDIARY AND TELESERVICES, INC.
On February 12, 1999, the Company completed the
acquisition of Telekey for which it paid: (i) $0.1
million at closing; (ii) issued a promissory note
for $0.2 million payable in equal monthly
installments over one year; (iii) issued 1,010,000
shares of Series F Convertible Preferred Stock
("Series F Preferred"); and (iv) agreed to issue at
least 505,000 and up to an additional 1,010,000
shares of Series F Preferred two years from the date
of closing (or upon a change of control or certain
events of default if they occur before the end of
two years), subject to Telekey meeting certain
revenue and EBITDA objectives. The 1,515,000 shares
of Series F Preferred Stock which are not
contingently issuable have been valued at $2.9
million.
The shares of Series F Preferred initially issued
will automatically convert into shares of common
stock on the earlier to occur of (a) the first date
that the 15 day average closing sales price of the
common stock is equal to or greater than $4.00 or
(b) July 1, 2001. The Company has guaranteed a price
of $4.00 per share at December 31, 1999 to
recipients of the common stock issuable upon the
conversion of the Series F Preferred, subject to
Telekey's achievement of certain defined revenue and
EBITDA objectives. If the market price is less that
$4.00 on December 31, 1999, the Company will issue
additional shares of common stock upon conversion of
the Series F Preferred based on the ratio of $4.00
to the market price, but not more than an aggregate
of 600,000 additional shares of common stock. The
Series F Preferred carries no dividend obligation.
Based on the contingent purchase price elements as
listed above, goodwill associated with the
acquisition may materially increase when these
contingencies are resolved.
At the acquisition date, the stockholders of Telekey
received shares of Series F Preferred Stock as
discussed above, which are ultimately convertible
into common stock. These stockholders in turn
granted a total of 120,000 shares of eGlobe common
stock to certain Telekey employees. The underlying
common stock granted by Telekey stockholders to
certain employees has been initially valued as
$232,000 and has been reflected as compensation
expense in the Pro Forma Condensed Consolidated
Statement of Operations. The stock grants will be
adjusted each reporting period (but not below zero)
for changes in the price of the eGlobe common stock
until the shares are issued.
12
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EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
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<TABLE>
<CAPTION>
EGLOBE TELEKEY
AS OF 12/31/98 AS OF 12/31/98 ADJUSTMENTS PRO FORMA
(NOTE A) (NOTE A)
------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 1,508,000 $ 99,000 $ -- $ 1,607,000
Accounts receivable, net 6,851,000 73,000 -- 6,924,000
Other current assets 494,000 185,000 -- 679,000
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TOTAL CURRENT ASSETS 8,853,000 357,000 -- 9,210,000
PROPERTY AND EQUIPMENT, NET 13,152,000 497,000 -- 13,649,000
GOODWILL AND OTHER INTANGIBLE ASSETS 12,107,000 236,000 4,782,000 (1) 17,125,000
OTHER ASSETS 2,276,000 -- -- 2,276,000
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TOTAL ASSETS $ 36,388,000 $ 1,090,000 $ 4,782,000 $ 42,260,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 5,798,000 $ 115,000 $ -- $ 5,913,000
Accrued expenses 6,203,000 846,000 50,000 (1) 7,099,000
Notes payable principally related to acquisitions 6,299,000 -- 150,000 (1) 6,449,000
Current maturities of long-term debt 8,540,000 514,000 -- 9,054,000
Other current liabilities 2,968,000 633,000 -- 3,601,000
Purchase obligation -- -- 125,000 (1) 125,000
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TOTAL CURRENT LIABILITIES 29,808,000 2,108,000 325,000 32,241,000
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LONG-TERM DEBT, NET OF CURRENT MATURITIES 1,237,000 504,000 -- 1,741,000
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TOTAL LIABILITIES 31,045,000 2,612,000 325,000 33,982,000
STOCKHOLDERS' EQUITY
Preferred stock 1,000 -- 2,000 (1) 3,000
Common stock 16,000 784,000 (784,000)(1) 16,000
Additional paid-in capital 33,975,000 -- 2,933,000 (1) 36,908,000
Accumulated deficit (28,566,000) (2,306,000) 2,306,000 (1) (28,566,000)
Accumulated other comprehensive loss (83,000) -- -- (83,000)
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TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 5,343,000 (1,522,000) 4,457,000 8,278,000
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 36,388,000 $ 1,090,000 $ 4,782,000 $ 42,260,000
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</TABLE>
See notes to the pro forma condensed consolidated financial statements.
13
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EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EGLOBE IDX
TWELVE MONTHS ENDED ELEVEN MONTHS TELEKEY
12/31/98 ENDED 11/30/98 TWELVE MONTHS ADJUSTMENTS
(NOTE B) (NOTE B) ENDED 12/31/98 (NOTE B) PRO FORMA
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUE $ 30,030,000 $ 2,795,000 $ 4,705,000 $ (121,000) (2) $ 37,409,000
COST OF REVENUE 16,806,000 3,176,000 1,294,000 (65,000) 21,211,000
- -----------------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT (LOSS) 13,224,000 (381,000) 3,411,000 (56,000) 16,198,000
- -----------------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Selling, general and
administrative 18,070,000 3,011,000 2,811,000 (113,000) 23,779,000
Depreciation and
amortization 3,070,000 510,000 192,000 2,222,000 5,994,000
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 21,140,000 3,521,000 3,003,000 2,109,000 29,773,000
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
OPERATIONS (7,916,000) (3,902,000) 408,000 (2,165,000) (13,575,000)
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Other income (expense) (1,981,000) 358,000 (61,000) (66,000) (1,750,000)
Proxy related litigation expense (3,647,000) -- -- -- (3,647,000)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE) (5,628,000) 358,000 (61,000) (66,000) (5,397,000)
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE TAXES
ON INCOME (13,544,000) (3,544,000) 347,000 (2,231,000) (18,972,000)
MINORITY INTEREST IN INCOME OF
SUBSIDIARY -- -- (59,000) 59,000 --
INCOME TAXES 1,500,000 -- -- 21,000 1,521,000
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(15,044,000) $ (3,544,000) $ 288,000 $ (2,193,000) $(20,493,000)
- -----------------------------------------------------------------------------------------------------------------------------------
NET LOSS PER SHARE
Basic and diluted $ (0.85) $ (0.95)
Basic and diluted weighted average
number of shares outstanding 17,736,654 -- -- 3,929,000 21,665,654
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to the pro forma condensed consolidated financial statements.
14
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE A. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The purchase of IDX was effective December 2, 1998 and is included in the
December 31, 1998 balance sheet of the Company. The following is the preliminary
allocation of the purchase price based on the fair value of the assets acquired
and the liabilities assumed. The final allocations will be determined when
certain contingencies are resolved as discussed earlier. The components of the
purchase price and its preliminary allocation to the assets and liabilities
acquired are as follows:
COMPONENTS OF PURCHASE PRICE:
Notes payable to former shareholders of IDX $ 5,000,000
Company's Series B Convertible Preferred Stock 3,500,000
Company's bridge loans converted to investment in IDX 1,500,000
Direct acquisition costs 429,000
Note payable to former shareholders of IDX
for preferred dividends payable 418,000
Accrued interest on bridge loans 44,000
------------
TOTAL PURCHASE PRICE 10,891,000
ALLOCATION OF PURCHASE PRICE:
Cash (119,000)
Accounts receivable (707,000)
Other current assets (394,000)
Property and equipment (975,000)
Other assets (172,000)
Goodwill (10,917,000)
Current liabilities 1,978,000
Long-term liability 415,000
------------
$ -
============
15
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE A. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (CON'T)
The following pro forma adjustment to the condensed consolidated balance sheet
is as if the acquisition of Telekey had occurred on December 31, 1998.
The final purchase price allocation will be determined when certain
contingencies are resolved as discussed earlier and additional information
becomes available. Accordingly, the final purchase price allocation may have a
material effect on the supplemental unaudited pro forma information presented
below.
(1) To reflect the acquisition of Telekey and the preliminary allocation of the
purchase price based on the fair value of the assets acquired and the
liabilities assumed. The components of the purchase price and its preliminary
allocation to the assets and liabilities acquired are as follows:
COMPONENTS OF PURCHASE PRICE:
Company's Series F Convertible Preferred Stock $ 2,935,000
Company's note to former shareholders of Telekey 150,000
Cash payment to former shareholders of Telekey 125,000
Direct acquisition costs 50,000
------------
TOTAL PURCHASE PRICE 3,260,000
ALLOCATION OF PURCHASE PRICE:
Cash and cash equivalents (99,000)
Accounts receivable (73,000)
Other current assets (185,000)
Property and equipment (497,000)
Goodwill (5,018,000)
Current liabilities 1,594,000
Long-term debt, including current
maturities 1,018,000
------------
$ -
============
16
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE B. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Effective with the period ended December 31, 1998, the Company changed from a
March 31 to a December 31 fiscal year end. As a result, the following table is
required to reflect twelve months of operations.
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS TWELVE MONTHS
ENDED 12/31/98 ENDED 3/31/98 ENDED 12/31/98
--------------------------------------------------
<S> <C> <C> <C>
Revenue $ 22,491,000 $ 7,539,000 $ 30,030,000
Cost of revenue 12,619,000 4,187,000 16,806,000
- ----------------------------------------------------------------------------------------
Gross profit 9,872,000 3,352,000 13,224,000
Costs and expenses:
Selling, general and administrative 13,555,000 4,515,000 18,070,000
Depreciation and amortization 2,256,000 814,000 3,070,000
- ----------------------------------------------------------------------------------------
Total costs and expenses 15,811,000 5,329,000 21,140,000
- ----------------------------------------------------------------------------------------
Loss from operations (5,939,000) (1,977,000) (7,916,000)
- ----------------------------------------------------------------------------------------
Other income (expenses):
Other expense (1,031,000) (950,000) (1,981,000)
Proxy related litigation expense (120,000) (3,527,000) (3,647,000)
- ----------------------------------------------------------------------------------------
Total other expenses (1,151,000) (4,477,000) (5,628,000)
- ----------------------------------------------------------------------------------------
Loss before taxes on income (7,090,000) (6,454,000) (13,544,000)
Income taxes -- 1,500,000 1,500,000
- ----------------------------------------------------------------------------------------
Net loss $ (7,090,000) $ (7,954,000) $(15,044,000)
- ----------------------------------------------------------------------------------------
</TABLE>
UCI was acquired on December 31, 1998 and had minimal operations which have not
been reflected in the Pro Forma Condensed Consolidated Statement of Operations
for the year ended December 31, 1998. However, the recurring effect of the
goodwill amortization related to the UCI acquisition has been included in the
Pro Forma Condensed Consolidated Statement of Operations.
17
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE B. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(CON'T)
The following pro forma adjustments to the condensed consolidated statement of
operations are as if the acquisitions had been completed at the beginning of the
period presented and are not indicative of what would have occurred had the
acquisitions actually been made as of such date. IDX was acquired on December 2,
1998, therefore, the results of operations of IDX for the month of December 1998
are included in the historical results of the Company for the twelve months
ended December 31, 1998.
<TABLE>
(2) Adjustments to revenue:
<S> <C>
Elimination of IDX billings to the Company $ (41,000)
Adjustment to revenue to give effect to IDX's purchase of a
subsidiary in April, 1998 and its sale of another
subsidiary in November,1998 as if the purchase and sale had
been completed at the beginning of the period presented (80,000)
--------------
$ (121,000)
==============
(3) Adjustments to cost of revenue:
Elimination of IDX billings to the Company $ (41,000)
Adjustment to cost of revenue to give effect to IDX's purchase of
a subsidiary in April, 1998 and its sale of another
subsidiary in November, 1998 as if the purchase and sale
had been completed at the beginning of the period presented (24,000)
--------------
$ (65,000)
==============
(4) Adjustments to selling, general and administrative expenses:
Adjustment for the incremental increase in management compensation $ 78,000
Adjustment for deferred compensation related to Telekey purchase 232,000
Adjustment to give effect to IDX's purchase of a subsidiary in
April, 1998 and its sale of another subsidiary in November,
1998 as if the purchase and sale had been completed at the
beginning of the period presented (423,000)
--------------
$ (113,000)
==============
(5) Adjustments to depreciation and amortization expenses:
Amortization for eleven months of cost in excess of net assets
acquired for the IDX purchase which was effective December
2, 1998 (7 year straight-line amortization) $ 1,425,000
Amortization of cost in excess of net assets acquired for the UCI
purchase which was effective December 31, 1998 (7 year
straight-line amortization) 165,000
Amortization of cost in excess of net assets acquired for the
Telekey purchase (7 year straight-line amortization) 717,000
--------------
2,307,000
Less amortization of cost in excess of net assets acquired,
recorded by the the Company in the historical results of
operations for the twelve months ended December 31, 1998. 85,000
--------------
$ 2,222,000
==============
</TABLE>
18
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE B. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(CON'T)
<TABLE>
(6) Adjustment to other income (expenses):
<S> <C>
Adjustment to give effect to IDX's purchase of a subsidiary in
April, 1998 and its sale of another subsidiary in November,
1998 as if the purchase and sale had been completed at the
beginning of the period presented $ (411,000)
Interest on $0.418 million IDX note @ 7.75% due 5/99 13,000
Interest on $0.5 million UCI note @8% due 6/99 20,000
Interest on $0.5 million UCI note @8% due 5/2000 40,000
Interest on $1.0 million IDX note @7.75% due 2/99 19,000
Interest on $1.5 million IDX note @7.75% due 6/99 65,000
Interest on $2.5 million IDX note @7.75% due 10/99 176,000
Additional interest recorded for value of 50,000 warrants issued
in connection with the UCI purchase 43,000
--------------
(35,000)
Less interest expense recorded by the Company in the historical
results of operations for the twelve months ended December
31, 1998 31,000
--------------
$ (66,000)
==============
(7) To eliminate the minority interest in income of a subsidiary. In
connection with the acquisition of Telekey by the Company, the 20%
minority interest in Telekey, L.L.C. was acquired by Telekey. $ 59,000
==============
(8) To reflect state income taxes (Telekey was previously an S-corporation)
at 6% as Georgia does not allow for a consolidated filing. The Telekey
federal taxable income can be offset with the Company's federal net
operating loss carryforwards. $ 21,000
==============
(9) Adjustment to the weighted average number of shares outstanding as if the
acquisitions had been completed at the beginning of the period
presented. The Company has the option to pay the IDX notes (including
interest) in common stock with the number of shares to be issued
determined by the market price of the common stock as of the due date.
In March, 1999, the Company elected to repay the $1.0 million IDX note
(including interest) using common stock, which, based on the terms of
conversion, resulted in the issuance of approximately 474,000 shares.
The Company has made no decision on the payment of the remaining two
notes totaling $4.0 million.
IDX purchase 2,000,000
Telekey purchase 1,515,000
Payment of $1.0 million IDX note (including interest) using shares of
common stock (weighted for nine months, the note was outstanding
and interest expense has been reflected for three months in the
Pro Forma Condensed Consolidated Statement of Operations) 351,000
UCI purchase 63,000
--------------
3,929,000
==============
</TABLE>
19
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE C. CONTINGENCIES
The following adjustments to the pro forma net loss per share are to
reflect the following: (1) the issuance of additional shares of
Series B and Series F Preferred Stock and the assumed conversion
into common stock which would have occurred if IDX and Telekey had
met their earn-out formulas at the beginning of the period presented
and stockholder approval for the IDX acquisition was obtained; (2)
the additional shares of common stock to be issued to UCI
shareholders assuming UCI had met its earn-out provision; (3) the
additional compensation expense related to the IDX stockholders'
grant of shares of Series B Preferred Stock, including shares
issuable under the IDX warrant; and (4) the assumption that the
Company's common stock met the guaranteed trading price of $8.00 per
share for IDX and UCI related shares and $4.00 per share for the
Telekey related shares. The increase in goodwill amortization
expense is the result of the additional goodwill recorded as a
result of the above issuances amortized over 7 years using
straight-line amortization. If the Company's common stock does not
trade at the guaranteed trading prices, subject to the acquired
companies meeting their earn-out objectives, and the Company
obtaining the required stockholder approval as discussed above, the
Company will be required to issue additional shares of common stock
and the estimated goodwill amortization reflected below will change.
The final purchase price allocations will be determined when certain
contingencies are resolved as discussed earlier and additional
information becomes available. This is not indicative of what would
have occurred had the acquisitions actually been made as of such
date.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31, 1998
------------------------
<S> <C>
PRO FORMA BASIC LOSS PER SHARE:
NUMERATOR
Pro forma net loss $(20,493,000)
Increase in goodwill amortization expense for earn-out formulas and
stockholder approval (7 year straight-line amortization) (3,788,000)
Additional compensation related to stock granted to IDX
employees by IDX stockholders after the Company's
purchase of IDX (3,420,000)
Additional compensation related to stock granted to Telekey
employees by Telekey stockholders after the Company's
purchase of Telekey (248,000)
------------------------
Adjusted pro forma net loss $(27,949,000)
------------------------
DENOMINATOR
Weighted average shares outstanding 21,665,654
Number of shares of common stock issuable under earn-out
formulas and upon stockholder approval:
IDX (stockholder approval) 500,000
IDX (contingent earn-out warrants) 2,500,000
Telekey (contingent earn-out stock) 505,000
UCI (contingent earn-out stock) 62,500
------------------------
Adjusted pro forma weighted average shares outstanding: 25,233,154
------------------------
PER SHARE AMOUNTS
Adjusted pro forma basic and diluted loss per share $(1.11)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
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: April 30, 1999 By /S/
----------------------------------------
Anne Haas
Controller, Treasurer
(Principal Accounting Officer)
21
<PAGE>
IDX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE ELEVEN-MONTH PERIOD
ENDED NOVEMBER 30, 1998 AND FOR THE
YEARS ENDED DECEMBER 31, 1997 & 1996
<PAGE>
IDX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONTENTS
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE ELEVEN-MONTH
PERIOD ENDED NOVEMBER 30, 1998
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
CONSOLIDATED BALANCE SHEET 4 -5
CONSOLIDATED STATEMENT OF OPERATIONS 6
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
AND COMPREHENSIVE LOSS 7
CONSOLIDATED STATEMENT OF CASH FLOWS 8
SUMMARY OF ACCOUNTING POLICIES 9 - 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14 - 23
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996
REPORT OF INDEPENDENT ACCOUNTANTS 24
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION 25
CONSOLIDATED STATEMENTS OF OPERATIONS 26
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) 27
CONSOLIDATED STATEMENTS OF CASH FLOWS 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 29 - 42
2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
IDX International, Inc.
Reston, Virginia
We have audited the accompanying consolidated balance sheet of IDX
International, Inc. and subsidiaries as of November 30, 1998 and the related
consolidated statements of operations, stockholders' deficit and comprehensive
loss, and cash flows for the eleven-month period then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of IDX International,
Inc. and subsidiaries as of November 30, 1998, and the results of their
operations and their cash flows for the eleven-month period then ended in
conformity with generally accepted accounting principles.
/S/ BDO Seidman, LLP
April 28, 1999
Denver, Colorado
3
<PAGE>
IDX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1998
November 30,
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT:
Cash $ 118,984
Accounts receivable, less allowance
of $125,618 for doubtful accounts 706,974
Note receivable (Note 1) 100,000
Inventory 187,959
Other assets (Note 8) 106,676
- -------------------------------------------------------------------------------------------------------------------
Total current assets 1,220,593
- -------------------------------------------------------------------------------------------------------------------
FURNITURE AND EQUIPMENT, less accumulated
depreciation and amortization (Note 2) 747,577
OTHER ASSETS:
Equipment for lease, less accumulated
depreciation (Note 3) 203,936
Capitalized software development costs, less
accumulated amortization of $20,644 23,496
Goodwill, less accumulated amortization
of $55,809 (Note 1) 576,712
Deposits and other assets 172,029
- -------------------------------------------------------------------------------------------------------------------
Total other assets 976,173
- -------------------------------------------------------------------------------------------------------------------
$ 2,944,343
- -------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and
notes to consolidated financial statements.
4
</TABLE>
<PAGE>
IDX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1998
November 30,
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 1,323,602
Accrued liabilities 423,192
Installment obligations under capital lease (Note 4) 10,973
Deposits 219,945
Note payable (Note 9) 1,915,400
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 3,893,112
- -------------------------------------------------------------------------------------------------------------------
MANDATORILY REDEEMABLE PREFERRED STOCK (Notes 5 and 9):
Series A Preferred Stock, no par value, 9,091
shares authorized, issued and outstanding
(aggregate liquidation preference $2,751,327) 2,751,327
Series B Preferred Stock, no par value, 3,821
shares authorized, issued and outstanding
(aggregate liquidation preference $3,164,823) 3,164,823
- -------------------------------------------------------------------------------------------------------------------
Total mandatorily redeemable preferred stock 5,916,150
- -------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 11)
STOCKHOLDERS' DEFICIT:
Common stock, no par value, authorized 43,423
shares; issued and outstanding 22,451
shares (Note 9) 1,124,700
Note receivable (Note 6) (399,900)
Accumulated other comprehensive losses (35,572)
Accumulated deficit (7,554,147)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' deficit (6,864,919)
- -------------------------------------------------------------------------------------------------------------------
$ 2,944,343
- -------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and
notes to consolidated financial statements.
5
</TABLE>
<PAGE>
IDX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1998
Eleven-Month Period Ended November 30,
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
REVENUE $ 2,795,421
COST OF REVENUE 3,176,142
- -------------------------------------------------------------------------------------------------------------------
Gross loss (380,721)
OPERATING EXPENSES:
Selling, general and administrative 2,779,185
Depreciation and amortization 510,339
Research and development 231,541
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 3,521,065
- -------------------------------------------------------------------------------------------------------------------
Operating loss (3,901,786)
OTHER INCOME (EXPENSE):
Interest income 20,561
Interest expense (66,541)
Equity in losses of joint ventures (Note 1) (24,577)
Gain on sale of subsidiaries (Note 1) 439,517
Loss on disposal of furniture and equipment (56,334)
Other 45,573
- -------------------------------------------------------------------------------------------------------------------
Total other income 358,199
- -------------------------------------------------------------------------------------------------------------------
NET LOSS $ (3,543,587)
- -------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and
notes to consolidated financial statements.
6
</TABLE>
<PAGE>
IDX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
AND COMPREHENSIVE LOSS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Other Total
Eleven-Month Period Ended ----------------------------- Note Comprehensive Accumulated Stockholders'
November 30, 1998 Shares Amount Receivable Losses Deficit Deficit
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1998 20,500 $ 477,300 $ -- $ (24,840) $(4,010,560) $(3,558,100)
Accretion of Series A and B
preferred stock (Note 5) -- (302,500) -- -- -- (302,500)
Common stock agreed to be issued
in business acquisition (Note 1) 701 550,000 -- -- -- 550,000
Common stock issued for note
receivable (Note 6) 1,250 399,900 (399,900) -- -- --
Foreign currency translation
adjustment -- -- -- (10,732) -- (10,732)
Net loss for the eleven-month period -- -- -- -- (3,543,587) (3,543,587)
- ------------------------------------- ---------------------------------------------------------------------------------------------
BALANCE, November 30, 1998 22,451 $ 1,124,700 $ (399,900) $ (35,572) $(7,554,147) $(6,864,919)
- ------------------------------------- ---------------------------------------------------------------------------------------------
<CAPTION>
Accumulated
Eleven-Month Period Ended Comprehensive
November 30, 1998 Loss
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Foreign currency translation
adjustment $ (10,732)
Net loss for the eleven-month period (3,543,587)
- ------------------------------------- -------------------
BALANCE, November 30, 1998 $ (3,554,319)
- ------------------------------------- -------------------
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.
7
<PAGE>
IDX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
Eleven-Month Period Ended November 30, 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
OPERATING ACTIVITIES:
Net loss $ (3,543,587)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 510,339
Equity in losses of joint ventures 24,577
Loss on disposal of furniture and equipment 56,334
Provision for bad debts 147,621
Provision for inventory obsolesence 144,203
Gain on sale of subsidiaries (439,517)
Changes in operating assets and liabilities:
Accounts receivable (1,033,957)
Inventory (246,542)
Other assets (34,593)
Accounts payable 1,392,373
Accrued liabilities 258,645
Deferred revenue (30,000)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,794,104)
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Investment in equipment for lease (54,767)
Purchase of furniture and equipment (456,612)
Acquisition of business, net of cash acquired (100,000)
Deposits and other assets (215,853)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (827,232)
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from preferred stock subscription receivable 50,000
Proceeds from long-term borrowings 128,488
Increase in minority interest in subsidiary 345,720
Proceeds from note payable 1,915,400
Principal payments on capital lease obligations (6,127)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,433,481
- -------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (29,301)
- -------------------------------------------------------------------------------------------------------------------
Net decrease in cash (1,217,156)
CASH, beginning of period 1,336,140
- -------------------------------------------------------------------------------------------------------------------
CASH, end of period $ 118,984
- -------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and
notes to consolidated financial statements.
8
</TABLE>
<PAGE>
IDX INTERNATIONAL, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
BUSINESS IDX International, Inc. (the "Company") was incorporated on
April 17, 1996 (inception) as a Virginia corporation. The
Company develops and markets voice and data
store-and-forward network services for transmitting voice,
facsimiles ("faxes") and other forms of digitized
information utilizing a global network established by the
Company and its international business partners ("IBPs").
The network consists of international private lines, shared
access lines and frame relays (collectively
telecommunication lines) connected to PC- based dedicated
access switches ("CyberPosts") which process and route voice
and fax traffic globally over the network.
PRINCIPALS OF The consolidated financial statements include the accounts
CONSOLIDATION of the Company's United States ("U.S.") and foreign
subsidiaries. The Company accounts for its investment in 50%
or less owned joint ventures under the equity method of
accounting. Intercompany transactions and balances have been
eliminated in consolidation.
LIQUIDITY The Company's ability to generate sufficient revenues and
AND CAPITAL ultimately achieve profitable operations remains uncertain.
RESOURCES The Company's future prospects depend upon, among other
things, its ability to demonstrate sustained commercial
viability of its service and to obtain sufficient working
capital.
During the eleven-month period ended November 30, 1998, the
Company incurred a net loss of $3.5 million and negative
operating cash flow of $2.8 million. At November 30, 1998,
the Company had a stockholders' deficit totaling $6.9
million.
The Company plans to operate in a fashion to generate both
increased revenues and cash flows during 1999. Additionally,
in December 1998, the Company was acquired by Executive
Telecard Ltd., d.b.a. eGlobe, Inc. ("eGlobe") (see Note 9).
Management believes that eGlobe will provide the Company
with financial and operational support which, together with
existing cash and anticipated cash flows from operations,
should enable the Company to continue operations through the
year ending December 31, 1999.
FOREIGN The functional currency of the Company's foreign
CURRENCY subsidiaries and joint ventures is the local currency. All
assets and liabilities are translated into U.S.
9
<PAGE>
IDX INTERNATIONAL, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
TRANSLATION dollars at current exchange rates as of the balance sheet
date. Revenue and expense items are translated at the
average exchange rates prevailing during the period.
Cumulative translation gains and losses are reported as
accumulated other comprehensive losses in the consolidated
statement of stockholders' deficit and are included in
comprehensive loss.
USE OF The preparation of financial statements in conformity with
ESTIMATES generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and
related notes to the consolidated financial statements.
Actual results could differ from those estimates.
REVENUE The Company operates and manages certain CyberPosts and
RECOGNITION licenses the use of CyberPost equipment and associated
AND COST software to its IBPs. Under such licensing agreements, the
OF SALES Company is generally obligated to provide maintenance and
upgrades and IBPs are responsible for the marketing and sale
of voice and data store-and-forward services as well as for
the operations and management of CyberPosts. Certain IBPs
are also stockholders of the Company.
The Company's revenues are generated principally from (i)
routing charges for voice and fax traffic through the
network, (ii) licensing and royalty fees and (iii) system
hardware and accessory sales. The Company recognizes fixed
license fees on the straight-line basis over the service
period, royalties and routing charges as services are
rendered to the ultimate customer, and system hardware and
accessory sales upon delivery and customer acceptance.
Cost of sales principally consists of telecommunication line
charges, local and international access charges, cost of
CyberPost accessories, maintenance costs, installation and
operator training costs and commissions to CyberPost
operators.
Revenue originating from Taiwan, the United States, Belgium
and the United Kingdom approximated 30%, 29%, 17% and 14% of
total revenues for the eleven-month period ended November
30, 1998. Revenue from one customer approximated 25% of
total revenues for such period.
10
<PAGE>
IDX INTERNATIONAL, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
The economic crisis in Asia has had a negative impact on the
Company's revenues and prospects with Asian customers. The
Company expects demand for its services in Asia to increase
if and when the affected economies recover. If the economic
crisis in Asia continues, demand for the Company's services
could be further dampened which could result in a
significant adverse impact on the Company's financial
condition, results of operations and cash flows.
CASH AND CASH The Company considers all highly-liquid investments with
EQUIVALENTS original maturities of three months or less to be cash
equivalents.
CONCENTRATIONS Financial instruments that potentially subject the Company
OF CREDIT RISK to a concentration of credit risk consist principally of
accounts receivable and cash. The Company in certain
instances requires security deposits from its IBPs to be
applied against future uncollectible accounts receivable, as
needed. In addition, there is an allowance for uncollectible
accounts receivable which is based upon the expected
collectibility of accounts receivable. The Company's cash is
placed with financial institutions which at times may exceed
federally insured limits. The Company has not experienced
any losses in such cash balances.
INVENTORY Inventory primarily consists of computer related supplies
for CyberPost equipment. Inventory is stated at the lower of
cost or market using the first-in, first-out method.
EQUIPMENT The Company's investment in equipment for lease is stated at
FOR LEASE cost, net of accumulated depreciation. Depreciation is
recorded on a straight-line basis over the equipment's
estimated useful life of three years.
FURNITURE Furniture and equipment are stated at cost, net of
AND EQUIPMENT accumulated depreciation. Depreciation is provided using the
straight-line method over the estimated useful lives of
three to seven years. Leasehold improvements are amortized
using the straight-line method over the lesser of the lease
term or the estimated useful life of the related
improvement.
GOODWILL The Company amortizes costs in excess of the fair value of
net assets of business acquired, goodwill, using the
straight-line method over seven years.
SOFTWARE Statement of Financial Accounting Standards ("SFAS") No. 86,
DEVELOPMENT "Accounting for the costs of Computer Software to be Sold,
COSTS Leased, or Otherwise Marketed", requires the capitalization
of certain software development costs
11
<PAGE>
IDX INTERNATIONAL, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
incurred subsequent to the date when technological
feasibility is established and prior to the date when the
product is generally available for licensing. The Company
defines technological feasibility as being attained at the
time a working model of a software product is completed. The
Company has capitalized $44,140 of software development
costs. Capitalized software development costs are amortized
using the greater of the straight-line method over the
estimated economic life of approximately three years or the
ratio of current year revenues by product, to the product's
total estimated revenues method. Amortization expense for
the eleven-month period ended November 30, 1998 was $10,674.
IMPAIRMENT OF Long-lived assets subject to the requirements of Statement
LONG-LIVED ASSETS of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", are evaluated for possible
impairment through review of undiscounted expected future
cash flows. If the sum of undiscounted expected future cash
flows is less than the carrying amount of the asset or if
changes in facts and circumstances indicate, an impairment
loss is recognized.
COMPREHENSIVE The Company has adopted SFAS No. 130, "Reporting
LOSS Comprehensive Income". Comprehensive loss is comprised of
net loss and all changes to stockholders' deficit, except
those due to investment by stockholders, changes in paid-in
capital and distributions to stockholders.
RESEARCH AND Research and development costs are expensed as incurred.
DEVELOPMENT
INCOME The Company provides for income taxes using the asset and
TAXES liability approach. The asset and liability approach
requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the
tax bases of the assets and liabilities. A valuation
allowance is recorded if, based on the evidence available,
management is unable to determine that it is more likely
than not that some portion or all of the deferred tax asset
will be realized.
12
<PAGE>
IDX INTERNATIONAL, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
STOCK The Company accounts for stock based compensation to
BASED employees in accordance with Accounting Principles Board
COMPENSATION Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
provides an alternative accounting method to APB 25 and
requires additional pro forma disclosures. The Company
accounts for stock based compensation to non-employees in
accordance with the provisions of SFAS 123.
13
<PAGE>
IDX INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ACQUISITION AND During 1997 the Company established two wholly-owned foreign
DISPOSITION OF subsidiaries, IDX Taiwan Ltd. ("IDX Taiwan") and IDX Hong
BUSINESS Kong Ltd. ("IDX HK"), and one majority-owned foreign
subsidiary, IDX Belgium, N.V. ("IDX Belgium"), to market the
Company's store-and-forward services. Upon the formation of
IDX Belgium, the Company acquired a 90% interest in IDX
Belgium in exchange for contributed capital of $75,600.
During January 1998, the Company established one
wholly-owned foreign subsidiary, IDX Singapore Ltd., and two
majority-owned foreign subsidiaries, IDX Europe Services,
N.V. ("IDX Europe") and Marvin European Holdings Lmt.
("Marvin") to market the Company's store-and forward
services.
During April 1998, IDX Belgium issued additional shares of
its common stock, plus an option to acquire an equal number
of its common shares, to a new investor for approximately
$350,000 in cash. Upon issuance of the additional shares in
April 1998, the Company's interest in IDX Belgium was
reduced to 75%.
In November 1998, the Company sold its interest in IDX
Belgium, IDX Europe and Marvin for $130,500, consisting of a
note receivable for $100,000 and equipment valued at
$30,500. Subsequent to November 30, 1998 the note receivable
was collected in full. The sale of these subsidiaries
resulted in a gain totaling $439,517.
In March 1997, the Company formed a joint venture to market
the Company's services in Panama. The Company contributed
$40,000 for a 20% interest in the joint venture. In
September 1998 the operations of this joint venture were
suspended indefinitely. During the eleven-month period ended
November 30, 1998, the Company's share of losses in this
joint venture exceeded its original investment. The loss
reflected in the consolidated statement of operations for
this period totaled $13,430. As a result, the investment has
no carrying value in the accompanying consolidated balance
sheet.
In August 1997, IDX Taiwan formed a joint venture with
Orlida Ltd. ("Orlida"), a Taiwanese company, in order to
expand the Company's operations in Taiwan. The Company
contributed CyberPost equipment with
14
<PAGE>
IDX INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
a net book value of $26,000 in exchange for a 33% interest
in the joint venture.
On May 8, 1998, the Company acquired all of the stock of
Orlida, in exchange for $100,000 cash and an agreement to
issue 700.64 shares of the Company's common stock, valued at
$550,000. Such shares were not issued as of November 30,
1998, but have been reflected as issued in the accompanying
financial statements. The acquisition was accounted for
using the purchase method of accounting and resulted in the
recording of goodwill totaling $632,521. Orlida's primary
business consists of marketing voice and data
store-and-forward services in Taiwan.
The Company's share of loss from Orlida for the period from
January 1, 1998 through the date of acquisition totaled
$11,147.
The following summarized unaudited proforma results of
operations assumes the acquisition of Orlida and the
dispositions of IDX Belgium, IDX Europe and Marvin had
occurred at the beginning of the period presented. The
proforma financial information may not necessarily reflect
the results of operations of the Company had the acquisition
or dispositions of the businesses actually occurred on
January 1, 1998.
<TABLE>
<CAPTION>
Eleven-Month Period Ended November 30, 1998
------------------------------------------------------------
<S> <C>
Revenue $ 2,715,000
Net loss (3,588,000)
</TABLE>
2. FURNITURE AND Furniture and equipment consisted of the following:
EQUIPMENT
15
<PAGE>
IDX INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
November 30, 1998
------------------------------------------------------------
<S> <C>
Equipment $ 865,966
Office and computer equipment 350,185
Leasehold improvements 33,282
Furniture and fixtures 18,409
------------------------------------------------------------
1,267,842
Less accumulated depreciation
and amortization 520,265
------------------------------------------------------------
Furniture and equipment, net $ 747,577
------------------------------------------------------------
</TABLE>
Furniture and equipment includes equipment under capital
leases with a net book value of $17,708 at November 30,
1998. Depreciation expense, including amortization of
equipment under capital leases, was $358,313 for the
eleven-month period ended November 30, 1998.
3. EQUIPMENT The Company leases CyberPost equipment to IBPs under
FOR operating leases, which are generally for a period of one to
LEASE five years and contain annual renewal options. The cost of
equipment for lease at November 30, 1998 was $376,402, and
the related accumulated depreciation was $172,466.
Depreciation expense for equipment for lease was $85,543 for
the eleven- month period ended November 30, 1998.
4. COMMITMENTS Telecommunication Lines
AND
CONTINGENCIES In its normal course of business, the Company enters into
agreements for the use of long distance telecommunication
lines. Future minimum payments under such agreements are as
follows:
Periods Ending December 31,
------------------------------------------------------------
16
<PAGE>
IDX INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
1998 - one month $ 108,896
1999 - year 1,705,412
2000 - year 535,109
2001 - year 421,728
2002 - year 70,288
------------------------------------------------------------
Total future minimum
telecommunication line payments $ 2,841,433
------------------------------------------------------------
</TABLE>
Leases
The Company leases its U.S. and foreign facilities under
noncancellable operating lease agreements. Rent expense for
the eleven-month period ended November 30, 1998 was
$188,145.
Future minimum lease payments under noncancellable operating
leases are as follows:
<TABLE>
<CAPTION>
Periods Ending December 31,
------------------------------------------------------------
<S> <C>
1998 - one month $ 17,830
1999 - year 247,124
2000 - year 132,730
2001 - year 136,712
2002 - year 140,813
2003 - year 145,038
------------------------------------------------------------
$ 820,247
------------------------------------------------------------
</TABLE>
Capital Lease Obligations
17
<PAGE>
IDX INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Future minimum payments for capital lease obligations are as
follows:
------------------------------------------------------------
Total future minimum lease payments due in 1999 $ 13,209
Less amount representing interest 2,236
------------------------------------------------------------
Total obligations under capital lease $ 10,973
------------------------------------------------------------
</TABLE>
Interest paid for capital lease obligations during the
eleven-month period ended November 30, 1998 was
approximately $2,800.
Subsequent to November 30, 1998, the Company entered into
additional capital lease obligations requiring future
minimum payments of approximately $992,000 through 2001.
Employee Savings Plan
On April 1, 1998, the Company adopted a 401(k) Profit
Sharing Plan. All employees are eligible to participate in
the plan and may contribute up to 15% of their annual
compensation. The Company may, at its discretion, match up
to 100% of participants' contributions and/or contribute an
amount to be allocated among the participants. As of
November 30, 1998, no contributions have been made to the
plan by the Company.
Contingencies
In certain countries where the Company has current or
planned operations, the Company may not have the necessary
regulatory approvals to conduct all or part of its voice and
fax store-and-forward services. In these jurisdictions, the
requirements and level of telecommunications' deregulation
is varied, including internet protocol telephony. Management
believes that the degree of active monitoring and
enforcement of such regulations is limited. Statutory
provisions for penalties vary, but could include fines
and/or termination of the Company's operations in the
associated jurisdiction. To date, the Company has not been
required to comply or been notified that it
18
<PAGE>
IDX INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
cannot comply with any material international regulations in
order to pursue its existing business activities. In
consultation with legal counsel, management has concluded
that the likelihood of significant penalties or injunctive
relief is remote. There can be no assurance, however, that
regulatory action against the Company will not occur.
5. MANDATORILY During 1997, the Company issued 9,091 shares of Series A
REDEEMABLE Preferred Stock ("Series A"), no par value, and 3,821 shares
PREFERRED of Series B Preferred Stock ("Series B"), no par value, for
STOCK cash totaling $2,499,900 and $3,000,000. The Series A and
Series B preferred stock are mandatorily redeemable on
January 1, 2002.
The holders of the Series A and B preferred stock are
entitled to receive cumulative dividends equal to 6% of the
respective Series A and B liquidation preference. Accrued
unpaid dividends as of November 30, 1998 on the Series A and
B preferred stock totaling $251,427 and $164,823 were
recognized as an increase to the Series A and B stock
carrying values.
In the event of a liquidation of the Company or a change in
control of the Company, the Series A and B preferred stock
have liquidation preference to common stock of $275 and $785
per share, plus accrued unpaid dividends.
As of November 30, 1998, the Company has reserved 17,168
shares of common stock for issuance upon conversion of the
Series A and B stock.
On December 3, 1998, the Series A and B stock was redeemed
in connection with the acquisition of the Company (see Note
9).
6. STOCK During September 1996, the Board of Directors approved the
BASED grant of an option to purchase 1,250 shares of common stock
COMPENSATION to an individual who served as a director and consultant to
the Company. The option carries an exercise price of $320
per share which was greater than the estimated fair value of
19
<PAGE>
IDX INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
common stock on the date of grant and is exercisable at any
time during the succeeding three-year period. On November
13, 1998, the option was exercised in exchange for a note
receivable of $399,900. The note bears interest at LIBOR
plus 250 basis points (7.88% at November 30, 1998) and is
payable through the cash proceeds received by the individual
from the sale of IDX to eGlobe, as defined in the note
agreement (see Note 9).
During September 1997, the Board of Directors adopted the
1997 Stock Incentive Plan (the "Incentive Plan"). The
Incentive Plan provides for awards in the form of restricted
stock, stock units, options (including incentive stock
options ("ISO"s) and nonstatutory stock options ("NSO"s) or
stock appreciation rights ("SAR"s). Employees, directors,
and consultants of the Company are eligible for grants and
restricted shares, stock units, NSOs and SARs. Only
employees of the Company are eligible for ISOs. A total of
4,500 shares of common stock have been reserved for issuance
under the Incentive Plan. To date, no awards have been
granted under the Incentive Plan.
Consideration for each award under the Incentive Plan will
be established by the Stock Option Committee of the Board of
Directors, but in no event shall the option price for ISOs
be less than 100% of the fair market value of the stock on
the date of grant. Awards will have such terms and be
exercisable in such manner and at such times as the Stock
Option Committee may determine. However, each ISO must
expire within a period of not more than ten years from the
date of grant.
7. INCOME A reconciliation of the Company's income tax benefit at the
TAXES Federal statutory tax rate and income taxes at the Company's
effective tax rate follows:
Eleven-Month Period Ended November 30, 1998
------------------------------------------------------------
20
<PAGE>
IDX INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Income tax benefit computed at the
Federal statutory rate $ 1,205,000
State income tax benefit, net of
Federal effect 140,000
Effect of foreign tax rate differences (52,000)
Other permanent differences (38,000)
Change in valuation allowance (1,255,000)
------------------------------------------------------------
$ --
------------------------------------------------------------
</TABLE>
Temporary differences between the consolidated financial
statement carrying amounts and the tax basis of assets and
liabilities that give rise to the significant portions of
deferred income taxes follows:
<TABLE>
<CAPTION>
November 30, 1998
------------------------------------------------------------
<S> <C>
Federal and state net operating losses $ 2,281,000
Foreign net operating losses 254,000
Intangibles 162,000
Allowance for doubtful accounts receivable 48,000
Inventory obsolesence reserve 45,000
Equity investment 4,000
Furniture and equipment accumulated depreciation (50,000)
Valuation allowance (2,744,000)
------------------------------------------------------------
$ --
------------------------------------------------------------
</TABLE>
The Company has incurred operating losses and paid no income
tax for the period presented. The income tax benefit from
the Company's operating loss carryforwards and other
temporary differences at November 30, 1998 was approximately
$2,744,000. A full valuation allowance has been recorded
against the net deferred tax asset because management
currently believes it is more likely than not that the asset
will not be realized.
At November 30, 1998, the Company had net operating loss
carryforwards
21
<PAGE>
IDX INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
available for U.S. income tax purposes of approximately
$6,000,000 which expire in the years 2011 to 2018. Net
operating loss carryforwards are subject to review and
possible adjustment by the Internal Revenue Service and may
be limited in the event of certain cumulative changes in the
ownership interests of significant stockholders.
8. RELATED Related party transactions may not be indicative of
PARTY transactions negotiated at arms length.
TRANSACTIONS
The Company receives consulting services from two of the
Company's stockholders, who also serve on the Board of
Directors. Compensation related to these services totaled
$5,000 for the eleven-month period ended November 30, 1998.
At November 30, 1998, accounts receivable due from related
parties and from officers and employees of the Company
totaled $39,204 and are included in other assets in the
accompanying balance sheet.
9. SUBSEQUENT On December 3, 1998, eGlobe acquired 100% of the outstanding
EVENTS shares of the Company's common and preferred stock in
exchange for notes payable totaling $5 million, 500,000
shares of eGlobe Series B Preferred Stock initially valued
at $3.5 million and contingently issuable warrants to
acquire 2,500,000 shares of eGlobe's common stock. The
purchase price is subject to eGlobe's stockholder approval,
certain working capital adjustments and the preferred stock
and warrants are subject to adjustment if certain financial
performance goals are not achieved by the Company. In
addition, certain key management personnel entered into
employment agreements with the Company.
In connection with the sale of the Company, during the
period May through November 1998 eGlobe advanced the Company
$1,915,400, bearing interest at 8.5% and has committed to
make additional advances to the Company.
10. SUPPLEMENTAL Supplemental disclosure of cash flow information and
CASH FLOW non-cash investing and financing activities follow:
INFORMATION
Eleven-Month Period Ended November 30, 1998
22
<PAGE>
IDX INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------
<S> <C>
Cash paid for interest $ 22,500
Note receivable received on sale of
subsidiary interest 100,000
Equipment received on sale of
subsidiary interest 30,500
Common stock agreed to be issued in
business acquisition 550,000
Accrued dividends on mandatorily
redeemable preferred stock 302,500
Note receivable received in exchange
for exercise of stock option 399,900
</TABLE>
11. YEAR 2000 Like other companies, IDX International, Inc. could be
ISSUES adversely affected if the computer systems the Company or
(UNAUDITED) its suppliers or customers use do not properly process and
calculate date-related information and data from the period
surrounding and including January 1, 2000. This is commonly
known as the "Year 2000" issue. Additionally, this issue
could impact non-computer systems and devices such as
production equipment, elevators, etc. At this time, because
of the complexities involved in the issue, management cannot
provide assurances that the Year 2000 issue will not have an
impact on the Company's operations.
The Company has implemented a plan to modify its business
technologies to be ready for the year 2000 and is in the
process of converting critical data processing systems. The
project is expected to be substantially complete by October
1999 at an approximate cost of $300,000.
23
<PAGE>
[LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of IDX International, Inc.
In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of operations, of changes in
stockholders' equity (deficit) and of cash flows present fairly, in all material
respects, the financial position of IDX International, Inc. and its subsidiaries
at December 31, 1997 and 1996, and the results of their operations and their
cash flows for the year ended December 31, 1997 and the period from April 17,
1996 (inception) through December 31, 1996 in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
May 15, 1998
except Note 12, which is as
of September 11, 1998 and
the last paragraph of
Note 7, which is as of
February 12, 1999
24
<PAGE>
<TABLE>
<CAPTION>
IDX INTERNATIONAL, INC.
-----------------------
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
---------------------------------------------
December 31,
------------
1996 1997
---- ----
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,770 $ 1,336,140
Accounts receivable, less allowance for
doubtful accounts, $0 and $82,620 3,560 148,340
Other accounts receivable 44,260 27,000
Other assets 68,950 89,490
----------- -----------
Total current assets 136,540 1,600,970
Equipment for lease, net 130,000 217,400
Furniture and equipment, net 150,280 986,550
Capitalized software development costs, net 44,140 34,170
Other assets -- 159,290
Investment in joint ventures -- 39,430
----------- -----------
Total assets $ 460,960 $ 3,037,810
=========== ===========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
---------------------------------------------------
AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------
Current liabilities:
Accounts payable $ 88,284 $ 381,290
Accrued liabilities 9,986 326,290
Deferred revenue -- 30,000
Current portion of obligations under capital lease 14,260 17,100
Deposits 152,600 268,640
Note payable 200,000 --
----------- -----------
Total current liabilities 465,130 1,023,320
Obligations under capital lease 20,490 8,920
Note payable 250,000 --
----------- -----------
Total liabilities 735,620 1,032,240
----------- -----------
Commitments and contingencies
Mandatorily redeemable preferred stock:
Series A Preferred Stock, no par value, 9,091 shares
authorized, issued and outstanding
(aggregate liquidation preference $2,613,670) -- 2,613,670
--
Series B Preferred Stock, no par value, 3,821 shares
authorized, issued and outstanding (aggregate
liquidation preference $3,000,000) -- 3,000,000
Series B Preferred Stock subscription receivable -- (50,000)
----------- -----------
Total mandatorily redeemable preferred stock -- 5,563,670
----------- -----------
Stockholders' equity (deficit):
Common stock, no par value, authorized 43,423
shares; issued and outstanding 20,500 shares 591,050 477,300
Cumulative translation adjustment (24,840)
Accumulated deficit (865,710) (4,010,560)
----------- -----------
Total stockholders' equity (deficit) (274,660) (3,558,100)
----------- -----------
Total liabilities, mandatorily redeemable preferred stock
and stockholders' equity (deficit) $ 460,960 $ 3,037,810
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
IDX INTERNATIONAL, INC.
-----------------------
Consolidated Statements of Operations
-------------------------------------
<TABLE>
<CAPTION>
For the period
from April 17, 1996 For the
(inception) to year ended
December 31, December 31,
1996 1997
---- ----
<S> <C> <C>
Revenue $ 12,600 $ 568,010
Cost of revenue 11,180 1,359,090
----------- -----------
Gross profit (loss) 1,420 (791,080)
----------- -----------
Operating expenses:
Selling, general and administrative 470,690 1,807,900
Depreciation and amortization 56,120 276,390
Research and development 338,160 264,440
----------- -----------
Total operating expenses 864,970 2,348,730
----------- -----------
Operating loss (863,550) (3,139,810)
Interest (expense) income, net (2,160) 13,130
----------- -----------
Net loss before income taxes (865,710) (3,126,680)
Benefit from income taxes -- --
Minority interest in loss of
consolidated subsidiary -- 8,400
Equity in loss of joint venture -- (26,570)
----------- -----------
Net loss (865,710) (3,144,850)
Accretion on preferred stock -- 113,750
----------- -----------
Net loss available to common stockholders $ (865,710) $(3,258,600)
=========== ===========
Basic and diluted net loss per share $ (56.82) $ (158.96)
=========== ===========
Shares used in computing basic and diluted
net loss per share 15,235 20,500
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
IDX INTERNATIONAL, INC.
-----------------------
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
--------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Shares Cumulative Total
----------------------- Accumulated Translation Stockholder's
Number Amount Deficit Adjustment Equity (Deficit)
------ ------ ------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Proceeds from issuance of common
stock 20,500 $ 452,750 $ 452,750
Compensation for non-qualified
stock options 138,300 138,300
Net loss from inception to
December 31, 1996 $ (865,710) (865,710)
------ ----------- ----------- ----------- -----------
Balance, December 31, 1996 20,500 591,050 (865,710) (274,660)
Accretion of Series A preferred (113,750) (113,750)
stock
Foreign currency translation
adjustment $ (24,840) (24,840)
Net loss for the year ended
December 31, 1997 (3,144,850) (3,144,850)
------ ----------- ----------- ----------- -----------
Balance, December 31, 1997 20,500 $ 477,300 $(4,010,560) $ (24,840) $(3,558,100)
====== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
IDX INTERNATIONAL, INC.
-----------------------
Consolidated Statements of Cash Flows
-------------------------------------
<TABLE>
<CAPTION>
For the period
from April 17, 1996 For the
(inception) to year ended
December 31, December 31,
1996 1997
---- ----
<S> <C> <C>
Cash flows used in operating activities:
Net loss $ (865,710) $(3,144,850)
Adjustments to reconcile net loss to net cash
used in operating period activities:
Depreciation and amortization expense 56,120 276,390
Provision for doubtful accounts -- 82,620
Stock compensation expense 138,300 --
Increase in accounts receivable (3,560) (227,510)
(Increase) decrease in other accounts receivable (44,260) 17,260
Increase in other assets (68,950) (43,460)
Increase in accounts payable and
accrued liabilities 98,270 646,370
Increase in deferred revenue -- 30,000
Increase in deposits 152,600 82,520
------- ------
Net cash used in operating activities (537,190) (2,280,660)
-------- ----------
Cash flows used in investing activities:
Investment in equipment for lease (156,000) (129,570)
Purchase of furniture and equipment (143,730) (1,043,890)
Investment in capitalized software development costs (44,140) (4,830)
Investment in other assets -- (126,070)
Investment in joint ventures -- (40,000)
--------- -----------
Net cash used in investing activities (343,870) (1,344,360)
--------- -----------
Cash flows from financing activities:
Proceeds from issuance of preferred stock -- 5,449,920
Proceeds from issuance of common stock 452,750 --
Proceeds from short-term borrowings 200,000 --
Proceeds from long-term borrowings 250,000 --
Repayment of short and long-term borrowings -- (450,000)
Principal payments on capital lease obligations (1,920) (16,860)
--------- -----------
Net cash provided by financing activities 900,830 4,983,060
--------- -----------
Effect of exchange rate changes on cash -- (41,670)
--------- -----------
Net increase in cash and cash equivalents 19,770 1,316,370
Cash and cash equivalents, beginning of period -- 19,770
--------- -----------
Cash and cash equivalents, end of period $ 19,770 $ 1,336,140
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
IDX INTERNATIONAL, INC.
-----------------------
Notes to Consolidated Financial Statements
------------------------------------------
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
- ----------------------------------------------
IDX International, Inc. (the Company) was incorporated on April 17, 1996
(inception) as a Virginia corporation. The Company develops and markets voice
and data store-and-forward network services for transmitting voice, facsimiles
(faxes) and other forms of digitized information utilizing a global network
established by the Company and its international business partners (IBPs). The
network consists of international private lines, shared access lines and frame
relays (collectively telecommunication lines) connected to PC-based dedicated
access switches (CyberPosts) which process and route voice and fax traffic
globally over the network. During the period from inception to December 31,
1996, the Company was a development stage enterprise.
Subsidiaries
During 1997, the Company established two wholly-owned foreign subsidiaries, IDX
Taiwan Ltd. (IDX Taiwan) and IDX Hong Kong Ltd. (IDX HK), and one majority-owned
foreign subsidiary, IDX Belgium, N.V. (IDX Belgium), to market the Company's
store-and-forward services. Upon the formation of IDX Belgium, the Company
acquired a 90% interest in IDX Belgium in exchange for contributed capital of
$75,600, and the minority interest holder acquired a 10% interest in IDX
Belgium, as well as options to acquire an additional 16% interest, in exchange
for contributed capital of $8,400. Under the terms of the associated Share
Option Agreement, the options expire in 2001 and have an exercise price equal to
the initial price per share paid by the parties to the agreement upon the
formation of IDX Belgium, plus a cumulative annual increase of 3% thereon.
During April 1998, IDX Belgium issued additional shares of its common stock,
plus an option to acquire an equal number of its common shares, to a new
investor in exchange for a $380,000 capital contribution. The option to acquire
additional shares carries a total exercise price of approximately $380,000. Upon
issuance of the additional shares in April 1998, the Company's interest in IDX
Belgium was reduced to 75%.
During January 1998, the Company established one wholly-owned foreign
subsidiary, IDX Singapore Ltd., and two majority-owned foreign subsidiaries, IDX
Europe Services, N.V., and Marvin European Holdings Lmt., to market the
Company's store-and-forward services. Through May 15, 1998, the Company has
contributed funding in the form of capital contributions and/or cash advances to
these subsidiaries in the amount of $51,000, $50,000 and $0, respectively.
29
<PAGE>
Joint Ventures
During the period from inception to December 31, 1996, the Company entered into
three joint venture arrangements to market the Company's voice and data
store-and-forward services. Of those arrangements, two were dissolved prior to
December 31, 1996. The third joint venture has been largely inactive and was
terminated in 1998.
In March 1997, the Company formed another joint venture to market the Company's
services in Panama. The Company contributed $40,000 for a 20% interest in the
joint venture. In August 1997, IDX Taiwan formed a joint venture with Orlida
Ltd. (Orlida), a Taiwanese company, in order to expand the Company's operations
in Taiwan (Note 12). The Company contributed CyberPost equipment with a net book
value of $26,000 in exchange for a 33% interest in the joint venture.
NOTE 2 - LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------
The Company's ability to generate sufficient revenues and ultimately achieve
profitable operations remains uncertain. The Company's future prospects depend
upon, among other things, its ability to demonstrate sustained commercial
viability of its service and to obtain sufficient working capital, both of which
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
During the year ended December 31, 1997, the Company incurred a net loss of $3.1
million and negative operating cash flow of $2.3 million. At December 31, 1997,
the Company had a stockholders' net capital deficiency of $3.6 million.
The Company plans to operate in a fashion to generate both increased revenues
and cash flows during 1998. Additionally, in March 1998, management entered into
a Letter of Intent for the sale of the Company to eGlobe, Ltd. (eGlobe) (Note
12). In the event the sale of the Company is not consummated, the Company
intends to issue additional shares of stock during 1998. Management believes
that should the sale of the Company be completed, eGlobe will provide the
Company with financial and operational support which, together with existing
cash and cash flows from operations, should enable the Company to continue
operations through the year ending December 31, 1998. In the event the sale is
not completed, management believes that the proceeds from other sales of the
Company's stock, together with existing cash and cash flows from operations,
will provide the Company with sufficient financial support to continue
operations through the year ending December 31, 1998. However, there can be no
assurance that the sale of the Company or other sales of the Company's stock
will be completed or that cash flows from operations will be sufficient to
sustain operations through the year ending December 31, 1998.
30
<PAGE>
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
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 amounts reported in the consolidated financial statements and related
notes to financial statements. Actual results could differ from those estimates.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Company's U.S. and non-U.S subsidiaries. The Company accounts for its investment
in joint ventures under the equity method of accounting. Intercompany
transactions and balances have been eliminated.
Revenue Recognition and Cost of Sales
The Company operates and manages certain CyberPosts and licenses the use of
CyberPost equipment and associated software to its IBPs. Under such licensing
agreements, the Company is generally obligated to provide maintenance and
upgrades and IBPs are responsible for the marketing and sale of voice and data
store-and-forward services as well as for the operations and management of
CyberPosts. Certain IBPs are also stockholders of the Company.
The Company's revenues are generated principally from (i) routing charges for
voice and fax traffic through the network, (ii) licensing and royalty fees and
(iii) system hardware and accessory sales. The Company recognizes fixed license
fees on the straight-line basis over the service period, royalties and routing
charges as services are rendered to the ultimate customer, and system hardware
and accessory sales upon delivery and customer acceptance.
Cost of sales principally consists of telecommunication line charges, local and
international access charges, cost of CyberPost accessories, maintenance costs,
installation and operator training costs and commissions to CyberPost operators.
Revenue originating from Panama, Taiwan, United Kingdom and Philippines
approximated 30%, 25%, 12% and 11% of total revenues for the year ended December
31, 1997, respectively. Revenue from four customers approximated 30%, 12%, 11%
and 11% of total revenues for such period.
31
<PAGE>
Cash and Cash Equivalents
The Company considers all highly-liquid investments with original maturities of
three months or less to be cash equivalents.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to a concentration of
credit risk consist principally of accounts receivable and cash equivalents. The
Company in certain instances requires security deposits from its IBP's to be
applied against future uncollectible accounts receivable, as needed. At December
31, 1997, $47,520 of such deposits is presented net against outstanding accounts
receivable. In addition, there is an allowance for uncollectible accounts
receivable which is based upon the expected collectibility of accounts
receivable.
Equipment for Lease
The Company's investment in equipment for lease is stated at cost, net of
accumulated depreciation. Depreciation is recorded on a straight-line basis over
the equipments' estimated useful life of three years.
Furniture and Equipment
Furniture and equipment are stated at cost, net of accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of three to seven years. Leasehold improvements are amortized using
the straight-line method over the lesser of the lease term or the estimated
useful life of the related improvement.
Software Development Costs
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed" (SFAS 86), requires
the capitalization of certain software development costs incurred subsequent to
the date when technological feasibility is established and prior to the date
when the product is generally available for licensing. The Company defines
technological feasibility as being attained at the time a working model of a
software product is completed. The Company capitalized $44,140 and $4,740 of
software development costs during the period from inception to December 31, 1996
and the year ended December 31, 1997, respectively. Capitalized software
development costs are amortized using the straight-line method over the
estimated economic life of three years. The Company began amortizing capitalized
software development costs during 1997. Amortization expense for 1997 and
accumulated amortization at December 31, 1997 was $14,710.
32
<PAGE>
Impairment of Long-Lived Assets
Long-lived assets subject to the requirements of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of", are evaluated for possible
impairment through review of undiscounted expected future cash flows. If the sum
of undiscounted expected future cash flows is less than the carrying amount of
the asset or if changes in facts and circumstances indicate, an impairment loss
is recognized.
Research and Development
Research and development costs are expensed as incurred.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries and joint ventures
is the local currency. All assets and liabilities are translated into U.S.
dollars at current exchange rates as of the balance sheet date. Revenue and
expense items are translated at the average exchange rates prevailing during the
period. Cumulative translation gains and losses are reported as a separate
component of stockholders' equity.
Income Taxes
The Company provides for income taxes using the asset and liability approach.
The asset and liability approach requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of the assets and
liabilities. A valuation allowance is recorded if, based on the evidence
available, it is more likely than not that some portion or all of the deferred
tax asset will not be realized.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated statement of position for cash
and cash equivalents, accounts receivable and accounts payable approximate fair
value due to the short maturity of those instruments. Based upon the offering
price of the Series B Preferred Stock, which has similar features to the Series
A Preferred Stock, the estimated fair value of the Series A Preferred Stock
outstanding is $7.1 million. As the Company issued the Series B Preferred Stock
on December 31, 1997, the carrying amount approximates fair value.
Stock Based Compensation
The Company accounts for stock based compensation to employees in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). Statement of Financial Accounting Standards No. 123,
33
<PAGE>
"Accounting for Stock-Based Compensation" (SFAS 123), provides an alternative
accounting method to APB 25 and requires additional pro forma disclosures. The
fair value based compensation expense for stock based compensation granted to
employees during the period from inception to December 31, 1996, measured in
accordance with the provisions of SFAS 123, does not differ significantly from
amounts included in net income. The Company accounts for stock based
compensation to non-employees in accordance with the provisions of SFAS 123. No
stock based compensation was granted and no options previously granted were
exercised during 1997.
Earnings Per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), which replaces
the presentation of primary earnings per share (EPS) with a presentation of
basic EPS, and requires the dual presentation of basic and diluted EPS on the
face of the statement of operations for entities with complex capital
structures. Prior period EPS has been restated as required by SFAS 128.
Securities which could potentially dilute basic EPS in the future consist of
convertible mandatorily redeemable preferred stock and common stock options and
were not included in the computation of diluted EPS because to do so would have
been anti-dilutive for the periods presented.
New Accounting Standard
In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130) was issued, which establishes standards for
reporting and disclosure of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. SFAS 130, which is effective for fiscal years beginning after
December 15, 1997, requires reclassification of financial statements for earlier
periods to be provided for comparative purposes. The Company anticipates that
implementation of the provisions of SFAS 130 will not have a significant impact
on the Company's existing disclosures.
34
<PAGE>
NOTE 4 - FURNITURE AND EQUIPMENT
- --------------------------------
Furniture and equipment is comprised of the following amounts at December 31:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Equipment $ 158,400 $ 1,016,650
Office and computer equipment 19,490 119,070
Furniture and fixtures 1,100 46,840
Leasehold improvements 1,410 31,510
----------- -----------
Furniture and equipment, at cost 180,400 1,214,070
Less accumulated depreciation and amortization (30,120) (227,520)
----------- -----------
Furniture and equipment, net $ 150,280 $ 986,550
=========== ===========
</TABLE>
Equipment under capital leases with a net book value of $30,610 and $31,615 at
December 31, 1996 and 1997, respectively, are included in equipment.
Depreciation expense, including amortization of equipment under capital leases,
was $30,120 and $197,400 for the period from inception to December 31, 1996 and
for the year ended December 31, 1997, respectively.
NOTE 5 - EQUIPMENT FOR LEASE
- ----------------------------
The Company leases CyberPost equipment to IBPs under operating leases, which are
generally for a period of one to five years and contain annual renewal options.
The cost of equipment for lease at December 31, 1996 and 1997 was $156,000 and
$307,680, respectively, and the related accumulated depreciation was $26,000 and
$90,280, respectively. Depreciation expense for equipment for lease was $26,000
and $64,280 for the period from inception to December 31, 1996 and for the year
ended December 31, 1997, respectively.
NOTE 6 - DEBT
- -------------
At December 31, 1996 short-term borrowings consisted of a $200,000 note payable
due to Telecommunications Development Corporation and long-term borrowings
consisted of a $250,000 note payable due to InteliSys, Inc., both of which are
parties related to the Company (Note 11). The notes bear interest at 8% and 0%,
respectively, and were fully repaid by the Company in January 1997 and October
1997, respectively.
Interest expense for the period from inception through December 31, 1996 and for
the year ended December 31, 1997 was $3,000 and $4,800, respectively. Interest
expense during the periods presented does not include imputed interest in
connection with the non-interest bearing note payable as such amounts are
insignificant.
35
<PAGE>
NOTE 7 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
During the period from inception to December 31, 1996, InteliSys entered into
long distance telecommunication agreements and capital lease obligations
described below. During April 1997, InteliSys announced its decision to
discontinue its own operations and the Company assumed certain contractual
agreements currently held by InteliSys for leased facilities, office equipment
and telecommunication lines utilized by the Company.
Telecommunication Lines
In its normal course of business, the Company enters into agreements for the use
of long distance telecommunication lines. Future minimum payments under such
agreements are approximately as follows:
<TABLE>
<CAPTION>
Years ending December 31:
-------------------------
<S> <C>
1998 $ 1,641,000
1999 1,262,000
2000 40,000
Total future minimum telecommunication
line payments $ 2,943,000
===========
</TABLE>
Leases
Total rent expense for U.S. office facilities shared by the Company and
InteliSys for the period from inception through December 31, 1996 and for the
three month period ended March 31, 1997 was $53,000 and $23,230, respectively.
Of this total, lease expense related to the Company's operations based on space
utilized during such periods was $21,000 and $13,940, respectively. Total rent
expense incurred by the Company for the period from inception to December 31,
1996 and for the year ended December 31, 1997 was $21,000 and $107,755,
respectively. Future minimum lease commitments at December 31, 1997 are
$212,000, 68,000, and 44,000 for 1998, 1999 and 2000, respectively. The
Company's U.S. office facility lease expires on December 31, 1998, and is
renewable at the option of the Company (Note 12).
36
<PAGE>
Capital Lease Obligations
The Company acquired $36,690 and $8,520 of equipment under capital lease
obligations during the period from inception to December 31, 1996 and the year
ended December 31, 1997, respectively. Interest paid for capital lease
obligations during the period was approximately $400 and $3,210, respectively.
Future payments for the capital leases are as follows:
<TABLE>
<CAPTION>
Years ending December 31:
------------------------
<S> <C>
1998 $ 20,350
1999 10,660
-------
Total future minimum lease payments 31,010
Less amount representing interest (4,990)
-------
26,020
Less current principal maturities of
obligation under capital lease (17,100)
-------
Long-term lease obligation $ 8,920
=======
</TABLE>
Contingencies
In certain countries where the Company has current or planned operations, the
Company may not have the necessary regulatory approvals to conduct all or part
of its voice and fax store-and-forward services. In these jurisdictions, the
requirements and level of telecommunications' deregulation is varied. Management
believes that the degree of active monitoring and enforcement of such
regulations is limited. There have been no situations in which any action
against the Company or its IBPs have occurred or have been threatened. Statutory
provisions for penalties vary, but could include fines and/or termination of the
Company's operations in the associated jurisdiction. In consultation with legal
counsel, management has concluded that the likelihood of significant penalties
or injunctive relief is remote. There can be no assurance, however, that
regulatory action against the Company will not occur.
NOTE 8 - MANDATORILY REDEEMABLE PREFERRED STOCK
- -----------------------------------------------
During 1997, the Company amended its Articles of Incorporation to authorize the
issuance of 9,091 shares of Series A Preferred Stock (Series A), no par value,
and 3,821 shares of Series B Preferred Stock (Series B), no par value.
In January 1997 and May 1997, the Company sold 3,636 and 5,455 shares of Series
A stock, respectively, in which the Company received total proceeds of $2.5
million.
37
<PAGE>
In September 1997, the Company entered into a Letter of Intent for the sale of
3,821 shares of Series B stock for $3.0 million. Prior to the close of the
transaction, the Company received from the purchaser of the Series B stock
advances totaling $2.95 million. Upon closing of the transaction in December
1997, such advances were applied against the $3 million. The remaining $50,000
was received in February 1998.
In preference to holders of common stock, holders of Series A and B stock are
entitled to receive cumulative dividends equal to 6% of the respective Series A
and B liquidation preference. Accrued unpaid dividends as of December 31, 1997
on the Series A stock in the amount of $113,750 were recognized as an increase
to the Series A stock carrying value.
In the event of a liquidation of the Company or a change in control of the
Company, Series A and B stock have liquidation preference to common stock of
$275 and $785 per share, respectively, plus accrued unpaid dividends
(liquidation preference). After the satisfaction of the liquidation preference,
the remaining assets of the Company will be distributed to the holders of common
stock on a pro rata basis.
During the period from January 1999 through December 2001, the Company may
redeem all, but not less than all, of the Series A and B stock outstanding for
an amount equal to the liquidation preference as of such date. On January 1,
2002, the Company is required to redeem all outstanding shares of Series A and B
stock then outstanding for an amount equal to the Series A and B liquidation
preference on such date.
Through December 2001, at the option of the holder, each share of Series A and B
stock is convertible into one share of common stock. The conversion rate is
subject to adjustment in certain circumstances, such as, but not limited to, if
prior to January 1, 1999, the Company issues common stock for less than $275 and
$785 per share, respectively, or issues additional shares of Series A and B
stock with a conversion rate greater than the effective conversion rate on such
date.
Notwithstanding the foregoing, each outstanding share of Series A and B Stock
will automatically convert into common stock immediately preceding the closing
of a qualified public offering, as defined.
Certain matters require the majority or supermajority approval of Series A and B
stockholders. On all other matters, holders of Series A and B stock have an
equal number of votes per share, on an as converted basis, as to holders of
common stock.
As of December 31, 1997, the Company has reserved 17,168 shares of common stock
for issuance upon conversion of the Series A and B stock.
38
<PAGE>
NOTE 9 - STOCK BASED COMPENSATION
- ---------------------------------
During June 1996, the Board of Directors approved the grant of options to
purchase 1,250 and 500 shares of common stock to an officer and a consultant of
the Company, respectively, for an exercise price below fair market value. In
connection with the grant, the Company recognized $98,800 and $39,500 of
compensation and consulting expense, respectively, during the period from
inception to December 31, 1996.
During September 1996, the Board of Directors approved the grant of an option to
purchase 1,250 shares of common stock to an individual who served as a director
and consultant to the Company. The option carries an exercise price of $320 per
share which is greater than the estimated fair value of common stock on the date
of grant and is exercisable at any time during the succeeding three year period.
No compensation expense connected with this option grant has been recognized by
the Company.
During September 1997, the Board of Directors adopted the 1997 Stock Incentive
Plan (the Incentive Plan). The Incentive Plan provides for awards in the form of
restricted stock, stock units, options (including incentive stock options (ISOs)
and nonstatutory stock options (NSOs)) or stock appreciation rights (SARs).
Employees, directors, and consultants of the Company are eligible for grants of
restricted shares, stock units, NSOs and SARs. Only employees of the Company are
eligible for ISOs. A total of 4,500 shares of common stock have been reserved
for issuance under the Incentive Plan. No awards have been granted under the
Incentive Plan to date.
Consideration for each award under the Incentive Plan will be established by the
Stock Option Committee of the Board of Directors, but in no event shall the
option price for ISOs be less than 100% of the fair market value of the stock on
the date of grant. Awards will have such terms and be exercisable in such manner
and at such times as the Stock Option Committee may determine. However, each ISO
must expire within a period of not more than ten years from the date of grant.
NOTE 10 - INCOME TAXES
- ----------------------
The Company has incurred operating losses and paid no U.S. income tax for the
periods presented. The income tax benefit from the Company's operating loss
carryforwards and other temporary differences at December 31, 1996 and 1997 was
approximately $329,000 and $1.5 million, respectively, and have been recognized
as a deferred tax asset. A full valuation allowance has been recorded against
the deferred tax asset because management currently believes it is more likely
than not that the asset will not be realized.
At December 31, 1997, the Company had net operating loss carryforwards available
for U.S. income tax purposes of $2.7 million which expire in 2011 and 2012. Net
operating loss carryforwards are subject to review and possible adjustment by
the Internal Revenue Service and may be limited in the event of certain
cumulative changes in the ownership interests of significant stockholders over a
three-year period in excess of 50%.
39
<PAGE>
NOTE 11 - RELATED PARTY TRANSACTIONS
- ------------------------------------
Related party transactions may not be indicative of transactions negotiated at
arms-length.
InteliSys
Management and the majority stockholder of the Company also manage and own
InteliSys, a computer hardware distributor. Prior to the Company's inception,
InteliSys funded the development of the Company's CyberPost technology. This
technology was assigned to the Company in exchange for a $250,000 note payable
to InteliSys (Note 6), which approximates the costs incurred in developing the
technology. Subsequent to the Company's inception and through March 31, 1997,
the Company and InteliSys shared certain office facilities, furniture, office
equipment and personnel. During the period from inception to December 31, 1996,
the Company purchased from InteliSys approximately $202,000 of equipment. In
connection with InteliSys' discontinued operations, during October 1997 the
Company acquired substantially all of the furniture and equipment of InteliSys
for $75,000.
The costs of these functions, services and goods have been directly charged
and/or allocated to the Company using methods management believes are
reasonable; primarily specific identification or percentage of respective square
footage utilized and/or labor hours incurred.
Consulting Services
The Company receives consulting services from two of the Company's stockholders,
who also serve on the Board of Directors. For the period from inception to
December 31, 1996 and for the year ended December 31, 1997, compensation related
to these services in cash and stock totaled $67,000 and $80,000, respectively.
At December 31, 1996 and 1997, accounts receivable due from related parties,
including amounts included in other accounts receivable due from officers and
employees of the Company, were $43,000 and $32,200, respectively.
During October 1997, the Company appointed the President of Teleplus, Inc.
(Teleplus), a service provider to the Company, as the President of IDX HK.
During the period from October to December 1997, while the individual served
concurrently as President of both entities, the Company procured services from
Teleplus in the amount of $31,350. During December 1997, the individual resigned
as President of IDX HK.
40
<PAGE>
NOTE 12 - SUBSEQUENT EVENTS
- ---------------------------
Acquisition of the Company
On March 20, 1998, the Company entered into a Letter of Intent for the sale of
the Company to eGlobe. Under the Letter of Intent, eGlobe will acquire 100% of
the outstanding shares of the Company's common and preferred stock in exchange
for cash, eGlobe Series B Preferred Stock and warrants to acquire shares of
eGlobe's common stock. Prior to the consummation of the transaction, key
management personnel will be required to execute employment agreements.
In connection with the above planned sale of the Company, eGlobe advanced the
Company $1.1 million, bearing interest at 8.5%, and has committed to make
additional advances prior to the closing of the sale of the Company. In the
event the sale of the Company to eGlobe is not completed, principle and accrued
interest outstanding are payable to eGlobe at the earlier of (i) the date on
which the Company has raised additional financing of $2 million or (ii) twelve
months from the date it is determined not to complete the sale.
Acquisition of Significant Customer
On May 8, 1998, certain of the Company's shareholders acquired all of the stock
of Orlida, in exchange for $100,000 cash and 700.64 shares of the Company's
common stock, valued at $550,000. The Company in turn has committed to acquire
from the aforementioned shareholders 100% of Orlida's stock in exchange for
$100,000 and 700.64 shares of the Company's common stock. Orlida's primary
business consists of marketing voice and data store-and-forward services in
Taiwan and, prior to its proposed acquisition by the Company, Orlida contracted
with the Company to route all of its traffic through the Company's network. In
addition, Orlida is a party to joint venture with the Company (Note 1).
On May 11, 1998, the Company entered into a loan agreement with Orlida whereby
the Company agreed to lend Orlida up to $100,000, bearing an annual interest
rate of 8.5%. Principle and accrued interest outstanding are payable to Company
at the earlier of (i) the date of the closing of the proposed acquisition of
Orlida by the Company or (ii) May 11, 1999.
Lease Commitment
On April 23, 1998, the Company entered into a Letter of Intent for a seven year
office facility lease to replace the Company's current office facility lease
which expires on December 31, 1998. The estimated annual future minimum
commitment under the proposed lease is $140,000.
41
<PAGE>
Employee Savings Plan
On April 1, 1998, the Company adopted a 401(k) Profit Sharing Plan. All
employees are eligible to participate in the plan. The Company may, at its
discretion, match up to 100% of participants' contributions and/or contribute an
amount to be allocated among the participants.
42
<PAGE>
TELEKEY, INC.
AND SUBSIDIARY AND
TRAVELERS TELESERVICES, INC.
COMBINED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
<PAGE>
TELEKEY, INC. AND SUBSIDIARY AND
TRAVELERS TELESERVICES, INC.
CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
COMBINED CONSOLIDATED BALANCE SHEETS 4 - 5
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS 6
COMBINED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT 7
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS 8
SUMMARY OF ACCOUNTING POLICIES 9 - 12
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS 13 - 17
2
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders
TeleKey, Inc.
Travelers Teleservices, Inc.
Atlanta, Georgia
We have audited the accompanying combined consolidated balance sheets of
TeleKey, Inc. and subsidiary and Travelers Teleservices, Inc. as of December 31,
1998 and 1997 and the related statements of operations, stockholders' deficit,
and cash flows for the years then ended. These financial statements are the
responsibility of the Companies' 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 combined consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TeleKey,
Inc. and subsidiary and Travelers Teleservices, Inc. as of December 31, 1998 and
1997, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
/S/ BDO Seidman, LLP
Denver, Colorado
March 26, 1999
3
<PAGE>
TELEKEY, INC. AND SUBSIDIARY AND
TRAVELERS TELESERVICES, INC.
COMBINED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT:
Cash $ 49,462 $ 89,985
Restricted cash 50,000 50,000
Accounts receivable, less allowance
of $7,500 and $48,142 for doubtful accounts 73,062 32,470
Inventory 120,094 92,261
Prepaid expenses and other assets 64,352 25,435
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 356,970 290,151
- ------------------------------------------------------------------------------------------------------------------------------------
FURNITURE AND EQUIPMENT, less accumulated
depreciation (Note 2) 496,825 482,045
GOODWILL, less accumulated amortization of
$11,822 (Note 1) 236,435 --
- ------------------------------------------------------------------------------------------------------------------------------------
$1,090,230 $ 772,196
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and
notes to combined consolidated financial statements.
4
<PAGE>
TELEKEY, INC. AND SUBSIDIARY AND
TRAVELERS TELESERVICES, INC.
COMBINED CONSOLIDATED BALANCE SHEETS
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 115,466 $ 192,115
Accrued liabilities:
Telecom taxes 710,926 552,361
Payroll 84,955 147,493
Credit card charge backs 20,000 75,000
Other 30,000 --
Deferred revenues 633,374 948,376
Line of credit (Note 4) 500,000 450,000
Current portion of obligation under
capital lease (Note 3) 14,269 12,422
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,108,990 2,377,767
OBLIGATION UNDER CAPITAL LEASE, net
of current portion (Note 3) 50,100 64,502
NOTE PAYABLE (Note 1) 453,817 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,612,907 2,442,269
- ------------------------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST (Note 1) -- 746,819
COMMITMENTS AND CONTINGENCIES (Notes 3, 7 and 10)
STOCKHOLDERS' DEFICIT (Note 8):
Common stock, no par value - 100,000 shares
authorized, 3,000 issued and outstanding 783,757 177,757
Common stock, no par value - 1,000 shares
authorized, 300 issued and outstanding 3 --
Accumulated deficit (2,306,437) (2,594,649)
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' deficit (1,522,677) (2,416,892)
- ------------------------------------------------------------------------------------------------------------------------------------
$ 1,090,230 $ 772,196
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and
notes to combined consolidated financial statements.
5
<PAGE>
TELEKEY, INC. AND SUBSIDIARY AND
TRAVELERS TELESERVICES, INC.
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Service (Note 6) $ 4,606,587 $ 5,649,981
Other 98,891 53,074
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 4,705,478 5,703,055
COST OF SERVICES 1,294,429 2,303,985
- ------------------------------------------------------------------------------------------------------------------------------------
Gross margin 3,411,049 3,399,070
OPERATING EXPENSES:
Selling and marketing 1,144,728 2,490,506
General and administrative 1,665,973 2,296,896
Depreciation and amortization 191,814 117,203
Excise tax adjustment (Note 5) -- (259,232)
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 3,002,515 4,645,373
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 408,534 (1,246,303)
OTHER INCOME (EXPENSE):
Interest income 5,450 12,258
Interest expense (67,031) (10,983)
- ------------------------------------------------------------------------------------------------------------------------------------
Total other income (expense) (61,581) 1,275
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest in
(income) loss of subsidiary 346,953 (1,245,028)
Minority interest in (income) loss of subsidiary (58,741) 248,814
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 288,212 $ (996,214)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and
notes to combined consolidated financial statements.
6
<PAGE>
TELEKEY, INC. AND SUBSIDIARY AND
TRAVELERS TELESERVICES, INC.
COMBINED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Travelers
TeleKey, Inc. Teleservices, Inc. Total
Years Ended Common Stock Common Stock Accumulated Stockholders'
--------------------- -------------------
December 31, 1997 and 1998 Shares Amount Shares Amount Deficit Deficit
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> C> <C> <C> <C>
BALANCE, January 1, 1997 3,000 $ 174,757 -- $ -- $(1,598,435) $(1,423,678)
Capital contribution -- 3,000 -- -- -- 3,000
Net loss -- -- -- -- (996,214) (996,214)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1997 3,000 177,757 -- -- (2,594,649) (2,416,892)
Issuance of common stock -- -- 300 3 -- 3
Capital contribution -- 6,000 -- -- -- 6,000
Capital contribution for acquisition
of ITC's 20% interest in
TeleKey, L.L.C. (Note 1) -- 600,000 -- -- -- 600,000
Net income -- -- -- -- 288,212 288,212
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1998 3,000 $ 783,757 300 $ 3 $(2,306,437) $(1,522,677)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and
notes to combined consolidated financial statements.
7
<PAGE>
TELEKEY, INC. AND SUBSIDIARY AND
TRAVELERS TELESERVICES, INC.
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 288,212 $(996,214)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 191,814 117,203
Minority interest in income (loss) of subsidiary 58,741 (248,814)
Changes in operating assets and liabilities:
Accounts receivable (40,592) 123,796
Inventory (27,833) 42,335
Prepaid expenses and other assets (38,917) 8,223
Accounts payable (76,649) 34,609
Accrued liabilities 71,027 227,279
Deferred revenues (315,002) 296,697
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 110,801 (394,886)
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of furniture and equipment (194,772) (256,110)
Acquisition of minority interest (600,000) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (794,772) (256,110)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 3 --
Proceeds under line of credit 525,000 450,000
Payments on line of credit (475,000) --
Capital contributions 606,000 3,000
Collection of contributions receivable -- 80,264
Change in restricted cash -- (4,752)
Principal payments on capital lease obligation (12,555) (2,896)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 643,448 525,616
- ------------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash (40,523) (125,380)
CASH, beginning of year 89,985 215,365
- ------------------------------------------------------------------------------------------------------------------------------------
CASH, end of year $ 49,462 $ 89,985
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and
notes to combined consolidated financial statements.
8
<PAGE>
TELEKEY, INC. AND SUBSIDIARY AND
TRAVELERS TELESERVICES, INC.
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
ORGANIZATION The combined consolidated financial statements include the
AND BUSINESS accounts of TeleKey, Inc. and its 100% owned subsidiary,
TeleKey, L.L.C. (80% owned through August 24, 1998, see Note
1) and Travelers Teleservices, Inc. an entity with common
ownership (collectively the "Companies"). TeleKey, L.L.C.
sells prepaid or "debit" telephone cards, providing domestic
and international long-distance telephone service from
destinations throughout the United States and Canada.
Travelers Teleservices, Inc. was created in 1998 to provide
credit card processing services for TeleKey, L.L.C.
PRINCIPALS OF All significant intercompany transactions and balances have
CONSOLIDATION been eliminated in combination and consolidation.
AND COMBINATION
LIQUIDITY The Companies' viability is dependent on their ability to
AND CAPITAL generate sufficient revenues and to limit selling and
RESOURCES marketing and general and administration expenses.
In 1998, the Companies curtailed their growth, significantly
reducing their operating expenses, and returned to
profitability.
The Companies plan to operate in a fashion to generate both
increased revenues and cash flows during 1999. Additionally,
in February 1999, the Companies were acquired by Executive
TeleCard, Ltd. d.b.a. eGlobe, Inc. ("eGlobe") (see Note 8).
Management believes that eGlobe will provide the Companies
with financial and operational support, if necessary, which
together with existing cash and anticipated cash flows from
operations, should enable the Companies to continue
operations through the year ended December 31, 1999.
USE OF The preparation of financial statements in conformity with
ESTIMATES 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 revenue and
expense during the reporting period. Actual results could
differ from those estimates.
CONCENTRATIONS Financial instruments that potentially subject the Companies
to a
9
<PAGE>
TELEKEY, INC. AND SUBSIDIARY AND
TRAVELERS TELESERVICES, INC.
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
OF CREDIT RISK concentration of credit risk consist primarily of cash and
accounts receivable. The Companies maintain cash balances,
which at times may exceed federally insured limits. The
Companies have not experienced any losses in their cash
balances. Concentrations of credit risk with respect to
accounts receivable are generally limited due to customers
who are dispersed across geographic areas. The Companies
maintain an allowance for potential losses based on
management's analysis of possible uncollectible accounts.
CASH AND The Companies consider all investments with a maturity of
CASH EQUIVALENTS three months or less to be cash and cash equivalents.
RESTRICTED The Companies' credit card processing company requires that
CASH cash balances be deposited with the processor in order to
ensure that any disputed claims by the credit card customers
can be readily settled.
INVENTORY Inventory consists of phone cards and is stated at the lower
of cost or market. Cost is determined principally under the
average cost method.
FURNITURE AND Furniture and equipment are stated at cost. Expenditures for
EQUIPMENT renewals and improvements are capitalized in the furniture
and equipment accounts. Replacements, maintenance, and
repairs which do not improve or extend the lives of the
respective assets are expensed as incurred. Depreciation is
calculated using the straight-line method over the estimated
useful lives of the related assets, which is five years for
all assets. Upon the retirement or sale of assets, the costs
of such assets and the related accumulated depreciation are
removed from the accounts and the gain or loss, if any, is
credited or charged to other income in the accompanying
combined consolidated statements of operations.
GOODWILL The Companies amortize costs in excess of the fair value of
net assets acquired, goodwill using the straight-line method
over seven years.
LONG-LIVED Management periodically evaluates carrying values of
ASSETS long-lived assets including furniture and equipment and
goodwill, to determine whether events
10
<PAGE>
TELEKEY, INC. AND SUBSIDIARY AND
TRAVELERS TELESERVICES, INC.
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
and circumstances indicate that these assets have been
impaired. An asset is considered impaired when undiscounted
cash flows to be realized from such asset are less than its
carrying value. In that event, a loss is determined based on
the amount the carrying value exceeds the fair market value
of such assets. Management believes that the long-lived
assets in the accompanying combined consolidated balance
sheets are appropriately valued.
REVENUE Revenues from debit cards are recognized as the cards are
RECOGNITION used and the long-distance telephone service is provided.
AND DEFERRED Payments received in advance for debit cards are recorded in
REVENUES the accompanying balance sheets as deferred revenue. These
revenues are recognized when the related service is
provided, generally over the 12 months following receipt of
payment. The prepaid cards generally expire 12 months after
the date of sale or last use, whichever occurs later. Unused
amounts that expire are referred to as breakage and are
recorded as revenues at the date of expiration.
Direct costs associated with these revenues are also
recognized when the related services are provided or expire.
Payments related to unrecognized revenues are included as a
reduction to the deferred revenue account.
COST OF Cost of services includes all expenses incurred in providing
SERVICES long-distance services, including long-distance carrier
costs. Also included in cost of services are the card
manufacturing costs, which are recorded as the related cards
are sold and relieved from inventory at a weighted average
cost.
ADVERTISING The Companies expense the production costs of advertising at
EXPENSES the time incurred. Advertising expenses amounted to
approximately $204,000 and $853,000 for the years ended
December 31, 1998 and 1997, and are included in selling and
marketing in the accompanying combined consolidated
statements of operations.
INCOME TeleKey, Inc. and Travelers Teleservices, Inc. are "S"
TAXES Corporations and TeleKey, L.L.C. is a limited liability
company, all of which are not subject to federal and state
income taxes. The taxable income or loss of the Companies
11
<PAGE>
TELEKEY, INC. AND SUBSIDIARY AND
TRAVELERS TELESERVICES, INC.
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
are included in the federal and state income tax returns of
their owners. Accordingly, no provision for income taxes has
been reflected in the accompanying combined consolidated
financial statements.
EQUITY The Companies account for equity based compensation to
BASED employees in accordance with Accounting Principles Board
COMPENSATION Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
provides an alternative accounting method to APB 25 and
requires additional pro forma disclosures.
12
<PAGE>
TELEKEY, INC. AND SUBSIDIARY AND
TRAVELERS TELESERVICES, INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ACQUISITION OF On August 24, 1998, TeleKey, Inc. acquired the remaining 20%
BUSINESS interest in TeleKey, L.L.C. held by ITC Service Company
INTEREST ("ITC") for $1,053,817, consisting of $600,000 in cash,
contributed to TeleKey, Inc. by its stockholders, and a
$453,817 note payable, which resulted in the recording of
goodwill totaling $248,257. Under the terms of the note
agreement, interest is payable quarterly at 10% and
principal is due December 31, 2000 or at the date in which
there is a change in control, as defined in the note
agreement, of TeleKey, Inc. which results in cash
consideration to TeleKey, Inc. or its stockholders. The note
is personally collateralized by 6,051 shares of ITC Holding
Company, Inc.'s (ITC's ultimate parent corporation) common
stock held in the aggregate by the stockholders' of TeleKey,
Inc.
2. FURNITURE AND Furniture and equipment consisted of the following:
EQUIPMENT
<TABLE>
<CAPTION>
December 31, 1998 1997
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Computer and telephone equipment $794,946 $653,776
Furniture and fixtures 68,062 68,062
Machinery and equipment 67,082 25,435
Software 11,955 --
---------------------------------------------------------------------------------------------------------------
942,045 747,273
Less accumulated depreciation 445,220 265,228
---------------------------------------------------------------------------------------------------------------
Furniture and equipment $496,825 $482,045
---------------------------------------------------------------------------------------------------------------
</TABLE>
Equipment under capital lease with a net book value of
$64,364 and $76,924 at December 31, 1998 and 1997 is
included in computer and telephone equipment (see Note 3).
Depreciation expense of equipment under capital lease was
$15,960 and $1,330 for the years ended December 31, 1998 and
1997.
13
<PAGE>
TELEKEY, INC. AND SUBSIDIARY AND
TRAVELERS TELESERVICES, INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. COMMITMENTS Telecommunication Lines
In its normal course of business, TeleKey, L.L.C. enters
into agreements for the use of long distance
telecommunication lines. Future minimum payments under such
agreements in 1999 total $6,800.
Leases
The Companies lease their office facilities under a
noncancellable operating lease agreement. Rent expense for
each of the years ended December 31, 1998 and 1997 was
approximately $46,000.
Future minimum lease payments under the noncancellable
operating lease are as follows:
<TABLE>
<CAPTION>
Years Ending December 31,
-----------------------------------------------------------
<S> <C>
1999 $ 46,000
2000 46,000
2001 7,000
-----------------------------------------------------------
$ 99,000
-----------------------------------------------------------
</TABLE>
Employee Savings Plan
TeleKey, L.L.C. has a simple IRA plan. Under the plan, all
employees are eligible to participate immediately, as there
are no eligibility period requirements. Employees who
contribute are vested immediately, and the plan allows for
TeleKey, L.L.C. to match employee contributions dollar for
dollar subject to the lesser of 3% of an employee's salary
or $6,000. The Company made no contributions to the simple
IRA plan during 1997 and $17,700 was contributed to the plan
during 1998.
14
<PAGE>
TELEKEY, INC. AND SUBSIDIARY AND
TRAVELERS TELESERVICES, INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Capital Lease Obligation
TeleKey, L.L.C. leases certain computer hardware under a
noncancellable capital lease obligation.
Future minimum payments for the capital lease obligation are
as follows:
<TABLE>
<CAPTION>
Years Ending December 31,
------------------------------------------------------------
<S> <C>
1999 $ 21,726
2000 21,726
2001 21,726
2002 17,130
------------------------------------------------------------
Total future minimum lease payments 82,308
Less amount representing interest 17,939
------------------------------------------------------------
64,369
Less current portion 14,269
------------------------------------------------------------
Obligation under capital lease,
net of current portion $ 50,100
------------------------------------------------------------
</TABLE>
Interest paid for the capital lease obligation during the
years ended December 31, 1998 and 1997 was approximately
$9,100 and $2,500.
4. LINE OF TeleKey, L.L.C. has a $1,000,000 line of credit to
CREDIT facilitate operational financing needs. The line of credit
is personally guaranteed by certain members of TeleKey,
L.L.C. and is due on demand. Interest is payable quarterly
at a variable rate based on the bank's rate (8.25% at
December 31, 1998). Borrowings under this facility totaled
$500,000 and $450,000 at December 31, 1998 and 1997. The
line of credit extends through October 29, 1999.
15
<PAGE>
TELEKEY, INC. AND SUBSIDIARY AND
TRAVELERS TELESERVICES, INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. GAIN ON As a result of the Taxpayer Relief Act of 1997, the Internal
EXCISE TAX Revenue Service ("IRS") determined that the 3% Federal
ADJUSTMENT Communication Commerce Tax on prepaid telephone cards be
remitted for periods after October 5, 1997. As a result of
the IRS determination, an excise tax adjustment for amounts
accrued prior to October 5, 1997, totaling $259,232 was
recognized in 1997.
6. SIGNIFICANT In 1998, the Companies recognized approximately 27% of total
CUSTOMERS revenues from two international exchange program groups. In
1997, these customers represent approximately 30% of the
Companies' total revenues.
7. EMPLOYEE On January 30, 1997, TeleKey, L.L.C. adopted the TeleKey,
APPRECIATION L.L.C. Employee Appreciation Rights Plan, which authorizes
RIGHTS PLAN the board to grant eligible key individuals certain rights
to receive cash payments or, at the option of TeleKey,
L.L.C.'s management, other securities equal to a specified
percentage of the appreciation of the value of the common
interests of TeleKey, L.L.C. between the date the
appreciation right is granted and the date the right is
realized. Unless otherwise specified in the individual
appreciation right grant, 50% of the rights will vest on the
second anniversary of the grant date, with an additional 25%
vesting on each of the next two anniversaries of the grant
date. Payment of the appreciation rights is contingent upon
the consummation of a realization event, as defined in the
employee appreciation rights plan. Upon employee
termination, TeleKey, L.L.C. shall have the option to
purchase all of the vested rights at a price equal to the
difference in the fair market value on the purchase date and
the grant date. Three employees were awarded rights under
the plan in 1997. Under the plan, a realization event had
not occurred and accordingly, no compensation expense was
recognized in 1998 and 1997.
8. SUBSEQUENT On February 12, 1999, eGlobe acquired 100% of the
EVENT outstanding shares of the Companies' common stock in
exchange for $125,000 in cash, $150,000 in
16
<PAGE>
TELEKEY, INC. AND SUBSIDIARY AND
TRAVELERS TELESERVICES, INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
notes payable, 1,010,000 shares of eGlobe Series F Preferred
Stock valued at $4,040,000 and an additional 505,000 shares
up to a maximum of 1,010,000 shares of contingently issuable
eGlobe Series F Preferred Stock. The additional shares of
Preferred Stock are issuable if certain financial
performance goals are achieved by the Companies. In
addition, certain key management personnel entered into
employment agreements with eGlobe.
9. SUPPLEMENTAL Supplemental information to the combined consolidated
CASH FLOW statements of cash flows and non cash investing and
INFORMATION financial activities are as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
------------------------------------------------------------
<S> <C> <C>
Cash paid for interest $67,000 $11,000
Assets acquired under capital
lease obligation -- 79,820
</TABLE>
10. YEAR 2000 The Companies could be adversely affected if their computer
ISSUES systems or the computer systems their suppliers or customers
(UNAUDITED) use do not properly process and calculate date-related
information and data from the period surrounding and
including January 1, 2000. This is commonly known as the
"Year 2000" issue. Additionally, this issue could impact
non-computer systems and devices such as production
equipment, elevators, etc. At this time, because of the
complexities involved in the issue, management cannot
provide assurances that the Year 2000 issue will not have an
impact on the Companies' operations.
The Companies have implemented a plan to modify their
business technologies to be ready for the year 2000 and have
converted critical data processing systems. The project was
completed in February 1999 and resulted in minimal cost to
the Companies. The Companies do not expect this effort to
have a significant effect on operations.
17
