SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
September 30, 1998 1-10210
- --------------------------- -----------------------------
EXECUTIVE TELECARD, LTD.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3486421
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
- --------------------------------------------------------------------------------
4260 EAST EVANS AVENUE, DENVER, COLORADO 80222
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (303) 691-2115
--------------------------
================================================================================
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
The number of shares outstanding of each of the registrant's classes of common
stock, as of November 1, 1998 is 17,725,466 shares, all of one class of $.001
par value Common Stock.
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
FORM 10-Q/A
QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
PAGE
----
PART I Item 1 Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1998
and March 31, 1998 3 - 4
Consolidated Statements of Operations for the three
months ended September 30, 1998 and 1997 5
Consolidated Statements of Operations for the six
months ended September 30, 1998 and 1997 6
Consolidated Statements of Cash Flows for the six
months ended September 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 8 - 13
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14 - 20
PART II Item 1 Legal Proceedings 21
Item 2 Changes in Securities 21
Item 3 Defaults Upon Senior Securities 21
Item 4 Submission of Matters to a Vote of Security Holders 21
Item 5 Other Information 21
Item 6 Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND MARCH 31, 1998
================================================================================
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 MARCH 31, 1998
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents $ 1,640,842 $ 2,391,206
Trade accounts receivable, less allowance of
$1,808,455 and $1,472,197 for doubtful
accounts. 7,430,656 7,719,853
Other current assets 373,188 376,604
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 9,444,686 10,487,663
PROPERTY AND EQUIPMENT,
net of accumulated depreciation and
amortization 11,993,859 11,911,310
OTHER:
Advances to companies being
acquired (Note 2) 2,246,000 -
Total other assets 1,051,193 501,483
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 24,735,738 $ 22,900,456
====================================================================================================================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND MARCH 31, 1998
================================================================================
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 MARCH 31, 1998
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable $ 2,845,511 $ 1,135,800
Accrued expenses 5,130,127 4,222,806
Income taxes payable 2,010,220 2,004,944
Other current liabilities 320,292 436,545
Current portion of long-term debt (Note 5) 7,576,440 244,020
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 17,882,590 8,044,115
LONG-TERM DEBT, less current maturities (Note 5) 1,491,184 7,735,581
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 19,373,774 15,779,696
- --------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY: (Note 7)
Preferred stock, $.001 par value, 5,000,000 shares
authorized; none issued -- --
Common stock, $.001 par value, 100,000,000 shares
authorized; 17,725,466 and 17,346,766 outstanding,
respectively 17,725 17,347
Additional paid-in capital 28,686,263 25,046,830
Stock to be subscribed 996,532 3,500,000
Accumulated deficit (24,371,261) (21,476,154)
Cumulative translation adjustment 32,705 32,737
- --------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 5,361,964 7,120,760
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,735,738 $ 22,900,456
====================================================================================================================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE $ 7,926,461 $ 8,891,328
COST OF REVENUE 4,328,989 4,855,848
- --------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 3,597,472 4,035,480
- --------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Selling, general and administrative 3,571,703 3,580,163
Corporate realignment expense -- 1,259,657
Settlement costs (Note 7) 996,532 --
Depreciation and amortization 671,313 595,188
- --------------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 5,239,548 5,435,008
- --------------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (1,642,076) (1,399,528)
- --------------------------------------------------------------------------------------------------------------------
OTHER EXPENSE:
Proxy related litigation expense (4,051) (53,017)
Other, principally interest expense (240,880) (315,024)
- --------------------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE (244,931) (368,041)
- --------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (1,887,007) (1,767,569)
INCOME TAXES -- 105,000
- --------------------------------------------------------------------------------------------------------------------
NET LOSS $(1,887,007) $(1,872,569)
- --------------------------------------------------------------------------------------------------------------------
NET LOSS PER SHARE:
BASIC $ (0.11) $ (0.11)
DILUTED $ (0.11) $ (0.11)
====================================================================================================================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE $ 15,612,796 $ 17,450,879
COST OF REVENUE 8,369,472 9,301,344
- --------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 7,243,324 8,149,535
- --------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Selling, general and administrative 7,197,225 6,950,435
Corporate realignment expense -- 1,259,657
Settlement costs (Note 7) 996,532 --
Depreciation and amortization 1,358,639 1,229,810
- --------------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 9,552,396 9,439,902
- --------------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (2,309,072) (1,290,367)
- --------------------------------------------------------------------------------------------------------------------
OTHER EXPENSE:
Proxy related litigation expense (4,051) (252,904)
Other, principally interest expense (581,984) (687,219)
- --------------------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE (586,035) (940,123)
- --------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (2,895,107) (2,230,490)
INCOME TAXES -- 140,000
- --------------------------------------------------------------------------------------------------------------------
NET LOSS $ (2,895,107) $ (2,370,490)
- --------------------------------------------------------------------------------------------------------------------
NET LOSS PER SHARE:
BASIC $ (0.16) $ (0.14)
DILUTED $ (0.16) $ (0.14)
====================================================================================================================
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
SIX MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(2,895,107) $(2,370,490)
Adjustments to reconcile net loss to net cash flows
provided by (used in) operating activities:
Depreciation and amortization 1,358,639 1,175,554
Provision for bad debts 336,258 205,268
Settlement costs 996,532 --
Interest expense related to discount 96,136 161,942
Gain on sale of property and equipment (127,002) --
Write-down of building to market -- 55,000
Changes in operating assets and liabilities:
Accounts receivable (47,061) (1,020,493)
Other assets -- 21,722
Accounts payable 1,709,711 (886,493)
Accrued expenses 907,321 1,280,961
Other liabilities (110,977) (37,537)
- --------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,224,450 (1,414,566)
- --------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Acquisitions of property and equipment (1,432,723) (1,689,366)
Proceeds from sale of building 125,338 --
Advances to companies being acquired (2,246,000) --
Other assets (553,126) 227,322
- --------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (4,106,511) (1,462,044)
- --------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from long-term debt 1,250,000 812,213
Proceeds from issuance of common stock -- 7,482,500
Principal payments on long-term debt (118,303) (3,199,952)
- --------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 1,131,697 5,094,761
- --------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (750,364) 2,218,151
CASH AND CASH EQUIVALENTS, beginning of period 2,391,206 2,172,480
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 1,640,842 $ 4,390,631
====================================================================================================================
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
================================================================================
NOTE 1 - BASIS OF PRESENTATION
---------------------------------------------------------------------------
The accompanying consolidated financial statements have been prepared
in accordance with United States generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments considered necessary for a
fair presentation have been included. Operating results for the three
and six months ended September 30, 1998 are not necessarily indicative
of the results that may be expected for the year ended December 31,
1998. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Form 10-K
for the year ended March 31, 1998. (On February 26, 1998, the
stockholders of the Company approved a change in the Company's fiscal
year from March 31, to a fiscal year ending December 31, commencing
April 1, 1998, so that the Company will have a nine month transition
period from April 1, 1998 through December 31, 1998).
The accompanying financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation.
Recent Accounting Pronouncements - The Financial Accounting Standards
Board ("FASB") has issued SFAS No. 131 "Disclosure About Segments of
an Enterprise and Related Information", SFAS No. 132, "Employers'
Disclosure about Pensions and Other Post-retirement Benefits" and SFAS
No. 133 "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 131 supersedes SFAS No. 14 "Financial Reporting
for Segments of a Business Enterprise." SFAS No. 131 establishes
standards on the way that public companies report financial
information about operating segments in annual financial statements
and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosure regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating
segments as components of a company about which separate financial
information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. SFAS No. 132 standardizes the disclosure
requirements for pensions and other post-retirement benefits and
requires additional information on changes in the benefit obligations
and fair values of plan assets that will
8
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
================================================================================
facilitate financial analysis. SFAS No. 133 requires companies to
record derivatives on the balance sheet as assets or liabilities,
measured at fair market value. Gains or losses resulting from changes
in the values of those derivatives are accounted for depending on the
use of the derivative and whether it qualifies for hedge accounting.
The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes
in fair value or cash flows.
SFAS No. 131 and 132 are effective for financial statements for
periods beginning after December 15, 1997, and requires comparative
information for earlier years to be restated. Because of the recent
issuance of these standards, management has been unable to fully
evaluate the impact, if any, the standards may have on the future
financial statement disclosure. Results of operations and financial
position, however, will be unaffected by implementation of these
standards.
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. Management believes that the adoption of SFAS No. 133 will have
no material effect on its financial statements.
Restatement - On November 16, 1998 the Company filed its original Form
10-Q for the quarter ended September 30, 1998 in which it disclosed as
a subsequent event the information on a settlement contained in Note
7. At that time the Company disclosed the recording of the cost
associated with the settlement in the fourth quarter of 1998. Upon
further review, the Company believes that the charge for the
settlement should have been recorded in the quarter ended September
30, 1998 and, accordingly, is filing this amended Form 10-Q to reflect
the charge in the correct period with a corresponding credit to
shareholders' equity for the additional value of the preferred stock
to be issued. As a result of this amendment, the net loss for the
three and six month period was increased by $996,532 or $.06 per share
- basic and diluted. Additionally, certain minor adjustments and
balance sheet reclassifications which increased as of September 30,
1998 total assets, and total liabilities and stockholder's equity by
approximately $377,000 have been reflected in this amended Form 10-Q.
NOTE 2 - ADVANCES TO COMPANIES BEING ACQUIRED
---------------------------------------------------------------------------
This amount consists of funds advanced to two companies that are in
the process of being acquired. It is contemplated that one acquisition
will be consummated during the fourth quarter of calendar 1998.
Advances to this company of $1,275,000 will be allocated to the
purchase price. In the event that the transaction is not completed (an
9
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
================================================================================
event management believes is unlikely), the Company will need to
pursue collection of amounts advanced and it may be necessary for the
Company to establish a reserve for this amount. The Company believes
that if the second acquisition is not consummated due to any reason
other than breach by the Company, the Company has the right to be
reimbursed for $571,000 of the total amount advanced of $971,000 (See
Note 5).
NOTE 3 - BASIC NET INCOME (LOSS) PER SHARE
---------------------------------------------------------------------------
Earnings per share are calculated in accordance with "SFAS" No. 128,
"Earnings Per Share". The weighted average shares outstanding for
calculating basic earnings (loss) per share were 17,725,466 and
17,712,702 for the three and six months ended September 30, 1998,
respectively, and 17,333,590 and 16,820,150 for the three and six
months ended September 30, 1997, respectively. Common stock options
and warrants of 37,191 and 90,621 for the three and six months ended
September 30, 1998, respectively, and 223,316 and 233,757 for the
three and six months ended September 30, 1997, respectively, were not
included in diluted earnings (loss) per share as the effect was
antidilutive due to the Company recording a loss for the periods
presented.
Options and warrants to purchase 2,051,197 shares of common stock at
exercise prices from $2.00 to $6.98 per share were outstanding at
September 30, 1998 but were not included in the computation of diluted
earnings per share for the three months ended September 30, 1998
because the exercise prices were greater than the average market price
of the common shares during that period. Options and warrants to
purchase 1,717,034 shares of common stock at exercise prices from
$2.00 to $6.98 per share were outstanding at September 30, 1998 but
were not included in the computation of diluted earnings per share for
the six months ended September 30, 1998 because the exercise prices
were greater than the average market price of the common shares during
that period. Options and warrants to purchase 337,641 shares of common
stock at exercise prices from $7.00 to $10.89 per share were
outstanding at September 30, 1997 but were not included in the
computation of diluted earnings per share for the three and six months
ended September 30, 1997 because the exercise prices were greater than
the average market price of the common shares for the periods.
NOTE 4 - COMPREHENSIVE INCOME
---------------------------------------------------------------------------
Effective April 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement requires the reporting of
comprehensive
10
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
================================================================================
income in addition to net income. Comprehensive income is a more
inclusive financial reporting methodology that includes disclosure of
certain financial information that historically has not been
recognized in the calculation of net income. The impact of
comprehensive income items was immaterial for the three and six months
ended September 30, 1998 and 1997.
NOTE 5 - LONG TERM DEBT
---------------------------------------------------------------------------
At September 30, 1998 and March 31, 1998, long-term debt consisted of
the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1998 1998
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
8.875% unsecured term note payable to a telecommunications company, net of
unamortized discount of $360,382 and $437,608, interest and principal payable in
August 1999 (1) $7,139,618 $7,062,392
8% mortgage note, payable monthly, including interest through March 2010, with
an April 2010 balloon payment; secured by deed of trust on the related land and
building 306,789 310,000
8.875% unsecured term note payable to a stockholder, net of unamortized discount
of $94,550, interest and principal payable in December 1999 (2) 905,450 --
12.00% unsecured term note payable to an investor, net of unamortized discount
of $26,351, interest and principal payable in December 1998 (3) 223,649 --
Capitalized lease obligations 492,118 607,209
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL 9,067,624 7,979,601
Less current maturities 7,576,440 244,020
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $1,491,184 $7,735,581
===========================================================================================================================
</TABLE>
11
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
================================================================================
(1) In connection with this transaction, the lender was granted warrants
to purchase 500,000 shares of the Company's common stock at a price of
$3.03 per share. The warrants expire on February 23, 2001. At
September 30, 1998, these warrants have not been exercised.
(2) In June 1998, the Company borrowed $1.0 million from an existing
stockholder. In connection with this transaction, the lender was
granted warrants to purchase 67,000 shares of the Company's common
stock at a price of $3.03 per share. The warrants expire in June 2001.
The stockholder also received as consideration for the loan the
repricing and extension of a warrant for 55,000 shares which is now
exercisable on or before February 2001 at a price of $3.75 per share.
At September 30, 1998, these warrants have not been exercised.
(3) In September 1998, a subsidiary of the Company entered into a bridge
loan agreement with an investor for $250,000. The proceeds were
advanced to a company that is in the process of being acquired by the
Company (See Note 2.) In connection with this transaction, the lender
was granted warrants to purchase 25,000 shares of the Company's common
stock at a price of $2.00 per share. The warrants expire on September
1, 2003. At September 30, 1998, these warrants have not been
exercised.
NOTE 6 - ACQUISITIONS
---------------------------------------------------------------------------
The Company has entered into a definitive agreement with United
Communications International ("UCI") to acquire UCI's calling card
business in Greece, Cyprus and the Middle East. The acquisition will
extend the Company's network of calling card platforms to Cyprus. The
Company is making the purchase for an initial cash payment of $75,000
with additional cash payments of up to $2.4 million over 18 months.
After the initial payment, $1.9 million of the cash is in the form of
an earnout and the payments may be less depending upon the revenue and
profit performance of the business. The purchase price also includes
the issuance of 125,000 shares of the Company's common stock, all of
which is subject to earnout.
On June 17, 1998 the Company entered into an Agreement and Plan of
merger With IBX International, Inc., on October 9, 1998, the Company
entered into a Memorandum of Understanding with IDX International,
Inc. ("IDX") and the shareholders of IDX which adjusted the terms of
the Merger Agreement with respect to the consummation of the proposed
transaction. The Memorandum of Understanding replaces the $5.0 million
cash portion of the purchase price with three notes: $1.0 million
payable on December 31, 1998; $1.5 million payable on June 30, 1999;
and $2.5 million payable on October 31, 1999, each
12
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
================================================================================
note bearing interest at LIBOR plus 250 basis points. In the event
that the Company defaults on any of these notes, the principal and
accrued interest may, at the Company's option, be converted into the
Company's common stock at the closing market price per share at the
date of default. In addition, the Company agrees to pay penalty
interest at LIBOR plus 450 basis points until the notes are converted
plus an amount equal to 10% of the default amount payable in the form
of warrants to purchase common stock of the Company. The price of the
warrants, if issued, will be set at the market price on the date of
default.
NOTE 7 - SUBSEQUENT EVENT
---------------------------------------------------------------------------
In November 1998, the Company reached an agreement with its former
chairman, Mr. Ronald Jensen, who is also the Company's largest
shareholder. The agreement concerned settlement of unreimbursed costs
and other potential claims.
Mr. Jensen had purchased $7.5 million of eGlobe's common stock in a
private placement in June 1997 and later was elected Chairman of the
Board of Directors. After approximately three months, Mr. Jensen
resigned his position citing both other business demands and the
demands presented by the challenges of the Company. During his tenure
as Chairman, Mr. Jensen incurred staff and other costs which were not
billed to the Company. Also, Mr. Jensen subsequently communicated with
the Company's current management indicating that there were a number
of issues raised during his involvement with the Company relating to
the provisions of his share purchase agreement which could result in
claims against the Company.
In order to resolve all current and potential issues, Mr. Jensen and
the Company have agreed to the exchange of his current holding of
1,425,000 shares of common stock for 75 shares of 8% series C
Cumulative Convertible Preferred Stock, which management estimates to
have a fair market value of approximately $3.4 million and a face
value of $7.5 million. The terms of the preferred stock permit Mr.
Jensen to convert the face value of the preferred stock to common
stock at 90% of market price, subject to a minimum conversion price of
$4.00 per share and a maximum of $6.00 per share. The difference
between the estimated fair value of the preferred stock to be issued
and the current market value of the common stock to be surrendered
resulted in a one-time non-cash charge to the Company's statement of
operations of $996,532 for the quarter ended September 30,1998, with a
corresponding credit to stockholders' equity. (See Note 1)
13
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
SEPTEMBER 30, 1998
================================================================================
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------------------
Statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical
in nature are intended to be, and are hereby identified as,
"forward-looking statements" for purposes of the safe harbor provided
by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements may be identified by words including
"believes," "anticipates," "expects" and similar expressions. The
Company cautions readers that forward-looking statements, including
without limitation, those relating to the Company's business
operations, revenues, working capital, liquidity, and income, are
subject to certain risks and uncertainties that would cause actual
results to differ materially from those indicated in the
forward-looking statements, due to several important factors such as
the rapid technological and market changes that create significant
business risks in the market for the Company's services, the intensely
competitive nature of the Company's industry and the possible adverse
effects of such competition, the Company's need for significant
additional financing and the Company's dependence on strategic
relationships, among others, and other risks and factors identified
from time to time in the Company's reports filed with the Securities
and Exchange Commission, including the risk factors set forth under
the caption "The Business - Risk Factors" in the Company's Annual
Report on Form 10-K for the year ended March 31, 1998.
RESULTS OF OPERATIONS
Overview. For the quarter ended September 30, 1998, the Company
incurred an operating loss of $1.6 million (1997 - $1.4 million) on
revenues of $7.9 million (1997 - $8.9 million). The operating loss
included non-cash charges for depreciation, amortization and provision
for bad debts of $0.9 million (1997 - $0.7 million) and a non-cash
charge of $1.0 million related to a settlement with the Company's
former chairman and largest shareholder to resolve all current and
potential issues relating to the provisions of his share purchase
agreement and for various costs he incurred. (See Note 7 to
Consolidated Financial Statements.) The net loss for the quarter was
$1.9 million (1997 - $1.9 million). For the six months ended September
30, 1998, the Company incurred an operating loss of $2.3 million (1997
- $1.3 million) on revenues of $15.6 million (1997 - $17.5 million).
The operating loss included non-cash charges for depreciation,
amortization and provision for bad debts of $1.7 million (1997 - $1.4
million) and the settlement costs of $1.0 million referred to above.
The net loss for the first six months of fiscal 1998 was $2.9 million
(1997 - $2.4 million).
Revenue. The continuing economic crisis in Asia has had a substantial
and negative
14
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
SEPTEMBER 30, 1998
================================================================================
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
---------------------------------------------------------------------------
impact on the Company's revenues. While new revenues appear to be
beginning to offset that decline, they have not yet fully offset such
decline. The decline in revenue for the quarter ended September 30,
1998 of $1.0 million was primarily due to a 34% decrease in activity
by the Company's Asian customers. Revenue from a new prepaid calling
card contract was $0.4 million in the current quarter with no
comparable revenue in the prior year. Revenue from this contract plus
revenue from several new customer contracts in the Company's
traditional postpaid calling card business is expected to have a
positive impact on the Company's total revenues for the fourth
calendar quarter of 1998. The decline in revenue for the six months
ended September 30, 1998 of $1.8 million was primarily due to a
decrease in activity by the Company's Asian customers.
Gross Profit. Gross profit was 45% in each of the quarters ended
September 30, 1998 and 1997. Included in the results for the quarter
ended September 30, 1998 is a prepaid calling card contract where the
initial revenues recognized are billable to the customer principally
on a cost reimbursable basis. Excluding the effect of this contract,
gross profit on the Company's traditional business was 48% which
represents an improving trend due to an ongoing program implemented in
early 1998 to reduce transmission costs. Cost of revenue may be
expected to fluctuate in the next few quarters as new pricing and
contractual arrangements are put in place and as the Company continues
to improve its network structure. For the six months ended September
30, 1998 gross profit was 46% versus 47% for the comparable period in
1997.
Other Costs and Expenses. Selling, general and administrative expenses
were $3.6 million in both the quarter ended September 30, 1998 and in
the prior year quarter. The current quarter reflects a $0.4 million
increase in marketing and sales expenses compared to the prior year
quarter. In the comparable quarter and six months of 1997, expenses
for employee severance, consulting and legal fees aggregated $1.3
million. These costs were incurred at the commencement of a
realignment program. In the current quarter of 1998, the Company
incurred settlement costs of $1.0 million related to a matter
involving the Company's former chairman and largest shareholder to
resolve all current and potential issues relating to the provisions of
his common stock purchase agreement and various costs he incurred.
(See Note 7 to Consolidated Financial Statements.) For the six months
ended September 30, 1998 selling, general and administrative expenses
were $7.2 million versus $7.0 million in the prior year six month
period.
15
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
SEPTEMBER 30, 1998
================================================================================
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
---------------------------------------------------------------------------
Other Expenses - Net. Interest expense of $0.3 million and $0.6
million in the quarter and six months ended September 30, 1998 (1997 -
$0.3 million and $0.7 million) was offset by a $0.1 million gain on
the sale of office property in New York
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $1.6 million at September 30, 1998
compared to $2.4 million at March 31, 1998. Accounts receivable, at
September 30, 1998 totaled $7.4 million compared to $7.7 million at
March 31, 1998. Subsequent to September 30, 1998, through aggressive
collection efforts, the Company has received or is expected to receive
past due accounts receivable in the amount of $2.1 million. Accounts
payable and accrued expenses totaled $8.0 million at September 30,
1998 compared to $5.4 million at March 31, 1998. The increase is
principally due to deferral of payments to certain providers of
telecommunications and professional services. Current liabilities at
September 30, 1998 exceeded current assets by $8.4 million,
principally due to a reclassification from long-term to short-term
debt of a loan by IDT Corporation ("IDT") of $7.2 million (face amount
of $7.5 million) which is due in August, 1999. (See Existing
Obligations below).
During the six months ended September 30, 1998, cash used in investing
activities, principally advances on acquisitions and capital
expenditures, was $4.2 million. Offsetting these uses of cash was a
borrowing of $1.3 million, from an existing shareholder and another
investor in June 1998 and September 1998, respectively.
Beginning in May and extending through November 15, 1998, the Company
has advanced $2.2 million to two companies which the Company is in the
process of acquiring. Because it has not yet raised substantial new
financing, the Company discontinued its bridge funding of one of these
companies in September. Additionally, the Company is preparing a plan
that, absent a significant cash infusion into the Company from debt or
equity financing by the first quarter 1999, will result in a reduction
in the Company's current level of spending relating to the expansion
of the business and delay of its plan to grow its business through new
service offerings.
Current Funding Requirements. Management estimates that based upon
current expectations the Company will require additional funding of up
to $30 million for the execution of its entire business plan, the
principal requirements being the financing of its acquisition program
and capital expenditures for new service offerings. To assist it in
16
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
SEPTEMBER 30, 1998
================================================================================
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
---------------------------------------------------------------------------
raising the required capital, the Company has engaged two
investment-banking firms.
The Company's financing plan consists of: (i) raising a significant
amount of equity capital through a private placement principally with
institutional investors; (ii) establishing a credit facility to
finance capital equipment needs; and (iii) obtaining a loan facility
secured by accounts receivable. Although the Company is actively
pursuing these sources of capital, there can be no assurance that it
will be successful in these efforts. Should the Company be
unsuccessful in securing additional capital, it will be required to
modify or curtail its plans for growth. Management estimates that, in
order to maintain its current level of operations, it will require a
near-term infusion of cash of $2.5 million. It has focused its efforts
on the collection of one significant past due receivable and has
reached an agreement with this customer which will provide $1.5
million in the near term. The Company, through its financing
subsidiary, is also negotiating a short-term loan of up to $1.0
million. Should this latter effort be unsuccessful, a plan to cut
costs related to expansion will be implemented.
The Company has entered into a definitive agreement with United
Communications International ("UCI") to acquire UCI's calling card
business in Greece, Cyprus and the Middle East. The acquisition will
extend the Company's network of calling card platforms to Cyprus. The
Company is making the purchase for an initial cash payment of $75,000
with additional cash payments of up to $2.4 million over 18 months.
After the initial payment, $1.9 million of the cash is in the form of
an earnout and the payments may be less depending upon the revenue and
profit performance of the business. The purchase price also includes
the issuance of 125,000 shares of the Company's common stock, all of
which is subject to earnout.
On June 17, 1998 the Company entered into an Agreement and Plan of
merger With IBX International, Inc., on October 9, 1998, the Company,
entered into a Memorandum of Understanding with IDX International,
Inc. ("IDX") and the shareholders of IDX which adjusted the terms of
the Merger Agreement with respect to the consummation of the proposed
transaction. The Memorandum of Understanding replaces the $5.0 million
cash portion of the purchase price with three notes: $1.0 million
payable on December 31, 1998; $1.5 million payable on June 30, 1999;
and $2.5 million payable on October 31, 1999, each note bearing
interest at LIBOR plus 250 basis points. In the event that the Company
defaults on any of these notes, the principal and accrued interest
may, at the Company's option, be converted into the Company's common
stock at the closing market price per share at the date of default. In
addition, the Company agrees to pay penalty interest at
17
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
SEPTEMBER 30, 1998
================================================================================
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
---------------------------------------------------------------------------
LIBOR plus 450 basis points until the notes are converted plus an
amount equal to 10% of the default amount payable in the form of
warrants to purchase common stock of the Company. The price of the
warrants, if issued, will be set at the market price on the date of
default.
The Company has also executed a definitive agreement to acquire,
subject to obtaining financing, substantially all of the assets of
ConnectSoft, a unified messaging company. The purchase price for this
potential acquisition is liabilities to be assumed, principally
long-term, of approximately $4.5 million.
Existing Obligations. In February 1998, the Company entered into a
loan agreement with IDT, a U.S. international telecommunications
carrier, the principal amount of which is $7.5 million. The loan
matures in August 1999 and bears interest at the rate of 8 7/8%, which
is due at maturity. As part of this agreement, the Company also issued
to IDT warrants to purchase 500,000 shares of the Company's common
stock at $3.03 per share, exercisable for a period of three years. The
proceeds of this loan were used to repay in full, term loans in the
amount of $7.0 million and balances of certain capital leases totaling
$0.4 million.
In June 1998, the Company borrowed $1.0 million from an existing
stockholder. The loan bears interest at 8 7/8% and is payable upon
maturity in December 1999. Under the terms of the agreement, the
stockholder received warrants to purchase 67,000 shares of common
stock at a price of $3.03 per share, exercisable for a period of three
years. The stockholder also received as consideration for the loan the
repricing and extension of a warrant for 55,000 shares which is now
exercisable on or before February 29, 2001 at a price of $3.75 per
share.
In September 1998, a subsidiary of the Company borrowed $0.3 million
from an investor. The loan bears interest at 12% per annum and is
payable upon maturity December 1, 1998. Under the terms of the
agreement, the investor received warrants to purchase 25,000 shares of
common stock at a price of $2.00 per share, exercisable for a period
of five years
Recent Accounting Pronouncements - The Financial Accounting Standards
Board ("FASB") has issued SFAS No. 131 "Disclosure About Segments of
an Enterprise and Related Information", SFAS No. 132, "Employers'
Disclosure about Pensions and Other Post-retirement Benefits" and SFAS
No. 133 "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 131 supersedes SFAS No. 14 "Financial Reporting
for
18
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
SEPTEMBER 30, 1998
================================================================================
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
---------------------------------------------------------------------------
Segments of a Business Enterprise." SFAS No. 131 establishes standards
on the way that public companies report financial information about
operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes
standards for disclosure regarding products and services, geographic
areas and major customers. SFAS No. 131 defines operating segments as
components of a company about which separate financial information is
available that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing
performance. SFAS No. 132 standardizes the disclosure requirements for
pensions and other post-retirement benefits and requires additional
information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis. SFAS No. 133
requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair market value. Gains or losses
resulting from changes in the values of those derivatives are
accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The key criterion for hedge accounting
is that the hedging relationship must be highly effective in achieving
offsetting changes in fair value or cash flows.
SFAS No. 131 and 132 are effective for financial statements for
periods beginning after December 15, 1997, and requires comparative
information for earlier years to be restated. Because of the recent
issuance of these standards, management has been unable to fully
evaluate the impact, if any, the standards may have on the future
financial statement disclosure. Results of operations and financial
position, however, will be unaffected by implementation of these
standards.
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. Management believes that the adoption of SFAS No. 133 will have
no material effect on its financial statements.
"Y2K" Issue. The Company is aware of the issues associated with the
programming code in existing computer systems as the year 2000
approaches. The "Year 2000 Issue" arises because many computer and
hardware systems use only two digits to represent the year. As a
result, these systems and programs may not process dates beyond the
year 1999, which may cause errors in information or system failures.
Assessments of the potential effects of the Y2K issue vary markedly
among different companies, governments, consultants, economists and
commentators, and it is not possible to predict what the actual impact
may be. Because the Company uses Unix-based systems for its platforms
and operating systems to deliver service to customers, it is estimated
that
19
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
SEPTEMBER 30, 1998
================================================================================
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
---------------------------------------------------------------------------
material modifications will not be required to ensure Y2K compliance.
The Company is continuing its analysis, assessment and planning, and
is using internal and external resources to identify, correct or
reprogram, and test the computer system for Y2K compliance. It is
anticipated that all reprogramming efforts, including testing, will be
completed by March 1999. Management is currently evaluating the
financial impact for Y2K compliance and expects that total costs for
the Company will not exceed $0.5 million. The Company has recently
hired an external consulting firm to assess the state of readiness of
all its systems which could be affected by the Year 2000 issue and
expects that this assessment will be completed by December 1998. No
material costs have been incurred during the six months ended
September 30, 1998 and management estimates that the Company will
incur most of the costs during 1999. In the event that it is unable to
correct the "Year 2000" problem, the Company will prepare a
contingency plan by April 1999.
The Company is also in the process of assessing Year 2000 readiness of
its key suppliers, and customers. This project has been undertaken
with a view toward assuring that the Company has adequate resources to
cover its various telecommunications requirements. A failure of the
Company's suppliers or customers to address adequately their Year 2000
readiness could affect the Company's business adversely. As part of
its contingency planning efforts, the Company will identify
alternative sources or strategies where necessary. In addition, the
Company is aware of the potential for claims against it for damages
arising from products and services that are not Year 2000 ready. The
Company believes that such claims against it would be without merit.
Finally, the Year 2000 presents a number of risks and uncertainties
that could affect the Company, including utilities failures,
competition for personnel skilled in the resolution of Year 2000
issues and the nature of government responses to the issues among
others. The Company's expectations as to the extent and timeliness of
modifications required in order to achieve Year 2000 compliance is a
forward-looking statement subject to risks and uncertainties. Actual
results may vary materially as a result of a number of factors,
including, among others, those described in this paragraph. There can
be no assurance however, that the Company will be able to successfully
modify on a timely basis such products, services and systems to comply
with Year 2000 requirements, which failure could have a material
adverse effect on the Company's operating results.
20
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
SEPTEMBER 30, 1998
================================================================================
ITEM 1 LEGAL PROCEEDINGS
---------------------------------------------------------------------------
The Company has been sued in the County of Denver Courts by a Colorado
reseller of transmission services. The lawsuit arises out of a
transaction wherein the plaintiff and the Company contemplated forming
a limited liability company for purposes of developing sales
opportunities generated by the plaintiff. The Company committed itself
to this transaction and relied upon the arrangement which it had
entered into. After the Company had committed itself to the
acquisition of equipment, financing, and entered into a services
contract with the customer, the plaintiff claimed that it was entitled
to a confiscatory amount of money for the introduction and, at the
same time, the plaintiff failed to provide those items of financing,
transmission services and connectivity, as well as the exclusivity
agreement which it had promised. For these reasons, the Company and
the plaintiff were unable to arrive at a definitive agreement on their
arrangement and the plaintiff has sued, claiming breach of a
noncircumvention agreement, notwithstanding the fact that the
plaintiff agreed to and was a part of the transaction between the
Company and its new customer. The Company believes this claim is
without merit and plans to defend this action vigorously.
ITEM 2 CHANGES IN SECURITIES
---------------------------------------------------------------------------
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
---------------------------------------------------------------------------
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------------------------------
None
ITEM 5 OTHER INFORMATION
---------------------------------------------------------------------------
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
---------------------------------------------------------------------------
a) Exhibits
27. Financial Data Schedule
b) Reports on Form 8-K
(i) A report on Form 8-K dated August 12, 1998 under Item 2
was filed with the Commission on August 12, 1998 to report
the signing of a definitive agreement to acquire Connectsoft
Communications Corporation.
21
<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: February 16, 1998 By /s/ Anne Haas
---------------------------------------
Anne Haas
Controller, Treasurer
(Principal Accounting Officer)
Date: February 16, 1998 By /s/ John E. Koonce, III
---------------------------------------
John E. Koonce, III
Chief Financial Officer
Date: February 16, 1998 By /s/ Christopher J. Vizas
---------------------------------------
Christopher J. Vizas
Chairman of the Board of Directors, and
Chief Executive Officer
(Principal Executive Officer)
22
