SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
March 31, 1999 1-10210
EXECUTIVE TELECARD, LTD.
d/b/a eGlobe, Inc.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3486421
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(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
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2000 PENNSYLVANIA AVENUE, NW, SUITE 4800, WASHINGTON, DC, 20006
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(Address of principal executive offices)
Registrant's telephone number, including area code: (303) 691-2115
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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 May 1, 1999 is 19,922,443 shares, all of one class of $.001 par
value Common Stock.
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
FORM 10-Q
QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PAGE
PART I Item 1 Consolidated Financial Statements -----
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 3 - 4
Consolidated Statements of Operations for the three months ended March 31, 1999
and 1998 5
Consolidated Statements of Comprehensive Income (Loss) for the three months ended
March 31, 1999 and 1998 6
Consolidated Statements of Cash Flows for the three months ended March 31, 1999
and 1998 7 - 8
Supplemental Disclosures of Cash Flow Information 9 - 10
Notes to Consolidated Financial Statements 11 - 32
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations 33 - 43
Item 7A Quantitative and Qualitative Disclosure About Market Risk 44
PART II Item 1 Legal Proceedings 45
Item 2 Changes in Securities 45
Item 3 Defaults Upon Senior Securities 45
Item 4 Submission of Matters to a Vote of Security Holders 46
Item 5 Other Information 46
Item 6 Exhibits and Reports on Form 8-K 46
SIGNATURES 47
</TABLE>
2
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EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND DECEMBER 31, 1998
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<TABLE>
<CAPTION>
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MARCH 31, 1999 DECEMBER 31, 1998
(UNAUDITED)
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<S> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents $ 687,366 $1,407,131
Restricted cash 154,842 100,438
Accounts receivable, less
allowance of $1,256,728 and
$986,497 for doubtful accounts 8,376,326 6,850,872
Other current assets 1,387,942 494,186
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TOTAL CURRENT ASSETS 10,606,476 8,852,627
PROPERTY AND EQUIPMENT,
net of accumulated depreciation
and amortization of $14,542,561 and
$13,648,667 13,114,378 13,152,410
GOODWILL AND OTHER INTANGIBLE ASSETS,
net of accumulated amortization of
$1,484,262 and $926,465 16,552,293 12,106,603
OTHER:
Advances to a non-affiliate (Note 3) 1,473,750 970,750
Deposits 554,482 518,992
Deferred financing and acquisition costs 776,329 736,071
Other assets 50,708 50,708
TOTAL OTHER ASSETS 2,855,269 2,276,521
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TOTAL ASSETS $ 43,128,416 $36,388,161
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</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
3
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999 AND DECEMBER 31, 1998
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<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
(UNAUDITED)
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<S> <C> <C>
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable $7,410,995 $5,798,055
Accrued expenses 4,430,146 6,203,177
Income taxes payable 1,767,229 1,914,655
Notes payable, and line of credit principally
related to acquisitions (Note 5)
5,859,040 6,298,706
Current maturities of long-term debt (Note 6) 8,572,955 8,540,214
Deferred revenue (Note 4) 1,628,178 485,804
Other liabilities 549,007 567,488
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TOTAL CURRENT LIABILITIES 30,217,550 29,808,099
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LONG-TERM DEBT, NET OF CURRENT MATURITIES (NOTE 6) 1,907,435 1,237,344
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TOTAL LIABILITIES 32,124,985 31,045,443
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COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK
8% Series E Cumulative Convertible Redeemable Preferred Stock, $.001
par value, 125 shares authorized, 50 shares outstanding (Note 7) 5,046,666 -
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STOCKHOLDERS' EQUITY:
Preferred stock, all series, $.001 par value, 5,000,000 shares
authorized (Note 8) 1,511 501
Common stock, $.001 par value, 100,000,000 shares authorized,
19,794,694 and 16,362,966 shares outstanding (Note 8) 19,794 16,362
Additional paid-in capital 40,812,454 33,975,268
Stock to be issued (Note 8) 1,178,690 -
Accumulated deficit (36,067,959) (28,566,346)
Accumulated other comprehensive income (loss) 12,275 (83,067)
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TOTAL STOCKHOLDERS' EQUITY 5,956,765 5,342,718
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TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY $43,128,416 $36,388,161
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</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
4
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
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THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
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<S> <C> <C>
REVENUE $ 8,385,050 $ 7,539,037
COST OF REVENUE 7,984,752 4,187,576
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GROSS PROFIT 400,298 3,351,461
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COSTS AND EXPENSES:
Selling, general and administrative 4,660,821 3,547,077
Corporate realignment expense - 967,715
Deferred compensation related to acquisitions 919,320 -
Depreciation and amortization 893,894 813,872
Amortization of goodwill and other intangible assets 554,746 -
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TOTAL COSTS AND EXPENSES 7,028,781 5,328,664
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LOSS FROM OPERATIONS (6,628,483) (1,977,203)
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OTHER EXPENSE:
Proxy related litigation expense - (3,526,874)
Interest expense related to acquisitions (237,925) -
Other interest expense (627,204) (717,832)
Other expense (8,001) (232,309)
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Total other expense (873,130) (4,477,015)
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LOSS BEFORE INCOME TAXES (7,501,613) (6,454,218)
TAXES ON INCOME - 1,500,000
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NET LOSS (7,501,613) (7,954,218)
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PREFERRED STOCK DIVIDENDS (NOTE 8) (3,712,379) -
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NET LOSS ATTRIBUTABLE TO COMMON STOCK $(11,213,992) $(7,954,218)
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NET LOSS PER SHARE (NOTE 9):
BASIC $ (0.63) $ (0.46)
DILUTED $ (0.63) $ (0.46)
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</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
5
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
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THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998
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<S> C> <C>
NET LOSS $ (7,501,613) $(7,954,218)
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS 95,342 (12,277)
COMPREHENSIVE NET LOSS $ (7,406,271) $(7,966,495)
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</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements
6
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
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THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
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<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net loss $ (7,501,613) $ (7,954,218)
Adjustments to reconcile net loss to net cash flows
used in operating activities:
Depreciation and amortization 1,448,640 813,872
Provision for bad debts 188,771 698,910
Deferred compensation 919,320 -
Non-cash interest expense 201,956 -
Issuance of options and warrants for services 18,849 220,000
Amortization of debt discount 304,244 478,580
Proxy related litigation expense - 3,500,000
Other, net - 137,548
Changes in operating assets and liabilities:
Accounts receivable (1,647,773) (148,281)
Other current assets (753,723) 125,797
Accounts payable 1,501,781 1,269,736
Income taxes payable (147,426) -
Accrued expenses (2,651,483) 19,160
Deferred revenue 532,974 -
Other liabilities (37,520) 1,835
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CASH USED IN OPERATING ACTIVITIES (7,623,003) (837,061)
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INVESTING ACTIVITIES:
Advances to non-affiliate (503,000) -
Purchase of Telekey, net of cash acquired (95,287) -
Purchases of property and equipment - (239,836)
Restricted cash (1,003) -
Deposits (35,490) (180,025)
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CASH USED IN INVESTING ACTIVITIES (634,780) (419,861)
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</TABLE>
7
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
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THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
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<S> <C> <C>
FINANCING ACTIVITIES:
Proceeds from notes payable 200,000 6,997,787
Proceeds from issuance of preferred stock 8,000,000 -
Stock issuance costs (320,645) -
Deferred acquisition and financing costs (40,258) -
Principal payments on notes payable (141,296) (7,137,540)
Payments on capital leases (159,783) -
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 7,538,018 (139,753)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (719,765) (1,396,675)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,407,131 3,787,881
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 687,366 $2,391,206
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</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
8
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
THREE MONTHS ENDED
MARCH 31,
1999 1998
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<S> <C> <C>
Cash paid during the period for:
Interest $ 85,627 $ 264,993
Income taxes $ 128,332 $ 46,759
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Non-cash investing and financing activities:
Equipment acquired
under capital lease
obligations $ 349,191 $ -
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Unamortized debt
discount related to
warrants $ 273,105 $ 25,742
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Common stock to be
issued for payment of
debt $ 200,000 $ -
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Common stock issued in
payment of debt $1,023,198 $ -
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Preferred stock
dividends $3,712,379 $ -
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</TABLE>
9
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (CON'T) TELEKEY ACQUISITION,
NET OF CASH ACQUIRED (NOTE 8)
<TABLE>
<CAPTION>
PERIODS ENDED
MARCH 31, MARCH 31,
1999 1998
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<S> <C> <C>
Working capital deficit, other
than cash acquired $ (1,284,060) $ -
Property and equipment 481,289 -
Purchase price in excess of the net assets
acquired 5,000,436 -
Acquired debt (1,017,065) -
Notes payable issued in acquisition (150,000) -
Issuance of Series F Convertible
Preferred Stock (1,010) -
Additional paid-in capital (1,955,613) -
Stock to be issued (978,690) -
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Net cash used to acquire Telekey $ 95,287 $ -
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</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
10
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
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Note 1 - Basis of Presentation
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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 months ended March 31,
1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Form 10-K for the nine
months ended 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.
Certain consolidated financial amounts have been reclassified for
consistent presentation. In December 1998, the Company acquired IDX
International, Inc. ("IDX"), a supplier of Internet Protocol, ("IP")
transmission services, principally to telecommunications carriers,
in 14 countries. Also, in December 1998, the Company acquired UCI
Tele Network, LTD. ("UCI"), a development stage calling card
business with contracts to provide calling card services in Cyprus
and Greece. In February 1999, the Company completed the acquisition
of Telekey, Inc. ("Telekey"), a provider of card-based
telecommunications services (see Notes 8 and 10).
RECENT ACCOUNTING PRONOUNCEMENTS - The Financial Accounting
Standards Board ("FASB") has issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133
requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair market value. Gains or
losses resulting from changes in the values of those derivatives are
accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective
in achieving offsetting changes in fair value or cash flows. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999.
Management believes that the adoption of SFAS No. 133 will have no
material effect on its financial statements.
11
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
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Note 2 - Management's Plan
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As of March 31, 1999, the Company had a net working capital
deficiency of $19.6 million, which consists of $7.5 million of
debt due in August 1999, short-term indebtedness of $5.4 million
related to acquisitions, of which $0.6 million is related to the
Telekey acquisition in February 1999 and $4.9 million is related
to two acquisitions in December 1998. Of this latter amount, up
to $4.4 million (plus accrued interest) may be paid, at the
Company's sole discretion, by the issuance of common stock.
On April 9, 1999, the Company entered into a financing
commitment totaling $20.0 million with an affiliate of the
Company's largest stockholder in the form of long-term debt.
This commitment is subject to approval by the Company's
stockholders at its annual meeting scheduled to occur in the
second calendar quarter of 1999. The Company's management
believes that there is a high probability that stockholder
approval will be obtained (see Note 11 for additional
information on this financing). However, if stockholder approval
is not obtained, the Company will be required to pursue
additional sources of capital, to repay the indebtedness due in
August 1999 of $8.5 million, including accrued interest of
approximately $1.0 million, and to support the business plan of
the Company.
Under the terms of this commitment, the lender provided the
Company with a $7.0 million unsecured loan, which is due on the
earlier of one year or approval of the $20.0 million facility by
the stockholders.
The estimated capital requirements for 1999 needed to meet the
Company's pre-existing cash obligations of approximately $12.1
million and to finance its growth plan are approximately $50.0
million. Through April 30, 1999, the Company acquired new
funding and commitments in excess of $32.0 million: $10 million
from the sale of convertible stock (of which $8.0 million has
been received and $2.0 million will be advanced upon
registration of the underlying common shares); $20.0 million in
committed long-term debt which is subject to stockholder
approval (under the commitment the lender has provided a bridge
loan of $7.0 million which the Company has drawn down); and $2.0
million or more in vendor financing for network equipment
purchases. Assuming that stockholder approval is forthcoming for
the
12
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EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
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Note 2 - Management's Plan (con't)
- --------------------------------------------------------------------------------
long-term debt, these funds should permit the Company to meet a
modest baseline growth plan. To achieve the growth, both in the
short and long-term, that the business plan anticipates will
require additional capital of $18.0 million. The Company
anticipates that these cash needs in the latter part of the year
will come from (1) a capital market financing of debt or equity
in the second half of the year of up to $30.0 million and (2)
secured equipment-based financing of up to $10.0 million. Should
the Company be unable to raise additional funds from these or
other sources, then its plans will be sharply curtailed and its
business adversely affected.
Although the Company's management believes that stockholder
approval for the financing by the lender described above is
probable, in the event approval is not obtained, there can be no
assurance that the Company will raise additional capital or
generate funds from operations sufficient to meet its
obligations and planned requirements. The lack of sufficient
funds from these sources would force the Company to curtail both
its existing and planned levels of operations and would
therefore have an adverse effect on the Company's business.
Note 3 - Advances To A Non-Affiliate
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The Company is in the process of negotiating the acquisition of a
company, the primary asset of which is software related to messaging
technology. Under the proposed transaction, the purchase price is
estimated to be approximately $7.5 million for which the Company
will issue preferred stock and assume certain liabilities. The
Company's funding requirement for further commercial development of
the technology is currently estimated to average $0.4 million per
month through the year ending December 31, 1999.
As of March 31, 1999, the Company had advanced approximately $1.5
million to this software company. Through May 11, 1999, the Company
has made additional advances of $0.3 million. The Company owns a
non-exclusive license for the technology, the value of which is
currently estimated by management to exceed the advances made to
date.
In the event that the proposed transaction does not occur and the
Company is unable to use or sell the licensed technology to generate
revenues, the Company will evaluate the recoverability of these
advances.
13
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EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
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Note 4 - Deferred Revenue
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Some of the Company's card services business is for prepaid cards.
The amount billed for these cards is initially recorded as deferred
revenue and subsequently recognized as revenue in the statement of
operations as the cards are used. Unused amounts that expire are
referred to as breakage and are recorded as revenues at the date of
expiration.
Note 5 - Notes Payable and Line of Credit Principally Related to Acquisitions
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<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
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<S> <C> <C>
12 % unsecured term note payable to an investor, net of
unamortized discount of $0 and $26,351, interest and
principal payable in March 1999. (1) $250,000 $ 223,649
Convertible subordinated promissory note for acquisition of
IDX, interest and principal repaid March 1999 through
issuance of common stock. (2) - 1,000,000
Convertible subordinated promissory note for acquisition of
IDX, interest and principal payable May 1999. (2) 418,024 418,024
Convertible subordinated promissory note for acquisition of
IDX, interest and principal payable June 1999. (2) 1,500,000 1,500,000
Convertible subordinated promissory note for acquisition of
IDX, interest and principal payable October 1999. (2) 2,500,000 2,500,000
8% promissory note for acquisition of UCI, interest and
principal payable June 1999, net of unamortized discount of
$21,484 and $42,967. (3) 478,516 457,033
Short-term loan from two officers. - 100,000
Short-term note payable to an investor. 100,000 100,000
Line of credit of Telekey, principal due on demand, interest
payable quarterly at a variable rate (8.25% at March 31,
1999), expires in October 1999. (4) 500,000 -
Non-interest bearing note for acquisition of Telekey,
payable in equal monthly principal payments over
one year. (4) 112,500 -
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Total notes payable and line of credit $5,859,040 $6,298,706
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</TABLE>
14
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
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(1) 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 developing messaging
technology. (See Note 3). In connection with this
transaction, the lender was granted warrants to
purchase 25,000 shares of the Company's common
stock at a price of $2.00 per share. The value
assigned to the warrants of $26,351 was recorded
as a discount to the note and has been amortized
through March 31, 1999 as additional interest
expense. The warrants expire on September 1, 2003
and as of March 31, 1999, these warrants have not
been exercised. The Company is in the process of
negotiating with the lender to extend this loan.
However, there can be no assurance that such
extension will be received.
(2) In December 1998, the Company acquired IDX. In
connection with this transaction, convertible
subordinated promissory notes were issued in the
amount of $5.0 million. An additional note of $0.4
million for accrued but unpaid dividends owed by
IDX was also issued by the Company and is due May
31, 1999. The notes bear interest at LIBOR plus
2.5% (7.75% as defined). Each of the notes, plus
accrued interest, may be paid in cash or shares of
the Company's common stock, at the sole discretion
of the Company. If the Company elects to pay the
notes with common stock, the price of the common
stock on the due date of the notes determines the
number of shares to be issued. In March 1999, the
Company elected to pay the first note, which had a
face value of $1.0 million, plus accrued interest,
in shares of common stock and issued 431,728
shares of common stock to discharge this
indebtedness. In connection with the discharge of
this indebtedness, IDX was granted warrants to
purchase 43,173 shares of the Company's common
stock at a price of $2.37 per share. The warrants
expire March 23, 2002. The value assigned to the
warrants of $62,341 was recorded as interest
expense in March 1999. At March 31, 1999 these
warrants have not been exercised. (See Note 8 for
further discussion). 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.
15
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
(3) On December 31, 1998, the Company acquired UCI. In
connection with this transaction, the Company issued a
promissory note for $0.5 million bearing interest at
8% due June 27, 1999. In connection with the note, UCI
was granted warrants to purchase 50,000 shares of the
Company's common stock at a price of $1.63 per share.
The warrants expire on December 31, 2003. The value
assigned to the warrants of $42,967 was recorded as a
discount to the note and will be amortized through
June 1999 as additional interest expense. At March 31,
1999, these warrants have not been exercised.
(4) On February 12, 1999, the Company acquired Telekey. In
connection with this transaction, the Company issued a
non-interest bearing note for $0.15 million. (See
Notes 8 and 10). Telekey also has a $1.0 million line
of credit expiring October 29, 1999 to facilitate
operational financing needs. The line of credit is
personally guaranteed by previous members of Telekey
and is due on demand. Interest is at a variable rate
(8.25% at March 31, 1999).
16
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Note 6 - Long Term Debt
- --------------------------------------------------------------------------------
At March 31, 1999 and December 31, 1998, long-term debt consisted
of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
8.875% unsecured term note payable to a
telecommunications company, interest and
principal payable August 1999, net of
unamortized discount of $201,299 and
$205,932. (1) $ 7,298,701 $7,294,068
8.875% unsecured term note payable to a
stockholder, interest and principal payable
December 1999, net of unamortized discount of
$50,322 and $45,844. (2) 949,678 954,156
8% promissory note for acquisition of UCI,
interest and principal payable June 2000. (3) 500,000 500,000
8% mortgage note, payable monthly, including
interest through March 2010, with an April 2010
balloon payment; secured by deed of trust on the
related land and building. 303,617 305,135
10% promissory note of Telekey payable to a
telecommunication company, interest payable
quarterly, principal due in December 2000. (4) 453,817 -
Capitalized lease obligations 974,577 724,199
- --------------------------------------------------------------------------------------------------------------------------
Total 10,480,390 9,777,558
Less current maturities, net of unamortized
discount of $ 251,621 and $251,776 8,572,955 8,540,214
- ---------------------------------------------------------------------------------------------------------------------------
Total long-term debt $1,907,435 $1,237,344
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Executive TeleCard, Ltd.
d/b/a eGlobe
Notes To Consolidated Financial Statements
March 31, 1999
- --------------------------------------------------------------------------------
(1) In February 1998, the Company borrowed $7.5 million from a
telecommunications company. 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.
The value assigned to such warrants when granted in
connection with the above note agreement was approximately
$0.5 million and was recorded as a discount to long-term
debt. The discount is being amortized over the term of the
note as interest expense. In January 1999, pursuant to the
anti-dilution provisions of the loan agreement, the exercise
price of the warrants was adjusted to $1.50 per share,
resulting in additional debt discount of $0.2 million. This
amount is being amortized over the remaining term of the
note. At March 31, 1999, 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 expiring June 2001 to
purchase 67,000 shares of the Company's common stock at a
price of $3.03 per share. The stockholder also received as
consideration for the loan, the repricing and extension of a
warrant for 55,000 shares to be exercisable before February
2001 at a price of $3.75 per share. The value assigned to
such warrants, including the revision of terms, of
approximately $68,846, was recorded as a discount to the
note payable and is being amortized over the term of the
note as interest expense. In January 1999, the exercise
price of the 122,000 warrants was lowered to $1.5125 per
share and the expiration dates were extended through January
31, 2002. The value of $19,480 assigned to the revision in
terms has been recorded as additional debt discount and is
being amortized to interest expense through December 31,
1999. At March 31, 1999, these warrants have not been
exercised.
(3) On December 31, 1998, the Company acquired UCI. In
connection with this transaction, the Company issued a $0.5
million note with 8% interest payable monthly due no later
than June 30, 2000.
(4) On February 12, 1999, the Company acquired Telekey. Telekey
has an outstanding promissory note for $0.454 million
bearing interest payable quarterly at 10% due on December
31, 2000 to a telecommunication company.
18
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Note 7- Series E Cumulative Convertible Redeemable Preferred Stock
- --------------------------------------------------------------------------------
In February 1999, the Company issued 50
shares of Series E Cumulative Convertible
Redeemable Preferred stock ("Series E
Preferred") to an affiliate of Mr. Ronald
Jensen, the Company's largest stockholder,
for $5.0 million. The Series E Preferred
carries an annual dividend of 8%, payable
quarterly beginning December 31, 2000. As
additional consideration, the Company agreed
to issue to the holder three year warrants to
purchase 723,000 shares of common stock at
$2.125 per share and 277,000 shares of common
stock at $0.01 per share. The value assigned
to such warrants when granted was
approximately $1.1 million and was recorded
as a deemed dividend because the Series E
Preferred stock was convertible at the
election of the holder at the issuance date.
The Series E Preferred holder may elect to
make the shares of Series E Preferred stock
convertible into shares of common stock
(rather than redeemable) at any time after
issuance. The Company may elect to make the
shares of Series E Preferred stock
convertible, but only if (i) it has positive
EBITDA for at least one of the first three
fiscal quarters of 1999 or (ii) completes a
public offering of equity securities for a
price of at least $3.00 per share and with
gross proceeds to the Company of at least $20
million on or before the end of the third
fiscal quarter of 1999. The shares of Series
E Preferred stock will automatically be
converted into shares of the Company's common
stock, on the earliest to occur of (x) the
first date as of which the last reported
sales price of the Company's common stock on
Nasdaq is $5.00 or more for any 20
consecutive trading days during any period in
which the Series E Preferred stock is
outstanding, (y) the date that 80% or more of
the Series E Preferred stock has been
converted into common stock, or (z) the
Company completes a public offering of equity
securities at a price of at least $3.00 per
share and with gross proceeds to the Company
of at least $20 million. The initial
conversion price for the Series E Preferred
stock is $2.125, subject to adjustment if the
Company issues common stock for less than the
conversion price. The shares of the Series E
Preferred stock may be
19
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Note 7- Series E Cumulative Convertible Redeemable Preferred Stock (con't)
- --------------------------------------------------------------------------------
redeemed at a price equal to the liquidation
preference ($5.0 million) plus accrued dividends in
cash or in common stock, at the Company's option or
at the option of any holder, provided that the holder
has not previously exercised the convertibility
option described above, at any time after February
2004. In connection with a debt placement concluded
in April 1999, the Series E Preferred holder elected
to make such shares convertible. Accordingly, such
shares are no longer redeemable. The Series E
Preferred stock will be reclassified to Stockholders'
Equity as permanent equity in April 1999.
Note 8- Stockholders' Equity
- --------------------------------------------------------------------------------
Preferred Stock
The Company has authorized 5 million shares of $ .001
par value preferred stock. The following is a summary
of the Company's series of preferred stock and the
amounts authorized and outstanding at March 31, 1999
and December 31, 1998:
Series B Convertible Preferred Stock,
500,000 shares authorized and issued and
outstanding at both March 31, 1999 and
December 31, 1998
8% Series C Cumulative Convertible
Preferred Stock, 275 shares authorized, 0
and 75 shares, respectively, issued and
outstanding
8% Series D Cumulative Convertible
Preferred Stock, 125 shares authorized, 30
and 0 shares, respectively, issued and
outstanding ($3.0 million aggregate
liquidation preference)
Series F Convertible Preferred Stock,
2,020,000 authorized, 1,010,000 and 0
shares, respectively, issued and
outstanding
20
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Note 8- Stockholders' Equity (con't)
- --------------------------------------------------------------------------------
Following is a detailed discussion of each series of
preferred stock:
Series B Convertible Preferred Stock
On December 2, 1998, the Company acquired all of the
common and preferred stock of IDX, a privately-held
IP based fax and telephony company, for (a) 500,000
shares of the Company's Series B Convertible
Preferred Stock ("Series B Preferred") valued at
$3.5 million which are convertible into 2,500,000
shares (2,000,000 shares until stockholder approval
is obtained and subject to adjustment as described
below) of common stock; (b) warrants ("IDX
Warrants") to purchase up to an additional 2,500,000
shares of common stock (subject to stockholder
approval as well as adjustment as described below);
(c) $5.0 million in 7.75% convertible subordinated
promissory notes ("IDX Notes") (subject to
adjustment as described below); (d) $1.5 million in
bridge loan advances to IDX made by the Company
prior to the acquisition which were converted into
part of the purchase price plus associated accrued
interest of $0.04 million; (e) $0.4 million for IDX
dividends accrued and unpaid on IDX's Preferred
Stock under a convertible subordinated promissory
note and (f) direct costs associated with the
acquisition of $0.4 million. The Company also
advanced approximately $0.4 million to IDX prior to
acquisition under an agreement to provide IDX up to
$2.3 million for working capital purposes over the
next twelve months. These pre-acquisition advances
were not considered part of the purchase price.
The Company plans to include these requests for the
approval of the warrants and additional stock as
matters to be voted upon by the stockholders at the
next annual meeting. This acquisition has been
accounted for under the purchase method of
accounting. The financial statements of the Company
reflect the preliminary allocation of the purchase
price. The preliminary allocation has resulted in
acquired goodwill of $10.9 million that is being
amortized on a straight-line basis over seven years.
The Company has not completed the review of the
purchase price allocation and will determine the
final allocation based on appraisals and other
information. To the extent that the estimated useful
lives of other identified intangibles are less than
seven years, the related amortization expense 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:
21
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Note 8- Stockholders' Equity (con't)
- --------------------------------------------------------------------------------
(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 operating income 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.
22
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Note 8 - Stockholders' Equity (con't)
- --------------------------------------------------------------------------------
(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 in Note 5 by the amount of
the Accrued Dividends and certain defined amounts
unless offset by proceeds from the sale of an IDX
subsidiary and a note issued to IDX by an option
holder. The Company may also elect to pay this
obligation in cash or in shares of common stock.
23
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Note 8 - Stockholders' Equity (con't)
- --------------------------------------------------------------------------------
(g) The IDX Notes consisted of four separate notes payable
in cash or common stock at the Company's sole
discretion. The notes have varying maturity dates
through October 31, 1999. See Note 5 for the terms and
conditions of the IDX Notes and discussion of the
payment of the $1.0 million promissory note and accrued
interest with common stock and warrants in March 1999.
Payment of the IDX Notes is subject to adjustment upon
the resolution of certain contingencies as discussed
above.
Based on the contingent purchase price elements as listed
above, goodwill associated with the acquisition may materially
increase when these contingencies are resolved.
The holders of the Series B Preferred Stock are not entitled
to dividends unless declared by the Board of Directors. The
shares of Series B Preferred Stock are not redeemable.
Further, the Company has agreed to register for resale the
shares of common stock underlying the conversion rights of the
holders of the Series B Preferred Stock, the IDX warrants and
the IDX Notes.
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 increase in the market
price during the first quarter of 1999 of the underlying
common stock granted by the IDX stockholders to certain
employees has resulted in a charge to income of $0.3 million.
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.
24
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Note 8 - Stockholders' Equity (con't)
- --------------------------------------------------------------------------------
SERIES C CUMULATIVE CONVERTIBLE PREFERRED STOCK
In February 1999, the Company issued 3,000,000 shares of
common stock in exchange for the 75 shares of outstanding
Series C Cumulative Convertible Preferred (convertible into
1,875,000 shares of common stock on the exchange date) to Mr.
Ronald Jensen, the Company's largest stockholder. The market
value of the 1,125,000 incremental shares of common stock
issued was recorded as a preferred stock dividend of
approximately $2.2 million with a corresponding credit to
paid-in capital. This transaction was contemporaneous with the
Company's issuance of Series E Preferred stock to an affiliate
of Mr. Jensen, which is discussed in Note 7.
SERIES D CUMULATIVE CONVERTIBLE PREFERRED STOCK
In January 1999, the Company issued 30 shares of Series D
Cumulative Convertible Preferred Stock ("Series D Preferred")
to a private investment firm for $3.0 million. The holder has
agreed to purchase 20 additional shares of Series D Preferred
stock for $2.0 million upon registration of the common stock
issuable upon conversion of this preferred stock. In
connection with this transaction, the Company issued warrants
to purchase 112,500 shares of common stock with an exercise
price of $0.01 per share and warrants to purchase 60,000
shares of common stock with an exercise price of $1.60 per
share. The value assigned to such warrants when granted was
approximately $0.3 million and was recorded as a discount to
the Series D Preferred. The discount is being amortized as a
deemed preferred dividend over the period from the date of
grant to the date of convertibility of the Series D Preferred
into common stock. The Company will issue additional warrants
to purchase 75,000 shares of common stock, with an exercise
price of $0.01 per share and warrants to purchase 40,000
shares of common stock with an exercise price of $1.60 per
share upon the issuance of the 20 additional shares of Series
D Preferred stock.
25
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Note 8 - Stockholders' Equity (con't)
- --------------------------------------------------------------------------------
The Series D Preferred stock carries an annual dividend of
8%, payable quarterly beginning December 31, 1999. The Company
has accrued approximately $53,000 in cumulative Series D
Preferred dividends as of March 31, 1999. The shares of Series
D Preferred stock are convertible, at the holder's option,
into shares of the Company's common stock any time after April
13, 1999 at a conversion price equal to the lesser of $1.60
or, in the case of the Company's failure to achieve positive
EBITDA or to close a $20 million public offering by the third
fiscal quarter of 1999, the market price just prior to the
conversion date. The shares of Series D Preferred stock will
automatically convert into common stock upon the earliest of
(i) the first date on which the market price of the common
stock is $5.00 or more per share for any 20 consecutive
trading days, (ii) the date on which 80% or more of the Series
D Preferred stock has been converted into common stock, or
(iii) the date the Company closes a public offering of equity
securities at a price of at least $3.00 per share with gross
proceeds of at least $20 million.
As additional consideration, the Company agreed to issue to
the investor for no additional consideration, additional
warrants to purchase the number of shares of common stock
equal to $0.3 million (based on the market price of the common
stock on the last trading day prior to June 1, 1999 or July 1,
2000, as the case may be), or pay $0.3 million in cash, for
each of the following: (i) consummate a specified merger
transaction by May 30, 1999, or (ii) achieve, in the fiscal
quarter commencing July 1, 2000, an aggregate amount of gross
revenues equal to or in excess of 200% of the aggregate amount
of gross revenues achieved by the Company in the fiscal
quarter ended December 31, 1998.
The shares of Series D Preferred stock must be redeemed if it
ceases to be convertible (which would happen if the number of
shares of common stock issuable upon conversion of the Series
D Preferred stock exceeded 19.9% of the number of shares of
common stock outstanding when the Series D Preferred stock was
issued, less shares reserved for issuance under warrants).
Redemption is in cash at a price equal to the liquidation
preference of the Series D Preferred stock at the holder's
option or the Company's option 45 days after the Series D
Preferred stock ceases to be convertible. If the Company
receives stockholder approval to increase the number of shares
issuable, it will issue the full amount of common stock upon
conversion of the Series D Preferred stock even if the number
of shares exceeds the 19.9% maximum number.
26
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Note 8 - Stockholders' Equity (con't)
- --------------------------------------------------------------------------------
SERIES F CONVERTIBLE PREFERRED STOCK
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 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 as of which the market
price is $4.00 or more for any 15 consecutive trading days
during any period that the Series F Preferred stock is
outstanding, 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.
This acquisition has been accounted for using 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
$5.0 million that is being amortized over seven years. The
purchase price allocation has not been finalized pending
resolutions of several purchase price elements, which are
contingent upon the following:
(a) Telekey's ability to achieve certain revenue and EBITDA
objectives 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) may limit the amount of
additional shares to be issued (with at least 505,000 being
issued and up to additional 1,010,000 shares of Series F
Preferred being issued) as well as eliminate the Company's
price guarantee as discussed in (b) below.
27
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Note 8 - Stockholders' Equity (con't)
- --------------------------------------------------------------------------------
(b) The Company has guaranteed a price of $4.00 per common stock
share at December 31, 1999 to recipients of the common stock
issuable upon the conversion of the Series F Preferred
Stock, subject to Telekey's achievement of certain defined
revenue and EBITDA objectives. It the market price is less
than $4.00 on December 31, 1999, the Company will issue
additional shares of common stock upon the conversion of the
Series F Preferred Stock based on the ratio of $4.00 to the
market price, but not more than an aggregate of 600,000
additional shares of common stock.
Based on the contingent purchase price elements as listed above,
goodwill associated with the acquisition may materially increase
when these contingencies are resolved.
The holders of the Series F Preferred Stock are not entitled to
dividends unless declared by the Board of Directors. The shares of
Series F 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 F
Preferred Stock.
At the acquisition date, the stockholders of Telekey received
Series F Preferred Stock, which are ultimately convertible into
common stock. In addition, the stockholders may receive additional
shares of Series F Preferred Stock subject to Telekey meeting its
performance objectives. These stockholders in turn granted a total
of 240,000 shares of eGlobe common stock to certain Telekey
employees. Of this total, 60,000 shares will be issued only if
Telekey meets certain performance objectives. As of March 31, 1999,
the value of the underlying non-contingent 180,000 shares of common
stock granted by the Telekey stockholders to certain employees has
resulted in a charge to income of $0.6 million. The stock grants
are performance based and will be adjusted each reporting period
(but not less than zero) for the changes in the stock price until
the shares are issued to the employees.
Common Stock
As discussed earlier, in February 1999, the Company issued 3,000,000
shares of common stock in exchange for the 75 outstanding shares of
Series C Preferred stock.
28
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Note 8 - Stockholders' Equity (con't)
- --------------------------------------------------------------------------------
In March 1999, the Company elected to pay the IDX $1.0 million
promissory note and accrued interest with shares of common stock.
The Company issued 431,728 shares of common stock and warrants to
purchase 43,173 shares of common stock to discharge this
indebtedness. In addition, the Company agreed to repay a $200,000
note payable and related accrued interest with 125,000 shares of
common stock to be issued subsequent to quarter end. In
connection with this transaction, the Company also issued 80,000
five-year warrants to purchase common shares at an exercise price
of $1.60. See Note 6 for further discussion.
Note 9 - Basic Net Loss Per Share of Common Stock
- --------------------------------------------------------------------------------
Earnings per share are calculated in accordance with "SFAS" No. 128,
"Earnings Per Share". The net loss of $11,213,992 attributable to
common stock for the three months ended March 31, 1999, includes
preferred stock dividends of $3,712,379. For the three months ended
March 31, 1998, the Company had no preferred stock dividends. The
weighted average shares outstanding for calculating basic earnings
(loss) per share were 17,873,564 and 17,346,766 for the three months
ended March 31, 1999 and 1998, respectively. Common stock options and
warrants of 413,889 and 282,595 for the three months ended March 31,
1999 and 1998, 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 1,135,906 shares of common stock at
exercise prices from $2.25 to $6.61 per share were outstanding at
March 31, 1999 but were not included in the computation of diluted
earnings per (loss) share for the three months ended March 31, 1999
because the exercise prices were greater than the average market
price of the common shares during that period. Options and warrants
to purchase 629,702 shares of common stock at exercise prices from
$3.50 to $6.98 per share were outstanding at March 31, 1998 but were
not included in the computation of diluted (loss) earnings per share
for the three months ended March 31, 1998 because the exercise prices
were greater than the average market price of the common shares
during that period.
In addition, convertible preferred stock and convertible subordinated
promissory notes convertible into 9.1 million shares of common stock
were not included in diluted earnings (loss) per share for the three
months ended March 31, 1999 due to the loss for the period.
29
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Note 10 - Acquisitions
- --------------------------------------------------------------------------------
On February 12, 1999, the Company completed the acquisition
of Telekey, Inc. ("Telekey"), for which it paid: (i) $0.1
million at closing; (ii) issued a promissory note for $0.2
million payable in equal monthly installments over one year;
(iii) issued 1,010,000 shares of Series F Convertible
Preferred Stock ("Series F Preferred"); and (iv) agreed to
issue at least 505,000 and up to an additional 1,010,000
shares of Series F Preferred two years from the date of
closing (or upon a change of control or certain events of
default if they occur before the end of two years), subject
to Telekey meeting certain revenue and EBITDA objectives. See
Note 8 for further discussion.
As discussed in Notes 5 and 8, the Company acquired IDX on
December 2, 1998 and UCI on December 31, 1998. The results of
operations for these two acquisitions are included in the
consolidated results of operations for the three months ended
March 31, 1999.
The following unaudited pro forma consolidated results of
operations are presented as if the IDX, UCI, and the Telekey
acquisitions had been made at the beginning of the periods
presented. Since Telekey was acquired in February 1999, the
Company has included Telekey's January 1999 results in its
pro forma results of operations for the three months ended
March 31, 1999 for comparative purposes.
Pro Forma Results for the
Three Months Ended March 31,
1999 1998
- --------------------------------------------------------------------------------
Net revenue $ 8,575,172 $ 9,466,659
Net loss $ (7,592,704) $ (10,117,044)
Net loss attributable to
common stock $(11,305,083) $ (10,117,044)
Net loss per share $ ( 0.54) $ (0.50)
30
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Note 11 - Subsequent Events
- --------------------------------------------------------------------------------
FINANCING COMMITMENT
In April 1999, the Company received a financing commitment of
$20.0 million in the form of long-term debt from an affiliate
of its largest stockholder ("Lender"). This financing is
subject to stockholder approval; but under the terms of the
Loan and Note Purchase Agreement ("Agreement"), the Company
initially received an unsecured loan ("Loan") of $7.0 million
bearing interest at 8% payable monthly with principal due April
2000. As additional consideration, the Lender received warrants
to purchase 1,500,000 shares of the Company's common stock at
an exercise price of $0.01 per share, of which 500,000 warrants
are immediately exercisable and 1,000,000 warrants are
exercisable only in the event that the stockholders do not
approve the $20.0 million facility or the Company elects not to
draw it down.
Under the Agreement, the Lender also agreed to purchase $20.0
million of 5% Secured Notes ("Notes,") at the Company's
request, provided that the Company obtains stockholder approval
to issue the Notes at its next stockholder meeting, currently
planned to occur during the second quarter of 1999. If
stockholder approval is obtained and the Company elects to
issue the Notes, the initial $7.0 million Loan must be repaid
from the proceeds. Principal and interest on the Notes are
payable over three years in monthly installments of $377,000
with a balloon payment of the outstanding balance due on the
third anniversary date.
However, the Company may elect to pay up to 50% of the original
principal amount of the Notes in shares of the Company's common
stock, at its option, if: (i) the closing price of the
Company's common stock is $8.00 per share for more than 15
consecutive trading days; (ii) the Company completes a public
offering of equity securities at a price of at least $5.00 per
share and with proceeds of at least $30.0 million; or (iii) the
Company completes an offering of securities with proceeds in
excess of $100.0 million. These Notes, if issued, will be
secured by substantially all of the Company's existing
operating assets, although the Company can pursue certain
additional financing, including senior debt or lease financing
for future capital expenditures and working capital
requirements in furtherance of its growth plan.
As additional consideration for the Notes, if issued, the
Lender will receive warrants to purchase 5,000,000 shares of
the Company's common stock at an exercise price of $1.00 per
share.
31
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Note 11 - Subsequent Events (con't)
- --------------------------------------------------------------------------------
The Agreement contains certain debt covenants and restrictions
by and on the Company.
LITIGATION
The Company is a defendant in an action brought 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 and
the plaintiff were unable to arrive at a definitive arrangement
and plaintiff sued, claiming breach of a noncircumvention
agreement. The parties have agreed in principle, to a
settlement, which is being documented presently. In the event
that settlement does not go forward, the Company will defend
this action and believes that, ultimately, it will prevail.
A former officer of the Company who was terminated in the fall
of 1997 filed suit against the Company in July 1998. The
executive entered into a termination agreement. The Company
made the determination that there were items which the
executive failed to disclose to the Company and, therefore, the
Company ceased making payments to the executive pending further
investigation. The executive sued claiming employment benefits
including expenses, vacation pay and rights to options. The
parties have agreed in principle, to a settlement which is
being documented presently. In the event that settlement does
not go forward, the Company will defend this action and
believes that, ultimately, it will prevail.
32
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Item 7 - 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 December 31, 1998.
RESULTS OF OPERATIONS
OVERVIEW Due to a change in fiscal year end, the quarter ended March
31, 1999 was the first quarter of fiscal 1999. During this quarter,
the Company experienced its first real growth in its business in
several quarters. Revenue increased from approximately $6.8 million in
the immediately previous quarter ending December 31, 1998, to $8.4
million in this quarter. Revenue in the year earlier quarter was
approximately $7.5 million. At the same time, and in key part as a
result of the Company's renewed development of the business, the
Company experienced substantially greater costs of revenue and
expenses. In addition, the Company incurred a number of non-cash
charges to income related primarily to three acquisitions completed in
December 1998 and February 1999, principally goodwill amortization and
deferred compensation expense. The quarter ended March 31, 1998,
included a number of charges to income resulting from the review and
restructuring process initiated by new management.
33
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (con't)
- --------------------------------------------------------------------------------
On an operating basis, the Company experienced anticipated increases in
costs of revenue relating to leases of capacity and other upfront costs
necessary to support new business arrangements and contracts, as well as
anticipated increases in expenses relating to the operational needs of
new contracts and contracts that are expected to be concluded later in
1999. The Company also experienced a net, non-recurring margin loss of
approximately $1.0 million related to pricing decisions on new contracts
designed to build toward a profitable long term revenue stream.
Management views these costs and expenses as the Company's investment in
the future.
Primarily as a result of the increased costs and expenses and the
non-cash charges, the Company incurred a net loss of $7.5 million for
the quarter ended March 31, 1999 compared to a net loss of $8.0 million
for the quarter ended March 31, 1998. The table below shows a
comparative summary of certain significant charges to income in both
periods which affected the reported net loss:
(in millions)
Quarter Ended March 31,
1999 1998
- --------------------------------------------------------------------------------
Acquisition - related:
Goodwill amortization $ 0.5 $ -
Deferred compensation,
to employees of acquired
companies 0.9 -
Warrant issuances and anti-
dilution adjustments associated
with debt 0.5 0.5
Proxy-related litigation settlement
costs - 3.5
Additional income tax provision - 1.5
Allowance and write-offs for bad
debts 0.2 0.7
Corporate realignment costs - 1.0
------- -------
$ 2.1 $ 7.2
------- -------
34
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (con't)
- --------------------------------------------------------------------------------
After deducting these items, the loss for first quarter of 1999 was
$5.4 million (1998 - $0.8 million), which included charges for
depreciation and amortization of property and equipment of $0.9
million (1998 - $0.8 million). Included in the first quarter 1999 loss
are operating losses, excluding depreciation and amortization, of its
newly acquired subsidiaries, IDX, UCI and Telekey, totaling
approximately $1.4 million.
Contemporaneous with the issuance of convertible preferred stock in
February 1999 to an affiliate of the Company's largest stockholder
(See Notes 7 and 8 to the Consolidated Financial Statements), the
Company issued shares of common stock in exchange for convertible
preferred stock held by this investor. The value of the incremental
shares of common stock issued compared to the shares issuable upon
conversion of the preferred stock was recorded during the first fiscal
quarter of 1999 as a preferred stock dividend of $2.2 million with a
corresponding credit to stockholders' equity. Additionally, the values
of the warrants issued with the two first quarter preferred stock
financings described below are being amortized as deemed preferred
stock dividends. For the quarter ended March 31, 1999, preferred
dividends of $1.5 million were recorded comprising both deemed and
accrued dividends. After giving effect to these dividends of $3.7
million, the net loss attributable to holders of common stock was
$11.2 million.
REVENUE
For the first quarter of 1999 revenue increased to $8.4 million
compared to $7.5 million for the first quarter of 1998 (and compared
to $6.8 million in the immediately prior quarter ending December 31,
1998). Of this amount, $3.4 million was derived from "legacy"
customers, meaning customers who were in place prior to the second
quarter of 1998.
Contracts and business arrangements entered into in the last nine
months generated $5.1 million, including $2.3 million from the
Company's newly acquired subsidiaries, IDX and Telekey, which are
expected to generate additional growth in future reporting periods. In
particular, IDX is in the process of completing the IP transmission
facilities for several new contracts signed with existing eGlobe
customers and with new customers.
35
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (con't)
- --------------------------------------------------------------------------------
GROSS PROFIT
Gross profit was $0.4 million for the first quarter of 1999 versus
$3.4 million for the first quarter of 1998. Anticipated increases in
the costs of revenue relating to leases of capacity and other upfront
costs necessary to support new business was a key element of this
margin difference. Also reflected in the difference are pricing
decisions which lead to large negative margins on some card services
contracts - negative margins which management expects will be
non-recurring. Some margin loss was experienced on a major card
services contract due to pricing decisions designed to establish a
larger and more profitable long term revenue stream. Initial results
for April 1999 indicate that positive margins are now being achieved
on the business. Management will monitor the progress towards higher
margin contributions and reflect that in future pricing policy.
Another factor in this decline is related to new IDX contracts where
there are substantial delays between the time at which costs are
incurred for new IP transmission facilities and the actual turn-up of
traffic for the customer. These up-front costs are charged primarily
to cost of revenue and as a result substantially and adversely affect
margins during the initial period of service to a new customer.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
These expenses totaled $4.6 million for the first quarter of 1999
compared to $3.5 million for the first quarter of 1998 (and $5.0
million for the fourth quarter of 1998). Included in the 1999 amount
is a provision for doubtful accounts of $0.2 million (1998 - $0.7
million).
Excluding these charges, SG&A was $4.4 million in the first quarter of
1999 compared to $2.8 million for 1998. The increase is mainly due to
the inclusion in the first quarter of 1999 of the operating results of
the newly acquired subsidiaries for which SG&A expenses principally,
employee compensation and other overheads, were $0.9 million. Also
contributing to the increase are higher personnel costs resulting from
recruitment and upgrading of management, additions to the marketing
and sales staff, and some staffing to support new and anticipated
contracts which occurred during calendar 1998.
36
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (con't)
- --------------------------------------------------------------------------------
DEFERRED COMPENSATION
These non-cash charges totaled $0.9 million for the first quarter of
1999 relate to stock allocated to employees of acquired companies by
their former owners out of the acquisition consideration paid by the
Company. Under SEC rules such transactions, adopted by the acquired
companies prior to acquisition, require the Company to record the
market value of the stock issuable to employees as of the date of
acquisition as compensation expense with a corresponding credit to
stockholders' equity, and to continue to record the effect of
subsequent changes in the market price of the issuable stock until
actual issuance. Accordingly, deferred compensation in future
reporting periods will increase or decrease based on changes in the
market price of the Company's common stock.
DEPRECIATION AND AMORTIZATION EXPENSE
These expenses increased from $0.8 million in the first quarter of
1998 to $1.4 million in the first quarter of 1999, principally due to
a $0.6 million charge for goodwill amortization on the three
acquisitions concluded recently.
PROXY RELATED LITIGATION EXPENSE
In the quarter ended March 31, 1998, the Company recorded a $3.5
million charge for the value of stock issued in connection with the
settlement of stockholder class action litigation.
INTEREST EXPENSE
Interest expense totaled $0.9 million for the first quarter of 1999
compared to $0.7 million in 1998. This increase was due to interest
expense related to acquisitions.
TAXES ON INCOME
In the quarter ended March 31, 1998, the Company recorded a $1.5
million provision for income taxes based on the initial results of a
restructuring study which identified potential international tax
issues. No provision was required for the first quarter of 1999.
37
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (con't)
- --------------------------------------------------------------------------------
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA
Management has launched an aggressive growth plan for 1999 and intends
to pursue that plan into the foreseeable future. A result of that plan
will be increasing cash demands and the need for aggressive cash
management. To accomplish all that it seeks to do, management will
have to acquire significant financing, some of which it has already
achieved in the first and second quarter of 1999.
Cash and cash equivalents were $0.7 million at March 31, 1999 compared
to $1.4 million at December 31, 1998. Accounts receivable, net,
increased by $1.5 million during the first quarter mainly due to
higher revenues. Accounts payable and accrued expenses totaled $11.8
million at March 31, 1999 ($12.0 million at December 31, 1998)
resulting principally from deferrals of payments to certain vendors,
accruals for interest costs on debt payable only at maturity and the
assumption of approximately $0.8 million of such liabilities in the
Telekey acquisition. Cash outflows from operating activities for the
three month period ended March 31, 1999 totaled $7.6 million, compared
to outflows of $0.8 million for the quarter ended March 31, 1998.
There was a net working capital deficiency of $19.6 million at March
31, 1999 compared to $21.0 million at December 31, 1998.
In the three-month period ended March 31, 1999, the Company made other
investments, principally advances totaling $0.5 million to the unified
messaging company which provides the software upon which the Company
is basing its new messaging service and for which the Company is
considering an acquisition (see Note 3 to the Consolidated Financial
Statements). Cash generated from financing activities totaled $7.5
million during the three month period ended March 31, 1999, mainly due
to proceeds of $8.0 million from financings described below.
In January and February, 1999, the Company entered into two separate
financing transactions through the issuance of preferred stock and
warrants totaling $10.0 million (see Notes 7 and 8 to the Consolidated
Financial Statements). Proceeds from these financings through March
31, 1999 are $8.0 million with the remaining $2.0 million to be
received upon registering the underlying common stock issuable on
conversion. Substantially all of the proceeds from these financings
have been used during the first quarter of 1999 to meet the capital
expenditure and working capital requirements of the business.
38
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (con't)
- --------------------------------------------------------------------------------
In February 1999, the Company acquired Telekey, a communications
services company, with a card based range of services including
calling, e-mail, voicemail and other features which will be
incorporated in the expanded service offerings of the Company. Telekey
was acquired for cash, short-term notes of $0.2 million and
convertible preferred stock. See Notes 8 and 10 to the Consolidated
Financial Statements.
In April 1999, the Company obtained a financing commitment in the form
of long-term debt totaling $20.0 million from an affiliate of the
Company's largest stockholder. This commitment is subject to
stockholder approval (see Note 11 to the Consolidated Financial
Statements). In addition, the lender provided a loan of $7.0 million
with a term of one year which is intended to serve as a bridge to
stockholder approval or the acquisition of other financing.
CURRENT FUNDING REQUIREMENTS
The Company has the following estimated firm cash obligations and
requirements during the remainder of calendar 1999:
(in millions)
Repayment of loans due August and $ 9.5
December 1999, including interest
Payment of promissory note issued in 0.5
connection with acquisition
Payment of estimated tax obligations related 0.7
to prior years
Y2K compliance program (see below) 1.0
--------
$11.7
========
39
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (con't)
- --------------------------------------------------------------------------------
Through April 30, 1999 the Company has acquired new funding and
commitments in excess of $32.0 million: $10.0 million from the sale of
convertible stock (of which the $8.0 million has been received and
$2.0 million will be advanced upon registration of the underlying
common shares); $20.0 million in committed long-term debt which is
subject to stockholder approval (under the commitment, the Lender has
provided a bridge loan of $7.0 million which the Company has drawn
down); and $2.0 million or more in vendor financing for network
equipment purchases. Assuming that stockholder approval is forthcoming
for the long-term debt, these funds might permit the Company to meet a
modest baseline growth plan. To achieve the growth, both short and
long-term, that management is targeting, however, will require
additional capital. The plan under which the Company is currently
operating requires cash in the second half of the year which the
Company anticipates will come from (1) a capital markets financing of
debt or equity in the second half of the year of up to $30.0 million,
and (2) secured equipment-based financing of up to $10.0 million.
The Company's full year 1999 growth plan contemplates, in addition to
the firm cash obligations noted above additional capital needs of up
to $38.0 million (including expenditures for the first quarter which,
as noted above, used most of the $8.0 million in proceeds from the
sale of convertible stock). Most of these funds will be used for
network expansion and upgrade, for the extension of the line of
services, for a few key acquisitions and investments, and, in
particular, for the launch of new services, such as the messaging
service. If significantly less capital is available, plans will need
to be curtailed, negatively affecting growth, particularly the launch
of new services.
Of the financing currently committed, $13.0 million is subject to
stockholder approval at the Company's next annual meeting scheduled to
occur in the second quarter of 1999. The Company's management believes
that there is a high probability that stockholder approval will be
obtained. However, if this approval does not occur, the Company will
be required to find additional sources of capital in the short-term,
principally to repay the indebtedness (including interest) of $8.5
million due in August 1999. In that event, there can be no assurance
that the Company can raise additional capital or generate sufficient
funds from operations to meet its obligations. The lack of funds from
these sources would force the Company to curtail its existing and
planned levels of operations and would therefore have a material
adverse effect on the Company's business.
40
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (con't)
- --------------------------------------------------------------------------------
TAXES
During 1998, the Company undertook a study to simplify its
organizational and tax structure and identified potential
international tax issues. In connection with this study, the Company
determined that it had potential tax liabilities and recorded an
additional tax provision of $1.5 million in the year ended March 31,
1998 to reserve against liabilities which could have arisen under the
existing structure. The Company initiated discussions with the
Internal Revenue Service ("IRS") related to the U. S. Federal income
tax issues identified by the study and filed with the IRS returns for
the Company for the years ended March 31, 1991 through 1998 reflecting
these findings. Neither the eventual outcome of these matters or of
any other issues can be predicted with certainty. However, based on
recent communications with the IRS, the Company believes that the tax
reserve as of March 31, 1999 reflects a conservative position on
potential U.S. and international exposures.
EFFECT OF INFLATION
The Company believes that inflation has not had a material effect on
the results of operations to date.
41
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (con't)
- --------------------------------------------------------------------------------
ACCOUNTING PRONOUNCEMENTS AND YEAR 2000 ISSUES
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair market value. Gains
or losses resulting from changes in the values of those derivatives
are accounted for depending on the use of the derivative and whether
it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective
in achieving offsetting changes in fair value or cash flows. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999 and is
currently not applicable to the Company.
YEAR 2000 ISSUES
The Company is aware of the issues associated with the programming
code in existing computer systems as the year 2000 approaches. The
"Year 2000 Issue" or "Y2K Issue" arises because many computer and
hardware systems use only two digits to represent the year. As a
result, these systems and programs may not process dates beyond the
year 1999, which may cause errors in information or system failures.
Assessments of the potential effects of the Y2K issue vary markedly
among different companies, governments, consultants, economists and
commentators, and it is not possible to predict what the actual impact
may be. Because the Company uses Unix-based systems for its platforms
and operating systems to deliver service to customers, the Company
believes material modifications may not be required to ensure Y2K
compliance. However, the Company is in the process of assessing and
testing the software resident on all its system hardware to validate
this assertion and anticipate that testing will be completed by June
1999. The Company is in various stages of its analysis, assessment,
planning and remediation and is using internal and external resources
to identify, correct or reprogram, and test the computer system for
Y2K compliance. The Company anticipates completing all reprogramming
efforts, including testing, by June 1999. Management is continuing to
update and evaluate the financial impact of Y2K compliance and expects
that total costs will not exceed $1.0 million. The Company is
proceeding with an internal certification process of its propriety
systems (e.g. Calling card and billing systems). The Company intends
to use external sources as necessary to validate our certification of
these critical systems. No material costs have been incurred during
the three month period ended March 31, 1999 and management estimates
that the Company will incur most of the costs during the remainder of
1999.
42
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (con't)
- --------------------------------------------------------------------------------
The Company is also in the process of assessing Year 2000 readiness of
its key suppliers and customers. This project has been undertaken with
a view toward assuring that the Company has adequate resources to
cover its various telecommunications requirements. A failure of the
Company's suppliers or customers to address adequately their Year 2000
readiness could affect the Company's business adversely. The Company's
worst-case Year 2000 scenarios would include: (i) undetected errors or
uncorrected defects in its current product offerings; (ii) corruption
of data contained in its internal information systems; and (iii) the
failure of infrastructure services provided by External Providers. The
Company is in the process of reviewing its contingency planning in all
of these areas and expects the plans to include, among other things,
the availability of support personnel to assist with customer support
issues, manual "work arounds" for internal software failure, and
substitution of systems, if needed. The Company anticipates that it
will have a contingency plan in place by June 1999. In addition, the
Company is aware of the potential for claims against it for damages
arising from products and services that are not Year 2000 ready. The
Company believes that such claims against it would be without merit.
Finally, the Year 2000 presents a number of risks and uncertainties
that could affect the Company, including utilities failures,
competition for personnel skilled in the resolution of Year 2000
issues and the nature of government responses to the issues among
others. The Company's expectations as to the extent and timeliness of
modifications required in order to achieve Year 2000 compliance is a
forward-looking statement subject to risks and uncertainties. Actual
results may vary materially as a result of a number of factors,
including, among others, those described in this paragraph. There can
be no assurance however, that the Company will be able to successfully
modify on a timely basis such products, services and systems to comply
with Year 2000 requirements, which failure could have a material
adverse effect on the Company's operating results.
43
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
ITEM 7A - Quantitative and Qualitative Disclosure About Market Risk
- --------------------------------------------------------------------------------
The Company measures its exposure to market risk at any point in time
by comparing the open positions to a market risk of fair value. The
market prices the Company uses to determine fair value are based on
management's best estimates, which consider various factors including:
Closing exchange prices, volatility factors and the time value of
money. At March 31, 1999, the Company was exposed to some market risk
through interest rates on its long-term debt and preferred stock and
foreign currency. At March 31, 1999, the Company's exposure to market
risk was not material. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Other Expenses
(Income)."
44
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
Item 1 Legal Proceedings
- --------------------------------------------------------------------------------
The following information sets forth information relating to material legal
proceedings involving the Company and certain of its executive officers and
directors. From time to time, the Company and its executive officers and
directors become subject to litigation which is incidental to and arises in
the ordinary course of business. Other than as set forth herein, there are
no material pending legal proceedings involving the Company or its
executive officers and directors.
The Company is a defendant in an action brought 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 and
the plaintiff were unable to arrive at a definitive arrangement
and plaintiff sued, claiming breach of a noncircumvention
agreement. The parties agreed in principle, to a settlement which
is being documented presently. In the event that settlement does
not go forward, the Company will defend this action and believes
that, ultimately, it will prevail. The Company is defending this
action vigorously and believes that it ultimately will prevail.
A former officer of the Company who was terminated in the fall of
1997 filed suit against the Company in July 1998. The executive
entered into a termination agreement. The Company made the
determination that there were items which the executive failed to
disclose to the Company and, therefore, the Company ceased making
payments to the executive pending further investigation. The
executive sued claiming employment benefits including expenses,
vacation pay and rights to options. The parties agreed in
principle, to a settlement which is being documented presently.
In the event that settlement does not go forward, the Company
will defend this action and believes that, ultimately, it will
prevail. The Company is defending this action vigorously and
believes that it ultimately will prevail.
Item 2 Changes in Securities
- --------------------------------------------------------------------------------
None
Item 3 Defaults upon Senior Securities
- --------------------------------------------------------------------------------
None
45
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
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/A
(i) A report on Form 8-K/A dated
February 12, 1999 under Item 2 was
filed with the Commission on March
1, 1999 to report the acquisition
of Telekey, Inc.
46
<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: May 17, 1999 By: /s/ Anne Haas
--------------------------------
Anne Haas
Controller, Treasurer
(Principal Accounting Officer)
Date: May 17, 1999 By: /s/ John E. Koonce, III
-------------------------------
John E. Koonce, III
Chief Financial Officer
Date: May 17, 1999 By: /s/ Christopher J. Vizas
-------------------------------
Christopher J. Vizas
Chairman of the Board of
Directors, and
Chief Executive Officer
(Principal Executive Officer)
47
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