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
September 30, 1999 1-10210
EGLOBE, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3486421
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
1250 24TH STREET, NW, SUITE 725, WASHINGTON, DC 20037
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(Address of principal executive offices)
Registrant's telephone number, including area code: (202) 822-8981
---------------------------
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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
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The number of shares outstanding of each of the registrant's classes of common
stock, as of November 1, 1999 is 22,943,541 shares, all of one class of $.001
par value common stock.
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EGLOBE, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
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PART I Item 1 Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 3 - 4
Consolidated Statements of Operations for the three months ended September 30, 1999 and 5
1998
Consolidated Statements of Operations for the nine months ended September 30, 1999 and 6
1998
Consolidated Statements of Comprehensive Income (Loss) for the three months and nine 7
months ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 8-9
1998
Supplemental Disclosures of Cash Flow Information 10-13
Notes to Consolidated Financial Statements 14 - 42
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 42-51
Item 7A Quantitative and Qualitative Disclosure About Market Risk 51
PART II Item 1 Legal Proceedings 51-52
Item 2 Changes in Securities 52
Item 3 Defaults Upon Senior Securities 52
Item 4 Submission of Matters to a Vote of Security Holders 52
Item 5 Other Information 53
Item 6 Exhibits and Reports on Form 8-K 53-54
SIGNATURES 55
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EGLOBE, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998
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PRO FORMA
SEPTEMBER 30, 1999
(UNAUDITED) (NOTE SEPTEMBER 30, 1999
10) (UNAUDITED) DECEMBER 31, 1998
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ASSETS
CURRENT:
<S> <C> <C> <C>
Cash and cash equivalents $ 4,045,611 $2,150,611 $1,407,131
Restricted cash 411,827 411,827 100,438
Accounts receivable, less
allowance of $1,387,764, $1,387,764
and $986,497 for doubtful accounts 8,893,803 8,893,803 6,850,872
Other current assets 1,682,990 1,682,990 494,186
TOTAL CURRENT ASSETS 15,034,231 13,139,231 8,852,627
PROPERTY AND EQUIPMENT,
Net of accumulated depreciation
and amortization of $16,662,426,
$16,662,426 and $13,648,667 23,783,105 23,783,105 13,152,410
GOODWILL, net of accumulated
amortization of $1,180,634,
$1,180,634, and $140,391 8,808,072 8,808,072 11,865,142
OTHER INTANGIBLE ASSETS,
Net of accumulated
amortization of $4,425,286,
$4,425,286 and $786,074 22,030,804 22,030,804 241,461
OTHER:
Advances to a non-affiliate (Note 4) -- -- 970,750
Deposits 1,741,709 1,741,709 518,992
Deferred financing and acquisition costs 266,800 266,800 736,071
Other assets 419,090 419,090 50,708
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TOTAL OTHER ASSETS 2,427,599 2,427,599 2,276,521
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TOTAL ASSETS $72,083,811 $70,188,811 $36,388,161
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See accompanying summary of accounting policies and notes to consolidated financial statements.
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EGLOBE, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998
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PRO FORMA
SEPTEMBER 30, 1999
(UNAUDITED) SEPTEMBER 30, 1999
(NOTE 10) (UNAUDITED) DECEMBER 31, 1998
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LIABILITIES, MINORITY INTEREST IN LLC AND STOCKHOLDERS' EQUITY
CURRENT:
<S> <C> <C> <C>
Accounts payable $9,472,800 $9,472,800 $5,798,055
Accrued expenses 9,034,765 9,034,765 6,203,177
Income taxes payable 1,293,370 1,293,370 1,914,655
Notes payable and line of credit principally
related to acquisitions (Note 6) 2,117,788 2,117,788 6,298,706
Notes payable and current maturities of
long-term debt (Notes 7 and 10) 3,999,583 4,040,583 8,540,214
Deferred revenue (Note 5) 1,706,368 1,706,368 485,804
Other liabilities 659,489 659,489 567,488
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TOTAL CURRENT LIABILITIES 28,284,163 28,325,163 29,808,099
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LONG-TERM DEBT, net of current maturities
(Notes 7 and 10) 12,459,270 14,458,270 1,237,344
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TOTAL LIABILITIES 40,743,433 42,783,433 31,045,443
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COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN LLC (NOTE 4) 2,329,309 2,329,309 --
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STOCKHOLDERS' EQUITY:
Preferred stock, all series, $.001 par value,
10,000,000, 10,000,000, and 5,000,000
shares authorized, 1,912,065, 1,910,130, and 500,075
shares outstanding (Note 8) 1,912 1,910 501
Common stock, $.001 par value, 100,000,000 shares
authorized, 21,447,291, 21,447,291 and 16,362,966
shares outstanding (Note 8) 21,447 21,447 16,362
Additional paid-in capital 76,753,754 70,858,756 33,975,268
Stock to be issued (Note 8) 13,911,690 13,911,690 --
Accumulated deficit (61,885,933) (59,925,933) (28,566,346)
Accumulated other comprehensive income (loss) 208,199 208,199 (83,067)
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TOTAL STOCKHOLDERS' EQUITY 29,011,069 25,076,069 5,342,718
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TOTAL LIABILITIES, MINORITY INTEREST IN LLC
AND STOCKHOLDERS' EQUITY $72,083,811 $70,188,811 $36,388,161
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See accompanying summary of accounting policies and notes to consolidated financial statements.
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EGLOBE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
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THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
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REVENUE $10,635,090 $ 7,926,461
COST OF REVENUE 10,205,027 4,328,989
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GROSS PROFIT 430,063 3,597,472
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COSTS AND EXPENSES:
Selling, general and administrative 6,674,002 3,571,703
Settlement costs -- 996,532
Deferred compensation related to acquisitions 148,800 --
Depreciation and amortization 1,180,871 671,313
Amortization of goodwill and other intangible assets 3,284,362 --
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TOTAL COSTS AND EXPENSES 11,288,035 5,239,548
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LOSS FROM OPERATIONS (10,857,972) (1,642,076)
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OTHER INCOME (EXPENSE):
Interest expense related to acquisitions (145,514) --
Other interest expense (1,632,229) (240,880)
Other income (expense) 25,502 (4,051)
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TOTAL OTHER INCOME (EXPENSE) (1,752,241) (244,931)
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NET LOSS (12,610,213) (1,887,007)
PREFERRED STOCK DIVIDENDS (NOTE 8) 6,454,021 --
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NET LOSS ATTRIBUTABLE TO COMMON STOCK $(19,064,234) $ (1,887,007)
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NET LOSS PER SHARE (NOTE 9):
BASIC $ (0.94) $ (0.11)
DILUTED $ (0.94) $ (0.11)
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See accompanying summary of accounting policies and notes to consolidated financial statements.
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EGLOBE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
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NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
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<S> <C> <C>
REVENUE $28,135,964 $ 23,151,833
COST OF REVENUE 27,441,664 12,557,048
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GROSS PROFIT 694,300 10,594,785
COSTS AND EXPENSES:
Selling, general and administrative 17,281,957 10,744,302
Corporate realignment expense -- 967,715
Settlement costs -- 996,532
Deferred compensation related to acquisitions 1,111,200 --
Depreciation and amortization 2,963,336 2,172,511
Amortization of goodwill and other intangible assets 4,883,156 --
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TOTAL COSTS AND EXPENSES 26,239,649 14,881,060
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LOSS FROM OPERATIONS (25,545,349) (4,286,275)
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OTHER INCOME (EXPENSE):
Proxy related litigation expense - (3,530,925)
Interest expense related to acquisitions (564,258) -
Other interest expense (5,281,084) (1,249,560)
Other income (expense) 31,044 (282,565)
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TOTAL OTHER EXPENSE (5,814,298) (5,063,050)
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LOSS BEFORE INCOME TAXES (31,359,647) (9,349,325)
TAXES ON INCOME -- 1,500,000
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NET LOSS (31,359,647) (10,849,325)
PREFERRED STOCK DIVIDENDS (NOTE 8) 10,782,994 -
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NET LOSS ATTRIBUTABLE TO COMMON STOCK $(42,142,641) $(10,849,325)
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NET LOSS PER SHARE (NOTE 9):
BASIC $ (2.18) $ (0.62)
DILUTED $ (2.18) $ (0.62)
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See accompanying summary of accounting policies and notes to consolidated financial statements.
6
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EGLOBE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
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THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
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<S> <C> <C>
NET LOSS $(12,610,213) $(1,887,007)
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS 19,304 --
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COMPREHENSIVE NET LOSS $(12,590,909 ) $(1,887,007)
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NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
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<S> <C> <C>
NET LOSS $(31,359,647) $(10,849,325)
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS 291,266 (12,277)
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COMPREHENSIVE NET LOSS $(31,068,381) $(10,861,602)
============ ============
See accompanying summary of accounting policies and notes to consolidated financial statements
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EGLOBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
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NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net loss $(31,359,647) $ (10,849,325)
Adjustments to reconcile net loss to net cash flows
provided by (used in) operating activities:
Depreciation and amortization 7,846,492 2,112,024
Provision for bad debts 746,556 1,035,168
Settlement costs -- 996,532
Gain on sale of property and equipment -- (127,002)
Deferred compensation 1,111,200 --
Issuance of options and warrants for services 18,849 220,000
Amortization of debt discount 4,601,919 574,716
Other non-cash interest expense 408,290 --
Proxy related litigation expense -- 3,500,000
Other, net -- 155,225
Changes in operating assets and liabilities:
Accounts receivable (2,665,600) (195,342)
Other current assets (854,157) --
Other assets (347,231) 125,797
Accounts payable 2,246,781 1,479,447
Income taxes payable (621,285) 1,500,000
Accrued expenses (421,366) 969,291
Deferred revenue 222,302 --
Other liabilities 52,482 (109,142)
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CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (19,014,415) 1,387,389
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EGLOBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
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NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
<S> <C> <C>
INVESTING ACTIVITIES:
Advances to non-affiliates subsequently acquired -- (2,246,000)
Proceeds from sale of building -- 125,338
Purchase of Telekey, net of cash acquired (95,287) --
Purchase of ConnectSoft, net of cash acquired (1,546,140) --
Purchase of Swiftcall, net of cash acquired (143,734)
Purchase of iGlobe, net of cash acquired (300,000) --
Purchases of property, equipment and intangibles (362,128) (1,672,559)
Restricted cash (257,988) --
Other assets (322,717) (733,151)
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CASH USED IN INVESTING ACTIVITIES (3,027,994) (4,526,372)
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FINANCING ACTIVITIES:
Proceeds from notes payable 29,473,080 8,247,787
Proceeds from issuance of preferred stock 10,000,000 --
Proceeds from capital leases 269,925 --
Proceeds from exercise of warrants 716,254 --
Proceeds on sale of common stock 249,640 --
Stock issuance costs (1,151,146) --
Deferred acquisition and financing costs (403,098) --
Principal payments on notes payable (15,741,131) --
Payments on capital leases (627,635) (7,255,843)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 22,785,889 991,944
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NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 743,480 (2,147,039)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,407,131 3,787,881
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,150,611 $1,640,842
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See accompanying summary of accounting policies and notes to consolidated financial statements.
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EGLOBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
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Cash paid during the period for:
Interest $714,800 --
Income taxes $693,211 $132,536
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Non-cash investing and financing activities:
Equipment acquired under capital lease obligations $ 765,552 --
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Unamortized debt discount related to warrants $ 9,854,426 $481,283
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Common stock issued in payment of debt $ 1,654,698 --
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Preferred stock dividends $ 4,750,494 --
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Preferred stock issued in payment of debt $ 4,214,223 --
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Preferred stock dividend related to exchange of
preferred stock for preferred stock $ 6,032,500 --
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Value of warrants issued and reflected as debt $14,135,250 $576,810
discount
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Increase in value of preferred stock as a result of $ 1,485,000 --
changes in conversion feature
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EGLOBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (CONTINUED) CONNECTSOFT
ACQUISITION, NET OF CASH ACQUIRED (NOTE 4)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
Working capital deficit, other than cash acquired $ (2,118,111) $ --
Property and equipment 513,437 --
Intangible assets 9,120,000 --
Purchase price in excess of the net assets acquired 993,440 --
Acquired debt (2,991,876) --
Advances to ConnectSoft prior to acquisition by
eGlobe (970,750) --
Issuance of Series G Cumulative
Convertible Redeemable Preferred stock (3,000,000) --
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Net cash used to acquire ConnectSoft $ 1,546,140 $ --
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (CONTINUED) TELEKEY
ACQUISITION, NET OF CASH ACQUIRED (NOTE 4)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
Working capital deficit, other than cash acquired $ (1,284,060) $ --
Property and equipment 481,289 --
Intangible assets 2,978,000 --
Purchase price in excess of the net assets acquired 2,022,436 --
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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See accompanying summary of accounting policies and notes to consolidated financial statements.
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EGLOBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (CONTINUED) SWIFTCALL
ACQUISITION, NET OF CASH ACQUIRED (NOTE 4)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
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<S> <C> <C>
Working capital deficit, other than cash acquired $ (1,528,107) $ --
Property and equipment 4,961,841 --
Stock to be issued (3,290,000)
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Net cash used to acquire Swiftcall $ 143,734 $ --
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (CONTINUED) OASIS ACQUISITION,
NET OF CASH ACQUIRED (NOTE 4)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
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<S> <C> <C>
Working capital surplus, other than cash acquired $ 78,806 $ --
Property and equipment 671,244 --
Intangible assets in LLC 1,580,000 --
Minority interest (2,330,050) --
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Net cash used to acquire Oasis $ - $ -
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See accompanying summary of accounting policies and notes to consolidated financial statements.
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EGLOBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (CONTINUED) IGLOBE
ACQUISITION, NET OF CASH ACQUIRED (NOTE 4)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
Working capital deficit, other than cash acquired $ (107,000) $ -
Property and equipment 5,577,000 -
Intangible assets 4,590,000 -
Deposits 900,000 -
Purchase price in excess of net assets acquired 376,000 -
Acquired debt ( 1,393,000) -
Stock to be issued (9,643,000) -
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Net cash used to acquire iGlobe $ 300,000 $ -
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See accompanying summary of accounting policies and notes to consolidated financial statements.
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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
and nine month periods ended September 30, 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, its wholly-owned subsidiaries and its controlling interest in
a partnership. 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 Networks, 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. In June 1999, the Company, through its
newly formed subsidiary, Vogo Networks, LLC ("Vogo"), purchased
substantially all of the assets of ConnectSoft Communications
Corporation ("ConnectSoft"), which developed and continues to enhance a
server based communication system that integrates various forms of
messaging, Internet and web content, personal services, and provides
telephone access to Internet content (including email and e-commerce
functions). In August 1999, the Company completed the acquisition of
Swiftcall Equipment and Services (USA) ("Swiftcall"), a
telecommunications company, and certain network operating equipment
held by an affiliate of Swiftcall. Effective August 1, 1999, the
Company acquired iGlobe, Inc. ("iGlobe"), a supplier of IP services,
particularly voice over IP, throughout Latin America. In September
1999, the Company acting through a newly formed subsidiary, acquired
control of Oasis Reservations Services, Inc. ("ORS"), a Miami based
transaction support services and call center to the travel industry,
from its sole stockholder, Outsourced Automated Services and Integrated
Solutions, Inc. ("Oasis"). The Company and Oasis formed eGlobe/Oasis
LLC ("LLC") which is responsible for conducting ORS' operations. The
Company manages and controls the LLC. (See Notes 4 and 8 for further
discussion).
Recent Accounting Pronouncements - The Financial Accounting Standards
Board ("FASB") has issued Statement of Financial Accounting Standards
("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
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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
September 15, 2000. Management believes that the adoption of SFAS No.
133 will have no material effect on its financial statements.
NOTE 2 - CHANGE OF COMPANY NAME
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At the annual meeting of the stockholders of the Company on June 16,
1999, the stockholders approved and adopted a proposal for amending the
Certificate of Incorporation to change the name of the Company from
Executive TeleCard, Ltd. to eGlobe, Inc. The amended Certificate of
Incorporation has been filed with and accepted by the State of
Delaware.
NOTE 3 - MANAGEMENT'S PLAN
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As of September 30, 1999, the Company had a net working capital
deficiency of $15.2 million. This net working capital deficiency
resulted principally from a loss from operations of $25.5 million
(including depreciation, amortization and other non-cash charges) for
the nine months ended September 30, 1999. Also contributing to the
working capital deficiency was $4.0 million in current maturities of
long-term debt, short term indebtedness of $2.1 million related to
acquisitions, and $18.5 million in accounts payable and accrued
expenses. The $4.0 million of long-term debt currently due consists
primarily of $1.0 million due to a stockholder in December 1999 and
term note payments over the one year period ending September 30, 2000
which are due to EXTL Investors. The indebtedness related to
acquisitions includes $0.1 million related to the Telekey acquisition
in February 1999, $0.5 million related to the UCI acquisition effective
in December 1998, and $1.2 million related to the iGlobe acquisition
effective as of August, 1999. See Note 4 for further discussion.
The Company has embarked on a program to raise $15.0 million through
the sale of equity. As of November 8, 1999, the Company had received
proceeds of approximately $2.0 million from the sale of Series N
Preferred Stock.
On April 9, 1999, the Company entered into a financing commitment for
long-term debt totaling $20.0 million with the Company's largest
stockholder. The repayment of up to 50% of this commitment in shares of
common stock and the exercise of certain warrants granted in connection
with the commitment was approved by the Company's stockholders at its
annual meeting in June 1999. Under the terms of the financing
commitment, the lender provided the Company with a short term $7.0
million unsecured
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loan, which was repaid out of the larger, long-term $20.0 million
financing received after stockholder approval was obtained at the
Company's annual meeting.
On the operating level, the Company is renegotiating its relationship
with an entity that was formerly one of its largest customers. At
September 30, 1999, 21.7% of the Company's net accounts receivable of
$8.9 million was due from this entity to which extended credit terms
have been granted. The new arrangement will assure more effective and
timely collection of receivables from that customer and will permit
renewed growth in that customer's business. This arrangement will also
assist in the collection of certain amounts due to the Company under
the extended credit terms -- the anticipated arrangement will include
the Company managing the cash collections from the ultimate users of
the services supplied to the customer.
This series of transactions provides net working capital of $21.0
million, extends payment periods of certain indebtedness and improves
the balance sheet of the Company. Combined, these transactions would
help fund existing operating losses and would provide a modest base for
growth; but they do not represent sufficient capital to meet the plan
established by management.
The estimated capital requirement through mid 2000, needed to continue
to fund certain anticipated operating losses, to meet the pre-existing
1999 cash obligations, to finance the growth plan and to meet the
anticipated requirements of the Company's announced acquisition
program, will be approximately $35.0 million.
The Company anticipates seeking to meet these cash needs from (1) a
private placement of equity in the fourth quarter of up to $15.0
million and (2) a financing of debt or equity in the first and second
quarters of 2000 of up to $30.0 million, with the possibility that some
of this total will be diminished by secured, equipment-based financing.
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. Should the Company be unable to
raise additional funds from these or other sources, then its plans
would need to be sharply curtailed and its business would be adversely
affected.
NOTE 4 - ACQUISITIONS
- -------------------------------------------------------------------------------
IDX
On December 2, 1998, the Company acquired all of the common and
preferred stock of IDX, a privately-held IP based fax and telephone
company, for (a) 500,000 shares of the Company's Series B Convertible
Preferred Stock ("Series B Preferred") originally valued at $3.5
million which were convertible into 2,500,000 shares (2,000,000 shares
until stockholder approval was obtained on June 16, 1999 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 which was obtained on June 16,
1999 and an adjustment as described below); (c) $5.0 million in 7.75%
convertible subordinated promissory notes ("IDX Notes") (subject to
adjustment
16
<PAGE>
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 $0.6 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. This acquisition was accounted for using the purchase method of
accounting. The shares of Series B Preferred, IDX Warrants and IDX
Notes were subject to certain adjustments related to IDX's ability to
achieve certain performance criteria, working capital levels and price
guarantees for the Series B Preferred and IDX Warrants providing IDX
met its performance objectives.
At the Company's annual meeting in June 1999, the stockholders approved
the increase of the convertibility of the Series B Preferred and IDX
Warrants as discussed in (a) and (b) above, respectively. As a result,
the acquired goodwill associated with the IDX purchase was increased by
approximately $1.5 million in the second quarter to reflect the higher
conversion feature approved in June 1999. As a result, the preliminary
purchase price allocation resulted in goodwill of $12.6 million as of
June 30, 1999.
The Company obtained a final appraisal of IDX's assets from independent
appraisers in the third quarter. This appraisal resulted in a net
reclassification of approximately $4.1 million of IDX's acquired
goodwill to other identifiable intangibles. These other identifiable
intangibles consist of assembled and trained workforce, partnership
network and non-compete agreements and are being amortized on a
straight-line basis from one to four years. Goodwill is being amortized
on a straight-line basis over seven years.
In July 1999, the Company renegotiated the terms of the IDX purchase
agreement with the IDX stockholders as follows;
(a) The 500,000 shares of Series B Preferred were reacquired by the
Company in exchange for 500,000 shares of Series H Convertible
Preferred Stock ("Series H Preferred"), a par value of $.001 per
share.
(b) The Company reacquired the original IDX Warrants in exchange for
new warrants to acquire up to 1,250,000 shares of the Company's
common stock, subject to IDX meeting certain revenue, traffic and
EBDITA levels at September 30, 2000 or December 31, 2000 if not
achieved by September 30, 2000.
(c) The Company reaquired the outstanding IDX Notes of $1.5 million
and $2.5 million (previously due in June 1999 and October 1999,
respectively) in exchange for 400,000 shares of Series I
Convertible Optional Redemption Preferred Stock ("Series I
Preferred"), par value of $.001 per share. (See Note 6 for
further discussion).
(d) The maturity date of the convertible subordinated promissory
note, face value of $418,024, was extended to July 15, 1999 from
May 31, 1999, and subsequently paid by issuance of 140,599 shares
of common stock.
17
<PAGE>
(e) The Company waived its right to reduce the principal balance of
the $2.5 million note payable by certain claims as provided for
under the terms of the original IDX purchase agreement.
The shares of the Series H Preferred Stock convert automatically into
up to 3,750,000 shares of common stock, subject to adjustment as
described below, on January 31, 2000 or earlier if the 15 day average
closing sales price of common stock is equal or greater than $6.00.
Providing the Series H Preferred has not been converted, the Company
has guaranteed a price of $6.00 per common stock share on January 31,
2000. If the market price of the common stock is less than $6.00 per
share on January 31, 2000, the Company will issue additional common
stock upon conversion of the Series H Preferred Stock based on the
ratio of $6.00 to the market price (as defined, but not less than
$3.333 per share) but not more than 3.0 million additional shares of
common stock. (See Note 8 for further discussion).
As a result of the exchange agreement, the Company recorded the excess
of the fair market value of the new preferred stock issuances and the
warrants over the carrying value of the reacquired preferred stock,
warrants and notes payable as a dividend to Series B Preferred
stockholders of approximately $6.0 million. In addition, upon the
conversion of the Series H Preferred Stock, an additional dividend of
up to $9.0 million may be recorded if more than 3,750,000 shares of
common stock are issued.
The financial statements of the Company reflect the preliminary
allocation of the purchase price. The Company will determine the final
purchase price allocation based on final review and resolution of the
contingent purchase price elements discussed above. Goodwill may
materially increase when these contingencies are resolved.
At the acquisition date, the stockholders of IDX originally received
Series B Preferred Stock and warrants as discussed above, which were
ultimately convertible into common stock subject to IDX meeting its
performance objectives. These stockholders in turn granted preferred
stock and warrants, each of which was 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 nine months of 1999 of
the underlying common stock granted by the IDX stockholders to certain
employees has resulted in a charge to income of $0.5 million. The
actual number of common shares issued upon conversion of the preferred
stock and warrants will ultimately be determined by 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
the stock price until the shares and/or warrants (if and when) issued
are converted to common stock.
UCI
18
<PAGE>
As discussed in Note 1, in December 1998, the Company acquired UCI. The
Company obtained a final appraisal of UCI's assets from independent
appraisers completed in the third quarter of 1999. This appraisal
resulted in a net reclassification of approximately $0.5 million of
UCI's acquired goodwill to other identifiable intangibles. The other
identifiable intangible relates to the value of certain contracts and
is being amortized on a straight-line basis over two years. Goodwill is
being amortized on a straight-line basis over seven years. The
preliminary purchase price allocation will be finalized pending
resolution of certain purchase price contingencies.
TELEKEY
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. See Notes 6 and 8 for further discussion.
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 initial preliminary
purchase price allocation based on management's review and preliminary
appraisals resulted in acquired goodwill of $3.5 million and an
acquired intangible of approximately $1.5 million related to the value
of certain distribution networks. These acquired intangibles are being
amortized on a straight-line basis over their estimated useful lives of
seven years. The Company obtained a final appraisal of Telekey's assets
from independent appraisers in the third quarter of 1999. This
appraisal resulted in a net reclassification of approximately $2.5
million of Telekey's goodwill to other identifiable intangibles. These
other identifiable intangibles are being amortized on a straight-line
basis over the useful lives of three to seven years. The final purchase
price allocation has not been finalized pending resolution 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 a maximum of
1,010,000 shares of Series F Preferred being issued) as well as
eliminate the Company's price guarantee as discussed in (b)
below.
(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 subject to
Telekey's achievement of certain defined revenue and EBITDA
objectives. If the market price is less than $4.00 on December
31, 1999,
19
<PAGE>
the Company will issue additional shares of common stock upon the
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.
Based on the contingent purchase price elements as listed above,
goodwill associated with the acquisition may materially increase when
these contingencies are resolved.
At the acquisition date, the stockholders of Telekey received Series F
Preferred Stock as discussed above, which is 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 have agreed to grant
upon conversion of the Series F Preferred 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 September 30, 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
$0.5 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.
CONNECTSOFT
In June 1999, the Company, through its subsidiary Vogo, purchased
substantially all the assets of ConnectSoft, for (a) one share of the
Company's 6% Series G Cumulative Convertible Redeemable Preferred Stock
("Series G Preferred") valued at $3.0 million; (b) assumed liabilities
of approximately $5.0 million, consisting primarily of long-term lease
obligations; (c) $1.8 million in advances to ConnectSoft made by the
Company prior to the acquisition which were converted into part of the
purchase price and (d) direct costs associated with the acquisition of
$0.4 million. 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 intangibles of $10.1
million that are being amortized on a straight-line basis over their
estimated useful lives. The acquired intangibles consist of goodwill of
$1.0 million to be amortized over seven years, existing technology of
$8.4 million to be amortized over five years and other identified
intangibles of $0.7 million to be amortized over seven years. The
preliminary allocation of the purchase price was based on appraisals
performed by a third party.
The Company also borrowed $0.5 million from the seller which bears
interest at a variable rate (8.0% at September 30, 1999). Principal and
interest payments are due in twelve (12) equal monthly payments
commencing on September 1, 1999. The remaining principal and accrued
interest also become due on the first date on which (i) the Company
receives in any transaction or series of transactions any equity or
debt financing of at least $50.0 million or (ii) Vogo receives in any
transaction or series of transactions any equity or debt financing of
at least $5.0 million. (See Notes 6 and 8 for further discussion).
20
<PAGE>
In August 1999, the Company issued 30 shares of Series K Cumulative
Convertible Preferred Stock ("Series K Preferred") in exchange for its
Series G Preferred held by the seller of Connectsoft. (See Note 8 for
further discussion).
SWIFTCALL
In August 1999, the Company acquired all the common stock of Swiftcall,
a privately-held telecommunications company, and certain network
operating equipment held by an affiliate of Swiftcall. The aggregate
purchase price equaled $3.3 million, due in two equal payments on
December 3, 1999 and June 1, 2000. The agreement provided that payments
could be made at the option of the Company, in whole or in part, (i) in
cash or (ii) in stock, by issuing to the stockholder of Swiftcall the
number of shares of common stock of the Company equal to the first
payment amount or the second payment amount, as the case may be,
divided by the market price as defined. On August 12, 1999, the Company
elected to make payment on both notes by issuing common stock.
As part of the transaction, the former stockholder of Swiftcall, who
also owns VIP Communications, Inc., ("VIP") a calling card company in
Reston, Virginia, agreed to cause VIP to purchase services from the
Company, of the type presently being purchased by VIP from the
Company's IDX subsidiary, which result in revenue to the Company of at
least $500,000 during the 12 months ending August 3, 2000. Any revenue
shortfall must be paid in cash by the former stockholder of Swiftcall.
The Company may offset any shortfall outstanding on September 1, 2000
by depositing the applicable portion of the second payment into escrow.
This acquisition has been accounting for using the purchase method of
accounting. The financial statements of the Company reflect the final
allocation of the purchase price. The final allocation of the purchase
price was based on appraisals performed by a third party. The final
allocation has resulted in acquired property and equipment valued at
approximately $5.0 million that is being depreciated on a straight-line
basis of seven years.
IGLOBE
Effective in August 1999, the Company acquired all the common shares of
iGlobe, a wholly owned subsidiary of Highpoint Telecommunications, Inc.
("Highpoint"). Recently established by Highpoint, iGlobe possesses an
infrastructure supplying Internet Protocol ("IP") services,
particularly voice over IP, throughout Latin America. In July 1999, the
Company and Highpoint agreed that the Company would manage the business
of iGlobe and would take responsibility for the ongoing financial
condition of iGlobe from August 1, 1999, pursuant to a Transition
Services and Management Agreement ("TSA"). Pursuant to this agreement,
Highpoint financed working capital through the closing date to iGlobe
for which the Company has issued a note payable of $1.2 million (see
Note 6). The acquisition closed October 14, 1999. The purchase price
consisted of (i) one share of 20% Series M Convertible Preferred Stock
("Series M Preferred") valued at $9.6 million, (ii) direct acquisition
costs of approximately $0.3 million; and (iii)
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<PAGE>
Highpoint was given a non-voting beneficial 20% interest of the equity
interest subscribed or held by the Company in a yet-to-be-completed
joint venture known as IP Solutions B.V.
The one share of Series M Preferred, par value $.001, has a liquidation
value of $9.0 million and carries an annual cumulative dividend of 20%
which will accrue and be payable annually or at conversion in cash or
shares of common stock, at the option of the Company. The premium of
$600,000 will be amortized as deemed preferred dividends over the one
year period from the issuance date. The Series M Preferred is
convertible, at the option of the holder, one year after the issue date
at a conversion price of $2.385. The Company has the right to
repurchase the Series M Preferred for cash upon a determination by the
eGlobe Board that it has sufficient cash to fund operations and make
the purchase. Each share of Series M Preferred shall automatically be
converted into shares of common stock, based on the then-effective
conversion rate, on the earliest to occur of (i) the first date as of
which the last reported sales price of the common stock is $5.00 or
more for any 10 consecutive trading days during any period in which
Series M Preferred is outstanding, (ii) the date that is seven years
after the issue date, or (iii) the date upon which the Company closes a
public offering of equity securities of the Company at a price of at
least $4.00 per share and with gross proceeds of at least $20.0
million.
The 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. This initial preliminary
purchase price allocation based on management's review and preliminary
appraisals resulted in acquired goodwill of $0.4 million and acquired
intangibles of $4.6 million related to a customer base, licenses and
operating agreements, a sales agreement, and an assembled workforce.
The goodwill is being amortized on a straight-line basis over seven
years and the acquired intangibles are being amortized on a
straight-line basis over the estimated useful lives of three years. The
Company will determine the final purchase price allocation based on
completion of management's review and final appraisals of iGlobe's
assets.
OASIS
In September 1999, the Company, acting through a newly formed
subsidiary, acquired control of ORS from its sole stockholder,
Outsourced Automated Services and Integrated Solutions, Inc. ("Oasis").
The Company and Oasis formed eGlobe/Oasis Reservations LLC, a limited
liability company ("LLC"), which is responsible for conducting the
business operations of ORS. The Company manages and controls the LLC
and receives 90% of the profits and losses from ORS' business. The LLC
was funded by contributions effected by the members under a
Contribution Agreement ("Contribution Agreement"). Oasis contributed
all the outstanding shares of ORS valued at approximately $2.4 million
as its contribution to the LLC. The Company contributed 1.5 million
shares of its common stock valued at $3.0 million on the date of
issuance and warrants to purchase additional shares of its common stock
to the LLC. The warrants are exercisable for the shares of common stock
as discussed below:
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<PAGE>
(a) shares equal to the difference between $3.0 million and the
value of the Company's 1.5 million share contribution on the
date that the shares of common stock (including the shares
underlying the warrants) contributed to the LLC are registered
with the SEC if the value of the 1.5 million shares on that
date is less than $3.0 million;
(b) shares equal to $100,000 of the Company's common stock for
each 30-day period beyond 90 days following the date of
contribution that the shares of the Company's common stock
(including the shares underlying the warrants) contributed to
the LLC remain unregistered;
(c) shares equal to up to $2.0 million of the Company's common
stock, subject to adjustment based upon ORS achieving certain
revenue and EBITDA targets during the measurement period of
August 1, 1999 to January 31, 2000: provided however, that
Oasis may select a different period if: (i) ORS obtains a new
customer contract at any time between the closing date and
March 31, 2000 and (ii) the Company enters into a new contract
with a specific customer at any time between the closing date
and March 31, 2000. If either of these events occur, then
Oasis may select as the measurement period, in its discretion,
any of the following; (x) the period from August 1, 1999 to
January 31, 2000, (y) the period from September 1, 1999 to
February 29, 2000 or (z) the period from October 1, 199 to
March 31, 2000;
(d) additional shares based upon (1) ORS achieving certain revenue
and EBIDTA targets, and (2) the Company's share price at the
date of registration of the shares for this transaction. Under
certain circumstances, these shares may be equal to the
greater of (A) 50% of the incremental revenue for the Second
Measurement Period (as defined in the agreements) over $9.0
million or (B) four times the incremental Adjusted EBITDA (as
defined in the agreements) for the Second Measurement Period
(as defined in the agreements) over $1.0 million provided,
however, that such number of shares shall not exceed the
greater of; (i) 1,000,000 shares of the Company's common stock
or (ii) that the number of shares of the Company's common
stock determined by dividing $8.0 million by the Second
Measurement Period Date Market Value (as defined in the
agreements); and provided further, that if the basis for
issuance of such shares is incremental revenue over $9.0
million then EBITDA for the Second Measurement Period must be
at least $1.0 million for the revenue between $9.0 million and
$12.0 million or at least $1.5 million for revenue above $12.0
million. In addition, the LLC may receive 0.5 million shares
of the Company's common stock if the revenue for the Second
Measurement Period is equal to or greater than $37.0 million
and the Adjusted EBITDA for the Second Measurement Period is
equal to or greater than $5.0 million.
According to the Operating Agreement, the net profits and net losses of
the LLC will be
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<PAGE>
allocated 90% to the Company and 10% to Oasis. Proceeds from the sale
of the Company's common stock or warrants would be allocated 90% to the
Company and 10% to Oasis. Proceeds from the sale of the ORS stock or
its assets will be allocated 100% to Oasis until Oasis has received
distributions of at least $9.0 million and then 90% to Oasis and 10% to
the Company. Pursuant to the LLC's Operating Agreement, the LLC is an
interim step to full ownership of ORS by the Company. Once the Company
has either raised $10 million in new capital or generated three
consecutive months of positive cash flow and registered the shares
issued in this transaction, the LLC will be dissolved and ORS will
become a wholly owned subsidiary of the Company. Under these
circumstances, Oasis would receive the shares of common stock and
warrants contributed to the LLC by the Company. Additionally, even if
these conditions are not fulfilled, Oasis has the right to redeem its
interest in the LLC at any time in exchange for the shares of common
stock and the warrants issued to the LLC by eGlobe.
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 based on preliminary
appraisals of ORS's assets. The Company has not completed the review of
the purchase price allocation and will determine the final allocation
based on final appraisals and resolution of the contingencies discussed
earlier.
As the Company controls the operations of the LLC, the LLC has been
included in the Consolidated Financial Statements with Oasis' interest
in the LLC recorded as a Minority Interest in the LLC.
In connection with the purchase and installation of equipment and
leasehold improvements at ORS' new facility in Miami, Florida, Oasis
agreed to loan ORS up to $451,400. The loan is required to be repaid in
six equal quarterly principal installments beginning November 30, 1999.
The Company guaranteed ORS' obligations under this loan and granted
Oasis a security interest in its ownership interest in the LLC. As of
September 30, 1999, there was no amount outstanding under this
commitment.
PRO FORMA RESULTS OF OPERATIONS
As discussed earlier, 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 and nine months ended September 30, 1999.
The following unaudited pro forma consolidated results of operations are
presented as if the IDX, UCI, Telekey, ConnectSoft, Swiftcall and the Oasis
acquisitions had been made at the beginning of the periods presented. The
historical results of operations of iGlobe have not been included in the pro
forma results of operations as it is not practical for the Company to include
such information due to the recent conclusion of the acquisition. 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 nine months ended
September 30, 1999 for comparative purposes. Since ConnectSoft was acquired in
June 1999, the Company has included ConnectSoft's January
24
<PAGE>
through May 1999 results in its pro forma results of operations for the nine
months ended September 30, 1999 for comparative purposes. Since Swiftcall was
acquired in August 1999, the Company has included Swiftcall's July 1999 results
and January through July 1999 results in its pro forma results of operations for
the three months and nine months ended September 30, 1999, respectively, for
comparative purposes. Since ORS was acquired in September 1999, the Company has
included ORS' July and August results and January through August 1999 results in
its pro forma results of operations for the three months and nine months ended
September 30 1999, respectively, for comparative purposes. In addition, the
effects of the renegotiations of the purchase agreement with the IDX
stockholders and the reclassification of certain intangibles of IDX, UCI and
Telekey have been included for all periods presented in the Pro Forma results of
operations.
<TABLE>
<CAPTION>
PRO FORMA RESULTS FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
NET REVENUE $ 11,642,921 $11,733,369 $32,430,450 $32,834,035
NET LOSS $(12,696,517) $(6,863,563) $(34,241,626) $(24,663,030)
NET LOSS ATTRIBUTABLE TO $(13,058,649) $ (6,863,563) $(38,932,731) $(24,663,030)
COMMON STOCK
NET LOSS PER SHARE $(0.43) $(0.25) $(1.32) $(0.94)
</TABLE>
NOTE 5 - DEFERRED REVENUE
- --------------------------------------------------------------------------------
Some revenues from the Company's card services business come from supplying
underlying services to issuers of prepaid cards. Those issuers prepay some or
all of the services provided. Payments received in advance for such services are
recorded in the accompanying balance sheets as deferred revenue. Consequently,
revenues from such services are recognized as the cards are used and service
provided. When a card for which service has been contracted expires without
being fully used (cards have effective lives of up to one year), then the unused
value is referred to as breakage and recorded as revenue at the date of
expiration. In addition, the Company, through its recent acquisition of ORS, has
deferred revenue related to certain reservations service contracts. Customers
are required to pay the Company for reservation services in advance based on
forecasted amounts. These advance payments are recorded by the Company as
deferred revenue, which is subsequently recognized as revenue when the related
services are performed.
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<PAGE>
NOTE 6 - NOTES PAYABLE AND LINE OF CREDIT PRINCIPALLY RELATED TO ACQUISITIONS
- --------------------------------------------------------------------------------
At September 30, 1999 and December 31, 1998, notes payable and lines of credit
principally related to acquisitions consisted of the following:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
- --------------------------------------------------------------------------------------------------------------
<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 September 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 and warrants. (2) - 1,000,000
Convertible subordinated promissory note for acquisition of
IDX, interest and principal paid in August 1999 through
issuance of common stock. (2) - 418,024
Convertible subordinated promissory note for acquisition of
IDX, interest and principal paid in August 1999 through
issuance of preferred stock. (2) - 1,500,000
Convertible subordinated promissory note for acquisition of
IDX, interest and principal paid in August 1999 through
issuance of preferred stock. (2) - 2,500,000
8% promissory note for acquisition of UCI, $250,000 payable in
August, 1999, and $250,000 plus interest payable December 1999,
net of unamortized discount of $0 and $42,967. (3) 500,000 457,033
Short-term loan from two officers. - 100,000
Short-term note payable to an investor. 100,000
Line of credit of Telekey, principal due on demand, interest
payable quarterly at a variable rate (8.25% at September 30,
1999), expires in October 1999. (4) 100,000 -
Non-interest bearing note for acquisition of Telekey, payable
in equal monthly principal payments over one year. (4) 62,500 -
Short term note due to seller of iGlobe, due
in November 1999. (5) 1,205,288 -
- --------------------------------------------------------------------------------------------------------------
Total notes payable and line of credit $ 2,117,788 $6,298,706
- --------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
(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 ConnectSoft, a company acquired in September 1999
as discussed in Note 4. 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 fully amortized as of September 30, 1999 as
additional interest expense. The warrants expire on September 1,
2003, and as of September 30, 1999 these warrants have not been
exercised. As part of the acquisition of ConnectSoft, the Company
renegotiated the terms of this note with the investor in July
1999. Pursuant to the renegotiations, the original note was
replaced with a new note dated July 14, 1999 with a face value of
$276,408 representing $250,000 of principal plus $26,408 of
accrued interest due on the original note. The new note has a
maturity date of September 12, 1999. In connection with this new
note, the lender was granted warrants to purchase 25,000 shares of
the Company's common stock at a price of $2.82 per share. The
value of $33,979 assigned to the warrants was recorded as a
discount to the note and amortized over the term of the loan. The
warrants expire on July 14, 2004. At September 30, 1999 these
warrants have not been exercised. The Company is currently
renegotiating the payment date with the investor.
(2) In connection with the IDX acquisition, the Company issued $5.0
million convertible subordinated promissory notes and a $0.4
million note payable for accrued but unpaid dividends owed by IDX.
The notes bore interest at LIBOR plus 2.5% (7.75% as defined).
Each of the notes, plus accrued interest, could be paid in cash or
shares of the Company's common stock, at the sole discretion of
the Company. 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 stockholders were granted
warrants expiring March 23, 2002 to purchase 43,173 shares of the
Company's common stock at a price of $2.37 per share. The value
assigned to the warrants of $62,341 was recorded as interest
expense in March 1999. At September 30, 1999, these warrants have
not been exercised.
In July 1999, the Company renegotiated the terms of the purchase
agreement with IDX stockholders. As a result of the
renegotiations, the Company exchanged the notes payable of $1.5
million and $2.5 million for 400,000 shares of Series I Preferred
Stock valued at $4.0 million. In addition, the maturity date of
the $418,024 note was extended to July 15, 1999 from May 31, 1999.
The Company elected to pay this note with shares of common stock
and issued 140,599 shares of common stock to discharge this
indebtedness. See Notes 4 and 8 for further discussion.
(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
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<PAGE>
expiring in December 31, 2003 to purchase 50,000 shares of the
Company's common stock at a price of $1.63 per share. The value
assigned to the warrants of $42,967 was recorded as a discount to
the note and was amortized through June 1999 as additional
interest expense. At September 30, 1999, these warrants have not
been exercised. In August 1999, the Company completed
renegotiation of the terms of this note. In November 1999, the
Company paid $250,000 with the remaining $250,000 plus accrued
interest payable on December 31, 1999.
(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 Note 4). Telekey also had a $1.0
million line of credit due on demand and bearing interest at a
variable rate (8.25% at September 30, 1999), to facilitate
operational financing needs. The line of credit was personally
guaranteed by previous stockholders of Telekey and was due on
demand. This line of credit expired in October 1999 and the
balance was repaid on November 2, 1999.
(5) Effective August 1, 1999, the Company acquired iGlobe. In
connection with this transaction, Highpoint financed working
capital through the closing date to iGlobe for which the Company
issued a note payable of $1.2 million. (See Note 4 for further
discussion).
NOTE 7 - NOTES PAYABLE AND LONG-TERM DEBT
- -------------------------------------------------------------------------------
At September 30, 1999 and December 31, 1998, notes payable and
long-term debt consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
<S> <C> <C>
8.875% unsecured term note payable to a telecommunications company, net
of unamortized discount of $0 and $205,932. (1) $ - $7,294,068
8.875% unsecured term note payable to a stockholder, interest and
principal payable December 1999, net of unamortized discount of
$63,121 and $45,844. (2) 936,879 954,156
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. 296,706 305,135
10% promissory note of Telekey payable to a telecommunication company,
interest payable quarterly, principal due December 2000. (4) 453,817 -
Promissory note with interest at a variable rate (8.0% at September 30,
1999), principal and interest payable in twelve equal monthly
installments commencing September 1999. (5) 500,000
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
<S> <C> <C>
5% Secured Note Payable, net of unamortized discount of $9,791,305 and
$0. (6) 10,208,695 -
Capitalized lease obligations (7) 5,602,756 724,199
- --------------------------------------------------------------------------------------------------------------------
Total 18,498,853 9,777,558
Less current maturities, net of unamortized
discount of $3,626,977 and $251,776 4,040,583 8,540,214
- --------------------------------------------------------------------------------------------------------------------
Total long-term debt $14,458,270 $1,237,344
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In February 1998, the Company borrowed $7.5 million from a
telecommunications company. In connection with this transaction,
the lender was granted warrants expiring February 23, 2001 to
purchase 500,000 shares of the Company's common stock at a price
of $3.03 per share. The value of approximately $0.5 million
assigned to such warrants when granted in connection with the
above note agreement was recorded as a discount to long-term debt.
The discount was 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 $1.5125 per share, resulting in additional debt
discount of $0.2 million. This amount was amortized over the
remaining term of the note. In July 1999, this note plus accrued
interest was repaid and the remaining unamortized discount was
recorded as interest expense. At September 30, 1999, these
warrants have not been exercised.
(2) In September 1998, the Company borrowed $1.0 million from an
existing stockholder. In connection with this transaction, the
lender was granted warrants expiring September 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
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 was recorded as
additional debt discount and is being amortized to interest
expense through December 31, 1999. In August 1999, the Company
entered into a stock purchase agreement with the lender. Under
this agreement, the lender agreed to purchase 160,257 shares of
common stock of the Company at a price per share of $1.56 and
received a warrant to purchase 60,000 shares of common stock of
the Company at a price per share of $1.00. Additionally, the
lender acquired an option to exchange the principal of the note
(up to a maximum amount of $500,000) for: (1) shares of common
stock of the Company at a price per share of $1.56 and (2)
warrants to purchase shares of common stock of the Company at a
price of $1.00 (60,000 shares per $250,000 of debt exchanged). The
value of the maximum number of warrants that would be issued upon
exercise of the option of $70,637 was recorded as additional debt
discount
29
<PAGE>
and is being amortized to interest expense through December 1999.
(See Note 8 for further discussion).
(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 September 30, 2000.
(4) Telekey, acquired in February, 1999, has an outstanding promissory
note for $0.454 million bearing interest payable quarterly at 10%
due on December 31, 2000.
(5) On June 17, 1999, the Company through its subsidiary Vogo
purchased substantially all the assets of ConnectSoft. In
connection with this purchase, the Company issued a $0.5 million
note to the seller. The note bears interest at a variable rate (8%
at September 30, 1999) and principal and interest payments are due
in twelve equal monthly payments commencing on September 1, 1999.
The remaining principal and accrued interest also become due on
the first date on which (i) the Company receives in any
transaction or series of transactions any equity or debt financing
of at least $50.0 million or (ii) Vogo receives in any transaction
or series of transactions any equity or debt financing of at least
$5.0 million. (See Notes 4 and 8 for further discussion).
(6) In April 1999, the Company received a financing commitment of
$20.0 million in the form of long-term debt from its largest
stockholder ("Lender"). Under the terms of the Loan and Note
Purchase Agreement ("Agreement"), in April 1999, the Company
received an unsecured loan ("Loan") of $7.0 million bearing
interest at 8% payable monthly with principal and remaining
interest due on the earlier of (i) April 2000, (ii) the date of
closing of an offering by the Company from which the Company
receives net proceeds of $30.0 million or more, and (iii) the
closing of the $20.0 million purchase of the Company's 5% Secured
Notes. 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 were
immediately exercisable and were exercised in September 1999, and
1,000,000 warrants were exercisable only in the event that the
stockholders did not approve the repayment of a $20.0 million
credit facility committed by the Lender in shares of the Company's
common stock and grant of warrants to purchase 5,000,000 shares of
the Company's common stock or the Company elected not to draw it
down. The 1,000,000 warrants did not become exercisable because
both the stockholder approval was received and the Company elected
to draw down the funds as discussed below. The value of
approximately $2.9 million assigned to the 500,000 warrants was
recorded as a discount to the note payable and amortized through
July 1999 when the note was repaid.
Under the Agreement, in July 1999, the Lender purchased $20.0
million of 5% Secured Notes ("Notes") dated June 30, 1999 at the
Company's request. The transactions contemplated by the Agreement
were approved by the Company's stockholders at the annual
stockholders meeting in June 1999. The initial $7.0
30
<PAGE>
million Loan was repaid from the proceeds of the Notes.
Additionally, proceeds from the Notes were used to repay the note
payable, discussed in note (1), and accrued interest totaling $8.4
million.
Principal and interest on the Notes are payable over three years
in monthly installments of $377,000 commencing August 1, 1999 with
a balloon payment for the remaining balance of $8.6 million due on
the earlier to occur of (i) June 30, 2002, or (ii) the date of
closing of an offering ("Qualified Offering") by the Company of
debt or equity securities, in a single transaction or series of
related transactions, from which the Company receives net proceeds
of $100.0 million or more.. Alternatively, 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. Also, under the Agreement,
the Lender purchased an Accounts Receivable Revolving Credit Note
("Revolver") for an amount up to the lesser of (1) 50% of eligible
receivables (as defined) or (2) the aggregate amount of principal
that has been repaid to date. Principal and interest on the
Revolver are payable on the earliest to occur of (i) the third
anniversary of the agreement, June 30, 2002, or (ii) the date of
closing of a Qualified Offering as defined above. At September 30,
1999, the balance on the Notes was $19,432,318 and the balance on
the Revolver was $567,682 totaling $20.0 million less an
unamortized discount of $9,791,305 for a net amount of
$10,208,695. These Notes and Revolver are secured by substantially
all of the Company's existing operating assets, although the
Company can pursue certain additional financing, including secured
debt or lease financing, for certain capital expenditures. The
Agreement contains certain debt covenants and restrictions by and
on the Company, as defined.
As additional consideration for the Notes, the Lender was granted
warrants to purchase 5,000,000 shares of the Company's common
stock at an exercise price of $1.00 per share. The warrants expire
in three years. The value assigned such warrants of approximately
$10.7 million was recorded as a discount to the Notes and is being
amortized over the term of the Notes as additional interest
expense. At September 30, 1999, these warrants have not been
exercised.
In August 1999, the Company and the Lender agreed to exchange
$4.0 million of the Notes for shares of Series J Cumulative
Convertible Preferred Stock. (See Note 10 for further discussion
of the transaction).
(7) The Company is committed under capital leases for certain property
and equipment. These leases are for terms of 36 months and bear
interest ranging from 8.49% to 9.07%.
31
<PAGE>
In June 1999, the Company acquired certain capital lease
obligations related to the ConnectSoft acquisition. These leases
were then refinanced for a total of $2,992,000 with a term of 36
months and bear interest at rates ranging from 10.24% to 11.40%
and contain certain buyout options at the end of the lease terms.
NOTE 8- STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
PREFERRED STOCK AND REDEEMABLE PREFERRED STOCK
At the June 16, 1999 annual stockholder meeting, a proposal to amend
the Company's Certificate of Incorporation to increase the Company's
authorized preferred stock to 10,000,000 was approved and adopted. Par
value for all preferred stock remained at $.001 per share. In addition,
the stockholders also approved and adopted a prohibition on
stockholders increasing their percentage of ownership of the Company
above 30% of the outstanding stock or 40% on a fully diluted basis
other than by a tender offer resulting in the stockholder owning 85% or
more of the outstanding common stock. The following is a summary of the
Company's series of preferred stock and the amounts authorized and
outstanding at September 30, 1999 and December 31, 1998:
Series B Convertible Preferred Stock, 500,000 shares
authorized, and 0 and 500,000 shares, respectively, issued and
outstanding
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, 50 and 0 shares, respectively, issued and
outstanding ($5.0 million aggregate liquidation preference)
8% Series E Cumulative Convertible Preferred Stock, 125 shares
authorized, 50 and 0 shares, respectively, issued and
outstanding
Series F Convertible Preferred Stock, 2,020,000 authorized,
1,010,000 and 0 shares, respectively, issued and outstanding
6% Series G Cumulative Convertible Redeemable Preferred Stock,
1 share authorized, no shares issued and outstanding
Series H Convertible Preferred Stock, 500,000 shares
authorized, 500,000 and 0 shares, respectively, issued and
outstanding
8% Series I Convertible Optional Redemption Preferred Stock,
400,000 shares authorized, 400,000 and 0 shares, respectively,
issued and outstanding
32
<PAGE>
5% Series K Cumulative Convertible Preferred Stock, 30 shares
authorized, 30 and 0 shares, respectively, issued and
outstanding ($3.0 million aggregate liquidation preference)
Following is a detailed discussion of each series of preferred stock
outstanding at September 30, 1999:
SERIES B CONVERTIBLE PREFERRED STOCK
On December 2, 1998, the Company issued 500,000 shares of Series B
Preferred Stock in connection with the acquisition of IDX. In July
1999, the Company renegotiated the terms of the IDX purchase agreement
with the IDX stockholders. As a result of the renegotiations, the
Series B Preferred Stock was reacquired by the Company in exchange for
500,000 shares of Series H Preferred Stock. (See Note 4 for further
discussion).
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 Stock (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 below.
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 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 originally recorded as a discount to the Series D
Preferred.
Upon the Company's registration in May 1999 of the common stock
issuable upon the conversion of the Series D Preferred, the investor
purchased 20 additional shares of Series D Preferred and the following
warrants for $2.0 million. The Company issued warrants to purchase
75,000 shares of common stock with an exercise price of $.01 per share
and warrants to purchase 40,000 shares of common stock with an exercise
price of $1.60. The value assigned to these warrants when granted was
approximately $0.3 million and was originally recorded as a discount to
the Series D Preferred.
33
<PAGE>
The discounts associated with the value of the warrants were amortized
as deemed preferred dividends over the periods from the dates of the
grants to the dates that the Series D Preferred could first be
converted into common stock defined as 90 days from issuance. On August
20, 1999, the exercise price of $1.60 for 100,000 warrants was lowered
to $1.44 per share. The value assigned to this revision in terms was
recorded as a preferred stock dividend. In connection with the revision
in terms, the investor exercised the warrants to purchase 100,000
shares at a price of $1.44 per share and warrants to purchase 75,000
shares at $0.01 per share.
The Series D Preferred stock carries an annual dividend of 8%, payable
quarterly beginning December 31, 1999. The Company has accrued
approximately $126,000 in cumulative Series D Preferred dividends as of
September 30, 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 90 days from issuance 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 $20.0 million public offering
by the third fiscal quarter of 1999, the market price just prior to the
conversion date. The Company did not achieve either of these targets;
therefore, the conversion price will be the lesser of $1.60 or market
price. 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.
Due to the Company's failure to consummate a specific merger
transaction by May 30, 1999, the Company issued to the investor a
warrant exercisable August 1, 1999 to purchase 76,923 shares of common
stock with an exercise price of $.01 per share. The value assigned to
the warrant when granted was approximately $0.3 million and was
recorded as a preferred stock dividend. The warrant is exercisable for
three years. In August 1999 the investor excerised the warrants to
purchase 76,923 shares at a price of $.01 per share.
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 July 1, 2000, or pay $0.3 million in cash, if the Company does
not 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
34
<PAGE>
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. The Company received stockholder approval to
increase the number of shares issuable and 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.
SERIES E CUMULATIVE CONVERTIBLE PREFERRED STOCK
In February 1999, the Company issued 50 shares of Series E Cumulative
Convertible Redeemable Preferred Stock ("Series E Preferred") to 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. The Company has accrued approximately $0.2 million in
Cumulative Series E Preferred dividends as of September 30, 1999. As
additional consideration, the Company issued 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 had the option to 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
could have elected to make the shares of Series E Preferred stock
convertible, but only if (i) it had positive EBITDA for at least one of
the first three fiscal quarters of 1999 or (ii) completed 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. 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. As a result, the carrying value of the Series E
Preferred stock was reclassified from Redeemable Preferred Stock to
Stockholders' Equity as permanent equity in April 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.
35
<PAGE>
SERIES F CONVERTIBLE PREFERRED STOCK
As discussed in Note 4, on February 12, 1999, the Company completed the
acquisition of Telekey. The purchase consideration included the
issuance of 1,010,000 shares of Series F Convertible Preferred Stock
("Series F Preferred"). The Company also 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 than $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 606,000 additional
shares of common stock.
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.
SERIES G CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK
In connection with the purchase of substantially all of the assets of
ConnectSoft in June 1999, as discussed in Note 4, the Company issued
one share of 6% Series G Cumulative Convertible Redeemable Preferred
Stock ("Series G Preferred") valued at $3.0 million. The Series G
Preferred carried an annual dividend of 6%, payable annually beginning
September 30, 2000. In August 1999, the Company issued 30 shares of
Series K Cumulative Convertible Preferred Stock in exchange for the one
share of Series G Preferred. This exchange is discussed in more detail
below.
SERIES H CONVERTIBLE PREFERRED STOCK
In July 1999, the Company issued 500,000 shares of Series H Convertible
Preferred Stock ("Series H Preferred") in exchange for 500,000 shares
of Series B Preferred. See Note 4 for discussion of renegotiation. The
shares of Series H Preferred Stock convert automatically into a maximum
of 3,750,000 shares of common stock, subject to adjustment as described
below, on January 31, 2000 or earlier if the 15 day average closing
sale price of the common stock is equal to or greater than $6.00.
Providing the Series H Preferred has not been converted, the Company
has guaranteed a price of $6.00 per share on January 31, 2000. If the
market price of the common stock is less than $6.00 per share on
January 31, 2000, the Company will issue additional shares of common
stock upon the conversion of the Series H Preferred Stock based on the
ratio of $6.00 to
36
<PAGE>
the market price (as defined, but not less than $3.3333 per share), but
not more than 3.0 million additional shares of common stock.
SERIES I CONVERTIBLE OPTIONAL REDEMPTION PREFERRED STOCK
In July 1999, the Company issued 400,000 shares of Series I Convertible
Optional Redemption Preferred Stock ("Series I Preferred") in exchange
for notes payable of $4.0 million due to the IDX stockholders. See Note
4 for discussion of renegotiation. The Company may redeem 150,000
shares of Series I Preferred Stock prior to February 14, 2000 and the
remainder prior to July 17, 2000 at a price of $10.00 per share plus 8%
of the value of the Series I Preferred Stock per annum from December 2,
1998 through the date of redemption. The redemption, solely at the
option of the company, may be made in cash, common stock or a
combination of the two. Any Series I Preferred Stock not redeemed by
the applicable date will be converted automatically into common stock
based on a conversion price of $10.00 per share plus 8% per annum of
the value of the Series I Preferred Stock from December 2, 1998 through
the date of conversion up to a maximum of 3.9 million shares of common
stock.
SERIES K CUMULATIVE CONVERTIBLE PREFERRED STOCK
In August 1999, the Company issued 30 shares of Series K Cumulative
Convertible Preferred Stock ("Series K Preferred") valued at $3.0
million in exchange for the one share of its Series G Preferred held by
the seller of ConnectSoft.
The Series K Preferred carries an annual dividend of 5% which is
payable quarterly, beginning December 31, 2000. The Company has accrued
approximately $15,200 in cumulative Series K Preferred dividends as of
September 30, 1999. The shares of Series K Preferred are convertible,
at the holder's option, into shares of the Company's common stock at
any time at a conversion price equal to $1.56. The shares of Series K
Preferred are also convertible into the Company's common stock at a
lower price upon a change of control (as defined) if the market price
of the Company's common stock on the date immediately preceding the
change of control is less than the conversion price. The shares of
Series K Preferred will automatically be converted into the Company's
common stock, on the earliest to occur of (i) 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 Series K Preferred is outstanding, (ii) the date that
80% or more of the Series K Preferred the Company has issued has been
converted into the Company's common stock, or (iii) 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
$20.0 million.
The carrying value of the Series G Preferred exceeded the fair value of
the Series K Preferred because of accrued dividends that were not paid
pursuant to the exchange. The excess of $36,411 reduced the loss
attributable to common stock in the third quarter.
37
<PAGE>
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.
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 July
1999, the Company issued 140,599 shares of common stock in repayment of
$418,024 related to the IDX acquisition. In addition, in July 1999, the
Company repaid a $200,000 note payable and related accrued interest
with 125,000 shares of common stock. In connection with this
transaction, the Company also issued 40,000 five-year warrants to
purchase common shares at an exercise price of $1.60 and warrant to
purchase 40,000 common shares at an exercise price of $1.00 per share.
In April 1999, the Company received a financing commitment of $20.0
million in the form of long-term debt from its largest stockholder
("Lender"). Under the Agreement, in April 1999, the Company received an
unsecured loan of $7.0 million. As additional consideration, the
Company issued the Lender warrants to purchase 1,500,000 shares of the
Company's common shares at an exercise of $0.01 per share. Of this
total, 500,000 warrants were immediately exercisable and the value of
approximately $2.9 million was recorded as a discount to the note
payable and amortized through July 1999 when the note was repaid. The
remaining 1,000,000 warrants were contingent and were cancelled in July
1999. Under this debt agreement, the Lender purchased $20.0 million
Notes in July 1999 and the initial $7.0 note was repaid with the
proceeds. As additional consideration for the Notes, the Lender was
granted warrants to purchase 5,000,000 shares of the Company's common
stock at an exercise price of $1.00 per share. The warrants expire in
three equal installments over the three years following issuance. The
value assigned to the warrants of $10.7 million was recorded in July
1999 as a discount to the Notes to be amortized during the term of the
Notes as additional interest. (See Notes 7 and 10 for further
discussion.)
In June 1999, the Company issued to a former employee 54,473 shares of
the Company's common stock in settlement of certain potential claims.
In August 1999, the Company entered into a stock purchase agreement
with a long time stockholder and a lender. Under this agreement, for
$250,000, the investor purchased 160,257 shares of common stock,
warrants valued at $80,311 to purchase 60,000 shares of common stock at
an exercise price of $1.00 per share and the option to exchange the
principal of an existing note (up to a maximum amount of $500,000) for
shares of common stock at a price per share of $1.56 and a warrant to
purchase shares of common stock at a price of $1.00 (60,000 per
$250,000 of debt exchanged). (See Note 7 for further discussion).
38
<PAGE>
In August 1999, the Company received proceeds of approximately $716,000
from the exercise of warrants to acquire 668,518 shares of common
stock. Also, in September 1999, the Lender, as discussed earlier,
exercised 500,000 warrants for $0.01 per share.
In September 1999, the Company issued 1.5 million shares of common
stock and warrants to purchase additional shares of common stock in
connection with its acquisition of control of ORS. (See Note 4 for
further discussion.)
See Notes 6, 7 and 8 (Preferred Stock) for discussion of warrants
issued in connection with debt renegotiations and issuances of
preferred stock. See Note 10 for a discussion of transactions occurring
subsequent to September 30, 1999 that will result in the issuance of
shares of convertible preferred stock and warrants.
EMPLOYEE AND DIRECTOR STOCK OPTION PLANS
On June 16, 1999, the Company's stockholders adopted an amendment to
increase the number of shares of the Company's common stock that may be
issued to employees by 1.5 million shares under the Company's 1995
Employee Stock Option and Appreciation Rights Plan. This increase
includes the reduction of the number of shares available for issuance
under the Company's 1995 Director Stock Option and Appreciation Rights
Plan by 0.4 million shares.
NOTE 9 - BASIC NET LOSS PER SHARE OF COMMON STOCK
- --------------------------------------------------------------------------------
Earnings (loss) per share are calculated in accordance with SFAS No.
128, "Earnings Per Share". The net loss of $19.1 million and $42.1
million attributable to common stock for the three and nine months
ended September 30, 1999 includes preferred stock dividends of $6.5
million and $10.8 million, respectively. For the three and nine month
periods ended September 30, 1998, the Company had no preferred stock
dividends. The weighted average shares outstanding for calculating
basic earnings (loss) per share were 20,301,473 and 17,725,466 for the
three months ended September 30, 1999 and 1998, respectively. The
weighted average shares outstanding for the nine month periods ended
September 30, 1999 and 1998, respectively, were 19,374,944 and
17,594,628. Common stock options and warrants of 10,643,115 and
3,430,781 for the nine months ended September 30, 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 in the
periods presented.
In addition, convertible preferred stock, stock to be issued and
convertible debt convertible into 19.6 million shares of common stock
were not included in diluted earnings (loss) per share for the three
and nine months ended September 30, 1999 due to the losses for the
respective periods.
Subsequent to September 30, 1999, the Company issued additional
preferred stock and warrants convertible into 3.5 million shares of
common stock. (See Note 10 for discussion).
39
<PAGE>
In addition, certain contingently issuable warrants related to recent
acquisitions have not been included in the computation of diluted
earnings (loss) per share as the contingencies had not been met as of
September 30, 1999. See Note 4.
NOTE 10 - PRO FORMA BALANCE SHEET AND SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
DEBT EXCHANGE FOR PREFERRED STOCK
In August 1999, the Company reached an agreement with EXTL Investors
whereby the Company would issue to EXTL Investors 40 shares of 5%
Series J Cumulative Convertible Preferred Stock ("Series J Preferred")
as prepayment of $4.0 million of the outstanding $20.0 million Secured
Notes issued to EXTL Investors. (See Note 7 for discussion.) The
exchange was finalized in November 1999. At the date of exchange, the
carrying value of the $4.0 million Notes, net of the unamortized
discount of approximately $1.9 million, was approximately $2.1 million.
The excess of the fair value of the Series J Preferred over the
carrying value of the note of $1.9 million will be recorded as an
extraordinary loss on debt extinguishment in November 1999. As a result
of this agreement, the $4.0 million is not subject to redraw under the
Revolver.
SERIES N CUMULATIVE CONVERTIBLE PREFERRED STOCK
On October 15, 1999, the Company sold 1,895 shares of 8% Series N
Cumulative Convertible Preferred Stock ("Series N Preferred") and
219,047 warrants for proceeds of $1.9 million. The Series N Preferred
carries an 8% annual dividend payable in cash or common stock at the
holder's option, or in the absence of an election of the holder, at the
election of the Company. The shares of Series N Preferred stock are
immediately convertible, at the holder's option, into shares of the
Company's common stock at a conversion price equal to the greater of
$2.125 and 101% of the average closing market price per share of common
stock for the 15 trading days prior to the binding commitment of the
holder to invest (provided however that no shares of Series N Preferred
sold after the first issuance shall have an initial conversion price
below the initial conversion of the shares sold at first issuance) or
85% of the market price per share of common stock, computing the market
price per share for the purpose of such conversion as equal to the
average closing market price per share for the five trading days
immediately prior to the conversion date, provided however that the
conversion price shall not be greater than the greater of $3.25 or 150%
of the initial conversion price.
Series N Preferred shall automatically convert into shares of common
stock on the earliest to occur of: (i) the date that is the fifth
anniversary of the issuance of Series N Preferred; (ii) the first date
of which the last reported sales price of the common stock on Nasdaq is
$6.00 or more for any 15 consecutive trading days during any period in
which Series N Preferred is outstanding; (iii) the date that 80% or
more of the Series N Preferred issued by the Company, has been
converted into common stock, the holders thereof have agreed with the
Company in writing to convert such Series N Preferred into common stock
or a combination of the foregoing; or (iv) the Company closes a public
offering of equity
40
<PAGE>
securities of the Company with gross proceeds of at least $25.0
million.
The warrants are exercisable one year from issuance and expire three
years from issuance. The exercise prices vary from $3 to $5 per share.
In addition, the holders may elect to make a cash-less exercise. The
value of the warrants of $219,189 will be recorded as a dividend at the
issuance date because the Series N Preferred is immediately
convertible.
The following unaudited pro forma condensed consolidated balance sheet
assumes the following transactions were completed as of September 30,
1999 (dollars in thousands).
PRO FORMA
(a) issuance of Series J Preferred Stock, valued at $4.0 million as
prepayment of $4.0 million of the outstanding $20.0 million
Secured Notes issued to EXTL Investors. The excess of the fair
value of the Series J Preferred over the carrying value of the
secured Notes of $2.0 million at September 30, 1999, is reflected
as a loss on extinguishment. The carrying value includes $0.1
classified as current and $1.9 million as long-term debt.
(b) Receipt of proceeds of $1,895,000 from the sale of Series N
Preferred Stock and warrants.
<TABLE>
<CAPTION>
UNAUDITED
SEPTEMBER 30, 1999 PRO FORMA PRO FORMA
(UNAUDITED) ADJUSTMENTS SEPTEMBER 30, 1999
<S> <C> <C> <C>
Current assets $13,139 $1,895 $15,034
Property and equipment, net 23,783 -- 23,783
Goodwill, net 8,808 -- 8,808
Intangible assets and other, net 24,459 -- 24,459
------ ------ ------
Total assets $70,189 $1,895 $72,084
Current liabilities $28,325 $ (41) $28,284
Long-term debt 14,459 (1,999 ) 12,460
------ -------- ------
Total liabilities 42, 784 (2,040) 40,744
Minority Interest in LLC 2,329 -- 2,329
Stockholders' equity 25,076 3,935 29,011
------ ------- ------
Total liabilities, minority
interest in LLC and stockholders' $70,189 $1,895 $72,084
equity
</TABLE>
41
<PAGE>
- --------------------------------------------------------------------------------
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, business plan, revenues, working capital, liquidity, need
for funding 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, the availability of such 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.
Since December 1998, the Company has been actively acquiring companies
consistent with its strategy to grow the business. In December 1998,
the Company acquired IDX and UCI. During the first nine months of the
year, the Company completed several acquisitions, including Telekey,
ConnectSoft, Swiftcall, iGlobe and Oasis. All of these acquisitions
were accounted for using the purchase method of accounting. The Company
has not completed the review of the purchase price allocations for some
of the acquisitions and will determine the final allocations based on
final appraisals and resolution of contingencies. See Note 4 -
Acquisitions for more information.
RESULTS OF OPERATIONS
Overview
The Company continued to grow in the third quarter, with revenue of $10.6
million as compared to $9.1 million for the previous quarter. Compared to the
same quarter last year, the Company showed growth of $2.7 million ($10.6 million
compared to $7.9 million). Revenues from the Company's new IP Voice services
("the Network Services") grew by 55% or $2.0 million as compared to the prior
quarter, including some sales from services using the iGlobe Latin American
Network in August and September; existing iGlobe contracts also contributed
approximately $0.6 million in IP private line revenues. Revenue from card
services declined by 22% or $1.1 million. As anticipated by management the
unified messaging and telephone access
42
<PAGE>
to internet services continued to make no material contribution to revenue
during the quarter and the acquisition of ORS, the transaction service call
center, late in the quarter had minimal impact on overall revenue. Network
Services continued the expansion of its direct network into more than a dozen
countries during the third quarter with the iGlobe acquisition, and increased
the number of minutes carried from the second to the third quarter by more than
50%, from 16.9 million minutes to more than 27 million minutes. The decline in
the Card Services business resulted directly from a series of management policy
decisions which have removed the Company from most aspects of the prepaid card
business in North America. These decisions led to the migration of customers off
the Company's platforms and a decline in minutes and associated revenue as a
result of contract modifications to strengthen services and control. This
decline was partially offset by seasonal increases in other areas of card
services.
Analyzing Network Services on a route-by-route basis, operating
margins for the provision of Voice over IP service continued to
improve in this quarter over last quarter when adjusted for the
up-front costs of implementing new direct routes for IP Voice,
although the investment in new routes, primarily the recurring
expenses which need to be absorbed as part of the Latin American
network acquired with iGlobe, did result in overall negative gross
margins for Network Services. The Company showed improvement in
margins for Card Services. Vogo and the continuing development work
being undertaken in unified messaging and telephone access to the
internet contributed substantial expenses without adding material
revenues for the quarter. In addition, the Company incurred
significant non-cash charges to income related primarily to goodwill
and warrant amortization associated with various acquisitions and
financings completed since December 1998. Overall, gross margin
improved when compared with the previous quarter.
-----------------------------------------------------------------------
The Company's anticipated increases in cost of revenue related to
leases of capacity and other up-front costs needed to implement new
routes and support new business arrangements and contracts, as well as
an anticipated increase in expenses related to the operational needs of
new contracts that are expected to be concluded in the fourth quarter.
The gross margin for the quarter included not only the up-front costs
to increase the global reach of the IP network, but a margin loss of
approximately $1.4 million related to up-front pricing inducements on
new contracts designed to build toward a profitable long-term revenue
stream. Management views these costs and expenses as an investment in
the future of the Company.
Primarily as a result of the increased costs and expenses related to
growth, acquisition costs and other non-cash charges, the Company
incurred net losses of $12.6 million and $31.4 million for the three
and nine months ended September 30, 1999 compared to a net loss of $1.9
million and $10.8 million for the same periods last year. Almost 50% of
such losses in the current quarter ( approximately $6 million) reflect
non-cash items. The table below shows a comparative summary of certain
significant charges to income in the periods, which affected the
reported losses:
43
<PAGE>
<TABLE>
<CAPTION>
(IN MILLIONS)
QUARTER ENDED NINE MONTHS
SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Acquisition - related:
Amortization of goodwill and $ 3.3 $ -- $ 4.9 $ --
other intangibles
Deferred compensation, to 0.1 -- 1.1 --
employees of acquired companies
Depreciation and 1.2 2.2 0.7 3.0
amortization
Amortization of debt discount 1.4 -- 4.6 .5
including value of warrants and
other direct costs
Proxy-related litigation settlement -- -- -- 3.5
costs
Additional income tax provision -- -- -- 1.5
Settlement costs -- 1.0 -- 1.0
Corporate realignment costs -- -- -- 1.0
-------- --------- --------- --------
$ 6.0 $ 1.7 $ 13.6 $ 9.7
======== ======== ========= ========
</TABLE>
After deducting these items, the loss for the third quarter of 1999 was
$6.6 million (as compared to $0.2 million for the same period in 1998).
For the nine months ended September 30, 1999 and 1998 the loss, after
deducting the non-cash items noted above was $17.8 million and $1.1
million, respectively. Included in the three months ended September 30,
1999 loss are operating losses of approximately $3.1 million, excluding
depreciation and amortization, of the newly acquired business of the
Company ($6.2 million for the nine months).
For the three and nine months ended September 30, 1999, the Company
recorded accrued dividends of $0.3 million and $0.6 million,
respectively, and deemed dividends related to the issuance of warrants
of $0.2 million and $2.0 million, respectively. In the first quarter of
1999, the Company issued 3,000,000 shares of common stock for the 75
shares of Series C Preferred (convertible into 1,875,000 shares of
common stock on the exchange date). 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. In the third quarter
1999, the Company renegotiated the terms of the IDX purchase agreement.
The Company exchanged Series B Preferred , warrants, and notes payable
of $4.0 million for shares of Series H Preferred , new warrants, and
shares of Series I Preferred . As the result of the exchange, the
Company recorded the excess of the fair market value of the new
preferred issuances and the warrants over the carrying value of the
reacquired preferred stock, warrants and notes payable as dividends to
the Series B Preferred stockholders of $6.0
44
<PAGE>
million. In addition, the Company issued 30 shares of Series K
Preferred in exchange for the one share of Series G Preferred in the
third quarter. The carrying value of Series G Preferred exceeded the
fair market value of Series K Preferred because of accrued dividends
that were not paid pursuant to the exchange. The excess of $36,411
reduced the accrued dividends. After giving effect the above dividends
of $6.5 million and $10.8 million, the net loss attributable to the
holders of common stock was $19.1 million and $42.1 million for the
three months and nine months ended September 30, 1999.
REVENUE
Revenue increased to $10.6 million in the third quarter as compared to
$7.9 million for the same quarter last year. For the nine months ended
September 30, 1999 and 1998 revenue increased to $28.1 million from
$23.2 million. Of this amount, approximately $2.4 million and $8.6
million, respectively, during the three and nine month periods ended
September 30, 1999 was derived from Card Services provided globally to
post paid card issuers - that is, to customers who were in place by the
second quarter of 1998. Contracts and business arrangements entered
into in the last twelve months accounted for approximately $8.2 and
$19.5 million of the revenue for the three and nine month periods ended
September 30, 1999 and included $6.4 million and $11.9 million,
respectively, in revenue from Network Services; the network services
revenue included some sales in August and September using the Latin
American network acquired with iGlobe and $0.6 million in IP private
line revenues from existing iGlobe contracts. Network Services is
expected to generate additional revenue growth in future reporting
periods. The services of Vogo Networks (unified messaging and telephone
access to Internet content and services) were launched with its first
customer late in the second quarter and will not contribute materially
to revenues in the fourth quarter, although it is anticipated that
there will be recognizable growth and a measurable revenue stream in
2000.
GROSS PROFIT
Gross profit was $0.4 million and $3.6 million for the three months
ended September 30, 1999 and 1998. For the nine months ended September
30, 1999 and 1998, gross profit was $0.7 million and $10.6 million,
respectively. An anticipated increase in the cost of revenue related to
leases of capacity and other up-front costs necessary to implement new
routes and services in Network Services was the key element of this
margin difference - as long as the IP voice network is growing with new
routes and services, such up-front costs will be incurred. It is also
expected that costs to build out the recently acquired iGlobe routes
and services will contribute negatively to gross margins through the
first quarter of next year. Also reflected in the difference between
the nine month period ending September 30, 1999 and the prior year
period are costs incurred primarily in the first quarter of 1999 due to
pricing decisions which led to large negative margins in some card
service contracts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
SG&A totaled $6.7 million and $3.6 million, respectively, for the third
quarter of 1999 and 1998, and $17.3 million and $10.7 million for the
nine months ended September 30, 1999 and 1998. Included in these
amounts is a provision for doubtful accounts of $0.4
45
<PAGE>
million and $0.2 million for the three months ended September 30, 1999
and 1998. The provision for doubtful accounts was $0.7 million and $1.0
million for the nine month periods ended September 30, 1999 and 1998,
respectively. Excluding the provision for doubtful accounts, SG&A was
$6.0 million and $16.3 million for the three and nine months ended
September 30, 1999 as compared to $3.4 million and $9.7 million for the
same periods in 1998. The increase in the nine month period is mainly
due to the inclusion, during the nine month period of the operating
results of the newly acquired subsidiaries for which SG&A expenses,
principally employee compensation, totaled $5.2 million.
DEFERRED COMPENSATION
These non-cash credits/charges totaled a charge of $0.1 million and
$1.1 million for the three and nine month period ended September 30,
1999 and relate to the stock allocated to employees of acquired
companies by their former owners out of the acquisition consideration
paid by the Company. 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 be reported based on changes in the market price of the
Company's common stock.
DEPRECIATION AND AMORTIZATION EXPENSE
These expenses increased from $0.7 million and $2.2 million to $4.5
million and $7.8 million for the three and nine month periods ended
September 30, 1999 and 1998, principally due to amortization charges
related to goodwill and other intangibles of $3.3 million and $4.9
million in the three and nine months ended September 30, 1999 related
to acquisitions completed since December 1, 1998. The balance of the
increase was attributable to increases in the fixed assets of acquired
companies.
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 $1.8 million and $5.8 million compared to $0.2
million and $1.3 million for the three and nine month periods ended
September 30, 1999 and 1998, respectively. This increase was primarily
due to amortization of the debt discount related to the value of the
warrants associated with acquisitions and financings, as well as an
increase in debt.
46
<PAGE>
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. Settlements and payments made with various tax jurisdictions
have decreased the provision to $1.2 million as of September 30, 1999.
The Company continues to work with various jurisdictions to settle
outstanding tax obligations for prior years. No income tax provision
was required for the nine month period ended September 30, 1999.
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA
As the Company continues its aggressive growth plan for the remainder
of 1999 and it intends to pursue that plan into the forseeable future,
it will require large cash demands and an aggressive cash management.
In meeting its objectives, the Company has raised significant
financing through a combination of issuance of preferred stock,
proceeds from exercise of warrants and placement of significant debt
with a major stockholder of the Company.
Cash and cash equivalents were $2.2 million at September 30, 1999
compared to $1.4 million at December 31, 1998. Accounts receivable,
net, increased by $2.0 million to $8.9 million at September 30, 1999
from $6.9 million at December 31, 1998, mainly due to higher revenues
and acquisitions. Accounts payable and accrued expenses totaled $18.5
million at September 30, 1999 (as compared to $12.0 million at
December 31, 1998) resulting principally from deferrals of payments to
certain vendors, and the assumption of approximately $3.6 million of
such liabilities in the ConnectSoft acquisition. Cash outflows from
operating activities for the nine month period ended September 30,
1999 totaled $19.0 million, compared to cash inflows of $1.4 million
for the nine month period ended September 30, 1998, and was due
primarily to the operating loss caused by lower gross margin and
higher selling, general administrative expenses.
On the operating level, the Company continues efforts to finalize a new
agreement and enhance its relationship with an entity that was formerly
one of its largest customers. At September 30, 1999, 21.7% of the
Company's net accounts receivable of $8.9 million was due from this
entity for which extended credit terms have been granted. The new
arrangement would assure more effective and timely collection of
receivables from that customer to permit renewed growth in that
customer's business. This arrangement will also assist in the
collection of certain amounts impacted by the extended credit terms.
The anticipated arrangements will include the Company managing the cash
collections from the ultimate users of the services supplied to the
customer.
-----------------------------------------------------------------------
There was a net working capital deficiency of $15.2 million at
September 30, 1999 compared to a deficiency of $21.0 million at
December 31, 1998.
Cash outflows from investing activities for the nine months ended
September 30, 1999 totaled $3.0 million which was $1.5 million less
than the cash outflow for the
47
<PAGE>
same period in 1998. This decrease was due to lower purchases of
property and equipment and no advances to non-affiliates subsequently
acquired in 1999 as compared to 1998. This decrease was offset by the
Company's purchases of Telekey, Connectsoft, Swiftcall and iGlobe
requiring approximately $2.1 million. (See Note 4 for further
discussion).
Cash generated from financing activities totaled $22.8 million during
the nine months period ended September 30, 1999 compared to $1.0
million during the nine months ended September 30, 1998. This increase
of $21.8 million was primarily due to the Company receiving a
financing commitment of $20.0 million in the form of long-term debt
with its largest stockholder ("Lender"). Under this arrangement, the
Company initially received an unsecured loan of $7.0 million until
stockholder approval was received. Upon stockholder approval in June
1999, the Lender purchased $20.0 million in Secured Notes with which
the Company repaid the initial $7.0 million loan. Under this
agreement, the Company could borrow up to $20.0 million with monthly
principal and interest payments of $377,000 with a balloon payment of
$8.6 million due in June 2002. Also, under the agreement, the Lender
purchased an Accounts Receivable Revolver Credit Note ("Revolver") for
an amount up to the lesser of (1) 50% of eligible receivables (as
defined) or (2) the aggregate amount of principal that has been repaid
to date. Principal and interest on the Revolver are payable on the
earliest to occur of (i) the third anniversary of the agreement, June
30, 2002, or (ii) the date of closing of a Qualified Offering as
defined in the agreement. In August, the Company reached an agreement
with the Lender whereby the Company will issue to the Lender 40 shares
of Series J Preferred as prepayment of $4.0 million of the outstanding
$20.0 million. The exchange was finalized in November 1999. Pursuant
to the exchange agreement, the $4.0 million is not subject to redraw
under the Revolver. See Note 7 and 10 to the Consolidated Financial
Statements. In addition, the Company received proceeds of $10.0
million from the sale of preferred stock which consisted of proceeds
of $5.0 million from the sale of Series D Preferred and proceeds of
$5.0 million from the sale of Series E Preferred. See Note 8 to the
Consolidated Financial Statements. In addition, the Company received
proceeds of $0.7 million from the exercise of warrants. These proceeds
were offset by the principal payments of $15.7 million on notes
payable consisting of payment of $7.0 million on an unsecured loan, as
discussed earlier, and payment of $7.5 million on an unsecured note
due to a telecommunications company. See Note 7 to the Consolidated
Financial Statements.
CURRENT FUNDING REQUIREMENTS
The Company has the following estimated firm cash obligations and
requirements during the remainder of calendar 1999:
- --------------------------------------------------------------------------------
(in millions)
Capital lease payments $ 0.7
Repayment of subsidiary's Line of Credit 0.1
Repayment of term loan principal 1.0
Current payments on notes 2.6
Y2K compliance program (see below) 0.3
------
$ 4.7
49
<PAGE>
Through September 30, 1999 the Company has acquired new funding and
commitments in excess of $38.0 million, including: $11.8 million from
the sale of convertible stock; $20.0 million in long-term debt; $0.7
million due to conversion of warrants and more than $2.0 million in
vendor financing for network equipment purchases. These funds alone
will not permit the Company to achieve the growth, both short and
long-term, that management is targeting. That growth will require
additional capital. The plan under which the Company is currently
operating requires cash in the last quarter of 1999 through mid 2000.
The Company anticipates that this capital will come from (1) a private
placement of equity in the fourth quarter of up to $15 million, (2) an
additional financing of debt or equity in the first half of 2000 of up
to $30.0 million with the possibility that this total will be
diminished by secured equipment-based financings.
These funds will be used for operations as required, for network
expansion and upgrade, for acquisitions and investments and, in
particular, for the launch of new services such as the Global Office
Services. If significantly less capital is available, it 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, results of operations and financial condition.
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 September 15, 2000 and is
currently not applicable to the Company because the Company does not
enter into hedging or derivative transactions.
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
50
<PAGE>
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 had determined that material operating systems
modifications may not be required to ensure Y2K compliance. This
determination was validated by testing the operating software resident
on the Unix-based systems which was completed in September 1999.
Reprogramming and testing of the Company's core application software
has been completed. The Company has used internal resources to
identify, correct or reprogram, and test its other, non-operational
computer systems for Y2K compliance. All reprogramming efforts,
including testing will be completed this month. Deployment of Y2K
compliant hardware and software is expected to be complete by the end
of November. Management is currently evaluating the financial impact
for Y2K compliance and expects that total remaining costs for the
Company will not exceed $0.25 million. Material costs have been
incurred during the nine months ended September 30, 1999 totaling
approximately $550,000. The Company believes that it does not have
"Year 2000" problems in its critical systems. Nevertheless, the
Company has prepared a contingency plan. The Company is also
continuing 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 systems and offerings; (ii)
corruption of data contained in its internal information systems; and
(iii) the failure of infrastructure and services provided by external
providers. The Company's contingency planning in all of these areas
includes, 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. 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 business, results of operations and
financial condition.
51
<PAGE>
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 September 30, 1999, the Company was exposed to some market
risk through interest rates on its long-term debt and preferred stock
and foreign currency. At September 30, 1999, the Company's exposure to
market risk was not material. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
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.
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 entered into a settlement agreement.
In August, 1999 a telecommunications services provider filed suit
against the Company seeking approximately $304,000 pursuant to a
service contract. The Company contends that the plaintiff breached the
agreement which is the subject of the complaint and is vigorously
defending this suit.
In October, 1999, a major telecommunications carrier filed suit against
the Company seeking approximately $2,000,000 pursuant to various
service contracts. The Company disputes the amounts allegedly owed and
is evaluating its options with respect to its response. These options
include a vigorous defense of the suit based on the quality of service
provided, erroneous invoices and unfair and deceptive billing
practices.
ITEM 2 - CHANGES IN SECURITIES
- --------------------------------------------------------------------------------
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- --------------------------------------------------------------------------------
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
None
52
<PAGE>
ITEM 5 - OTHER INFORMATION
- --------------------------------------------------------------------------------
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) Exhibits
4.1 Form of Warrant to purchase 5,000,000 shares of common stock
of eGlobe, Inc. issued to EXTL Investors LLC (Incorporated by
reference to Exhibit 4.1 in Current Report on Form 8-K of
eGlobe filed July 19, 1999).
4.2 Certificate of Designations, Rights and Preferences of 5%
Series K Cumulative Convertible Preferred Stock of eGlobe,
Inc. (Incorporated by reference to Exhibit 4.1 in Current
Report on Form 8-K of eGlobe, Inc. filed September 3, 1999).
4.3 Form of Warrants to purchase shares of common stock of
eGlobe, Inc. dated as of September 15, 1999 (Incorporated by
reference to Exhibit 4.3 in Current Report on Form 8-K of
eGlobe filed October 5, 1999).
4.4 Certificate of Designations, Rights and Preferences of 20%
Series M Cumulative Convertible Preferred Stock of eGlobe,
Inc. (Incorporated by reference to Exhibit 4.1 in Current
Report on Form 8-K of eGlobe, Inc. filed October 29, 1999).
4.5 Certificate of Designations, Rights and Preferences of Series
N Cumulative Convertible Preferred Stock of eGlobe, Inc.
4.6 Form of Warrants to purchase shares of common stock of
eGlobe, Inc. dated as of October 15, 1999.
4.7 Certificate of Designations, Rights and Preferences of 5%
Series J Cumulative Convertible Preferred Stock of eGlobe,
Inc.
10.1 Loan and Note Purchase Agreement, dated April 9, 1999,
between EXTL Investors LLC, eGlobe Financing Corporation and
eGlobe, Inc. (Incorporated by reference to Exhibit 10.16 in
Annual Report on Form 10-K of eGlobe, for the period ended
December 31, 1998).
10.2 Side Letter, dated June 16, 1999, between EXTL Investors LLC
and eGlobe, Inc. (Incorporated by reference to Exhibit 10.2
in Current Report on Form 8-K of eGlobe filed July 19, 1999).
10.3 Amendment No. 1 to Loan and Note Purchase Agreement, dated
June 30, 1999, between EXTL Investors LLC, eGlobe Financing
Corporation, IDX Financing Corporation and Telekey Financing
Corporation and eGlobe, Inc. (Incorporated by reference to
Exhibit 10.3 in Current Report on Form 8-K of eGlobe filed
July 19, 1999).
53
<PAGE>
10.4 Form of Secured Promissory Note in the original principal
amount of $20,000,000, dated June 30, 1999, of eGlobe
Financing Corporation, IDX Financing Corporation and Telekey
Financing Corporation payable to EXTL Investors LLC
(Incorporated by reference to Exhibit 10.4 in Current Report
on Form 8-K of eGlobe filed July 19, 1999).
10.5 Security Agreement, dated June 30, 1999, among eGlobe
Financing Corporation, IDX Financing Corporation, Telekey
Financing Corporation and EXTL Investors LLC (Incorporated by
reference to Exhibit 10.5 in Current Report on Form 8-K of
eGlobe filed July 19, 1999).
10.6 Security Agreement, dated June 30, 1999, among eGlobe, Inc.,
IDX International, Inc. and EXTL Investors LLC (Incorporated
by reference to Exhibit 10.6 in Current Report on Form 8-K of
eGlobe filed July 19, 1999).
10.7 Guaranty, dated June 30, 1999, among eGlobe, Inc., IDX
International, Inc. and EXTL Investors LLC (Incorporated by
reference to Exhibit 10.7 in Current Report on Form 8-K of
eGlobe filed July 19, 1999).
10.8 Form of Accounts Receivable Revolving Credit Note in the
original principal amount of up to $20,000,000, dated June
30, 1999, of eGlobe Financing Corporation, IDX Financing
Corporation and Telekey Financing Corporation payable to EXTL
Investors LLC (Incorporated by reference to Exhibit 10.8 in
Current Report on Form 8-K of eGlobe filed July 19, 1999).
10.9 Transition Management & Services Agreement between eGlobe,
Inc. and Highpoint Telecommunications, Inc., dated as of
August 1, 1999 (Incorporated by reference to Exhibit 10.1 in
Current Report on Form 8-K of eGlobe filed October 29, 1999).
27 Financial Data Schedule
(b) Reports on Form 8-K and 8-K/A
(1) A REPORT OF FORM 8-K WAS FILED WITH THE COMMISSION ON JULY 2, 1999 TO
REPORT THE ACQUISITION OF SUBSTANTIALLY ALL OF THE ASSETS OF
CONNECTSOFT COMMUNICATIONS CORPORATION AND CONNECTSOFT HOLDING CORP.
(2) A REPORT ON FORM 8-K WAS FILED WITH THE COMMISSION ON JULY 19, 1999 TO
REPORT THE ISSUANCE OF $20 MILLION OF SECURED NOTES AND WARRANTS.
(3) A REPORT ON FORM 8-K/A, FURTHER AMENDING A REPORT ON FORM 8-K DATED
DECEMBER 2, 1998 REPORTING THE ACQUISITION OF IDX INTERNATIONAL, INC.,
WAS FILED WITH THE COMMISSION ON AUGUST 31, 1999 TO REPORT THE
RENEGOTIATION OF THE TERMS OF CONSIDERATION PAID TO THE FORMER
STOCKHOLDERS OF IDX.
54
<PAGE>
(3) A REPORT ON FORM 8-K WAS FILED WITH THE COMMISSION ON SEPTEMBER 3, 1999
TO REPORT COMPLIANCE WITH AN ORDER OF THE NASDAQ STOCK MARKET RELATING
TO ONGOING LISTING.
(4) A REPORT ON FORM 8-K WAS FILED WITH THE COMMISSION ON OCTOBER 5, 1999
TO REPORT THE ACQUISITION OF CONTROL OF OASIS RESERVATION SERVICES,
INC.
(5) A REPORT ON FORM 8-K WAS FILED WITH THE COMMISSION ON OCTOBER 15, 1999
TO REPORT COMPLIANCE WITH AN ORDER OF THE NASDAQ STOCK MARKET RELATING
TO ONGOING LISTING.
(6) A REPORT ON FORM 8-K WAS FILED WITH THE COMMISSION ON OCTOBER 29, 1999
TO REPORT THE ACQUISITION OF IGLOBE, INC.
<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.
eGlobe, Inc.
(Registrant)
Date: November 15, 1999 By /S/ Anne Haas
--------------------------------------------
Anne Haas
Controller, Treasurer
(Principal Accounting Officer)
Date: November 15, 1999 By /S/ Christopher J. Vizas
---------------------------------------------
Christopher J. Vizas
Chairman of the Board of Directors, and
Chief Executive Officer
(Principal Executive Officer)
55
EXHIBIT 4.5
CERTIFICATE OF DESIGNATIONS
RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS
OF 8% SERIES N CUMULATIVE CONVERTIBLE
PREFERRED STOCK BY RESOLUTION OF
THE BOARD OF DIRECTORS OF
EGLOBE, INC.
Pursuant to Section 151 of the General
Corporation Law of the State of Delaware
8% SERIES N CUMULATIVE CONVERTIBLE
PREFERRED STOCK
I, Christopher J. Vizas, Chairman of the Board of eGlobe, Inc. (the
"Corporation"), a corporation organized and existing under and by virtue of the
General Corporation Law of the State of Delaware ("DGCL"), DO HEREBY CERTIFY
that, pursuant to authority conferred upon the Board of Directors by the
Restated Certificate of Incorporation, as amended, of the Corporation (the
"Certificate of Incorporation"), the Board of Directors, in accordance with the
provisions of Section 151 of the DGCL, adopted the following resolution,
effective as of October 14, 1999 providing for the creation of the 8% Series N
Cumulative Convertible Preferred Stock:
RESOLVED that, pursuant to Article IV of the Certificate of
Incorporation of the Corporation, there be and hereby is authorized and created
a series of Cumulative Convertible Preferred Stock consisting of 20,000 shares
having a par value of $.001 per share, which series shall be titled "8% Series N
Cumulative Convertible Preferred Stock."
The designations, rights, preferences, privileges and restrictions of
the 8% Series N Cumulative Convertible Preferred Stock shall be made as follows:
1. Designation and Amount. This series of Preferred Stock shall be
designated and known as "8% Series N Cumulative Convertible Preferred Stock"
(the "Series N Preferred Stock") and shall consist of 20,000 shares. The par
value of the Series N Preferred Stock shall be $.001 per share. Certain defined
terms used herein are defined in paragraph 8 below. The Series N Preferred Stock
may be issued in consecutive series (i.e., Series N-1, N-2, et seq.) if more
than one closing occurs.
2. Voting. 2(a) Except as may be otherwise provided by these terms of
the Series N Preferred Stock or by law, the holders of Series N Preferred Stock
shall have no voting rights unless dividends payable on the shares of Series N
Preferred Stock are in arrears for thirty (30) days, in which case the holders
of Series N Preferred Stock voting separately as a class with the shares of any
other Preferred Stock having similar voting rights, will be entitled at the next
regular or special meeting of stockholders of the Corporation to elect one
director (such voting rights will continue until such time as the dividend
arrearage on Series N Preferred Stock has been paid in full). The affirmative
vote or consent of holders of at least 66 2/3% of the outstanding shares of
Series N Preferred Stock will be required for the issuance of any class or
series of stock of the Corporation ranking senior to or pari passu with the
shares of Series N Convertible Preferred Stock (other than the Series D
Preferred Stock, Series E Preferred Stock, Series I Preferred Stock, Series J
Preferred Stock, Series M Preferred Stock, and Series K Preferred
<PAGE>
Stock), each par value $.001 per share, authorized as of the date hereof) as to
dividends or rights on liquidation, winding up and dissolution.
2(b) Whenever holders of Series N Preferred Stock are required or
permitted to take any action by vote as a single class or series, such action
may be taken without a meeting by written consent, setting forth the action so
taken and signed by the holders of the Series N Preferred Stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
3. Dividends. 3(a) The holders of the Series N Preferred Stock shall be
entitled to receive, out of funds legally available therefor, when, as and if
declared by the Board of Directors, cumulative annual dividends of 8.0% of the
Liquidation Amount (as defined below) per share of Series N Preferred Stock
outstanding (the "Accruing Dividends"). Accruing Dividends shall accrue from the
Issue Date (whether or not the Corporation has earnings, there are funds legally
available therefor or such dividends are declared) and shall be fully
cumulative. Accruing Dividends shall be payable annually out of assets legally
available therefor on December 31 (hereinafter referred to as a "Dividend
Payment Date"), commencing December 31, 2000, when, as and if declared by the
Board of Directors. All dividends that accrue on each share of Series N
Preferred Stock shall be payable in full upon conversion of such share (when, as
and if declared by the Board of Directors).
3(b) On each Dividend Payment Date commencing December 31, 2000, or
upon conversion of Series N Preferred Stock (subject to Section 5(a)(vi)),
Accruing Dividends, may, at the election of the holder (if the holder makes an
election in writing prior to the initial Dividend Payment Date) or in the
absence of an election by the holder at the election of the Corporation, be
payable (i) in cash or (ii) in kind, in validly issued, fully paid nonassessable
shares of Common Stock, computing the value of a share of Common Stock for the
purpose of such payment as equal to the average closing market price per share
for the fifteen trading days immediately prior to the annual Dividend Payment
Date; provided, however that the Corporation may pay Accruing Dividends in kind
only to the extent that such payment would not require shareholder approvals
(including under rules of the Nasdaq Stock Market) or such shareholder approvals
shall have been obtained and the shares are registered for resale under the
Securities Act of 1933.
3(c) All shares of Common Stock which may be issued as a dividend will
thereupon be duly authorized, validly issued, fully paid and nonassessable.
3(d) The record date for the payment of Accruing Dividends shall,
unless otherwise altered by the Corporation's Board of Directors, be the
fifteenth day of the month immediately preceding the month in which the Dividend
Payment Date occurs, but in no event more than sixty (60) days nor less than ten
(10) days prior to the Dividend Payment Date.
3(e) No dividends shall be granted on any Common Stock or other Junior
Stock unless and until all accrued but unpaid dividends with respect to the
Series N Preferred Stock have been paid in full. Accruing Dividends shall not be
payable unless and until all accrued but unpaid dividends with respect to any
Senior Stock then outstanding have been paid in full. All dividends with respect
to the Series N Preferred Stock shall be payable on a parity basis with
dividends (including accrued but unpaid dividends) on Parity Stock.
4. Liquidation. 4(a) (i) Upon any liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary, the holder(s) of each
outstanding share of Series N Preferred Stock shall first be entitled, before
any distribution or payment is made upon any Junior Stock but after the full
-2-
<PAGE>
liquidation preference has been paid with respect to all Senior Stock, and on a
parity basis with all Parity Stock, to be paid, in the case of each such share,
an amount equal to $1,000 per share of Series N Preferred Stock (the
"Liquidation Amount"), plus accrued and unpaid dividends thereon (collectively,
the "Liquidation Preference"). If upon such liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary, the assets to be
distributed among the holders of Series N Preferred Stock shall be insufficient
to permit payment in full to all holders of Series N Preferred Stock of the
aggregate Liquidation Preference and the amount of any payment to all holders of
any other class or series of Preferred Stock ranking on parity with the Series N
Preferred Stock as to liquidation, then the entire assets of the Corporation to
be so distributed shall be distributed ratably among the holders of Series N
Preferred Stock and the holders of any other class or series of Preferred Stock
ranking on parity with the Series N Preferred Stock as to liquidation, in
accordance with the respective amounts payable on liquidation upon the shares of
Series N Preferred Stock and such Preferred Stock ranking on parity with the
Series N Preferred Stock as to liquidation. After payment in full to the holders
of Series N Preferred Stock of the aggregate Liquidation Preference as
aforesaid, holders of the Series N Preferred Stock shall, as such, have no right
or claim to any of the remaining assets of the Corporation.
(ii) Written notice of any such liquidation, dissolution or winding up,
stating a payment date and the place where said payments shall be made, shall be
given (A) by certified or registered mail, postage prepaid, (B) by a nationally
known overnight delivery service or (C) by hand, not less than 45 days prior to
the payment date stated therein, to each holder of record of Series N Preferred
Stock, such notice to be addressed to each such holder at its address as shown
by the records of the Corporation.
4(b) None of the merger or the consolidation of the Corporation, or the
sale, lease or conveyance of all or substantially all of its property and
business as an entirety, shall be deemed to be a liquidation, dissolution or
winding up of the Corporation within the meaning of this paragraph 4, unless
such sale, lease, or conveyance shall be in connection with a plan of
liquidation, dissolution or winding up of the Corporation.
5. Conversion. The holders of shares of Series N Preferred Stock shall
have the following conversion rights:
5(a). Right to Convert. (i) Subject to the terms and conditions of
paragraph 5, including this paragraph 5(a)(i), from and after the Issue Date (as
defined below), any share or shares of Series N Preferred Stock shall be
convertible into such number of fully paid and nonassessable shares of Common
Stock (the "Conversion Rate") as is obtained by (1) multiplying the number of
shares of Series N Preferred Stock by the Liquidation Amount and (2) dividing
the result by a conversion price equal to the greater of (A) the greater of
$2.125 and 101% of the average closing market price per share of Common Stock
for the fifteen trading days prior to the binding commitment of the holder to
invest in such shares, provided, however, that no shares of Series N Preferred
Stock sold after the first issuance of Series N Preferred Stock shall have an
initial conversion price below the initial conversion price of the shares of
Series N Preferred Stock sold at such first issuance (such initial conversion
price, as it may have last been adjusted pursuant to the terms hereof, is
referred to herein as the "Initial Conversion Price") or (B) eighty-five per
cent (85%) of the market price per share of common stock, computing the market
price per share for the purpose of such conversion as equal to the average
closing market price per share for the five trading days immediately prior to
the conversion date, provided, however, that the conversion price shall not be
greater than the greater of $3.25 or 150% of the Initial Conversion Price.
(ii) Each share of Series N Preferred Stock shall automatically be
converted into shares of Common Stock, based on the then-effective Conversion
Rate, on the earliest to occur of: (1) the date that is
-3-
<PAGE>
the fifth anniversary of the first issuance of Series N Preferred Stock; (2) the
first date as of which the last reported sales price of the Common Stock on
Nasdaq is $6.00 or more for any 15 consecutive trading days during any period in
which Series N Preferred Stock is outstanding; (3) the date that 80% or more of
the Series N Preferred Stock issued by the Corporation, cumulatively from and
after the date hereof, whether or not such Series N Preferred Stock is then
outstanding, has been converted into Common Stock, the holders thereof have
agreed with the Corporation in writing to convert such Series N Preferred Stock
into Common Stock or a combination of the foregoing; or (4) the Corporation
closes a public offering of equity securities of the Corporation with gross
proceeds to the Corporation of at least $25 million.
(iii) A holder's rights of conversion shall be exercised by the holder
thereof by giving written notice that the holder elects to convert a stated
number of shares of Series N Preferred Stock into Common Stock. Such written
notice may be given by telecopying a written and executed notice of conversion
to the Corporation at its main telecopier number at its principal office and
delivering within five (5) business days thereafter, to the Corporation at its
principal office (or such other office or agency of the Corporation as the
Corporation may designate by notice in writing to the holders of the Series N
Preferred Stock), together with a copy to the Corporation's transfer agent, the
original notice of conversion by express courier, together with a certificate or
certificates for the shares to be so converted, duly endorsed to the Corporation
or in blank, and with a statement of the name or names (with address) in which
the certificate or certificates for shares of Common Stock shall be issued;
provided, however, that the Corporation shall not be obligated to issue
certificates for shares of Common Stock in any name other than the name or names
set forth on the certificates for the shares of Series N Preferred Stock being
converted unless all requirements for transfer of Series N Preferred Stock have
been complied with. Conversion shall be effective upon receipt by the
Corporation and the transfer agent of the telecopied notice (provided that the
original notice and the share certificate or certificates are sent to the
Corporation and the transfer agent as contemplated above).
(iv) In the case of automatic conversion, the outstanding shares of
Series N Preferred Stock shall be converted into Common Stock automatically
without any further action by the holders of such shares or by the Corporation
and whether or not the certificates representing such shares are surrendered to
the Corporation or its transfer agent.
(v) In case of any liquidation of the Corporation, all rights of
conversion shall cease and terminate at the close of business on the business
day preceding the date fixed for payment of the amount to be distributed to the
holders of the Series N Preferred Stock pursuant to paragraph 4.
(vi) The number of shares into which the Series N Preferred Stock is
convertible will be determined without giving effect to any Accruing Dividends
on the Series N Preferred Stock. Dividends which accrue shall be payable in full
upon conversion.
5(b). Issuance of Certificates; Time Conversion Effected. (i) Promptly
after the receipt of the written notice referred to in subparagraph 5(a)(iii),
or upon automatic conversion as referred to in subparagraph 5(a)(iv), as
applicable, and surrender of the certificate or certificates for the share or
shares of Series N Preferred Stock to be converted (as provided in subparagraph
5(a)(iii), the Corporation shall issue and deliver or cause to be issued and
delivered, to such holder of Series N Preferred Stock or to such holder's
nominee or nominees, registered in such name or names as such holder may direct,
a certificate or certificates for the number of shares of Common Stock, as
necessary, issuable upon the conversion of such share or shares of Series N
Preferred Stock. Upon the effectiveness of conversion the rights of the holder
of such share or shares of Series N Preferred Stock being converted shall cease,
and the Person or Persons in whose name or names any certificate or certificates
for shares of Common Stock shall be issuable upon such conversion shall be
deemed to have become the holder or holders of record of the shares of Common
-4-
<PAGE>
Stock represented thereby.
(ii) The Corporation shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon such conversion unless the
certificates evidencing such shares of Series N Preferred Stock are either
delivered to the Corporation or its transfer agent as provided below, or the
holder notifies the Corporation or its transfer agent that such certificates
have been lost, stolen or destroyed and executes an agreement satisfactory to
the Corporation to indemnify the Corporation from any loss incurred by it in
connection with such certificates. Upon surrender by any holder of the
certificates formerly representing shares of Series N Preferred Stock at the
office of the Corporation or any transfer agent for the Series N Preferred
Stock, there shall be issued and delivered to such holder promptly at such
office and in its name as shown on such surrendered certificate or certificates,
a certificate or certificates for the number of shares of Common Stock into
which the shares of Series N Preferred Stock surrendered were convertible on the
date on which such automatic conversion occurred. Until surrendered as provided
above, each certificate formerly representing shares of Series N Preferred Stock
shall be deemed for all corporate purposes to represent the number of shares of
Common Stock resulting from such automatic conversion.
5(c). Fractional Shares; Partial Conversion. In the event that the
computation pursuant to subparagraph 3(b), 5(a) and 5(b) of the number of shares
of Common Stock issuable as a dividend or upon conversion of shares of Series N
Preferred Stock results in any fractional share of Common Stock, the Corporation
shall pay in cash the value of such fractional shares of Common Stock upon such
issuance and conversion. In case the number of shares of Series N Preferred
Stock represented by the certificate or certificates surrendered pursuant to
subparagraph 5(a) exceeds the number of shares converted, the Corporation shall,
upon such conversion, issue and deliver to the holder of the Certificate or
Certificates so surrendered, at the expense of the Corporation, a new
certificate or certificates for the number of shares of Series N Preferred Stock
represented by the certificate or certificates surrendered which are not to be
converted, and which new certificate or certificates shall entitle the holder
thereof to the rights of the shares of Series N Preferred Stock represented
thereby to the same extent as if the Certificate theretofore covering such
unconverted shares had not been surrendered for conversion.
5(d). Adjustment of Price Upon Issuance of Common Stock. Except as
provided in subparagraph 5(m) below or in the case of any Permitted Issuance,
if, during the period that ends on the last day of the eighteenth month
following the date of the first sale of a share of Series N Preferred Stock, the
Corporation shall issue or sell, or is, in accordance with subparagraphs 5(d)(1)
through 5(d)(4), deemed to have issued or sold, any shares of Common Stock for a
consideration per share less than the Initial Conversion Price, forthwith upon
such issue or sale, the Initial Conversion Price shall be reduced to the price
determined by multiplying the Conversion Price by a fraction (i) the numerator
of which shall be equal to the sum of (A) the number of shares of Common Stock
outstanding (on a fully diluted basis as provided in subparagraph 5(d)(5) below)
immediately prior to such issue or sale and (B) the number of shares of Common
Stock that the consideration, if any, received by the Corporation upon such
issuance or sale would have purchased at the Initial Conversion Price divided by
the Initial Conversion Price and (ii) the denominator of which shall be equal to
the total number of shares of Common Stock outstanding (on a fully diluted basis
as provided in subparagraph 5(d)(5)) immediately after such issue or sale.
For purposes hereof, "Permitted Issuances" means the issue or sale of
(i) shares of Common Stock by the Corporation pursuant to the exercise or
conversion, as the case may be, of Convertible Securities outstanding, or
issuable under a binding contract existing, immediately prior to the first
issuance date of the Series N Preferred Stock (as adjusted pursuant to the terms
of such securities to give effect to stock dividends or stock splits or a
combination of shares in connection with a recapitalization, merger,
consolidation or other reorganization occurring after the first issuance date of
the Series N Preferred
Stock), and (ii) options to acquire Common Stock by the Corporation pursuant to
a resolution of, or a stock option plan approved by a resolution of, the Board
of Directors of the Corporation (or the compensation committee thereof) to the
Corporation's employees or directors.
For purposes of this subparagraph 5(d), the following subparagraphs
5(d)(1) to 5(d)(5) shall also be applicable:
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<PAGE>
5(d)(1). Issuance of Rights or Options. Except in the event of any
Permitted Issuance, in case at any time the Corporation shall in any manner
grant or sell (whether directly or by assumption in a merger or otherwise) any
warrants or other rights to subscribe for or to purchase, or any options for the
purchase of, Common Stock or any stock or security convertible into or
exchangeable (with or without further consideration) for Common Stock (such
warrants, rights or options being called "Options" and such convertible or
exchangeable stock or securities being called "Convertible Securities"), whether
or not such Options or the right to convert or exchange any such Convertible
Securities are immediately exercisable, and the price per share for which Common
Stock is issuable upon the exercise of such Options or upon the conversion or
exchange of such Convertible Securities (determined by dividing (i) the total
amount, if any, received or receivable by the Corporation as consideration for
the granting of such Options, plus the minimum aggregate amount of additional
consideration payable to the Corporation upon the exercise of all such Options,
plus, in the case of such Options which relate to Convertible Securities, the
minimum aggregate amount of additional consideration, if any, payable upon the
issue or sale by the Corporation of all such Convertible Securities and upon the
conversion or exchange thereof, by (ii) the total maximum number of shares of
Common Stock issuable upon the exercise of all such Options or upon the
conversion or exchange of all such Convertible Securities issuable upon the
exercise of such Options) shall be less than the Initial Conversion Price, then
the total maximum number of shares of Common Stock issuable upon the exercise of
all such Options or upon conversion or exchange of all such Convertible
Securities issuable upon the exercise of such Options shall be deemed to have
been issued for such price per share as of the date of granting of such Options
and thereafter shall be deemed to be outstanding when computing the Conversion
Price. Except as otherwise provided in subparagraph 5(d)(3), no adjustment of
the Initial Conversion Price shall be made upon the actual issue of Common Stock
or Convertible Securities upon exercise of such Options or upon the actual issue
of Common Stock upon conversion or exchange of such Convertible Securities.
5(d)(2). Issuance of Convertible Securities. Except in the event of any
Permitted Issuance, in case at any time the Corporation shall in any manner
issue (whether directly or upon assumption in a merger or otherwise) or sell any
Convertible Securities, whether or not the rights to exchange or convert any
such Convertible Securities are immediately exercisable, and the price per share
for which Common Stock is issuable upon such conversion or exchange (determined
by dividing (i) the total amount received or receivable by the Corporation as
consideration for the issue or sale of all such Convertible Securities, plus the
minimum aggregate amount of additional consideration, if any, payable to the
Corporation upon the conversion or exchange thereof, by (ii) the total maximum
number of shares of Common Stock issuable upon the conversion or exchange of all
such Convertible Securities) shall be less than the Initial Conversion Price,
then the total maximum number of shares of Common Stock issuable upon conversion
or exchange of all such Convertible Securities shall be deemed to have been
issued for such price per share as of the date of the issue or sale of such
Convertible Securities and thereafter shall be deemed to be outstanding when
computing the Conversion Price; provided, that (A) except as otherwise provided
in subparagraph 5(d)(3), no adjustment of the Initial Conversion Price shall be
made upon the actual issue of such Common Stock upon conversion or exchange of
such Convertible Securities and (B) if any such issue or sale of such
Convertible Securities is made upon exercise of any Options to purchase any such
Convertible Securities for which adjustments of the Conversion Price have been
or are to be
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<PAGE>
made pursuant to other provisions of this subparagraph 5(d), no further
adjustment of the Conversion Price shall be made by reason of such issue or
sale.
5(d)(3). Change in Option Price or Conversion Rate. If (i) the exercise
price provided for in any Option referred to in subparagraph 5(d)(1), (ii) the
additional consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in subparagraph 5(d)(1) or 5(d)(2), (iii) the
additional consideration, if any, payable upon the issuance of any Convertible
Securities issuable upon the exercise of any Options referred to in subparagraph
5(d)(1), (iv) the number of shares of Common Stock issuable upon the exercise of
Options referred to in subparagraph 5(d)(1), or (v) the rate at which
Convertible Securities referred to in subparagraph 5(d)(1) or 5(d)(2) are
convertible into or exchangeable for Common Stock, shall change at any time
(including, but not limited to, changes under or by reason of provisions
designed to protect against dilution), then upon the happening of such event the
Initial Conversion Price shall forthwith be readjusted to the Conversion Price
which would have been in effect had such Options or Convertible Securities still
outstanding provided for such changed purchase price, additional consideration,
number of shares or conversion rate, as the case may be, at the time initially
granted, issued or sold. Upon the expiration of any Option referred to in
subparagraph 5(d)(1) or the expiration or termination of any right to convert or
exchange Convertible Securities referred to in subparagraphs 5(d)(1) or (2), the
Initial Conversion Price then in effect hereunder shall forthwith be increased
to the Conversion Price which would have been in effect at the time of such
expiration or termination had such Option or Convertible Securities, to the
extent outstanding immediately prior to such expiration or termination, never
been issued;
5(d)(4). Consideration for Stock. In case any shares of Common Stock,
Options or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received by the
Corporation therefor, without deduction therefrom of any amounts paid or
receivable for accrued interest or accrued dividends and any expenses incurred
or any underwriting commissions or concessions paid or allowed by the
Corporation in connection therewith. In case any shares of Common Stock, Options
or Convertible Securities shall be issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the
Corporation shall be deemed to be the fair value of such consideration at the
time of such issuance or sale as determined in good faith by the Board of
Directors of the Corporation, without deduction of any amounts paid or
receivable for accrued interest or accrued dividends and any expenses incurred
or any underwriting commissions or concessions therewith. In case any Options
shall be issued in connection with the issue and sale of other securities of the
Corporation, together comprising one integral transaction in which no specific
consideration is allocated to such Options by the parties thereto, such Options
shall be deemed to have been issued for such consideration as determined in good
faith by the Board of Directors of the Corporation.
5(d)(5). Treasury Shares: Full Dilution. The number of shares of Common
Stock outstanding at any given time shall not include shares owned or held by or
for the account of the Corporation, and the disposition of any such shares shall
be considered an issue or sale of Common Stock for the purpose of this
subparagraph 5(d). The number of shares outstanding at any given time shall
include, in addition to shares of Common Stock then issued and outstanding, all
shares of Common Stock issuable upon the exercise of all Options or Convertible
Securities outstanding.
5(e). Subdivision or Combination of Common Stock or Series N Preferred
Stock. In case the Corporation shall at any time subdivide (by any stock split,
stock dividend or otherwise) its outstanding shares of Common Stock into a
greater number of shares, the Conversion Price shall be proportionately reduced,
and, conversely, in case the outstanding shares of Common Stock shall be
combined into a smaller number of shares, the Conversion Price shall be
proportionately increased. Any dividend or other
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<PAGE>
distribution made upon any capital stock of the Corporation payable in Common
Stock or in any security convertible into or exercisable for Common Stock (other
than the Series N Preferred Stock) without or for de minimus consideration shall
be deemed to be a subdivision for purposes of this subparagraph 5(e). In the
event of a subdivision or combination of the Series N Preferred Stock, the
Liquidation Amount shall be proportionately reduced or increased, as the case
may be.
5(f). Reorganization. Reclassification. Merger or Distribution. If any
of the following shall occur: (i) any distribution on the capital stock of the
Corporation or capital reorganization or reclassification of such capital stock
which is effected in such a way that holders of Common Stock shall be entitled
to receive stock, securities, evidence of indebtedness or other assets (other
than cash dividends out of current or retained earnings) with respect to or in
exchange for Common Stock; (ii) any consolidation or merger to which the
Corporation is a party other than a merger in which the Corporation is the
continuing corporation and which does not result in any reclassification of, or
change (other than a change in name, or par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
combination) in, the outstanding shares of Common Stock; or (iii) any sale or
conveyance of all or substantially all of the property or business of the
Corporation as an entirety, then, as a condition of such distribution,
reorganization, classification, consolidation, merger, sale or conveyance,
lawful and adequate provisions shall be made whereby each holder of a share or
shares of Series N Preferred Stock shall thereupon have the right to receive,
upon the basis and upon the terms and conditions specified herein and in lieu of
the shares of Common Stock immediately theretofore receivable upon the
conversion of such share or shares of Series N Preferred Stock, such shares of
stock, securities, evidence of indebtedness or assets as may be issued or
payable in such transaction with respect to or in exchange for a number of
outstanding shares of such Common Stock equal to the number of shares of such
Common Stock immediately theretofore receivable upon such conversion had such
distribution, reorganization, reclassification, consolidation, merger, sale or
conveyance not already taken place, and in such case appropriate provisions
shall be made with respect to the right and interests of such holder to the end
that the provisions hereof (including without limitation provisions for
adjustment of the Conversion Price) shall thereafter be applicable, as nearly as
may be, in relation to any shares of stock, securities, evidence of indebtedness
or assets thereafter deliverable upon the exercise of such conversion rights.
Anything herein to the contrary notwithstanding, if the provisions of this
subparagraph 5(f) shall be deemed to apply to any distribution, reorganization,
reclassification, consolidation, merger, sale or conveyance in respect of the
Corporation or its capital stock, no duplicative adjustments shall be made to
the Conversion Price pursuant to subparagraph 5(d) or 5(e) upon the occurrence
of such distribution, reorganization, reclassification, consolidation, merger,
sale or conveyance.
5(g). Notice of Adjustment. Upon any adjustment of the Conversion
Price, then and in each such case the Corporation shall give written notice
thereof, (i) by certified or registered mail, postage prepaid, (ii) by a
nationally known overnight delivery service or (iii) delivered by hand,
addressed to each holder of shares of Series N Preferred Stock at the address of
such holder as shown on the books of the Corporation, which notice shall state
the Conversion Price resulting from such adjustment, setting forth in reasonable
detail the method upon which such calculation is based. Notice will be effective
on the fifth day after mailing under subparagraph (i) and when delivered to the
addressee under subparagraphs (ii) and (iii).
5(h). Other Notices. In case at any time:
(i) the Corporation shall declare any dividend upon its Common
Stock payable in cash or stock or make any other distribution to the holders of
its Common Stock;
(ii) the Corporation shall offer for subscription pro rata to
the holders of its Common
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<PAGE>
Stock any additional shares of stock of any class or other rights;
(iii) there shall be any distribution (other than a cash
dividend) on the capital stock of the Corporation or capital reorganization or
reclassification of the capital stock of the Corporation, or a consolidation or
merger of the Corporation with or into, or a sale of all or substantially all
its assets to, another entity or entities; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give (A) by
certified or registered mail, return receipt requested, postage prepaid, (B) by
a nationally known overnight delivery service or (C) delivered by hand,
addressed to each holder of any shares of Series N Preferred Stock at the
address of such holder as shown on the books of the Corporation at least 30 days
prior written notice of the date on which the books of the Corporation shall
close or a record shall be taken for such dividend, distribution or subscription
rights or for determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up and the date when the same shall take place. Such notice in
accordance with the foregoing sentence shall also specify, in the case of any
such dividend, distribution or subscription rights, the date on which the
holders of Common Stock shall be entitled thereto and the date on which the
holders of Common Stock shall be entitled to exchange their Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, as the case may be.
5(i). Stock to be Reserved. The Corporation shall at all times reserve
and keep available out of its authorized but unissued Common Stock, solely for
the purpose of issuance upon the conversion of Series N Preferred Stock as
herein provided, including any dividends that accrue on the Series N Preferred
Stock, as specified in paragraph 3 above, such number of shares of Common Stock
as shall then be issuable upon the conversion of all outstanding shares of
Series N Preferred Stock. The Corporation covenants that all shares of Common
Stock which shall be so issued shall be duly and validly issued and fully paid
and nonassessable and free from all taxes, liens and charges with respect to the
issue thereof, and, without limiting the generality of the foregoing, the
Corporation covenants that it will from time to time take all such action as may
be required to assure that the par value per share of the Common Stock is at all
times equal to or less than the lowest Conversion Price in effect at the time.
The Corporation will take all such action as may be necessary to assure that all
such shares of Common Stock may be so issued without violation of any applicable
law or regulation, or of any requirement of any securities exchange upon which
the Common Stock may be listed or Nasdaq. The Corporation will not take any
action which results in any adjustment of the Conversion Price if the total
number of shares of Common Stock issued and issuable after such action upon
conversion of the Series N Preferred Stock would exceed the total number of
shares of Common Stock then authorized by the Certificate of Incorporation.
5(j). Reissuance of Preferred Stock. Shares of Series N Preferred Stock
which are converted into shares of Common Stock as provided herein shall resume
the status of authorized and unissued shares of Preferred Stock without
designation as to series or class until shares are once more designated as part
of a particular series or class by the Board of Directors of the Corporation.
5(k). Issue Tax. The issuance of certificates for shares of Common
Stock upon conversion of Series N Preferred Stock shall be made without charge
to the holders thereof for any issuance tax in respect thereof; provided. that
the Corporation shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any certificate
in a name other than that of
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<PAGE>
the holder of the Series N Preferred Stock which is being converted.
5(l). Closing of Books. The Corporation will at no time close its
transfer books against the transfer of any Series N Preferred Stock or of any
shares of Common Stock issued or issuable upon the conversion of any shares of
Series N Preferred Stock in any manner which interferes with the timely
conversion of such Series N Preferred Stock, except as may otherwise be required
to comply with applicable securities laws.
5(m). Limitations on Adjustments. Anything herein to the contrary
notwithstanding, no adjustment in the Conversion Price shall be required unless
such adjustment, either by itself or with other adjustments not previously made,
would require a change of at least $0.01 (one cent) in such Conversion Price;
provided, that any adjustment which by reason of this subparagraph 5(m) is not
required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations of shares of Common Stock or Series N
Preferred Stock under this paragraph 5 shall be rounded to the nearest three
decimal points.
6. Certain Approvals. The Corporation acknowledges that as a
prerequisite to the conversion of Series N Preferred Stock as contemplated
hereby it may be necessary for a holder of Series N Preferred Stock to comply
with the filing and notice requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, the requirements of any exchange or market
on which the Common Stock may be listed (including, without limitation, the
requirement of shareholder approval prior to the issuance of Common Stock upon
conversion) or other laws, rules or regulations applicable to such conversion.
The Corporation will, at its expense, fully cooperate with the holders of Series
N Preferred Stock and use its best efforts to cause any such prerequisite to be
met. In the event such prerequisite has not been met on the applicable
conversion date, then such date shall, as to such holder of Series N Preferred
Stock, be extended until such prerequisite is met, and during such time Accruing
Dividends shall continue to accrue as contemplated by paragraph 3 above and such
shares of Series N Preferred Stock shall remain outstanding and be entitled to
all rights and preferences provided herein.
7. Information Rights. Each holder of Series N Preferred Stock will be
sent copies of all material provided to holders of Common Stock and copies of
all filings made with the Securities and Exchange Commission pursuant to rules
and regulations thereof.
8. Definitions.
"Affiliate" of a Person shall mean someone that directly, or indirectly
through one or more intermediaries, controls, or is controlled by, or is under
common control with, such Person.
"Board of Directors" shall mean the Board of Directors of the
Corporation or the Executive Committee of the Board of Directors.
"Change of Control" shall mean the occurrence of one or more of the
following events: (i) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all or substantially all of
the assets of the Corporation to any Person or group of related Persons for
purposes of Section 13(d) of the Exchange Act (a "Group"), together with any
Affiliates thereof; (ii) the approval by the holders of the capital stock of the
Corporation of any plan or proposal for the liquidation or dissolution of the
Corporation; (iii) any Person or Group shall become the owner, directly or
indirectly, beneficially or of record, of shares representing more than 50.0% of
the aggregate ordinary voting power represented by the issued and outstanding
capital stock of the Corporation; or (iv) the replacement of a majority of the
Board
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<PAGE>
of Directors of the Corporation over a two-year period, and such replacement
shall not have been approved by a vote of at least a majority of the Board of
Directors of the Corporation then still in office who either were members of
such Board of Directors at the beginning of such period or whose election as a
member of such Board of Directors at the beginning of such period or whose
election as a member of such Board of Directors was previously so approved.
"Common Stock" shall mean the common stock, $.001 par value, of the
Corporation.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
"Issue Date" shall mean the date of original issuance of any share of
Series N Preferred Stock.
"Junior Stock" shall mean any class or series of capital stock
(including Common Stock) of the Corporation (other than Series D Preferred
Stock, Series E Preferred Stock, Series I Preferred Stock, Series J Preferred
Stock, Series K Preferred Stock and Series M Preferred Stock) that may be issued
which, at the time of issuance, is not declared to be on a parity with or senior
to the Series N Preferred Stock as to dividends and rights upon liquidation (or
in the case of Preferred Stock issued after the date hereof which has not
received the consent required by paragraph 2(a) hereto).
"Nasdaq" shall mean the Nasdaq Stock Market.
"Parity Stock" shall mean any class or series of Preferred Stock of the
Corporation (including Series D Preferred Stock) which, at the time of issuance,
is declared to be on a parity with the Series N Preferred Stock as to dividends
and rights upon liquidation and (in the case of Preferred Stock issued after the
date hereof) which has received the consent required by paragraph 2(a) hereto.
"Person" shall mean an individual, corporation, trust partnership,
limited liability company, joint venture, unincorporated organization,
government agency or any agency or political subdivision thereof, or other
entity.
"Preferred Stock" shall mean any class or series of preferred stock of
the Corporation.
"Senior Stock" shall mean the Series D, E, I, J, K and M Preferred
Stock of the Corporation or any class or series of Preferred Stock that: (a) at
the time of issuance is declared to be senior to the Series N Preferred Stock as
to dividends and rights upon liquidation; and (b) has received the consent
required by paragraph 2(a) hereto.
"Warrants" shall have the meaning set forth in the Stock Purchase
Agreement.
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<PAGE>
IN WITNESS WHEREOF, the undersigned has hereunto signed his name and
affirms that the statements made herein are true under the penalties of perjury
this 14th day of October, 1999.
/s/ Christopher J. Vizas
------------------------------
Christopher J. Vizas
Chairman of the Board and CEO
ATTEST:
/s/ Graeme Brown
- -----------------------------------
Graeme Brown
Assistant Secretary
EXHIBIT 4.6
WARRANT
NEITHER THE WARRANTS REPRESENTED HEREBY NOR THE SECURITIES ISSUABLE UPON
EXERCISE THEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"). NONE OF SUCH SECURITIES MAY BE OFFERED OR SOLD EXCEPT
PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT, OR (ii) AN AVAILABLE
EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING TO THE DISPOSITION OF
SECURITIES AND UPON DELIVERY TO THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY
SATISFACTORY TO COUNSEL FOR THE COMPANY, THAT SUCH EXEMPTION FROM REGISTRATION
UNDER THE ACT IS AVAILABLE.
DATE: October __, 1999
NO.: ____
WARRANT TO PURCHASE
SHARES OF
COMMON STOCK
OF
EGLOBE, INC.
eGlobe, Inc., a Delaware corporation (the "Company"), hereby issues to
____________ (the "Holder") this warrant to purchase from the Company, for a
price per share equal to $_____ (the "Exercise Price"), ________shares of common
stock, $.001 par value per share of the Company (the "Common Stock").
1. Exercise. (a) The rights represented by this warrant may be
exercised, in whole or in part at any time beginning on the date that is one
year after the date hereof until 5:00 PM (New York, New York time) on the third
anniversary of the date hereof (the "Exercise Period"), by (a) the surrender of
this warrant, along with the purchase form attached as Exhibit A (the "Purchase
Form"), properly executed, at the address of the Company set forth in section
6.2 (or such other address as the Company may designate by notice in writing to
the Holder at its address set forth in section 6.2) and (b) the payment to the
Company of the exercise price by check, payable to the order of the Company, for
the number of shares of Common Stock specified in the Purchase Form, together
with any applicable stock transfer taxes which must by law be borne by Holder. A
certificate representing the shares of Common Stock so purchased and, in the
event of an exercise of fewer than all the rights represented by this warrant, a
new warrant in the form of this warrant issued in the name of the Holder or its
designee(s) and representing a new warrant to purchase a number of shares of
Common Stock equal to the number of shares of Common Stock as to which this
warrant was theretofore exercisable less the number of shares of Common Stock as
to which this warrant shall theretofore have been exercised, shall be delivered
to the Holder or such designee(s) as promptly as practicable, but in no event
later than three business days, after this warrant shall have been so exercised.
(b) In lieu of a monetary payment of the Aggregate Exercise
Price, a Holder may elect to receive, without the payment of any additional
consideration, shares equal to the value of his Warrant or portion thereof by
the surrender of such Warrant to the Company with the "cashless exercise"
election form (the "Cashless Exercise Form") attached hereto as Exhibit B.
Thereupon, the Company shall issue to the Holder, such number of fully paid and
nonassessable shares of Common Stock as is computed using the following formula:
X = Y(A-B)
-------------
A
where X = the number of shares to be issued to the Holder pursuant to this
Warrant.
Y = the number of shares covered by this Warrant in respect of which
the net issuance election is made.
A = the Fair Market Value of one share of common stock, defined as the
average closing price per common share for the five (5) trading
days prior to receipt by the Company of the Cashless Exercise Form.
B = the Exercise Price in effect under this Warrant.
2. Antidilution. The Holder of this Warrant shall receive the same
rights and protections with regard to dilution as are provided for the Holders
of Series N Cumulative Convertible Preferred Stock pursuant to paragraphs 5(d),
5(e), 5(f), 5(g) and 5(m) of the Certificate of Designations of the Series N
Cumulative Convertible Preferred Stock.
3. Transfer. Subject to applicable law (including the requirements set
forth in the legend at the beginning of this warrant), this warrant may be
transferred at any time, in whole or in part, to any person or persons, provided
that the transferee is an Affiliate of the Holder. Any transfer shall be
effected by the surrender of this warrant, along with the form of assignment
attached as Exhibit C, properly executed, at the address of the Company set
forth in section 6.2 (or such other address as the Company may designate by
notice in writing to the Holder at its address set forth in section 6.2).
Thereupon, the Company shall issue in the name or names specified by the Holder
a new warrant or warrants of like tenor and representing a warrant or warrants
to purchase in the aggregate a number of shares equal to the number of shares to
which this warrant was theretofore exercisable less the number of shares as to
which this warrant shall theretofore have been exercised.
4. Payment of Taxes. The Company shall cause all shares of Common Stock
issued upon the exercise of this warrant to be validly issued, fully paid and
nonassessable and not subject to preemptive rights. The Company shall pay all
expenses in connection with, and all taxes and other governmental charges that
may be imposed with respect to. the issuance or delivery of the shares of Common
Stock upon exercise of this warrant, unless such tax or charge is imposed by law
upon the Holder.
5. Reservation of Shares. From and after the date of this warrant, the
Company shall at all times reserve and keep available for issuance upon the
exercise of this warrant a number of its authorized but unissued shares of
Common Stock sufficient to permit the exercise in full of this warrant and shall
use its best efforts to list such shares on the Nasdaq National Market stock
exchange.
6. Miscellaneous.
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<PAGE>
6.1 Securities Act Restrictions. The Holder acknowledges that this
warrant may not be sold, transferred or otherwise disposed of without
registration under the Securities Act of 1933, as amended (the "Act") or an
applicable exemption from the registration requirements of the Act and,
accordingly, this warrant and all certificates representing the Common Stock
issuable upon the exercise of this warrant shall bear a legend in the form set
forth on the top of page one of this warrant.
6.2 Notices. Any notices and other communications under this warrant
shall be in writing and may be given by any of the following methods: (a)
personal delivery; (b) facsimile transmission; (c) registered or certified mail.
postage prepaid, return receipt requested; or (d) overnight delivery service.
Notices shall be sent to the appropriate party at its address or facsimile
number given below (or at such other address or facsimile number for such party
as shall be specified by notice given hereunder): (a) if to the Company, to it
at: 1250 24th Street, NW, Suite 725, Washington, D.C. 20037, Fax No. (202)
822-8984, Attention: General Counsel, and if to the Holder, to it at his/her
address appearing on the stock records of the Company at the time that a notice
shall be mailed, or at such other address as the party to be notified shall from
time to time have furnished to the Company. All such notices and communications
shall be deemed received upon (a) actual receipt thereof by the addressee, (b)
actual delivery thereof to the appropriate address or (c) in the case of a
facsimile transmission, upon transmission thereof by the sender and issuance by
the transmitting machine of a confirmation slip confirming that the number of
pages constituting the notice have been transmitted without error. In the case
of notices sent by facsimile transmission, the sender shall contemporaneously
mail a copy of the notice to the addressee at the address provided for above.
However, such mailing shall in no way alter the time at which the facsimile
notice is deemed received.
6.3 Amendment. This warrant may be modified or amended or the
provisions of this warrant may be waived only with the written consent of the
Company and the Holder.
<PAGE>
6.4 Governing Law. This warrant shall be governed by the law of the
State of Delaware, without regard to the provisions thereof relating to
conflicts of laws.
EGLOBE, INC.
By:
------------------------------
Name:
Title:
<PAGE>
EXHIBIT A
PURCHASE FORM
[To be executed only upon exercise of warrant]
The undersigned registered owner of this warrant irrevocably exercises
this warrant for the purchase of ________shares of common stock, $.001 par value
per share (the "Common Stock") of eGlobe, Inc., and herewith makes payment
therefor in the aggregate amount of $________________, all at the price and on
the terms and conditions specified in this warrant and requests that
certificates for the shares of Common Stock hereby purchased be issued in the
name of and delivered to the undersigned and, if such shares of Common Stock
shall not include all of the shares of Common Stock issuable as provided in this
warrant, that a new warrant of like tenor and date for the balance of the shares
of Common Stock issuable hereunder be delivered to the undersigned.
Dated:
------------------------------ ----------------------------------
(Name of Registered Owner)
----------------------------------
(Signature of Registered Owner)
----------------------------------
(Street Address)
----------------------------------
(City) (State) (Zip Code)
<PAGE>
EXHIBIT B
CASHLESS EXERCISE FORM
[To be executed only upon exercise of warrant]
The undersigned registered owner of this warrant irrevocably exercises
this warrant under the cashless exercise provision of paragraph 1 (b) of this
Warrant all at the price and on the terms and conditions specified in this
warrant.
Holder requests that Company issue to the Holder, subject to
verification of the formula and calculation below, such number of fully paid and
nonassessable shares as is computed using the following formula:
X = Y(A-B)
-------------
A
where X = the number of shares to be issued to the Holder pursuant to this
Warrant.
Y = the number of shares covered by this Warrant in respect of which
the net issuance election is made.
A = the Fair Market Value of one share of common stock, defined as the
average closing price per common share for the five (5) trading
days prior to receipt by the Company of the Cashless Exercise Form.
B = the Exercise Price in effect under this Warrant.
Dated:
------------------------------ ----------------------------------
(Name of Registered Owner)
----------------------------------
(Signature of Registered Owner)
----------------------------------
(Street Address)
----------------------------------
(City) (State) (Zip Code)
<PAGE>
EXHIBIT C
ASSIGNMENT FORM
FOR VALUE RECEIVED. the undersigned registered owner of this warrant
hereby sells, assigns and transfers to the assignee named below all of the
rights of the undersigned under this warrant with respect to the number of
shares of common stock, $.001 par value per share of eGlobe, Inc. set forth
below:
Name and Address of Assignee No. of Shares of Common Stock
---------------------------- --- -- ----------------------
and does hereby irrevocably constitute and appoint ____________________
attorney-in-fact to register such transfer on the books of eGlobe, Inc.
maintained for the purpose, with full power of substitution in the premises.
Dated: Print Name:
------------------------------ -------------------------
Signature:
--------------------------
Witness:
----------------------------
EXHIBIT 4.7
CERTIFICATE OF DESIGNATIONS
RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS
OF 5% SERIES J CUMULATIVE CONVERTIBLE
PREFERRED STOCK BY RESOLUTION OF
THE BOARD OF DIRECTORS OF
EGLOBE, INC.
Pursuant to Section 151 of the General
Corporation Law of the State of Delaware
5% SERIES J CUMULATIVE CONVERTIBLE
PREFERRED STOCK
I, Christopher J. Vizas, Chairman of the Board of eGlobe, Inc. (the
"Corporation"), a corporation organized and existing under and by virtue of the
General Corporation Law of the State of Delaware ("DGCL"), DO HEREBY CERTIFY
that, pursuant to authority conferred upon the Board of Directors by the
Restated Certificate of Incorporation, as amended, of the Corporation (the
"Certificate of Incorporation"), the Board of Directors, in accordance with the
provisions of Section 151 of the DGCL, adopted the following resolution,
effective as of November 5, 1999 providing for the creation of the 5% Series J
Cumulative Convertible Preferred Stock:
RESOLVED that, pursuant to Article IV of the Certificate of
Incorporation of the Corporation, there be and hereby is authorized and created
a series of Cumulative Convertible Preferred Stock consisting of 40 shares
having a par value of $.001 per share, which series shall be titled "5% Series J
Cumulative Convertible Preferred Stock."
The designations, rights, preferences, privileges and restrictions of
the 5% Series J Cumulative Convertible Preferred Stock shall be made as follows:
1. Designation and Amount. This series of Preferred Stock shall be
designated and known as "5% Series J Cumulative Convertible Preferred Stock"
(the "Series J Preferred Stock") and shall consist of 40 shares. The par value
of the Series J Preferred Stock shall be $.001 per share. Certain defined terms
used herein are defined in paragraph 8 below.
2. Voting. 2(a) Except as may be otherwise provided by these terms of
the Series J Preferred Stock or by law, the holders of Series J Preferred Stock
shall have no voting rights unless dividends payable on the shares of Series J
Preferred Stock are in arrears for six quarterly periods, in which case the
holders of Series J Preferred Stock voting separately as a class with the shares
of any other Preferred Stock having similar voting rights, will be entitled at
the next regular or special meeting of stockholders of the Corporation to elect
one director (such voting rights will continue until such time as the dividend
arrearage on Series J Preferred Stock has been paid in
<PAGE>
full). The affirmative vote or consent of holders of at least 66 2/3% of the
outstanding shares of Series J Preferred Stock will be required for the issuance
of any class or series of stock of the Corporation ranking senior to or pari
passu with the shares of Series J Convertible Preferred Stock (other than the
series of Preferred Stock authorized as of the date hereof and other than the
Series K Preferred Stock, which is authorized as pari passu with the Series J),
each par value $.001 per share, authorized as of the date hereof) as to
dividends or rights on liquidation, winding up and dissolution.
2(b) Whenever holders of Series J Preferred Stock are required or
permitted to take any action by vote as a single class or series, such action
may be taken without a meeting by written consent, setting forth the action so
taken and signed by the holders of the Series J Preferred Stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
3. Dividends. 3(a) The holders of the Series J Preferred Stock shall be
entitled to receive, out of funds legally available therefor, when, as and if
declared by the Board of Directors, cumulative annual dividends of 5.0% of the
Liquidation Amount (as defined below) per share of Series J Preferred Stock
outstanding (the "Accruing Dividends"). Accruing Dividends shall accrue from the
Issue Date (whether or not the Corporation has earnings, there are funds legally
available therefor or such dividends are declared) and shall be fully
cumulative. Accruing Dividends shall be payable quarterly out of assets legally
available therefor on March 31, June 30, September 30 and December 31 (each of
such dates being hereinafter referred to as a "Dividend Payment Date"),
commencing December 31, 1999, when, as and if declared by the Board of
Directors. All accrued dividends on each share of Series J Preferred Stock shall
be payable in full upon conversion of such shares.
3(b) On each Dividend Payment Date commencing December 31, 1999, and
upon conversion of Series J Preferred Stock, Accruing Dividends are payable, at
the option of the holders, in cash or in fully paid and nonassessable shares of
Common Stock of the Corporation; provided, however, that the Corporation may pay
Accruing Dividends in common stock only to the extent that such payment would
not require shareholder approvals (including under rules of the Nasdaq Stock
Market) or such shareholder approvals shall have been obtained. If the
Corporation is not able to pay in common stock, payments shall be made in cash.
Dividends, if paid in Common Stock, shall be converted based on the average
closing price of eGlobe Common Stock for the 15 days immediately preceding the
Dividend Payment Date.
3(c) All shares of Common Stock which may be issued as a dividend will
thereupon be duly authorized, validly issued, fully paid and nonassessable.
3(d) The record date for the payment of Accruing Dividends shall,
unless otherwise altered by the Corporation's Board of Directors, be the
fifteenth day of the month immediately preceding the month in which the Dividend
Payment Date occurs, but in no event more than sixty (60) days nor less than ten
(10) days prior to the Dividend Payment Date
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<PAGE>
3(e) No dividends shall be granted on any Common Stock or other Junior
Stock unless and until all accrued but unpaid dividends with respect to the
Series J Preferred Stock have been paid in full. Accruing Dividends shall not be
payable unless and until all accrued but unpaid dividends with respect to any
Senior Stock then outstanding have been paid in full. All dividends with respect
to the Series J Preferred Stock shall be payable on a parity basis with
dividends (including accrued but unpaid dividends) on Parity Stock.
4. Liquidation. 4(a) (i) Upon any liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary, the holder(s) of each
outstanding share of Series J Preferred Stock shall first be entitled, before
any distribution or payment is made upon any Junior Stock but after the full
liquidation preference has been paid with respect to all Senior Stock, and on a
parity basis with all Parity Stock, to be paid, in the case of each such share,
an amount equal to $100,000 per share of Series J Preferred Stock (the
"Liquidation Amount"), plus accrued and unpaid dividends thereon (collectively,
the "Liquidation Preference"). If upon such liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary, the assets to be
distributed among the holders of Series J Preferred Stock shall be insufficient
to permit payment in full to all holders of Series J Preferred Stock of the
aggregate Liquidation Preference and the amount of any payment to all holders of
any other class or series of Preferred Stock ranking on parity with the Series J
Preferred Stock as to liquidation, then the entire assets of the Corporation to
be so distributed shall be distributed ratably among the holders of Series J
Preferred Stock and the holders of any other class or series of Preferred Stock
ranking on parity with the Series J Preferred Stock as to liquidation, in
accordance with the respective amounts payable on liquidation upon the shares of
Series J Preferred Stock and such Preferred Stock ranking on parity with the
Series J Preferred Stock as to liquidation. After payment in full to the holders
of Series J Preferred Stock of the aggregate Liquidation Preference as
aforesaid, holders of the Series J Preferred Stock shall, as such, have no right
or claim to any of the remaining assets of the Corporation.
(ii) Written notice of any such liquidation, dissolution or winding up,
stating a payment date and the place where said payments shall be made, shall be
given (A) by certified or registered mail, postage prepaid, (B) by a nationally
known overnight delivery service or (C) by hand, not less than 45 days prior to
the payment date stated therein, to each holder of record of Series J Preferred
Stock, such notice to be addressed to each such holder at its address as shown
by the records of the Corporation.
4(b) None of the merger or the consolidation of the Corporation, or the
sale, lease or conveyance of all or substantially all of its property and
business as an entirety, shall be deemed to be a liquidation, dissolution or
winding up of the Corporation within the meaning of this paragraph 4, unless
such sale, lease, or conveyance shall be in connection with a plan of
liquidation, dissolution or winding up of the Corporation.
5. Conversion. The holders of shares of Series J Preferred Stock shall
have the following conversion rights:
-3-
<PAGE>
5(a). Right to Convert. (i) Subject to the terms and conditions of
paragraph 5, from and after the Issue Date, any share or shares of Series J
Preferred Stock shall be convertible at the option of the holder into such
number of fully paid and nonassessable shares of Common Stock (the "Conversion
Rate") as is obtained by (1) multiplying the number of shares of Series J
Preferred Stock by the Liquidation Amount and (2) dividing the result by an
initial conversion price equal to $1.56 (such conversion price, as it may have
last been adjusted pursuant to the terms hereof, is referred to herein as the
"Conversion Price").
(ii) Each share of Series J Preferred Stock shall automatically be
converted into shares of Common Stock, based on the then-effective Conversion
Rate, on the earliest to occur of (1) the first date as of which the last
reported sales price of the Common Stock on Nasdaq is $5.00 or more for any 20
consecutive trading days during any period in which Series J Preferred Stock is
outstanding, (2) the date that 80% or more of the Series J Preferred Stock
issued by the Corporation, cumulatively from and after the date hereof, whether
or not such Series J Preferred Stock is then outstanding, has been converted
into Common Stock, the holders thereof have agreed with the Corporation in
writing to convert such Series J Preferred Stock into Common Stock or a
combination of the foregoing, or (3) the Corporation closes a public offering of
equity securities of the Corporation at a price of at least $3.00 per share and
with gross proceeds to the Corporation of at least $20 million.
(iii) Upon any Change of Control, however, each holder of Series J
Preferred Stock shall, in the event that the last reported sale price of the
Common Stock on Nasdaq on the date immediately preceding the date of the Change
of Control (the "Change of Control Price") is less than the Conversion Price,
have a one time right to convert such holder's shares of Series J Preferred
Stock into shares of the Common Stock at a conversion price equal to the Change
of Control Price. In lieu of issuing the shares of Common Stock issuable upon
conversion in the event of a Change of Control, the Corporation may, at its
option, make a cash payment equal to the number of shares of Common Stock to be
converted multiplied by the Change of Control Price.
(iv) A holder's rights of conversion shall be exercised by the holder
thereof by giving written notice that the holder elects to convert a stated
number of shares of Series J Preferred Stock into Common Stock. Such written
notice may be given by telecopying a written and executed notice of conversion
to the Corporation at its main telecopier number at its principal office and
delivering within five (5) business days thereafter, to the Corporation at its
principal office (or such other office or agency of the Corporation as the
Corporation may designate by notice in writing to the holders of the Series J
Preferred Stock), together with a copy to the Corporation's transfer agent, the
original notice of conversion by express courier, together with a certificate or
certificates for the shares to be so converted, duly endorsed to the Corporation
or in blank, and with a statement of the name or names (with address) in which
the certificate or certificates for shares of Common Stock shall be issued;
provided, however, that the Corporation shall not be obligated to issue
certificates for shares of Common Stock in any name other than the name or names
set forth on the certificates for the shares of Series J Preferred Stock being
converted unless all requirements for transfer of Series J Preferred Stock have
been complied with. Conversion shall be effective upon receipt by the
Corporation and the transfer agent of the
-4-
<PAGE>
telecopied notice (provided that the original notice and the share certificate
or certificates are sent to the Corporation and the transfer agent as
contemplated above).
(v) In the case of automatic conversion, the outstanding shares of
Series J Preferred Stock shall be converted into Common Stock automatically
without any further action by the holders of such shares or by the Corporation
and whether or not the certificates representing such shares are surrendered to
the Corporation or its transfer agent.
(vi) In case of any liquidation of the Corporation, all rights of
conversion shall cease and terminate at the close of business on the business
day preceding the date fixed for payment of the amount to be distributed to the
holders of the Series J Preferred Stock pursuant to paragraph 4.
(vii) The number of shares into which the Series J Preferred Stock is
convertible will be determined giving effect to any Accruing Dividends on the
Series J Preferred Stock.
5(b). Issuance of Certificates; Time Conversion Effected. (i) Promptly
after the receipt of the written notice referred to in subparagraph 5(a)(iv), or
upon automatic conversion as referred to in subparagraph 5(a)(v), as applicable,
and surrender of the certificate or certificates for the share or shares of
Series J Preferred Stock to be converted, the Corporation shall issue and
deliver or cause to be issued and delivered, to such holder of Series J
Preferred Stock or to such holder's nominee or nominees, registered in such name
or names as such holder may direct, a certificate or certificates for the number
of shares of Common Stock, including, subject to subparagraph 5(c) below,
fractional shares, as necessary, issuable upon the conversion of such share or
shares of Series J Preferred Stock. Upon the effectiveness of conversion the
rights of the holder of such share or shares of Series J Preferred Stock being
converted shall cease, and the Person or Persons in whose name or names any
certificate or certificates for shares of Common Stock shall be issuable upon
such conversion shall be deemed to have become the holder or holders of record
of the shares represented thereby.
(ii) The Corporation shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon such conversion unless the
certificates evidencing such shares of Series J Preferred Stock are either
delivered to the Corporation or its transfer agent as provided below, or the
holder notifies the Corporation or its transfer agent that such certificates
have been lost, stolen or destroyed and executes an agreement satisfactory to
the Corporation to indemnify the Corporation from any loss incurred by it in
connection with such certificates. Upon surrender by any holder of the
certificates formerly representing shares of Series J Preferred Stock at the
office of the Corporation or any transfer agent for the Series J Preferred
Stock, there shall be issued and delivered to such holder promptly at such
office and in its name as shown on such surrendered certificate or certificates,
a certificate or certificates for the number of shares of Common Stock into
which the shares of Series J Preferred Stock surrendered were convertible on the
date on which such automatic conversion occurred. Until surrendered as provided
above, each certificate formerly representing shares of Series J Preferred Stock
shall be deemed for all corporate purposes to represent the number of shares of
Common Stock resulting from such automatic conversion.
-5-
<PAGE>
5(c). Fractional Shares; Partial Conversion. In the event that the
computation pursuant to subparagraph 5(a) of the number of shares of Common
Stock issuable upon conversion of shares of Series J Preferred Stock results in
any fractional share of Common Stock, the Corporation may, at its option, issue
fractional shares or scrip representing fractional shares of Common Stock or pay
in cash the value of such fractional shares of Common Stock upon such
conversion, which for this purpose shall be deemed to equal the last reported
sales price of the Common Stock prior to the First Conversion Date. In case the
number of shares of Series J Preferred Stock represented by the certificate or
certificates surrendered pursuant to subparagraph 5(a) exceeds the number of
shares converted, the Corporation shall, upon such conversion, issue and deliver
to the holder of the Certificate or Certificates so surrendered, at the expense
of the Corporation, a new certificate or certificates for the number of shares
of Series J Preferred Stock represented by the certificate or certificates
surrendered which are not to be converted, and which new certificate or
certificates shall entitle the holder thereof to the rights of the shares of
Series J Preferred Stock represented thereby to the same extent as if the
Certificate theretofore covering such unconverted shares had not been
surrendered for conversion.
5(d). Adjustment of Price Upon Issuance of Common Stock. Except as
provided in subparagraph 5(m) below or in the case of any Permitted Issuance, if
and whenever the Corporation shall issue or sell, or is, in accordance with
subparagraphs 5(d)(1) through 5(d)(4), deemed to have issued or sold, any shares
of Common Stock for a consideration per share less than the Conversion Price,
forthwith upon such issue or sale, the Conversion Price shall be reduced to the
price determined by multiplying the Conversion Price by a fraction (i) the
numerator of which shall be equal to the sum of (A) the number of shares of
Common Stock outstanding (on a fully diluted basis as provided in subparagraph
5(d)(5) below) immediately prior to such issue or sale and (B) the number of
shares of Common Stock that the consideration, if any, received by the
Corporation upon such issuance or sale would have purchased at the Conversion
Price divided by the Conversion Price and (ii) the denominator of which shall be
equal to the total number of shares of Common Stock outstanding (on a fully
diluted basis as provided in subparagraph 5(d)(5)) immediately after such issue
or sale.
For purposes hereof, "Permitted Issuances" means the issue or sale of
(i) shares of Common Stock by the Corporation pursuant to the exercise or
conversion, as the case may be, of Convertible Securities outstanding, or
issuable under a binding contract existing, immediately prior to the first
issuance date of the Series J Preferred Stock (as adjusted pursuant to the terms
of such securities to give effect to stock dividends or stock splits or a
combination of shares in connection with a recapitalization, merger,
consolidation or other reorganization occurring after the first issuance date of
the Series J Preferred Stock), and (ii) options to acquire Common Stock by the
Corporation pursuant to a resolution of, or a stock option plan approved by a
resolution of, the Board of Directors of the Corporation (or the compensation
committee thereof) to the Corporation's employees or directors.
For purposes of this subparagraph 5(d), the following subparagraphs
5(d)(1) to 5(d)(5) shall also be applicable:
-6-
<PAGE>
5(d)(1). Issuance of Rights or Options. Except in the event of any
Permitted Issuance, in case at any time the Corporation shall in any manner
grant or sell (whether directly or by assumption in a merger or otherwise) any
warrants or other rights to subscribe for or to purchase, or any options for the
purchase of, Common Stock or any stock or security convertible into or
exchangeable (with or without further consideration) for Common Stock (such
warrants, rights or options being called "Options" and such convertible or
exchangeable stock or securities being called "Convertible Securities"), whether
or not such Options or the right to convert or exchange any such Convertible
Securities are immediately exercisable, and the price per share for which Common
Stock is issuable upon the exercise of such Options or upon the conversion or
exchange of such Convertible Securities (determined by dividing (i) the total
amount, if any, received or receivable by the Corporation as consideration for
the granting of such Options, plus the minimum aggregate amount of additional
consideration payable to the Corporation upon the exercise of all such Options,
plus, in the case of such Options which relate to Convertible Securities, the
minimum aggregate amount of additional consideration, if any, payable upon the
issue or sale by the Corporation of all such Convertible Securities and upon the
conversion or exchange thereof, by (ii) the total maximum number of shares of
Common Stock issuable upon the exercise of all such Options or upon the
conversion or exchange of all such Convertible Securities issuable upon the
exercise of such Options) shall be less than the Conversion Price, then the
total maximum number of shares of Common Stock issuable upon the exercise of all
such Options or upon conversion or exchange of all such Convertible Securities
issuable upon the exercise of such Options shall be deemed to have been issued
for such price per share as of the date of granting of such Options and
thereafter shall be deemed to be outstanding when computing the Conversion
Price. Except as otherwise provided in subparagraph 5(d)(3), no adjustment of
the Conversion Price shall be made upon the actual issue of Common Stock or
Convertible Securities upon exercise of such Options or upon the actual issue of
Common Stock upon conversion or exchange of such Convertible Securities.
5(d)(2). Issuance of Convertible Securities. Except in the event of any
Permitted Issuance, in case at any time the Corporation shall in any manner
issue (whether directly or upon assumption in a merger or otherwise) or sell any
Convertible Securities, whether or not the rights to exchange or convert any
such Convertible Securities are immediately exercisable, and the price per share
for which Common Stock is issuable upon such conversion or exchange (determined
by dividing (i) the total amount received or receivable by the Corporation as
consideration for the issue or sale of all such Convertible Securities, plus the
minimum aggregate amount of additional consideration, if any, payable to the
Corporation upon the conversion or exchange thereof, by (ii) the total maximum
number of shares of Common Stock issuable upon the conversion or exchange of all
such Convertible Securities) shall be less than the Conversion Price, then the
total maximum number of shares of Common Stock issuable upon conversion or
exchange of all such Convertible Securities shall be deemed to have been issued
for such price per share as of the date of the issue or sale of such Convertible
Securities and thereafter shall be deemed to be outstanding when computing the
Conversion Price; provided, that (A) except as otherwise provided in
subparagraph 5(d)(3), no adjustment of the Conversion Price shall be made upon
the actual issue of such Common Stock upon conversion or exchange of such
Convertible Securities and (B) if any such issue or sale of such Convertible
Securities is made upon exercise of any Options to purchase any such Convertible
Securities for which adjustments of the Conversion Price have been or are to be
-7-
<PAGE>
made pursuant to other provisions of this subparagraph 5(d), no further
adjustment of the Conversion Price shall be made by reason of such issue or
sale.
5(d)(3). Change in Option Price or Conversion Rate. If (i) the exercise
price provided for in any Option referred to in subparagraph 5(d)(1), (ii) the
additional consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in subparagraph 5(d)(1) or 5(d)(2), (iii) the
additional consideration, if any, payable upon the issuance of any Convertible
Securities issuable upon the exercise of any Options referred to in subparagraph
5(d)(1), (iv) the number of shares of Common Stock issuable upon the exercise of
Options referred to in subparagraph 5(d)(1), or (v) the rate at which
Convertible Securities referred to in subparagraph 5(d)(1) or 5(d)(2) are
convertible into or exchangeable for Common Stock, shall change at any time
(including, but not limited to, changes under or by reason of provisions
designed to protect against dilution), then upon the happening of such event the
Conversion Price shall forthwith be readjusted to the Conversion Price which
would have been in effect had such Options or Convertible Securities still
outstanding provided for such changed purchase price, additional consideration,
number of shares or conversion rate, as the case may be, at the time initially
granted, issued or sold. Upon the expiration of any Option referred to in
subparagraph 5(d)(1) or the expiration or termination of any right to convert or
exchange Convertible Securities referred to in subparagraphs 5(d)(1) or (2), the
Conversion Price then in effect hereunder shall forthwith be increased to the
Conversion Price which would have been in effect at the time of such expiration
or termination had such Option or Convertible Securities, to the extent
outstanding immediately prior to such expiration or termination, never been
issued;
5(d)(4). Consideration for Stock. In case any shares of Common Stock,
Options or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received by the
Corporation therefor, without deduction therefrom of any amounts paid or
receivable for accrued interest or accrued dividends and any expenses incurred
or any underwriting commissions or concessions paid or allowed by the
Corporation in connection therewith. In case any shares of Common Stock, Options
or Convertible Securities shall be issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the
Corporation shall be deemed to be the fair value of such consideration at the
time of such issuance or sale as determined in good faith by the Board of
Directors of the Corporation, without deduction of any amounts paid or
receivable for accrued interest or accrued dividends and any expenses incurred
or any underwriting commissions or concessions therewith. In case any Options
shall be issued in connection with the issue and sale of other securities of the
Corporation, together comprising one integral transaction in which no specific
consideration is allocated to such Options by the parties thereto, such Options
shall be deemed to have been issued for such consideration as determined in good
faith by the Board of Directors of the Corporation. If the Board of Directors of
the Corporation shall not make any determination, the consideration for the
options shall be deemed to be zero.
5(d)(5). Treasury Shares: Full Dilution. The number of shares of Common
Stock outstanding at any given time shall not include shares owned or held by or
for the account of the Corporation, and the disposition of any such shares shall
be considered an issue or sale of Common Stock for the purpose of this
subparagraph 5(d). The number of shares outstanding at any given time shall
include, in addition to shares of Common Stock then issued and outstanding, all
shares of Common Stock issuable upon the exercise of all Options or Convertible
Securities outstanding.
-8-
<PAGE>
5(e). Subdivision or Combination of Common Stock or Series J Preferred
Stock. In case the Corporation shall at any time subdivide (by any stock split,
stock dividend or otherwise) its outstanding shares of Common Stock into a
greater number of shares, the Conversion Price shall be proportionately reduced,
and, conversely, in case the outstanding shares of Common Stock shall be
combined into a smaller number of shares, the Conversion Price shall be
proportionately increased. Any dividend or other distribution made upon any
capital stock of the Corporation payable in Common Stock or in any security
convertible into or exercisable for Common Stock (other than the Series J
Preferred Stock) without or for de minimus consideration shall be deemed to be a
subdivision for purposes of this subparagraph 5(e). In the event of a
subdivision or combination of the Series J Preferred Stock, the Liquidation
Amount (and the public offering price referred to in paragraph 5(a)) shall be
proportionately reduced or increased, as the case may be.
5(f). Reorganization. Reclassification. Merger or Distribution. If any
of the following shall occur: (i) any distribution on the capital stock of the
Corporation or capital reorganization or reclassification of such capital stock
which is effected in such a way that holders of Common Stock shall be entitled
to receive stock, securities, evidence of indebtedness or other assets (other
than cash dividends out of current or retained earnings) with respect to or in
exchange for Common Stock, (ii) any consolidation or merger to which the
Corporation is a party other than a merger in which the Corporation is the
continuing corporation and which does not result in any reclassification of, or
change (other than a change in name, or par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
combination) in, the outstanding shares of Common Stock, or (iii) any sale or
conveyance of all or substantially all of the property or business of the
Corporation as an entirety, then, as a condition of such distribution,
reorganization, classification, consolidation, merger, sale or conveyance,
lawful and adequate provisions shall be made whereby each holder of a share or
shares of Series J Preferred Stock shall thereupon have the right to receive,
upon the basis and upon the terms and conditions specified herein and in lieu of
the shares of Common Stock immediately theretofore receivable upon the
conversion of such share or shares of Series J Preferred Stock, such shares of
stock, securities, evidence of indebtedness or assets as may be issued or
payable in such transaction with respect to or in exchange for a number of
outstanding shares of such Common Stock equal to the number of shares of such
Common Stock immediately theretofore receivable upon such conversion had such
distribution, reorganization, reclassification, consolidation, merger, sale or
conveyance not already taken place, and in such case appropriate provisions
shall be made with respect to the right and interests of such holder to the end
that the provisions hereof (including without limitation provisions for
adjustment of the Conversion Price) shall thereafter be applicable, as nearly as
may be, in relation to any shares of stock, securities, evidence of indebtedness
or assets thereafter deliverable upon the exercise of such conversion rights.
Anything herein to the contrary notwithstanding, if the provisions of this
subparagraph 5(f) shall be deemed to apply to any distribution, reorganization,
reclassification, consolidation, merger, sale or conveyance in respect of the
Corporation or its capital stock, no duplicative adjustments shall be made to
the Conversion Price pursuant to subparagraph 5(d) or 5(e) upon the occurrence
of such distribution, reorganization, reclassification, consolidation, merger,
sale or conveyance.
-9-
<PAGE>
5(g). Notice of Adjustment. Upon any adjustment of the Conversion
Price, then and in each such case the Corporation shall give written notice
thereof, (i) by certified or registered mail, postage prepaid, (ii) by a
nationally known overnight delivery service or (iii) delivered by hand,
addressed to each holder of shares of Series J Preferred Stock at the address of
such holder as shown on the books of the Corporation, which notice shall state
the Conversion Price resulting from such adjustment, setting forth in reasonable
detail the method upon which such calculation is based.
5(h). Other Notices. In case at any time:
(i) the Corporation shall declare any dividend upon its Common
Stock payable in cash or stock or make any other distribution to the holders of
its Common Stock;
(ii) the Corporation shall offer for subscription pro rata to
the holders of its Common Stock any additional shares of stock of any class or
other rights;
(iii) there shall be any distribution (other than a cash
dividend) on the capital stock of the Corporation or capital reorganization or
reclassification of the capital stock of the Corporation, or a consolidation or
merger of the Corporation with or into, or a sale of all or substantially all
its assets to, another entity or entities; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give (A) by
certified or registered mail, return receipt requested, postage prepaid, (B) by
a nationally known overnight delivery service or (C) delivered by hand,
addressed to each holder of any shares of Series J Preferred Stock at the
address of such holder as shown on the books of the Corporation at least 30
days' prior written notice of the date on which the books of the Corporation
shall close or a record shall be taken for such dividend, distribution or
subscription rights or for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up and the date when the same shall take place. Such
notice in accordance with the foregoing sentence shall also specify, in the case
of any such dividend, distribution or subscription rights, the date on which the
holders of Common Stock shall be entitled thereto and the date on which the
holders of Common Stock shall be entitled to exchange their Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, as the case may be.
5(i). Stock to be Reserved. The Corporation shall at all times reserve
and keep available out of its authorized but unissued Common Stock, solely for
the purpose of issuance upon the conversion of Series J Preferred Stock as
herein provided, including any dividends that accrue on the Series J Preferred
Stock, as specified in paragraph 3 above, such number of shares of Common Stock
as shall then be issuable upon the conversion of all outstanding shares of
Series J Preferred Stock. The Corporation covenants that all shares of Common
Stock which shall be so issued shall be duly and validly issued and fully paid
and nonassessable and free from all taxes, liens and charges with respect to the
issue thereof, and, without limiting the generality of the foregoing, the
Corporation covenants that it will from time to time take all such action as may
be required to assure that the par value per share of the Common Stock is at all
times equal to or less than the lowest Conversion Price in effect at the time.
The Corporation will take all such action as may be necessary to assure that all
such shares of Common Stock may be so issued without violation of any applicable
law or regulation, or of any requirement of any national securities exchange
upon which the Common Stock may be listed. The Corporation will not take any
action which results in any adjustment of the Conversion Price if the total
number of shares of Common Stock issued and issuable after such action upon
conversion of the Series J Preferred Stock would exceed the total number of
shares of Common Stock then authorized by the Certificate of Incorporation.
-10-
<PAGE>
5(j). Reissuance of Preferred Stock. Shares of Series J Preferred Stock
which are converted into shares of Common Stock as provided herein shall resume
the status of authorized and unissued shares of Preferred Stock without
designation as to series or class until shares are once more designated as part
of a particular series or class by the Board of Directors of the Corporation.
5(k). Issue Tax. The issuance of certificates for shares of Common
Stock upon conversion of Series J Preferred Stock shall be made without charge
to the holders thereof for any issuance tax in respect thereof; provided. that
the Corporation shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any certificate
in a name other than that of the holder of the Series J Preferred Stock which is
being converted.
5(l). Closing of Books. The Corporation will at no time close its
transfer books against the transfer of any Series J Preferred Stock or of any
shares of Common Stock issued or issuable upon the conversion of any shares of
Series J Preferred Stock in any manner which interferes with the timely
conversion of such Series J Preferred Stock, except as may otherwise be required
to comply with applicable securities laws.
5(m). Limitations on Adjustments. Anything herein to the contrary
notwithstanding, no adjustment in the Conversion Price shall be required unless
such adjustment, either by itself or with other adjustments not previously made,
would require a change of at least $0.01 (one cent) in such Conversion Price;
provided, that any adjustment which by reason of this subparagraph 5(m) is not
required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations of shares of Common Stock or Series J
Preferred Stock under this paragraph 5 shall be rounded to the nearest three
decimal points.
6. Certain Approvals. The Corporation acknowledges that as a
prerequisite to the conversion of Series J Preferred Stock as contemplated
hereby it may be necessary for a holder of Series J Preferred Stock to comply
with the filing and notice requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the filing fee for which shall be paid by
the Corporation; provided, that all reasonable efforts shall be made by the
holders of Series J Preferred Stock to require only one such filing), the
requirements of any exchange or market on which the Common Stock may be listed
(including, without limitation, the requirement of shareholder approval prior to
the issuance of Common Stock upon conversion) or other laws, rules or
regulations applicable to such conversion. The Corporation will, at its expense,
fully cooperate with the holders of Series J Preferred Stock and use its best
efforts to cause any such prerequisite to be met. In the event such prerequisite
has not been met on the applicable conversion date, then such date shall, as to
such holder of Series J Preferred Stock, be extended until such prerequisite is
met, and during such time Accruing Dividends shall continue to accrue as
contemplated by paragraph 3 above and such shares of Series J Preferred Stock
shall remain outstanding and be entitled to all rights and preferences provided
herein.
-11-
<PAGE>
7. Information Rights. Each holder of Series J Preferred Stock will be
entitled to copies of all material provided to holders of Common Stock and
copies of all filings made with the Securities and Exchange Commission pursuant
to rules and regulations thereof upon request by such holder.
8. Definitions.
"Affiliate" of a Person shall mean someone that directly, or indirectly
through one or more intermediaries, controls, or is controlled by, or is under
common control with, such Person.
"Board of Directors" shall mean the Board of Directors of the
Corporation or the Executive Committee of the Board of Directors in
circumstances in which the Committee is empowered to act on behalf of the Board.
"Change of Control" shall mean the occurrence of one or more of the
following events: (i) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all or substantially all of
the assets of the Corporation to any Person or group of related Persons for
purposes of Section 13(d) of the Exchange Act (a "Group"), together with any
Affiliates thereof; (ii) the approval by the holders of the capital stock of the
Corporation of any plan or proposal for the liquidation or dissolution of the
Corporation; (iii) any Person or Group shall become the owner, directly or
indirectly, beneficially or of record, of shares representing more than 50.0% of
the aggregate ordinary voting power represented by the issued and outstanding
capital stock of the Corporation; or (iv) the replacement of a majority of the
Board of Directors of the Corporation over a two-year period, and such
replacement shall not have been approved by a vote of at least a majority of the
Board of Directors of the Corporation then still in office who either were
members of such Board of Directors at the beginning of such period or whose
election as a member of such Board of Directors at the beginning of such period
or whose election as a member of such Board of Directors was previously so
approved.
"Common Stock" shall mean the common stock, $.001 par value, of the
Corporation.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
-12-
<PAGE>
"Issue Date" shall mean the date of original issuance of any share of
Series J Preferred Stock.
"Junior Stock" shall mean any class or series of capital stock
(including Common Stock) of the Corporation (other than the series of Preferred
Stock authorized as of the date hereof) which may be issued which, at the time
of issuance, is not declared to be on a parity with or senior to the Series J
Preferred Stock as to dividends and rights upon liquidation (or in the case of
Preferred Stock issued after the date hereof which has not received the consent
required by paragraph 2(a) hereto).
"Nasdaq" shall mean the Nasdaq Stock Market.
"Parity Stock" shall mean any class or series of Preferred Stock of the
Corporation (including Series D Preferred Stock) which, at the time of issuance,
is declared to be on a parity with the Series J Preferred Stock as to dividends
and rights upon liquidation and (in the case of Preferred Stock issued after the
date hereof) which has received the consent required by paragraph 2(a) hereto.
"Person" shall mean an individual, corporation, trust partnership,
limited liability company, joint venture, unincorporated organization,
government agency or any agency or political subdivision thereof, or other
entity.
"Preferred Stock" shall mean any class or series of preferred stock of
the Corporation.
"Senior Stock" shall mean any class or series of Preferred Stock of the
Corporation (including the series of Preferred Stock authorized as of the date
hereof) which, at the time of issuance, is declared to be senior to the Series J
Preferred Stock as to dividends and rights upon liquidation and (in the case of
Preferred Stock issued after the date hereof) which has received the consent
required by paragraph 2(a) hereto.
<PAGE>
IN WITNESS WHEREOF, the undersigned has hereunto signed his name and
affirms that the statements made herein are true under the penalties of perjury
this 5th day of November, 1999.
/s/ Christopher J. Vizas
-----------------------------------
Christopher J. Vizas
Chairman of the Board and President
ATTEST:
/s/ Graeme S.R. Brown
- -----------------------------------
Graeme S.R. Brown
Assistant Secretary
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