SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM APRIL 1, 1998 TO DECEMBER 31, 1998
Commission File Number: 1-10210
EXECUTIVE TELECARD, LTD.
- - --------------------------------------------------------------------------------
d/b/a eGlobe, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3486421
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation of organization) No.)
2000 Pennsylvania Avenue, NW, Suite 4800, Washington, DC 20006
- - --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (303) 691-2115
------------------------------
- - --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK $.001 PAR VALUE
(Title of Class)
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 any 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 No X
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing sale price of such stock as of March 31, 1999
amounted to $51,388,246.
The number of shares outstanding of each of the registrant's classes of common
stock as of March 31, 1999 was 21,344,694 shares, all of one class of $.001 par
value common stock.
<PAGE>
EXECUTIVE TELECARD, LTD.
d/b/a/ eGlobe, Inc.
FORM 10-K
NINE MONTH PERIOD ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I Item 1 Business 4-33
Item 2 Properties 34
Item 3 Legal Proceedings 34
Item 4 Submission of Matters to a Vote of Security Holders
PART II Item 5 Market for Registrant's Common Stock and Related
Stockholder Matters 35-37
Item 6 Selected Consolidated Financial Information 38
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 39-52
Item 7A Quantitative and Qualitative Disclosure About Market Rate 52
Item 8 Consolidated Financial Statements and Supplementary Data F-1 to F-53
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III Item 10 Directors and Executive Officers of the Registrant 48 - 52
Item 11 Executive Compensation 52 - 60
Item 12 Security Ownership of Certain Beneficial Owners and
Management 60 - 64
Item 13 Certain Relationships and Related Transactions 64
PART IV Item 14 Exhibits, Financial Statements, Schedules and Reports on
Form 8-K 65
SIGNATURES 66-67
G Glossary G1-G3
</TABLE>
<PAGE>
EXECUTIVE TELECARD, LTD.
d/b/a/ eGlobe, Inc.
PART I
ITEM 1 - BUSINESS (GENERAL)
- - --------------------------------------------------------------------------------
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains certain forward-looking statements
that involve risks and uncertainties. In addition, members of the Company's
senior management may, from time to time, make certain forward-looking
statements concerning the Company's operations, performance and other
developments. The Company's actual results could differ materially from those
anticipated in such forward-looking statements as a result of various factors,
including those set forth under the caption "Business--Risk Factors" and
elsewhere in this annual report on Form 10-K, as well as factors which may be
identified from time to time in the Company's other filings with the Securities
and Exchange Commission or in the documents where such forward-looking
statements appear. Unless the context suggests otherwise, references in this
annual report on Form 10-K to "eGlobe" or to the "Company" mean Executive
TeleCard, Ltd. and its subsidiaries.
- - --------------------------------------------------------------------------------
OUR BUSINESS
The Company is incorporated in the State of Delaware under the corporate
name of Executive TeleCard, Ltd. On August 14, 1998, we began doing business
under the name ("d/b/a/") eGlobe. Management believes that creating a new
corporate identity is an important step in the continuing development of the
Company. The common stock of the Company is quoted on the Nasdaq National Market
under the symbol "EGLO".
General
In 1998, the Company restructured key portions of its operations, refocused
its business, and changed its name. It took these actions because management
believed that the Company needed to concentrate on what it does best and do it
better.
The business of eGlobe is to provide services to large telecommunications
companies, primarily to telephone companies that are dominant in their national
markets, and to specialized telephone companies, to Internet Service Providers
("ISP's") and to issuers of credit cards as well. The services of the Company
enable its customers to provide global reach for "enhanced" or "value added"
telecommunications services that they supply, in turn, to their customers. Until
1998, the entire focus of eGlobe was on supporting calling card services. In
1998, that focus began to change.
4
<PAGE>
Taking advantage of our key assets - our operating platforms in more than
40 countries, our ability to originate telephone calls (and in many cases,
provide data access) in more than 90 countries and territories, and our customer
and operating relationships built over the years - we started working with
customers to extend their lines of services. A key part of that extension was
the recognition that "IP" (Internet Protocol) technologies had become a basic
element of our business and a principal need of our customers - even the card
services business relies on portions of its billing and operating functions on
IP software and services. To support the extension of services, in December
1998, we acquired IDX International, Inc. ("IDX") with its IP voice and fax
capabilities and made significant investments in unified messaging software. In
addition, we began exploring ways to integrate other services into our operating
platforms, including additional acquisitions that might complement current
offerings or extend our portfolio of services.
After our year of restructuring and refocus, we are implementing our new,
broader service strategy and leave 1998 committed to a program of growth. That
program will demand substantial new resources, particularly, human resources and
cash. For those reasons, in the first quarter of 1999 we raised $10.0 million
from the sale of equity, arranged a $20.0 million debt facility from an
affiliate of a major stockholder, entered into a key vendor financing
arrangement, and plan to raise substantial amounts of additional capital during
the next two years. Growth in the international telecommunications business
often results in a disparity between cash outlays and inflows during periods of
growth, with outlays far exceeding inflows. If its growth plans are successful,
eGlobe anticipates a period of cash flow disparity.
Management expects to invest in growth. Cash will be the key element of
that investment - whether it takes the form of recruiting personnel, acquiring
technology, expanding facilities, or extending the business base through
marketing or acquisitions.
In 1998, we made two principal investments in growth - the acquisition of
IDX and the investment in, and acquisition of a technology license for, unified
messaging technology. Already in 1999, we have furthered our strategy through
the acquisition of Telekey, Inc. ("Telekey") and our negotiations to extend our
role in unified messaging and related technologies through a joint venture
investment in the company that developed the messaging software that our new
services will be based upon.
Operating Platforms and IP Network
In more than 40 locations around the world, we have installed operating
platforms. These platforms are computers, software and related communications
termination equipment. In many instances, our platforms are co-located with the
international gateway facilities of the dominant telecommunications company in a
national market - frequently that company is both the operating partner and the
customer. The platforms are connected to both the local telephone network and to
international networks. The platforms supply global services to our customers -
their functions include managing voice and data access to one or more networks,
identifying and validating user access, providing various levels of transaction
processing, routing calls or data messages, providing access to additional
service functions (for example, the unified messaging service currently in beta
test), and supplying billing and accounting information. One of the strengths of
the platform is its
5
<PAGE>
inherent flexibility, subject to necessary interface and applications
programming, in providing a "front end" access node for a range of different
services.
Until the end of 1998, we had no transmission facilities of our own. The
network of platforms relied on transmission services supplied by others to route
calls or messages. With the acquisition of IDX, that began to change. IDX has
developed, and is working to expand, an international network of
telecommunications trunks that employ Internet Protocol as the basic method of
transporting telephone calls, faxes or data messages. Our platforms are
beginning to use that network to route calls and messages. Use of the IDX
network to provide transmission services for our other services will reduce
costs, create other operating efficiencies and, perhaps most important, permit
us to offer new IP based services to our customers, services which would have
been difficult if not impossible to supply without the IDX network.
IDX, like eGlobe works principally as a provider to, and operating partner
with, telephone companies and ISP's. This key element of the IDX network and
service model helps it mesh with our operating platform service. In combination
with us IDX is concentrating on developing business and operating arrangements
with the existing customers of eGlobe. So far this strategy appears to be
successful, establishing IDX trunk connections collocated with the operating
platforms in the international gateway facilities of our customers.
Services
In 1999, we will concentrate on three lines of service: Network Services
(the IP voice and fax capabilities of IDX); Card Services; and the first
elements of a new suite of services called "Global Office" which is being built
around the global access capabilities of the operating platforms and the first
phase of the unified messaging service.
Network Services
We offer new, low-cost transmission services by transmitting digitized and
compressed voice and data messages as IP packets over an international network
of frame relay which we manage as a packet-switched private network. This
approach resembles that used by many large corporations to transport voice and
data over their wide area networks. We believe that IDX's voice service,
"CyberCall," and fax service, "CyberFax," provide significant efficiencies to
customers, compared to PSTN transmission, for the portion of the transmission
delivered by the IP network. We believe that the call quality of IDX service is
comparable to that of the PSTN. A portion of the telephony connection must be
routed over the PSTN. However, by increasing the number of nodes on the IDX
network over time, as supported by traffic flow, we expect to reduce the portion
of the call flowing over the PSTN. This should reduce cost and increase the
network's efficiency, since the call or fax can be delivered to the intended
recipient from the closest network node.
IDX offers several additions to its each of its primary services, including
billing and report generation designed exclusively to support the CyberFax and
CyberCall products. We believe that these features significantly enhance the
attractiveness of the IDX services to telephone companies and
6
<PAGE>
internet service providers. We are working with telephone companies and ISP's to
increase the use of the IDX network and increase the number of network nodes
through which service can be delivered.
eGlobe offers an international toll free service ("Service 800") that
allows a caller to make a long distance telephone call without paying the
applicable international toll charges, which are billed to the Service 800
customer (normally the recipient of the calls). This service was our original
service prior to introducing our calling card services several years ago. We are
presently offering international toll-free service for calls originating in
Australia, Austria, Canada, Denmark, France, Hong Kong, Japan, the Netherlands,
Switzerland, the United Kingdom, the United States and West Germany, among
others. Given its characteristics, the service has been consolidated into
network services division managed by IDX.
Card Services
Card Services provide customers (telephone companies, ISP's and other card
issuers, such as specialized carriers and banks) with the ability to offer
calling card programs to their customers. Services include platform services -
we provide our operating platforms and the customer provides transmission
services - and enhancement services where we provide a combination of platform
and transmission services. Calling card services include validation, routing,
multi-currency billing and payments, in addition to credit, prepaid and true
debit functionality.
The service is designed for telecommunications operators (including
integrated telephone companies, wholesale network providers, resale carriers and
ISP's) and corporations looking for a calling card solution to enhance their
core business (which is often not related to telecoms) with global calling
capabilities on a prepaid, postpaid, debit or limit basis. These customers want
us to originate and terminate calls domestically and internationally. Customers
are billed for use of the platform and transmission on a per minute basis.
Contracts are ordinarily multi-year, sometimes with minimum use requirements.
We maintain a central processing center in Denver, Colorado for user
validation, storage, and processing of billing information. We offer card
service customer interface in multiple languages (whether via computer or via
operators).
We provide 24-hour operator assistance and other customer service options.
This assistance includes "default to operator" assistance for calls from rotary
and pulse-tone telephones. Our operating platforms diverts calls placed from
such telephones to an operator who processes the call. The default-to-operator
feature enables access to our Platforms from any telephone in any country or
territory in our network.
The following table lists some features provided in our card services offerings:
7
<PAGE>
CALLING CARD FEATURES
STANDARD FEATURES: ENHANCED FEATURES:
Operator Default Customized Languages, Prompts and Closing
Operator Assistance Conference Calling
Language Selection Translation Services
Self-Selected PIN Access to U.S. Toll-Free Numbers
Multiple Calling
Star Key (*) Prompt Restart
Auto Redial
Prompt Interrupt
Voice Mail Compatibility
GLOBAL OFFICE AND NEW SERVICES
In 1998, we invested more than $1 million in unified messaging and related
technologies to help prepare the core elements of a new service offering. In
combination with the voice and data access capabilities of the operating
platforms, this unified messaging technology will provide a global capability
for an end user to dial up the internet while traveling, or dial into a
corporate intranet, and retrieve and manage voice mail, email and faxes around
the world with a local telephone call.
This new offering is being developed in combination with key customers,
primarily a handful of national telephone companies that combine their local
telephone dominance with a dominant internet position in their home markets. The
service will be supplied to the telephone company which will in turn make it
available to their telephone and internet customers - the target audience is the
early technology adapter and the business executive and professional traveling
away from the office.
The unified messaging technology is software-based. In facilities terms, a
server will be added to the operating platform to support the messaging
functionality.
The plan is to expand the first phase of the offering described above over
the course of the next year with additional services - in particular, the same
software that supports the messaging capability is capable of supporting
voice-based telephone access to the net and the world wide web, both to retrieve
or review information or to support other transactions.
STRATEGY
Our goal is to become a leading network-based provider of global software
defined services. To achieve this goal, our present strategy includes:
BUILDING ON GLOBAL PRESENCE AND STRATEGIC RELATIONSHIPS
We believe that international relationships and alliances are important in
offering services and that these relationships will be even more important as
competition expands globally. We have long-standing relationships with national
telephone companies and ISP's. We want to deepen our relationships with these
telecommunication companies and increase the number of services we
8
<PAGE>
provide to them. We believe that we will have a competitive advantage to the
extent that we can maintain and further develop our existing relationships.
EXPANDING SERVICE OFFERINGS AND FUNCTIONALITY WHILE MAINTAINING CORE
SERVICES
We believe that it will be necessary to offer a suite of enhanced business
communications services, and that the early providers of credible multi-service
offerings will have an advantage. We have introduced global IP voice and IP fax
services, and we plan to introduce a broad range of other services including
Global Office(TM). We believe that new service offerings and increased product
diversification will allow us to achieve a greater return on assets, reduce the
seasonality of our revenue stream and decrease exposure to global or regional
economic downturns. We also believe that we will be well served by maintaining
our existing core card services business which is a necessary complement to many
of our planned new services.
FOCUSING ON INTERNATIONAL CARRIERS AND OTHER CARD COMPANIES
Many telecommunications companies market their services directly to
businesses and other end users. We offer our services principally to national
carriers and ISP's, as well as to some specialized telecom companies and card
issuers. These companies, in turn, use our services to provide an enhanced
service to their customers. We believe that many of these providers will
continue to outsource the kind of services we offer and are increasingly seeking
new revenue sources by offering value-added services such as those we intend to
offer. We also believe that we provide a cost-efficient opportunity because of
our existing international network and low cost processing made possible by the
network operating platforms. We further believe that we derive a significant
advantage in marketing to these customers because of our independence from the
major global carriers, which allows national telephone companies, ISP's and card
issuers to do business with us without risking their customer bases.
CONTINUING FOCUS ON THE BUSINESS TRAVELER
In identifying and offering new services to support our customers, we will
continue to pursue services which build upon our strengths, particularly our
global reach. As a result, we have has a particular focus on providing services
that will be valuable to the business or professional user away from their
office, particularly traveling around the world.
INDUSTRY BACKGROUND
During the last decade, due to changing regulatory environments and
numerous mergers, acquisitions and alliances among the major communications
providers, there has been a convergence in the services offered by
communications companies. The result has been increased globalization of
services, strong competition from new entrants into different communications
industry segments and the increasing need to differentiate services. In
addition, companies have been focusing on areas where they have expertise,
superior technology and cost advantages, and have sought to purchase or
outsource the portions of the service where they do not have such advantages. We
believe that this trend is precipitating the pursuit of new services and expect
that it will result in increased outsourcing of more complex value-added
services that are unrelated to the core expertise of an organization.
9
<PAGE>
The evolving environment for communications has increased the number of
messages sent and received and the types and means of communications mobile
professionals use. With advances in many areas of communications technology,
professionals and other travelers are demanding additional features from their
telephone and internet providers, particularly ease of Internet access, true
global access and unified messaging.
INTERNET PROTOCOL (IP)
Unlike the transmission technology which is the basis of the PSTN, where
voice and data are transported in the form of relatively continuous analog and
digital signals, Internet Protocol-based transmission transports voice and data
in the form of data packets which do not flow in a continuous channel. As a
result of this essentially "random" packet transport system, the information
being transported - whether voice, video, fax or other forms of messages or
information - is much more easily managed and manipulated. That relative ease of
management and manipulation leads to a wide range of new functions and services,
all of which are possible as a result of the underlying IP capability. This has
led to a proliferation of IP based services and is rapidly making IP the
technical basis for many new value-added and enhanced services, including voice
(telephone) services. Indeed, our card services already rely on IP capabilities
in key billing and transaction management functions.
IP, therefore will, in our judgement, ultimately become the dominant
underlying service protocol. That means that without regard to the type of
information--whether voice or data, card service or messaging, the ability to
call home or "surf" the web--IP will be a key building block for "enhanced"
"value added", or "intelligent" network services in the future.
With the acquisition of IDX and our investment in unified messaging, IP has
become a core technology in our service mix.
Early Internet voice transmission was of poor quality, but IP transmission
quality improved significantly with the development of an IP "gateway" that
connects telephone calls between IP networks and PSTN networks. The computer
server converts the PSTN voice into data packets and routes the data over the
Internet or another IP network. A second computer server in the destination area
converts the data back to analog form and switches it to the local phone network
as a local call. IP gateways have enabled IP telephony to evolve into numerous
new services and networks.
IP telephony offers many benefits;
o simplified management;
o use for both voice and data transmission allows consolidation of
traffic over a single network;
o reduction of overhead and maintenance costs for the IP portion of the
transmission, and
o enables use of applications such as video, voice mail, conferencing,
messaging, data-sharing, and directory services over the same network.
10
<PAGE>
Other technologies--such as ISDN and ATM--also have brought some of the benefits
of consolidating telephone and data networks. IP transmission also offers
ubiquity. The communications industry requires large scale acceptance of new
technologies to justify the massive investment in infrastructure needed to
implement them. The ubiquity and critical mass that the Internet has achieved
has attracted significant investment and application development, which also
have promoted and developed IP transmission.
MARKET
The global telecommunications services industry is growing significantly.
Two of the fastest growth areas have been mobile communication related services
and international telecommunication services, which have grown at impressive
rates.
We believe that demand for global telecommunications services, including
our offerings, will continue to grow substantially as a result of (1) increased
reliance by business users on telecommunication services; (2) increased
globalization of business; and (3) use of the Internet.
Changes in global telecommunication services have dramatically increased
both the number of messages and the medium used. Messages are increasingly
taking electronic form as electronic mail and other electronic communications
tools usage has grown. Increased e-mail usage, in turn, has led to increased
demand for mobile, dial-up access to the Internet.
The growth in the global telecommunications market also reflects the
increasingly international nature of business, the significant growth of
emerging and newly industrialized economies and the increase in international
trade. We believe that as multinational corporations globalize, and expand into
new markets, their demand for diverse and customized telecommunications services
will continue to grow. Increased globalization will lead to increased demand for
products and services that address the communication and information management
needs of an increasingly mobile society. Growth in communication and information
demand on the part of international travelers is further evidenced by the
proliferation of electronic devices (such as notebook and subnotebook computers
with modems, both wireline and wireless) and the explosive growth of the
Internet, corporate intranets and network services that allow travelers remote
access to their home offices. As business travel grows, the percentage of
travelers who have a need for remote office access to messaging and
communication services will increase.
The Internet continues to become a preferred solution in many circumstances
to the increased message and communication needs of mobile consumers. The
worldwide commercial Internet/intranet market has grown very rapidly, and this
growth is expected to continue. Many factors are driving this increase in demand
for Internet access by an increasingly more mobile group of end users. Strategic
developments affecting this demand for nomadic Internet access include:
o increasing deregulation and competition in telecommunications
markets;
o growth of Internet usage to a critical mass to achieve near
universal acceptance;
o dramatic increase in the use of e-mail, and
11
<PAGE>
o decreasing access costs to backbone providers and end users.
In addition to consumer use, corporations have been moving online. The
number of large companies with a Web presence continues to increase, as does the
number of registered commercial domains. This increase in corporate use
indicates how quickly the Internet has become a mainstream channel for corporate
marketing, communications and business transactions.
COMPETITION
Our industry is intensely competitive and rapidly evolving. The
communications industry is dominated by companies much larger than us, with much
greater name recognition, much larger customer bases and substantially greater
financial, personnel, marketing, engineering, technical and other resources than
we have. In addition, several other companies have commenced offerings, or have
announced intentions to offer, enhanced communications services similar to
certain of the enhanced services we plan to offer.
Our core services compete against services provided by companies such as
AT&T Corp., British Telecom, MCI/Worldcom and Global One, as well as some
smaller multinational providers. In providing enhanced services we expect to
compete with businesses already offering or planning to offer such services.
These companies include Premiere Technologies (provides enhanced communication
services and is developing a unified messaging platform), JFAX (remote office
services) and General Magic (provides IP based integrated voice and data
applications). We expect other parties to develop platform products and services
similar to our services offered.
We believe the principal factors affecting competition include services and
features, geographic coverage, price, quality, reliability of service and name
recognition. We expect to build upon our global network and operating platform
by offering a broader range of services, by expanding our relationships with
national telephone companies and other large companies that outsource business
to us, and by continuing to provide processing services efficiently. We believe
we will be able to compete effectively if we can successfully implement our
competitive strategy. However, to the extent other companies are successful in
offering superior enhanced communication services or introducing such services
before we do, we likely would be adversely affected and such effects could
material. See "Risk Factors-Rapid technological and market changes create
significant risks to us."
SALES AND MARKETING
We market our services to national telephone companies, ISP's, specialized
telecom companies, and card issuers which in turn provide our services to their
customers. During 1998, we established a direct sales force (approximately 15
people) to focus on sales to these customers. To be close to our customers, we
have based much of our direct sales force in Europe and Asia. Also during 1998,
we established a marketing staff responsible primarily for providing marketing
support to the sales efforts at varying levels of involvement. The marketing
staff also promotes the Company's corporate image in the marketplace and
provides marketing support to our customers to encourage their customers to use
our services. We pay sales commissions to our sales employees and agents.
12
<PAGE>
ENGINEERING
Our engineering personnel are responsible for provisioning and implementing
network upgrades and expansion and updating, testing and supporting proprietary
software applications, as well as creating and improving enhanced system
features and services. Our software engineering efforts include (1) updating our
proprietary network of operating platforms and integrating our software with
commercially available software and hardware when feasible, and (2) identifying
and procuring improved services compatible with our existing services and
platforms.
TECHNOLOGY: INTELLECTUAL PROPERTY RIGHTS
We regard our operating platforms and our global IP voice, IP fax and other
software as proprietary and have implemented some protective measures of a legal
and practical nature to ensure they retain that status. We have filed a patent
application relating to certain aspects of the operating platform with the U.S.
Patent and Trademark Office, and are taking steps to extend our patent
application to certain international jurisdictions. We have also registered
certain trade or service marks with the U.S. Patent and Trademark Office, and
applications for registration of additional marks are currently pending. Certain
trade or service marks also have been registered in some European and other
countries, and applications for registration of additional marks are pending. In
addition to filing patents and registering marks in various jurisdictions, we
obtain contractual protection for our technology by entering into
confidentiality agreements with our employees and customers. We also limit
access to and distribution of our operating platforms, hardware, software,
documentation and other proprietary information.
There can be no assurance, however, the steps we have taken to protect our
proprietary rights will be adequate to deter misappropriation of our technology.
Despite our measures, competitors could copy certain aspects of our operating
platform and our global IP voice, IP fax and other software or obtain
information which we regard as trade secrets. Further, if challenged, there can
be no assurance we can successfully defend any patent issued to us or any marks
registered by us. In any event, we believe that such technological innovation
and expertise and market responsiveness are as (or more) important than the
legal protections described above. We believe it is likely our competitors will
independently develop similar technology and we will not have any rights under
existing laws to prevent the introduction or use of such technology. See "Risk
Factors--We Have Only Limited Protection of Proprietary Rights and Technology
and are Exposed to Risks of Infringement Claims."
CUSTOMERS
For the nine month period ended December 31, 1998, Telefonos de Mexico,
S.A., de C.V. ("Telmex"), MCI and Worldcom, Inc. (primarily its affiliates ATC
and LDDS), and Telecom Australia accounted for 19%, 16% and 10%, respectively,
of our revenues and were the only customers accounting for 10% or more of our
revenues. In the fourth calendar quarter of 1998, we experienced a significant
and permanent decline in revenues from several North American customers,
particularly Telmex. See Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.
13
<PAGE>
REGULATION
We are subject to regulation as a telecommunications service provider in
some jurisdictions. In addition, we or a local partner is required to have
licenses or approvals in those countries where we operate and where equipment is
installed.
UNITED STATES FEDERAL REGULATION
Pursuant to the Communications Act of 1934, as amended (the "Communications
Act"), the Federal Communications Commission ("FCC") is required to regulate the
telecommunications industry in the U. S. Under current FCC policy,
telecommunications carriers reselling the services of other carriers, and not
owning domestic telecommunications transmission facilities of their own, are
considered non-dominant and, as a result, are subject to streamlined regulation.
The degree of regulation varies between domestic telecommunications services
(services which originate and terminate within the U. S.) and international
telecommunications services (services which originate in the U. S. and terminate
in a foreign country or vice versa).
Non-dominant providers of domestic services do not require prior
authorization from the FCC to provide service. However, non-dominant providers
of international services must obtain authorization to provide service from the
FCC pursuant to Section 214 of the Communications Act. Carriers providing
international service also must file a tariff with the FCC, setting forth the
terms and conditions under which they provide international services. The FCC
has determined that it no longer will require non-dominant providers of domestic
services to file tariffs, but instead will require carriers to post this
information on the Internet. That decision has been stayed, pending appeal by
the U.S. Court of Appeals for the District of Columbia Circuit. We provide both
domestic and international services to and from the U.S. and therefore must
possess authority under Section 214 of the Communications Act and must file
tariffs for domestic and international services with the FCC. We have held an
authorization to provide service since 1989. We also have tariffs on file with
the FCC setting forth the terms and conditions under which we provide domestic
and international services.
In addition to these authorization and tariff requirements, the FCC imposes
a number of additional requirements on all telecommunications carriers.
The regulatory requirements in force today impose a relatively minimal
burden on us. There can be no assurance, however, that the current regulatory
environment and the present level of FCC regulation will continue, or that we
will continue to be considered non-dominant.
NON-U.S. GOVERNMENT REGULATION
Telecommunications activities are subject to government regulation to
varying degrees in every country throughout the world. In many countries where
we operate, equipment cannot be connected to the telephone network without
regulatory approval, and therefore installation and operation of our operating
platform or other equipment requires such approval. We have licenses or other
equipment approvals in the jurisdictions where we operate. In most jurisdictions
where we conduct business, we rely on our local partner to obtain the requisite
authority. In many countries our
14
<PAGE>
local partner is a national telephone company, and in some jurisdictions also is
(or is controlled by) the regulatory authority itself.
As a result of relying on our local partners, we are dependent upon the
cooperation of the telephone utilities with which we have made arrangements for
our authority to conduct business, as well as for operational and certain of our
administrative requirements. Our arrangements with these utilities are
nonexclusive and take various forms. Although some of these arrangements are
embodied in formal contracts, any telephone utility could cease to accommodate
our requirements at any time. Depending upon the location of the telephone
utility, such action could have a material adverse effect on our business and
prospects. In some cases, principally countries which are members of the
European Community and the U. S., laws and regulations provide that the
arrangements necessary for us to conduct our service may not be arbitrarily
terminated. However, the time and cost of enforcing our rights may make legal
remedies impractical. We presently have good relations with most of the foreign
utilities with which we do business. There can be no assurance, however, that
such relationships will continue or that governmental authorities will not seek
to regulate aspects of our services or require us to obtain a license to conduct
our business.
Many aspects of our international operations and business expansion plans
are subject to foreign government regulations, including currency regulations.
There can be no assurance that foreign governments will not adopt regulations or
take other actions that would have a direct or indirect adverse impact on our
business opportunities. See "Risk Factors--Risks Associated with International
Business."
IP TELEPHONY
The regulation of IP telephony is still evolving. The U. S. FCC has stated
that some forms of IP telephony appear to be similar to "traditional" telephone
service, but the FCC has not decided whether, or how, to regulate providers of
IP telephony. In addition, several efforts have been made to enact U.S. federal
legislation that would either regulate or exempt from regulation services
provided over the Internet. State public utility commissions also may retain
intrastate jurisdiction and could initiate proceedings to regulate the
intrastate aspects of IP telephony. A number of countries currently prohibit IP
telephony. Other countries permit but regulate IP telephony. If and to the
extent that governments prohibit or regulate IP telephony, we could be subject
to regulation and possibly to a variety of penalties under foreign or U.S. law,
including without limitation, orders to cease operations or to limit future
operations, loss of licenses or of license opportunities, fines, seizure of
equipment and, in certain foreign jurisdictions, criminal prosecution.
EMPLOYEES
As of December 31, 1998, we employed two hundred-two (202) employees, as
follows: one hundred eleven (111) in Denver, Colorado, seven (7) in Tarrytown,
New York, four (4) in Washington, D.C., twenty-seven (27) in Reston, Virginia,
one (1) in Nyon, Switzerland, nine (9) in Silkeborg, Denmark, fourteen (14) in
Hong Kong, twenty-nine (29) in Taipei, Taiwan, one (1) in Brussels, Belgium,
seven (7) in Godalming, United Kingdom and one (1) in Limassol, Cyprus. See Note
13 to the Consolidated Financial Statements for geographic business segment
information.
15
<PAGE>
CERTAIN RECENT DEVELOPMENTS
Effective with the period ended December 31, 1998, the Company changed to a
December 31, fiscal year end. Therefore, the period ended December 31, 1998
represents a nine month period as compared to the twelve month fiscal years
ended March 31, 1998, 1997, 1996 and 1995.
IDX ACQUISITION. On December 2, 1998, we acquired IDX International, Inc.
("IDX"), a privately held Virginia corporation (the "IDX acquisition"). IDX is a
supplier of IP (Internet protocol) fax and IP voice platforms and services to
telecommunications operators and ISP's in 14 countries. With 56 employees, IDX
currently has approximately $6.5 million of annualized revenue (based upon
revenues for the most recent two month period ended December 31, 1998). IDX will
provide us with two key services for our new suite of Internet services: IP fax
and IP voice. For at least the first year, IDX will operate as a separate
subsidiary, although we have begun to use its services to support some of the
card services requirements. IDX will operate with its existing management and
personnel in facilities in Reston, Virginia.
Under the merger agreement signed with IDX, we recently elected Hsin Yen,
the President of IDX, and Richard Chiang, the Chairman of IDX prior to the IDX
acquisition, to our Board of Directors. This expands our Board to a total of 11
directors. As the President of IDX, Hsin Yen reports directly to Mr. Vizas, our
Chairman and Chief Executive Officer.
As a result of the IDX acquisition, all of the shares of common stock and
preferred stock of IDX, outstanding immediately prior to the effective time of
the IDX acquisition (excluding any treasury shares) were converted into, in the
aggregate, (a) 500,000 shares of our Series B Convertible Preferred Stock
("Series B Preferred Stock"), which are convertible into up to 2,500,000 shares
(2,000,000 shares until stockholder approval is obtained) of our common stock
("Common Stock"), subject to adjustment as described below, (b) warrants to
purchase up to 2,500,000 shares of our Common Stock, subject to stockholder
approval as well as adjustment as described below (the "IDX Warrants"), and (c)
$5.0 million which amount is subject to decrease as described below, in interest
bearing Convertible Subordinated Promissory Notes.
The shares of Series B Preferred Stock are convertible at the holders
option at any time at the then current conversion rate. The shares of Series B
Preferred Stock will automatically convert into shares of our Common Stock on
the earlier to occur of (a) the first date that the 15 day average closing sales
price of our Common Stock is equal to or greater than $8.00 or (b) 30 days after
the later to occur of (i) December 2, 1999 or (ii) the receipt of any necessary
stockholder approval relating to the issuance of the Common Stock upon such
conversion, subject to IDX's achievement of certain revenue and EBITDA
objectives.
The IDX Warrants are exercisable only to the extent that IDX achieves
certain revenue and EBITDA goals over the twelve months ending December 2, 1999
(and if stockholder approval is received). We have "guaranteed" a price of $8.00
per share at December 2, 1999 to recipients of the Common Stock issuable upon
the conversion or exercise, as the case may be, of the Series B Preferred Stock
and IDX Warrants, subject to IDX's achievement of certain revenue and EBITDA
objectives. If the market price is less than $8.00 on December 2, 1999, subject
to IDX's achievement of certain revenue and EBITDA objectives, we will issue
additional shares of Common Stock
16
<PAGE>
upon conversion of the Series B Preferred Stock and exercise of the IDX Warrants
(subject to the receipt of any necessary stockholder approval) based on the
ratio of $8.00 to the market price, but not more than an aggregate of 7 million
additional shares of Common Stock.
The Convertible Subordinated Promissory Notes are due in three installments
(the first of which was paid in stock in March 1999) through October 30, 1999,
and are payable in cash or Common Stock (valued at the then market price). In
addition, we have agreed to pay the accrued but unpaid dividends (the "IDX
Accrued Dividends") on IDX's preferred stock under an interest bearing
Convertible Subordinated Promissory Note in the original principal amount of
$418,000 due May 31, 1999. We are entitled to reduce the aggregate principal
balance of the last payment due on the Convertible Subordinated Promissory Notes
by the amount of the IDX Accrued Dividends and certain other deferred amounts
unless offset by net proceeds from the sale of a subsidiary of IDX and a note
issued to IDX by an option holder. See Note 6 to the Consolidated Financial
Statements for further discussion.
UCI ACQUISITION. On December 31, 1998, we acquired UCI Tele Networks, Ltd.
("UCI"), a privately held corporation established under the laws of the Republic
of Cyprus (the "UCI acquisition"). UCI is a development stage calling card
business serving Greece, Cyprus and the Middle East. We have projected that the
UCI acquisition will provide projected revenues in 1999 ranging between $2 and
$3 million. UCI will operate with its existing management and personnel from
offices in Limassol, Cyprus.
We acquired UCI for 125,000 shares of our Common Stock (50% delivered at
the acquisition date and 50% to be delivered February 1, 2000, subject to
adjustment); warrants to purchase 50,000 shares of our Common Stock, with an
exercise price equal to the market price at the time of issuance of $1.63 and
$2.1 million in promissory notes or cash, according to a payment schedule and
subject to adjustments based on an earnout formula, each as described below. We
paid UCI $75,000 in January 1999; we agreed to pay UCI $500,000 with interest at
the rate of 8% per annum 180 days following the UCI closing date; we agreed to
pay UCI $500,000 with interest at the rate of 8% per annum 18 months following
the UCI closing date, and we agreed to pay UCI $1.025 million on February 1,
2000 or December 31, 2000, subject to certain adjustments as discussed below.
We agreed to adjust the purchase price we paid to acquire UCI as follows.
If the closing market price on the Nasdaq National Market of our Common Stock on
February 1, 2000 is less than $8.00, we will issue additional shares of our
Common Stock equal in number to: $1 million divided by the closing market price
of our Common Stock on December 1, 1999, less 125,000 shares of our Common
Stock. These shares as well as the 62,500 shares of Common Stock to be delivered
are subject to adjustment as discussed below.
If UCI does not achieve 100% of its revenue target as of February 1, 2000,
we will pay less cash and issue fewer shares of our Common Stock. If UCI
achieves more than 100% of its revenue target for the same period, then we shall
pay up to $300,000 in additional cash to UCI. See Note 6 to the Consolidated
Financial Statements for further discussion.
EXCHANGE WITH RONALD JENSEN. In November 1998, we reached an agreement
with Mr. Ronald Jensen, who is also our largest stockholder. The agreement
concerned settlement of
17
<PAGE>
unreimbursed costs and potential claims. Mr. Jensen had purchased $7.5 million
of our Common Stock in a private placement in June 1997 and later was elected
Chairman of our Board of Directors. After approximately three months, Mr. Jensen
resigned his position, citing both other business demands and the challenges of
managing our business. During his tenure as Chairman, Mr. Jensen incurred staff
and other costs that were not billed to eGlobe. Also, Mr. Jensen subsequently
communicated with our current management, indicating there were a number of
issues raised during his involvement with eGlobe relating to the provisions of
his share purchase agreement which could result in claims against us.
To resolve all current and potential issues, Mr. Jensen agreed with us
to exchange his current holding of 1,425,000 shares of Common Stock for 75
shares of our 8% Series C Cumulative Convertible Preferred Stock ("Series C
Preferred Stock"), which management estimated to have a fair market value of
approximately $3.4 million and a face value of $7.5 million. The terms of the
Series C Preferred Stock permit Mr. Jensen to convert the Series C Preferred
Stock into the number of shares equal to the face value of the preferred stock
divided by 90% of common stock market price, but with a minimum conversion price
of $4.00 per share and a maximum of $6.00 per share, subject to adjustment if we
issue Common Stock for less than the conversion price. The difference between
the estimated fair value of the Series C Preferred Stock to be issued and the
market value of the Common Stock surrendered resulted in a one-time non-cash
charge to our statement of operations of $1.0 million in the quarter ended
September 30, 1998 with a corresponding credit to stockholders' equity.
In connection with subsequent issuances of securities which are
convertible into or exercisable for our Common Stock, we discussed with Mr.
Jensen the extent to which the conversion price of the Series C Preferred Stock
should be adjusted downward. The parties agreed to exchange all of the
outstanding Series C Preferred Stock for shares of Common Stock, which exchange
would have the same economic effect as if the Series C Preferred Stock had been
converted into Common Stock with an effective conversion price of $2.50 per
share. On February 16, 1999, we agreed to exchange 75 shares of Series C
Preferred Stock then held by Mr. Jensen for 3,000,000 shares of Common Stock.
The market value of the 1,125,000 incremental shares of Common Stock issued of
approximately $2.7 million will be recorded as a preferred stock dividend in the
quarter ended March 31, 1999. See Notes 7 and 17 to the Consolidated Financial
Statements for further discussion.
SERIES D PREFERRED STOCK. We concluded a private placement of $3 million in
January 1999 with Vintage Products Ltd. ("Vintage"). We sold (i) 30 shares of
our 8% Series D Cumulative Convertible Preferred Stock (the "Series D Preferred
Stock"), (ii) warrants to purchase 112,500 shares of Common Stock, with an
exercise price of $.01 per share, and (iii) warrants to purchase 60,000 shares
of Common Stock, with an exercise price of $1.60 per share, to Vintage. In
addition, we agreed to issue to Vintage, for no additional consideration,
additional warrants to purchase the number of shares of Common Stock equal to
$250,000 (based on the market price of the Common Stock on the last trading day
prior to June 1, 1999 or July 1, 2000, as the case may be), or pay $250,000 in
cash, if we do not (i) consummate a specified merger transaction by May 30,
1999, or (ii) achieve, in the fiscal quarter commencing July 1, 2000, an
aggregate amount of gross revenues equal to or in excess of 200% of the
aggregate amount of gross revenues achieved by the Company in the fiscal quarter
ended December 31, 1998.
18
<PAGE>
The shares of Series D Preferred Stock are convertible, at the holder's
option, into shares of our Common Stock at any time after April 13, 1999 at a
conversion price, which is subject to adjustment if we issue Common Stock for
less than the conversion price, equal to the lesser of $1.60 or, if we fail to
have positive EBITDA for at least one of the first three fiscal quarters of 1999
or we fail to complete a public offering of equity securities for a price of at
least $3.00 per share and with gross proceeds to us of at least $20 million on
or before the end of the third fiscal quarter of 1999, the market price just
prior to conversion. 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 we issued has been converted into Common Stock, or (iii) the
date we close a public offering of equity securities at a price of at least
$3.00 per share and with gross proceeds to us of at least $20 million.
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 was issued, less
shares reserved for issuance under warrants). Redemption is in cash at a price
equal to the liquidation preference of the Series D Preferred Stock at the
holder's option or our option 45 days after the Series D Preferred Stock ceases
to be convertible. If we receive stockholder approval to increase the number of
shares issuable we must 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.
Vintage has agreed to purchase 20 additional shares of Series D Preferred
Stock plus warrants for $2 million upon the registration of the Common Stock
issuable upon the conversion of the Series D Preferred Stock. At that time we
will issue to Vintage 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. See Note 17 to the Consolidated
Financial Statements for further discussion.
SERIES E PREFERRED STOCK. In February 1999, contemporaneously with the
exchange of Mr. Jensen's Series C Preferred Stock for shares of common stock, we
concluded a private placement of $5 million with EXTL Investors LLC, a limited
liability company in which Ronald Jensen and his wife are the sole members
("EXTL Investors"). We sold 50 shares of our 8% Series E Cumulative Convertible
Redeemable Preferred Stock (the "Series E Preferred Stock"), and warrants (the
"Series E Warrants") to purchase (i) 723,000 shares of Common Stock with an
exercise price of $2.125 per share and (ii) 277,000 shares of Common Stock with
an exercise price of $.01 per share to EXTL Investors.
The shares of the Series E Preferred Stock may be redeemed at a redemption
price equal to the face value plus accrued dividends, in cash or in Common
Stock, at our option or at the option of any holder, provided that the holder
has not previously exercised the convertibility option described, at any time
following the date that is five years after we issue the Series E Preferred
Stock. The Series E Preferred Stockholder may elect to make the shares of Series
E Preferred Stock convertible into shares of Common Stock at any time after
issuance. We also may elect to make the shares of Series E Preferred Stock
convertible, but only if (i) we have positive EBITDA for at least one of the
first three fiscal quarters of 1999 or (ii) we complete a public offering of
equity securities for a price of at least
19
<PAGE>
$3.00 per share and with gross proceeds to us of at least $20 million on or
before the end of the third fiscal quarter of 1999. On April 9, 1999 in
connection with the $20 million financing discussed below, the Series E
Preferred Stockholders exercised the convertibility option. As a result, the
Series E Preferred Stock is no longer redeemable.
The shares of Series E Preferred Stock will automatically be converted into
shares of our Common Stock, on the earliest to occur of (x) the first date as of
which the last reported sales price of our Common Stock on Nasdaq is $5.00 or
more for any 20 consecutive trading days during any period in which Series E
Preferred Stock is outstanding, (y) the date that 80% or more of the Series E
Preferred Stock we have issued has been converted into Common Stock, or (z) we
complete a public offering of equity securities at a price of at least $3.00 per
share and with gross proceeds to us of at least $20 million. The initial
conversion price for the Series E Preferred Stock is $2.125, subject to
adjustment if we issue Common Stock for less than the conversion price. See Note
17 to the Consolidated Financial Statements for further discussion.
TELEKEY ACQUISITION. On February 12, 1999, we acquired Telekey, Inc.
("Telekey"), a privately held Georgia corporation (the "Telekey acquisition").
Telekey provides a range of card based telecommunications services (calling,
voice mail, email and others) primarily to foreign academic travelers (teachers
and students) visiting the US and Canada. Telekey will operate with its existing
management and personnel in existing facilities in Atlanta, Georgia.
As a result of the Telekey acquisition, all of the shares of common stock
of Telekey outstanding immediately prior to the effective time of the Telekey
acquisition were converted into, in the aggregate, (a) a base amount of
1,010,000 shares of our Series F Convertible Preferred Stock ("Series F
Preferred Stock") at closing, (b) at least 505,000 and up to 1,010,000 shares of
Series F Preferred Stock two years later (or upon a change of control or certain
events of default if they occur before the end of two years), subject to
Telekey's meeting certain revenue and EBITDA tests, (c) $125,000 in cash at
closing and (d) a Promissory Note in the original principal amount of $150,000,
payable in equal monthly installments over one year, issued at closing.
The shares of Series F Preferred Stock will automatically convert into
shares of our Common Stock on the earlier to occur of (a) the first date that
the 15 day average closing sales price of our Common Stock is equal to or
greater than $4.00 or (b) July 1, 2001. We have "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 Stock, subject to Telekey's achievement
of certain revenue and EBITDA objectives. If the market price is less than $4.00
on December 31, 1999, we will issue additional shares of Common Stock upon
conversion of the Series F Preferred Stock based on the ratio of $4.00 to the
market price, but not more than an aggregate of 600,000 additional shares of
Common Stock.
DEBT FINANCING. On April 9, 1999, we and our wholly owned subsidiary eGlobe
Financing Corporation ("eGlobe Financing"), entered into a Loan and Note
Purchase Agreement with EXTL Investors (which, together with its affiliates, is
our largest stockholder). eGlobe Financing initially borrowed $7 million from
EXTL Investors and we granted EXTL Investors warrants (1/3 of which are
presently exercisable) to purchase 1,500,000 shares of our Common Stock at an
exercise price of $.01 per
20
<PAGE>
share. As a condition to receiving this $7.0 million unsecured loan, we entered
into a Subscription Agreement with eGlobe Financing under which we have
irrevocably agreed to subscribe for eGlobe Financing stock for an aggregate
subscription price of up to $7.5 million (the amount necessary to repay the loan
and accrued interest).
As part of the Loan and Note Purchase Agreement, EXTL Investors agreed to
purchase $20 million of 5% Secured Notes from eGlobe Financing, upon our
request, provided that we first obtain any required stockholder approval at our
next stockholder meeting. If we issue the Secured Notes to EXTL Investors, we
must repay the $7 million initial loan. We also must grant EXTL Investors
warrants to purchase 5,000,000 shares of our Common Stock at an exercise price
of $1.00 per share, although 2/3 of the initial warrants to purchase 1,500,000
shares will expire if we issue the secured notes.
If eGlobe Financing does not issue Secured Notes for the $20 million after
we obtain stockholder approval (or if we do not obtain approval at our next
annual stockholder meeting), the $7 million loan must be repaid on the earliest
to occur of (i) April 9, 2000, (ii) the date that we complete an offering of
debt or equity securities from which we receive net proceeds of at least $30
million or (iii) the occurrence of an event of default. Also, the remaining 2/3
of the initial warrants to purchase 1,500,000 shares will become exercisable at
that time.
The Secured Notes, if sold, must be repaid in 36 specified monthly
installments commencing on the first month following issuance, with the
remaining unpaid principal and accrued interest being due in a lump sum with the
last payment. The entire amount becomes due earlier if we complete an offering
of debt or equity securities from which we receive net proceeds of at least $100
million (a "Qualified Offering"). The principal and interest of the Secured
Notes may be paid in cash. However, up to 50% of the original principal amount
of the Secured Notes may be paid in our Common Stock at our option if (i) the
closing price of our Common Stock on Nasdaq is $8.00 or more for any 15
consecutive trading days, (ii) we close a public offering of our equity
securities at a price of at least $5.00 per share and with gross proceeds to us
of at least $30 million, or (iii) we close a Qualified Offering (at a price of
at least $5.00 per share, in the case of an offering of equity securities).
The proceeds of these financings will be used by us to fund capital
expenditures relating to our network of IP trunks and intelligent platforms for
calling card and unified messaging services, and for working capital and general
corporate purposes. The proceeds of the Secured Notes would also be used to
repay the $7 million initial loan and our approximately $8 million of senior
indebtedness to IDT Corporation.
If eGlobe Financing issues the Secured Notes, we will transfer
substantially all of our operating assets to eGlobe Financing so that EXTL
Investors can have a security interest in our assets to secure payment under the
Secured Notes. The security interest would be subject to certain exceptions for
existing debt and vendor financing. We and our operating subsidiaries would
guarantee payment of the Secured Notes.
21
<PAGE>
EXTL Investors also has agreed, under the Loan and Note Purchase Agreement,
to make advances to eGlobe Financing from time to time based upon eligible
accounts receivable. These advances may not exceed the lesser of 50% of eligible
accounts receivable and (ii) the aggregate amount of principal payments made by
eGlobe Financing under the Secured Notes. We will guarantee repayment of these
advances, which also will be secured by the same security arrangement as the
Secured Notes.
The Loan and Note Purchase Agreement contains several covenants which we
believe are fairly customary, including prohibitions on:
(i) mergers and sales of substantially all assets;
(ii) sales of material assets other than on an arm's length basis and in
the ordinary course;
(iii) encumbering any of our assets (except for certain permitted liens);
(iv) incurring or having outstanding indebtedness other than certain
permitted debt (which includes certain existing debt and future equipment and
facilities financing), or prepaying any subordinated indebtedness; or
(v) paying any dividends or distributions on any class of our capital stock
(other than any dividend on outstanding preferred stock or additional preferred
stock issued in the future) or repurchasing any shares of our capital stock
(subject to certain exceptions).
The Loan and Note Purchase Agreement contains several fairly standard
events of default, including:
(i) non-payment of any principal or interest on the $7 million loan or the
Secured Notes, or non- payment of $250,000 or more on any other indebtedness;
(ii) failure to perform any obligation under the Loan and Note Purchase
Agreement or related documents;
(iii) breach of any representation or warranty in the Loan and Note
Purchase Agreement;
(iv) inability to pay our debts as they become due, or initiation or
consent to judicial proceedings relating to bankruptcy, insolvency or
reorganization;
(vi) dissolution or winding up, unless approved by EXTL Investors; and
(vi) final judgment ordering payment in excess of $250,000.
OTHER POTENTIAL ACQUISITIONS. We are currently negotiating to acquire,
substantially all the assets of two other companies. One of such companies would
be acquired by a joint venture between
22
<PAGE>
the seller and us. The cash element of the aggregate purchase prices for these
potential acquisitions is approximately $1.0 million plus financial commitments
of approximately $1.3 million. In addition, we will issue preferred stock
convertible into between 230,000 and 1.1 million shares of common stock.
RISK FACTORS
We caution you that our performance is subject to risks and uncertainties.
There are a variety of important factors like those that follow that may cause
our future results to differ materially from those projected in any of our
forward-looking statements made in this Annual Report on Form 10-K or otherwise.
WE HAVE INCURRED SIGNIFICANT LOSSES, ATTRIBUTABLE IN PART TO NUMEROUS CHARGES
We incurred a net loss of $13.3 million for the fiscal year ended March 31,
1998 and a net loss of $7.1 million for the nine month period ended December 31,
1998. We continue to incur operating losses and are likely to report net losses
for the next year, due in part to large non-cash charges for goodwill,
amortization and amortization of debt discount. A significant portion of the
losses for the year ended March 31, 1998 resulted from the following charges;
corporate realignment costs of $3.1 million, settlement costs of $3.9 million
(for previously existing litigation settled by new management), an additional
income tax provision of $1.5 million, an additional allowance for doubtful
accounts of $1.4 million and warrants associated with debt of $0.5 million. Some
of these charges resulted from a detailed review of the Company's activities
initiated by new management. Excluding these items, we incurred a net loss for
the fiscal year ended March 31, 1998 of $2.3 million. Of the net loss for the
nine month period ended December 31, 1998, $1.0 million was attributable to
settlement costs relating to certain claims by our former Chairman and largest
stockholder, an additional allowance for doubtful accounts totaled $0.8 million
and warrants associated with debt equaled $0.6 million. Management has been
taking steps to introduce new services and new revenues and replace lost
revenues. However, our ability to achieve profitability and positive cash flow
depends upon a number of factors, including our ability to increase revenue
while maintaining or reducing costs by achieving economies of scale. A variety
of factors, external and internal, may keep us from succeeding in increasing or
maintaining revenue or achieving or sustaining economies of scale and positive
cash flow in the future, and our failure to do so could have a material adverse
effect on our business.
WE NEED ADDITIONAL CAPITAL TO FINANCE OUR OPERATING AND CAPITAL REQUIREMENTS
We estimate we will need to raise up to $40 million during the current
fiscal year to have sufficient working capital to facilitate running our
business, acquiring assets and technology, repaying indebtedness incurred in
connection with certain acquisitions, upgrading our facilities, and developing
new services. (See "Management's Discussion and Analysis of Financial Condition
and Results of Operations Liquidity, Capital Resources and Other Financial
Data"). In addition, we will need to repay or refinance our existing $7.5
million term loan (plus approximately $1.0 million in interest) that will be due
and payable in full in August 1999. To the extent that we spend more on
acquisitions or service development our need for additional financing will
increase. We have reached
23
<PAGE>
agreements to raise $32.0 million in financing: $10.0 million from the sale of
preferred stock, $8.0 million of which has been received in January and February
1999, and $2.0 million of which is subject to registration of the stock $20.0
million in a long-term debt facility subject to stockholder approval and more
than $2.0 million of vendor financing. However, there is no assurance that we
will satisfy the conditions or receive the committed but unfunded financing. If
such Proposed Financing is not raised as expected, we will face a significant
and immediate need for additional funds. There can be no assurance that we will
be able to raise the necessary funds in a timely manner or on favorable terms.
Should we be unsuccessful in our efforts to raise additional capital, we will be
required to curtail our expansion plans. If we do not raise enough additional
capital to repay the term loan and interest by August 1999, there will be a
material adverse effect on our business and financial condition.
OUR CUSTOMERS CHANGED DURING 1998
In fiscal 1998, we added significant new card service revenue for the first
time in two years and shed a substantial portion of our existing card service
revenue. Several of our largest North American calling card services customers,
who accounted for approximately 40% of our revenues during the fiscal year ended
March 31, 1998, have substantially reduced their use of our services and can be
expected to end their use of our services in the near future. As a result, we
have experienced a decline in card service revenue. Although we have added new
customers for our card services, during the third quarter of 1998 and
subsequently, such customers have not yet generated revenues sufficient to
offset losses from existing customers. Our results of operations have been
negatively and significantly affected by this change. Any further such changes
could negatively and materially impact our business, financial condition and
results of operations.
RAPID TECHNOLOGICAL AND MARKET CHANGES CREATE SIGNIFICANT RISKS FOR US
The markets for our services are characterized by rapidly changing
technology, changes in customer needs, changes in cost structures, evolving
industry standards and frequent new service and product introductions. Our
future success will depend, in significant part, on our ability to develop and
introduce new services, to meet changing customer needs on a timely and
cost-effective basis, to remain competitive with products and services based on
new technologies, to modify our cost structure, to maintain cost-effective
services, and enhance our existing services. We may not be successful in
achieving these goals.
We, like others in our industry, believe it will be necessary to offer a
suite of enhanced business communications services, and that those companies
which do not offer acceptable services in a timely manner will not be able to
compete successfully. We may not be able to keep up with rapid technological and
market changes and we may not be able to offer acceptable new services in a
timely manner to be able to compete successfully. In addition, others may
develop services or technologies that will render our services or technology
noncompetitive or obsolete. Because the telecommunications services industry is
highly competitive and characterized by rapid technological advances, our
ability to realize our expectations will depend on:
o our success at enhancing our current offerings;
24
<PAGE>
o our ability to develop new products and services that keep pace
with developments in technology;
o our ability to meet evolving customer requirements, especially
ease-of-use requirements;
o our ability to deliver those products through appropriate
distribution channels, and
o our ability to license technology from third parties.
This will require, among other things, that we:
o correctly anticipate customer needs and price our products
competitively;
o hire and retain personnel with the necessary skills and
creativity;
o provide adequate funding for development efforts, and
o manage distribution channels effectively.
Our competitive position and operating results could suffer if:
o we fail to anticipate or to respond adequately to customer
requirements or to technological developments, particularly those
of our competitors; and
o we delay the development, production, testing, marketing, or
availability of new or enhanced products or services, or
customers fail to accept such products or services.
COMPETITION MAY AFFECT OUR BUSINESS ADVERSELY
Our industry is intensely competitive and rapidly evolving. The
communications industry is dominated by companies much larger than us, with much
greater name recognition, larger customer bases and financial, personnel,
marketing, engineering, technical and other resources substantially greater than
ours. To the extent that these companies offer services similar to and priced
competitively with our services, there likely would be a negative effect on our
pricing and revenues, which in turn could have a material adverse effect on our
business, financial condition and results of operations. Our ability to succeed
will depend in part on such larger companies outsourcing to companies such as
ours services of the type we offer. In addition, several other companies have
offered or have announced intentions to offer enhanced communications services
similar to certain of the enhanced services we plan to offer. To the extent that
such entities are successful in offering superior services or introducing
credible service offerings before we do, we likely would be adversely affected
and such effects could be material. We expect new types of products and services
not yet
25
<PAGE>
announced or available in the marketplace to be developed and introduced which
will compete with the services we offer today and plan to offer.
OUR BUSINESS DEPENDS ON CREATING AND MAINTAINING STRATEGIC RELATIONSHIPS
A principal element of our strategy is to maintain our existing, and create
new, strategic relationships with international carriers and others. These
relations enable or would enable us to offer additional services that we cannot
offer on our own and to offer our services to a larger customer base than we
could otherwise reach through our direct marketing efforts. We believe
international relationships and alliances are important in offering calling card
services and that such relationships will be even more important as providers
add new services. Our success depends in part on our ability to maintain and
develop such relationships, the quality of these relationships and the ability
of these strategic partners to market services effectively. Our failure to
maintain and develop such relationships or our strategic partners' failure to
market our services successfully could have a material adverse effect on our
business, financial condition and results of operations.
THERE ARE RISKS ASSOCIATED WITH THE RECENT IDX, UCI AND TELEKEY ACQUISITIONS,
AND WITH FUTURE ACQUISITIONS
We acquired IDX, an IP fax and voice company, in December 1998. As a result
of the IDX acquisition, we added 47 employees and two operating locations.
Although we have made changes to integrate IDX into our operations, to
assimilate the new employees and to implement reporting, monitoring and
forecasting procedures with respect to the former IDX businesses, we may have
difficulty implementing these steps. In addition, the continuing integration of
IDX into our operations may divert management attention from our existing
businesses and may result in additional administrative expense. We acquired IDX
subject to a variety of existing obligations. Moreover, in our due diligence
investigation of IDX, we may not have discovered all matters of a material
nature relating to IDX and its business.
We acquired UCI, a calling card services company, in December 1998, adding
one employee and one operating location. In February 1999, we acquired Telekey,
a calling card services company, adding eight employees and one operating
location. We are subject to the same risks with respect to the UCI acquisition
and the Telekey acquisition as described in the prior paragraph with respect to
the IDX acquisition.
As part of our business strategy, we will continue to evaluate strategic
acquisitions of businesses and to pursue joint ventures principally relating to
our current operations. These transactions commonly involve certain risks,
including, among others, that:
o we may experience difficulty in assimilating acquired operations,
services, products and personnel, which may divert our management's
attention from other business concerns;
o the acquisition may disrupt our ongoing business by placing
significant administrative, technical and financial demands on our
systems, procedures and controls;
26
<PAGE>
o we may not be able to successfully incorporate acquired technology and
rights into our service offerings and maintain uniform standards,
controls, procedures, and policies;
o we may not be able to locate or acquire appropriate companies at
attractive prices;
o we may lack the necessary experience to enter new markets; and
o an acquisition may impair our relationships with employees and
customers as a result of changes in management.
We may not be successful in overcoming these risks or any other problems
encountered in connection with future transactions. Expected benefits from
future acquisitions, if any, may not be fully realized or realized within the
expected time frame, revenues following future acquisitions may be lower than
expected, and operating costs or customer loss and business disruption following
future acquisitions, if any, may be greater than expected, and costs or
difficulties related to the integration of the businesses, if any, that we may
acquire may be greater than expected.
The purchase price allocations for the acquisitions made to date are
preliminary pending resolution of certain purchase price elements. The recorded
goodwill associated with these acquisitions may materially increase when the
contingencies are resolved. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Notes 6 and 17 to the
Consolidated Financial Statements for additional discussion.
We believe that additional acquisitions may require additional capital
resources. Therefore, we may be required to borrow money, or otherwise obtain
financing, for future acquisitions. If we are unable to procure suitable
financing, we may be unable to complete desired acquisitions. In addition, a
transaction could materially adversely affect our operating results if we (1)
dilute our shareholders by issuing additional equity securities, (2) incur
additional debt, or (3) amortize acquisition or debt-related expenses for
goodwill and other intangible assets, and (4) write-off software development
costs.
WE WILL RELY ON IP TELEPHONY, THE REGULATION OF WHICH IS CHANGING AND UNCERTAIN
Since IP telephony is a recent market development, the regulation of IP
telephony is still evolving. A number of countries currently prohibit IP
telephony. Other countries permit but regulate IP telephony. In the U.S., the
FCC has stated that some forms of IP telephony appear to be similar to
traditional telephone services, but the FCC has not decided whether, or how, to
regulate providers of IP telephony. In addition, several efforts have been made
to enact U.S. federal legislation that would either regulate or exempt from
regulation services provided over the Internet. State public utility commissions
also may retain intrastate jurisdiction and could initiate proceedings to
regulate the intrastate aspects of IP telephony. If governments, prohibit or
regulate IP telephony, we could be subject to a variety of regulatory
requirements or penalties, including without limitation, orders to cease
operations or to limit future operations, loss of licenses or of license
opportunities, fines, seizure of equipment and, in certain jurisdictions,
criminal prosecution. The revenue and/or profit generated from Internet
telephony may have become a significant portion of our overall revenue and/or
profit at the time IP telephony is regulated and/or curtailed. Any of the
developments
27
<PAGE>
described above could have a material adverse effect on our business, operating
results and financial condition.
WE HAVE SIGNIFICANTLY INCREASED OUR OUTSTANDING SHARES OF CAPITAL STOCK AND WE
MAY HAVE FURTHER DILUTION
During the past few months, we significantly increased the number of
outstanding shares of capital stock. As described below under the caption
"Certain Recent Developments," we issued Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock in connection with the IDX acquisition, the Telekey acquisition,
the settlement with Mr. Jensen and two financings. We also granted warrants to
providers of bridge loans, the former IDX stockholders and the investors in the
two financings. As a result, the number of shares of Common Stock on a
fully-diluted basis has increased from 17.8 million shares as of November 1,
1998 to 39.5 million shares as of April 9, 1999. (These figures exclude employee
and director options and assume conversion of all preferred stock, exercise of
all in the money options and warrants and full achievement of all earn out
provisions related to certain acquisitions have been achieved by companies
acquired as of April 9, 1999). This has resulted in a significant reduction in
the respective percentage interests of our Company held by our stockholders
(other than those purchasing additional stock in the recent financings). We
expect to issue additional shares of capital stock in connection with financing
agreements we have entered into (described above) and further financings,
acquisitions and joint ventures. We will be required under the terms of existing
agreements to issue additional stock if the market price of our Common Stock
does not equal $8.00 (subject to IDX meeting its performance objectives) by
December 1999 of $10.00 related to the stockholder litigation settlement by mid
2000.
WE DEPEND ON CARRIERS AND OTHERS FOR TRANSMISSION SERVICES
We do not own telecommunications transmission facilities and therefore
depend on telecommunications carriers for transmission. We generally procure
these long distance telecommunication services via strategic arrangements with
the carriers owning such facilities or more common commercial arrangements for
the supply of transmissions capacity. Our ability to make our business
profitable will depend, in part, on our ability to continue to obtain
transmission services on favorable terms. We believe that as providers add new
and enhanced communications services, cost will be a key reason for
distinguishing between services. Accordingly, we will need to keep reducing our
transmission costs and pursue low cost alternative routing technologies. Failure
to obtain transmission services at favorable rates could result in losses on
particular services or over particular routes, and could lead to a loss of
customers, which could have a material adverse effect on our business, financial
condition and results of operations.
WE ARE EXPOSED TO THE ASIAN ECONOMIC CRISIS
The continuing economic crisis in Asia has had a negative impact on our
revenues and prospects with Asian customers. Since we expect the IDX acquisition
to contribute significantly to our revenues, because IDX sells its services in
large part to Asian customers, our financial results will be tied more closely
to the Asian economic situation. While we expect demand in Asia to increase as
the affected economies recover, we do not know when and if this recovery will
occur. The problems
28
<PAGE>
in Asia could dampen demand for our services, including those provided by IDX,
which could result in a significant adverse impact on our financial condition
and results of operations.
WE HAVE ONLY LIMITED PROTECTION OF PROPRIETARY RIGHTS AND TECHNOLOGY AND ARE
EXPOSED TO RISKS OF INFRINGEMENT CLAIMS
We rely primarily on a combination of intellectual property laws and
contractual provisions to protect our proprietary rights and technology.
However, these laws and contractual provisions provide only limited protection.
Unauthorized parties may copy our technology, reverse engineer our software or
otherwise obtain and use information we consider proprietary. In addition, the
laws of some foreign countries do not protect our proprietary rights to the same
extent as the laws of the U.S. Our means of protecting our proprietary rights
and technology may not be adequate. In addition, it is likely that our
competitors will independently develop similar technology and that we will not
have any rights under existing laws to prevent the introduction or use of such
technology.
Many patents, copyrights and trademarks have been issued in the
telecommunication service area. We believe that in the ordinary course of our
business third parties may claim that our current or future products or services
infringe the patent, copyright or trademark rights of such third parties. We
cannot ensure that actions or claims alleging patent, copyright or trademark
infringement will not be brought against us, or that, if such actions are
brought, we will ultimately prevail. Any such claims, regardless of their merit,
could be time consuming, result in costly litigation, cause delays in
introducing new or improved products or services, require us to enter into
royalty or licensing agreements, or cause us to stop using the challenged
technology, trade name or service mark at potentially significant expense to us.
If our key technology is found to infringe the intellectual property rights of
others, it could have a material adverse effect on our business, financial
condition and results of operations.
OUR OPERATING PLATFORMS AND SYSTEMS MAY FAIL OR BE CHANGED, EXPOSING OUR
BUSINESS TO DOWNTIME
Our operations depend upon protecting and maintaining our operating
platforms and central processing center against damage, technical failures,
unauthorized intrusion, natural disasters, sabotage and similar events. We have
taken certain precautions to protect ourselves and our customers from events
that could interrupt delivery of our services. However, we cannot ensure that an
event would not cause the failure of one or more of our communications platforms
or even our entire network. Such an interruption could have a material adverse
effect on our business, financial condition and results of operations.
Our operating platforms and networks are vulnerable to computer viruses or
similar disruptive problems caused by our customers or their customers. Computer
viruses or problems caused by third parties could lead to interruptions, delays,
or cessation in service to our customers. Third parties could also potentially
jeopardize the security of confidential information stored in our computer
systems or our customers' computer systems, which could cause losses to us or
our customers or deter some from subscribing to our services. Although we intend
to continue to implement security measures to prevent unauthorized access to
information or systems, "hackers" have circumvented such measures in the past,
and others may be able to circumvent our security measures or the security
measures of our third-party providers in the future. To alleviate problems
caused by computer viruses
29
<PAGE>
or other inappropriate uses or security breaches, we may have to interrupt,
delay or cease service to our customers, which could have a material adverse
effect on our business, financial condition, and results of operations. In
addition, customers or others may assert claims of liability against us as a
result of any such interruption.
WE DEPEND ON KEY MANAGEMENT AND PERSONNEL
Our success depends upon the continued efforts of our senior management
team and our technical, marketing and sales personnel. We believe our continued
success will depend to a significant extent upon the efforts and abilities of
Christopher J. Vizas, our Chairman and Chief Executive Officer (who joined us in
December 1997), and certain other key executives. Mr. Vizas has entered into an
employment agreement, which expires on December 5, 2000. We also believe that to
be successful we must hire and retain highly qualified engineering personnel. In
particular, we rely on certain key employees to design and develop our
proprietary operating platforms and related software, systems and services.
Competition in the recruitment of highly qualified personnel in the
telecommunications services industry is intense. Hiring employees with the
skills and attributes required to carry out our strategy can be extremely
competitive and time-consuming. We may not be able to retain or successfully
integrate existing personnel or identify and hire additional qualified
personnel. If we lose the services of key personnel or are unable to attract
additional qualified personnel, our business could be materially and adversely
affected. We do not have key-man life insurance.
FAILURE TO OBTAIN YEAR 2000 COMPLIANCE MAY HAVE ADVERSE EFFECTS ON US
We are aware of the issues associated with the programming code in existing
computer systems as the year 2000 approaches. The "Year 2000 Issue" or "Y2K
Issue" arises because many computer and hardware systems use only two digits to
represent the year. As a result, these systems and programs may not process
dates beyond the year 1999, which may cause errors in information or system
failures. Assessments of the potential effects of the Y2K issue vary markedly
among different companies, governments, consultants, economists and
commentators, and it is not possible to predict what the actual impact may be.
Because we use Unix-based systems for our platforms and operating systems to
deliver service to customers, we believe material modifications may not be
required to ensure Y2K compliance. However, we are in the process of assessing
and testing the software resident on all our system hardware to validate this
assertion and anticipate that testing will be completed by June 1999. We are in
various stages of our analysis, assessment, planning and remediation and are
using internal and external resources to identify, correct or reprogram, and
test the computer system for Y2K compliance. We anticipate completing all
reprogramming efforts, including testing, by June 1999. Management is continuing
to update and evaluate the financial impact of Y2K compliance and expects that
total costs will not exceed $1.0 million. We are proceeding with an internal
certification process of our propriety systems (e.g. operating platforms and
billing systems). We intend to use external sources as necessary to validate our
certification of these critical systems. No material costs have been incurred
during the nine month period ended December 31, 1998 and management estimates
that we will incur most of the costs during 1999.
To operate our business, we rely upon providers of telecommunications
services, Internet services, government agencies, utility companies and other
third party providers ("External
30
<PAGE>
Providers"). We are also assessing the Year 2000 readiness of our key External
Providers, and customers. We undertook this project to assure ourselves that we
would have adequate resources to cover our various telecommunications
requirements. The failure of our External Providers or customers to address
adequately their Year 2000 readiness could affect our business adversely. As
part of our contingency planning efforts, we will identify alternative sources
or strategies where necessary. In addition, we are aware of the potential for
claims against us for damages arising from products and services that are not
Year 2000 ready. We believe that such claims against us would be without merit.
Finally, the Year 2000 presents a number of risks and uncertainties that could
affect us, 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. Our expectations as to the extent and timeliness of
modifications required 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. We may not be able to successfully modify on a timely basis such
products, services and systems to comply with Year 2000 requirements, the
failure of which could have a material adverse effect on our operating results.
A significant portion of our business is conducted outside of the U. S.
External Providers located outside of the U. S. may face significantly more
severe Year 2000 issues than similar entities located in the U. S.. If such
External Providers located outside the United States are unable to rectify their
Year 2000 issues, we may be unable to effectively conduct portions of our
business, which could result in a material adverse effect on our financial
condition and results of operations.
Our worst-case Year 2000 scenarios would include: (i) undetected errors or
uncorrected defects in our current product offerings; (ii) corruption of data
contained in our internal information systems; and (iii) the failure of
infrastructure services provided by External Providers. We are in the process of
reviewing our contingency planning in all of these areas and expect the plans to
include, among other things, the availability of support personnel to assist
with customer support issues, manual "work arounds" for internal software
failure, and substitution of systems, if needed. We anticipate that the Company
will have a contingency plan in place by June, 1999.
OUR BUSINESS IS EXPOSED TO THE RISKS ASSOCIATED WITH INTERNATIONAL BUSINESS
We conduct a significant portion of our business outside the U. S. and
accordingly, derive a portion of our revenues and accrue expenses in foreign
currencies. Accordingly, our results of operations may be materially affected by
international events and fluctuations in foreign currencies. We do not employ
foreign currency controls or other financial hedging instruments.
Our international operations and business expansion plans are also subject to a
variety of government regulations, currency fluctuations, political
uncertainties and differences in business practices, staffing and managing
foreign operations, longer collection cycles in certain areas, potential changes
in tax laws, and greater difficulty in protecting intellectual property rights.
Governments may adopt regulations or take other actions, including raising
tariffs, that would have a direct or indirect adverse impact on our business
opportunities within such governments' countries. Furthermore, from time to
time, the political, cultural and economic climate in various national markets
and regions of the world may not be favorable to our operations and growth
strategy.
31
<PAGE>
OUR BUSINESS IS SUBJECT TO REGULATORY RISKS
Though we do not own telecommunications transmission facilities, but
instead use the facilities of other carriers, we are subject to regulation in
many jurisdictions.
U. S. Federal Regulation. Under current FCC policy, telecommunications
carriers reselling the services of other carriers and not owning their own
telecommunications transmission facilities are considered non-dominant and, as a
result, are subject to streamlined regulation. We must have an authorization
from the FCC to provide international services, and must file tariffs at the FCC
setting forth the terms and conditions under which we provide both international
and domestic services. These and other regulatory requirements impose a
relatively minimal burden on us at the present time. However, we cannot ensure
that the current US regulatory environment and the present level of FCC
regulation will continue, or that we will continue to be considered
non-dominant.
Other Government Regulation. In most countries where we operate, equipment
cannot be connected to the telephone network without appropriate approvals, and
therefore, we must obtain such approval to install and operate our operating
platforms or other equipment. In most jurisdictions where we conduct business we
rely on our local partner to obtain the requisite authority. Relying on local
partners causes us to depend entirely upon the cooperation of the telephone
utilities with which we have made arrangements for our authority to conduct
business, as well as operational and certain of our administrative requirements.
Any telephone utility could cease to accommodate our requirements at any time.
Depending upon the location of the telephone utility, such action could have a
material adverse effect on our business and prospects. Such relationships may
not continue and governmental authorities may seek to regulate our services or
require us to obtain a license to conduct our business.
ACCOMMODATING THE EURO COULD IMPACT OUR BUSINESS
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and the euro, making the euro their common legal currency on that
date. There will be a transition period between January 1, 1999 and January 1,
2002, during which the old currencies will remain legal tender in the
participating countries as denominations of the euro. During the transition
period, public and private parties may pay for goods and services using either
the euro or the participating country's former currency on a no compulsion, no
prohibition basis. Conversion rates, however, will no longer be computed
directly from one former currency to another. Instead, a triangular process will
apply whereby an amount denominated in one former currency will first be
converted into the euro. The resultant euro-denominated amount will then be
converted into the second former currency. At this time, we do not believe that
the euro's introduction will have a material impact on our business during the
transition period, but we cannot accurately predict the impact on our business.
OUR STOCK PRICE WILL FLUCTUATE, AND COULD FLUCTUATE SIGNIFICANTLY
Market prices for securities of telecommunications services companies have
generally been volatile. Since our common stock has been publicly traded, the
market price of our common stock has fluctuated over a wide range and may
continue to do so in the future. The market price of our
32
<PAGE>
common stock could be subject to significant fluctuations in response to various
factors and events, including, among other things:
o the depth and liquidity of the trading market for our common stock;
o quarterly variations in actual or anticipated operating results;
o growth rates;
o changes in estimates by analysts;
o market conditions in the industry;
o announcements by competitors;
o regulatory actions; and
o general economic conditions.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations, which have particularly affected the market
prices of the stocks of high-technology companies and which may be unrelated to
the operating performance of particular companies. Furthermore, our operating
results and prospects from time to time may be below the expectations of public
market analysts and investors. Any such event could result in a decline in the
price of our common stock.
WE HAVE ADOPTED CERTAIN ANTI-TAKEOVER PROVISIONS
We have adopted a rights plan and have entered into a stockholder rights
agreement dated February 27, 1997 between ourselves and American Stock Transfer
& Trust Company, as rights agent (the "Rights Agreement"). The Rights Agreement
provides for issuing rights (the "Rights") for each share of common stock
outstanding on February 28, 1997. Each Right represents the right to purchase
one one-hundredth of a share of our Series A Participating Preferred Stock (the
"Series A Preferred Stock") at a price of $70 per one-hundredth of a share of
Series A Preferred Stock, subject to adjustment. All shares of common stock we
issued between the date of adoption of the Rights Agreement and the distribution
date (as defined in the Rights Agreement) or, the date, if any, on which the
Rights are redeemed will have Rights attached to them. The Rights become
exercisable upon the occurrence of certain defined change of control triggering
events. The Rights will have certain anti-takeover effects as they will cause
substantial dilution to a person or group that acquires a substantial interest
in us without the prior approval of our Board of Directors. The effect of the
Rights may be to inhibit a change in control in our business (including a third
party tender offer at a price which reflects a premium to then prevailing
trading prices) that may be beneficial to our stockholders.
Our restated certificate of incorporation allows our Board of Directors to
issue up to five million shares of preferred stock and to fix the rights,
privileges and preferences of those shares without any further vote or action by
the stockholders. The rights of the holders of the common stock
33
<PAGE>
will be subject to, and may be adversely affected by, the rights of the holders
of any shares of preferred stock that we may issue in the future. Any issuances
of preferred stock in the future could have the effect of making it more
difficult for a third party to acquire a majority of our outstanding voting
stock. In addition, we are subject to certain anti-takeover provisions of the
Delaware General Business Corporation Law, which could have the effect of
discouraging, delaying or preventing a change of control.
WE ANTICIPATE THAT WE WILL NOT PAY CASH DIVIDENDS
We have not declared or paid cash dividends on our common stock since
August 1996 when we declared a stock split which we effected in the form of a
ten percent (10%) stock dividend. We currently intend to retain any future
earnings to finance growth and therefore we do not anticipate paying cash
dividends in the foreseeable future. In addition, our payment of cash dividends
is currently subject to certain restrictions under the terms of the Series D
Preferred Stock and the Series E Preferred Stock.
ITEM 2 - PROPERTIES
- - --------------------------------------------------------------------------------
The land and building occupied by the Company at 4260 East Evans Avenue,
Denver, Colorado, consisting of approximately 14,000 sq. ft., was purchased in
December 1992. The Company rents office space at the following locations:
Tarrytown, New York; Paris, France; Brussels, Belgium; Nyon, Switzerland; Hong
Kong, H.K.; Silkeborg, Denmark; Godalming, United Kingdom; Washington, D.C.;
Reston, Virginia; Atlanta, Georgia; Taipai, Taiwan; and Limassol, Cyprus. The
Company believes that its facilities are adequate for operations for the coming
year.
ITEM 3 - LEGAL PROCEEDINGS
- - --------------------------------------------------------------------------------
The following information sets forth information relating to material legal
proceedings involving the Company and certain of its executive officers and
directors. From time to time, the Company and its executive officers and
directors become subject to litigation which is incidental to and arises in the
ordinary course of business. Other than as set forth herein, there are no
material pending legal proceedings involving the Company or its executive
officers and directors.
The Company, its former auditors, certain of its present and former
directors and others are defendants in a consolidated securities law class
action, which alleges that certain public filings and reports made by us
including our Forms 10-K for the 1991, 1992, 1993 and 1994 fiscal years (i) did
not present fairly the financial condition of the Company and its earnings; and
(ii) failed to disclose the role of Richard Bertoli as a consultant to the
Company.
34
<PAGE>
On April 2, 1998 the parties entered into a formal settlement agreement.
Pursuant to the settlement agreement the plaintiffs agreed to release the
Company and the other defendants from all obligation or liability and we agreed,
on behalf of the Company and the other defendants, to deliver to a settlement
administrator a total of 350,000 shares of our Common Stock and to pay the
settlement administrator up to $50,000 in actual reasonable charges and expenses
incurred in connection with providing notice to the expenses incurred in
connection with providing notice to the plaintiffs and administering the
settlement. A charge of $3.5 million was recorded in the fourth quarter of the
year ended March 31, 1998 and represents the value assigned to the 350,000
shares of Common Stock referred to above, which have been valued at a maximum
possible value of $10.00 per share pursuant to the terms of the settlement
agreement. Such value relates to our obligation to issue additional stock or
cash if the market price of our stock is less than $10.00 per share during the
relevant periods, as defined. We have obligation to issue additional stock if
our share price is above $10.00 per share for fifteen consecutive days during
the two year period after all shares have been distributed to the class. The
settlement is subject to Court approval. The shares of the Company's Common
Stock have been issued. The actions have gone to final judgment and all appeal
periods have expired.
CSI CORP. V. EXECUTIVE TELECARD, LTD., CASE NO. 98 CV 8329, DIV./CTRM. 7,
DISTRICT COURT, CITY AND COUNTY OF DENVER, STATE OF COLORADO
We are a defendant in an action brought by a Colorado reseller of
transmission services, October 28, 1998. The lawsuit arises out of a transaction
wherein the plaintiff and we contemplate forming a limited liability company for
purposes of developing sales opportunities generated by the plaintiff. We and
the plaintiff were unable to arrive at a definitive agreement on their
arrangement and the plaintiff sued, claiming breach of a noncircumvention
agreement. Discovery has not commenced as yet, litigation is in its early
stages, and therefore, an additional opinion cannot be given at the present
time. We believe this claim is without merit and plans to defend this action
vigorously.
ROBERT N. SCHUCK V. EXECUTIVE TELECARD, LTD., CASE NO. 98 CIV. 5037, U.S.D.C.,
S.D.N.Y.
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. We made the determination that there were items which the executive
failed to disclose to the Company and therefore we ceased making payments to the
executive pending further investigation. The executive sued, claiming employment
benefits including expenses, vacation pay and rights to options. The parties
have agreed in principle, to a settlement, which is being documented presently.
In the event that settlement does not go froward, we are defending this action
and believe that, ultimately, we will prevail.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - --------------------------------------------------------------------------------
None.
35
<PAGE>
Executive TeleCard, Ltd.
d/b/a eGlobe
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
- - --------------------------------------------------------------------------------
A. MARKET INFORMATION
Our common stock has traded on the Nasdaq National Market under the symbol
"EXTL" from December 1, 1989 through September 18, 1998 and since that date
under the symbol "EGLO".
The following table reflects the high and low prices reported on the Nasdaq
National Market for each quarter of the fiscal year ended March 31, 1998.
High Low
---- ---
Quarter Ended June 30, 1997 $ 9 1/4 $ 4 1/2
Quarter Ended September 30, 1997 8 3/4 3 1/4
Quarter Ended December 31, 1997 4 1 19/32
Quarter Ended March 31, 1998 4 19/32 2 1/4
The following table reflects the high and low prices reported on the Nasdaq
National Market for each quarter of the nine month period ended December 31,
1998 and the quarter ended March 31, 1999.
High Low
---- ---
Quarter Ended June 30, 1998 $ 4 1/4 $ 2 1/32
Quarter Ended September 30, 1998 3 9/16 1 9/16
Quarter Ended December 31, 1998 2 1/2 1 1/4
Quarter Ended March 31, 1999 3 5/16 11/2
On April 13, 1999 the last reported sale price of our common stock on the
NASDQ National market was $4.50 per share.
B. RECENT SALES OF UNREGISTERED SECURITIES
During the nine month period ended December 31, 1998, we offered and sold
the following equity securities that were not registered under the Securities
Act:
(1) On June 18, 1998, we issued to an existing stockholder in connection
with his $1.0 million loan to the Company warrants to purchase 67,000 shares of
our Common Stock at an exercise price of $3.03125 per share, and we repriced to
$3.75 and extended existing warrants for 55,000 shares of Common Stock.
Subsequent to December 31, 1998 the exercise price of the 122,000
36
<PAGE>
warrants was lowered to $1.5125 per share and the expiration dates were extended
through January 31, 2002.
(2) On September 1, 1998, we issued a warrant to purchase 25,000 shares of
our Common Stock at an exercise price of $2.00 per share to a private investor
in connection with his $250,000 loan to a subsidiary of ours. The warrant is
exercisable at any time until September 1, 2003. We advanced the proceeds to a
software company for development of unified messaging software. We are
negotiating a joint venture arrangement whereby we will share 50% ownership
interest of certain software technology related to commercial development of
messaging technology. See note 17 to the Consolidated Financial Statements for
further discussion.
(3) On September 2, 1998, we issued a warrant to purchase 2,500 shares of
our Common Stock at an exercise price of $2.00 per share to an investment firm
in exchange for services rendered to us. The warrant is exercisable at anytime
until September 1, 2003
(4) On December 2, 1998, we issued (a) 500,000 shares of the Series B
Preferred Stock, which are convertible into up to 2,500,000 shares (2,000,000
shares until stockholder approval is obtained) of Common Stock, subject to
adjustment as described below, (b) the IDX Warrants, subject to IDX's
achievement of certain revenue and EBITDA objectives, at an exercise price of
$.001 per share, if shareholder approval is obtained, and (c) $5.4 million which
amount is subject to decrease, in interest bearing Convertible Subordinated
Promissory Notes in exchange for all of the stock of IDX.
The shares of Series B Preferred Stock are convertible into up to 2,500,000
shares of Common Stock (2,000,000 shares until stockholder approval is
obtained), subject to adjustment as described below. The shares of Series B
Preferred Stock are convertible at the holders' option at any time at the then
current conversion rate. The shares of Series B Preferred Stock will
automatically convert into shares of Common Stock on the earlier to occur of (a)
the first date that the 15 day average closing sales price of Common Stock is
equal to or greater than $8.00 or (b) 30 days after the later to occur of (i)
December 2, 1999 or (ii) the receipt of any necessary stockholder approval
relating to the issuance of the Common Stock upon such conversion. We have
guaranteed a price of $8.00 per share on December 2, 1999, subject to IDX's
achievement of certain revenue and EBITDA objectives. If the market price of the
Common Stock is less than $8.00 on December 2, 1999 and IDX has met its
objectives, we will issue additional shares of Common Stock upon conversion of
the Series B Preferred Stock (subject to the receipt of any necessary
stockholder approval) based on the ratio of $8.00 to the market price (as
defined, but not less than $3.3333 per share), but not more than 3.5 million
additional shares of Common Stock.
The IDX Warrants are exercisable only to the extent that IDX (which is managed
by the former IDX executives for the "earn-out" period) achieves certain revenue
and EBITDA goals over the twelve months following the merger closing date and if
stockholder approval is obtained. We have guaranteed a price of $8.00 per share
on December 2, 1999, subject to IDX's achievement of certain revenue and EBITDA
objectives. If the market price of the Common Stock is less than $8.00 on
December 2, 1999, we will issue additional shares of Common Stock upon exercise
of the IDX Warrants based on the ratio of $8.00 to the market price (but not
less than $3.3333 per share), up to a maximum of 3.5 million additional shares
of Common Stock.
37
<PAGE>
The Convertible Subordinated Promissory Notes are due in four installments
(the first of which was paid in stock in March 1999) through October 30, 1999.
If we fail to meet any of the three maturity dates, the matured balance of the
Convertible Subordinated Promissory Notes will begin to accrue default interest
at the rate of LIBOR plus 400 basis points until repaid and we will issue the
former IDX stockholders warrants to purchase shares of Common Stock equal to ten
percent (10%) of the matured balance, including interest. In lieu of paying the
matured balance in cash, we may elect, in our sole discretion, to convert all or
part of the matured balance into shares of Common Stock.
(5) On November 18, 1998, we agreed with Mr. Jensen to exchange his holding
of 1,425,000 shares of Common Stock for 75 shares of Series C Preferred Stock
convertible into 1,875,000 shares of Common Stock at such date based on the
terms of the Series C Preferred Stock. On February 16, 1999, we agreed to
exchange the Series C Preferred Stock for 3,000,000 shares of our Common Stock.
(6) On December 31, 1998, we issued an aggregate of 62,500 shares of our
Common Stock and a warrant to purchase 50,000 shares of our Common Stock at an
exercise price of $1.63 per share along with other consideration of $2.1
million, $1.1 million subject to adjustment, in exchange for all of the stock of
UCI. In addition, we agreed to issue an additional 62,500 shares of Common Stock
on February 1, 2000 subject to adjustment based on UCI meeting certain revenue
targets. We also agreed to issue additional shares of Common Stock if the market
price of our Common Stock on February 1, 2000 is less than $8.00 per share
subject to adjustment based on UCI meeting its revenue targets.
See "Executive Compensation" for information regarding the grant of options
to purchase shares of Common Stock to some of our employees under our 1995
Employee Stock Option and Appreciation Rights Plan as partial consideration for
the execution of employment, confidentiality and non-competition agreements and
to our directors under the Director Stock Option Plan as consideration for
services provided.
Each issuance of securities described above was made in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act or
Regulation D promulgated thereunder for transactions by an issuer not involving
any public offering. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for distribution in connection with such transactions. All
recipients had adequate access to information about us through their
relationship with us or through information about us made available to them.
C. HOLDERS
The approximate number of holders of our common stock as of March 31, 1999
was in excess of 4,300 record and beneficial owners.
38
<PAGE>
D. DIVIDENDS
We have not paid or declared any cash dividends on our common stock since
our inception and anticipate not paying any cash dividends on our common stock
in the near future. In addition, our payment of cash dividends is currently
subject to certain restrictions under the terms of the Series D Preferred Stock
and the Series E Preferred Stock. We declared a ten percent (10%) common stock
split, effected in the form of a stock dividend, on June 30, 1995 and
distributed on August 25, 1995 to stockholders of record as of August 10, 1995.
On May 21, 1996 we declared another ten percent (10%) stock dividend.
Stockholders of record as of June 14, 1996 received the dividend on August 5,
1996.
Balance of this page intentionally left blank.
39
<PAGE>
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL INFORMATION
- - --------------------------------------------------------------------------------
The following is a summary of selected consolidated financial data of
eGlobe as of and for the five most recent fiscal periods ended. This data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our Consolidated Financial Statements
and the Notes thereto appearing elsewhere in this document. Effective with the
period ended December 31, 1998, the Company elected to convert to a December 31
fiscal year end. Therefore, the period ended December 31, 1998 represents a
nine-month period as compared to the twelve-month fiscal years ended March 31,
1998, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
FOR THE NINE MONTH
PERIOD ENDED DECEMBER FOR THE YEARS
31, ENDED
(3) (4) MARCH 31,
-----------------------------------------------------------------------------------------
1998 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Net Revenues $ 22,490,642 $ 33,122,767 $ 33,994,375 $ 30,298,228 $ 22,980,726
Income (Loss) from Operations (5,939,633) (5,700,424) 2,423,564 3,097,009 (292,307)
Other Income (Expense) (1,150,559) (5,949,486) (1,401,612) 69,843 (4,324,193)
Net Income (Loss) (7,090,192) (13,289,910) 773,952 2,852,852 (4,616,500)
Net Earnings (Loss) per
Common Share: (1)(2)
Basic $ (0.40) $ (0.78) $ 0.05 $ 0.18 $ (0.30)
Diluted $ (0.40) $ (0.78) $ 0.05 $ 0.18 $ (0.30)
<CAPTION>
AS OF AS OF
DECEMBER 31, MARCH 31,
-----------------------------------------------------------------------------------------
1998 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
BALANCE SHEET:
Cash and Cash Equivalents $ 1,407,131 $ 2,391,206 $ 2,172,480 $ 950,483 $ 1,734,232
Total Assets 36,388,161 22,900,456 23,679,686 16,732,074 12,943,044
Long-Term Obligations 1,237,344 7,735,581 9,737,007 2,150,649 671,774
Total Liabilities 31,045,443 15,779,696 15,720,414 9,692,065 9,023,293
Total Stockholders' Equity 5,342,718 7,120,760 7,959,272 7,040,009 3,919,751
</TABLE>
(1) Based on the weighted average number of shares outstanding during the
period.
(2) The weighted average number of shares outstanding during the periods
has been adjusted to reflect two ten percent (10%) stock splits,
effected in the form of stock dividends and distributed August 25,
1995 and August 5, 1996.
(3) Includes the December 2, 1998 acquisition of IDX for which the Company
acquired all of the common and preferred stock of IDX. See Note 6 to
the Consolidated Financial Statements.
(4) Includes the December 31, 1998 acquisition of UCI.. See Note 6 to the
Consolidated Financial Statements.
40
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- - --------------------------------------------------------------------------------
GENERAL
In 1998, the Company changed its fiscal year end from March 31 to December 31.
This change reflects some of the more fundamental changes instituted by
management.
The business of the Company is to provide services to large telecommunications
companies, primarily to telephone companies which are dominant in their national
market, and to specialized telephone companies and to Internet Service Providers
("ISP's") as well. The services of the Company enable its customers to provide
global reach for "enhanced" or "value added" services that they are supplying,
in turn, to their end user customers. Prior to 1998, the entire focus was on
supporting calling card services. In 1998 that focus began to change.
Taking advantage of the key assets of the Company - its operating platforms in
more than forty countries, its ability to originate telephone calls (and in many
cases, provide data access) in more than 90 countries and territories, and the
customer and operating relationships built over the years - management started
working with customers to extend the line of services. A key part of that
extension was the recognition that "IP" (Internet Protocol technologies) had
become a basic element of the Company's business and a principal need of its
customers- even the card services business relies on IP software and services in
its billing and operating functions. To support the extension of services, the
Company acquired IDX, as discussed below, with its IP voice and fax capabilities
and made significant investments in unified messaging software. In addition, the
Company began exploring ways to integrate other services into its operating
platforms, including additional acquisitions which might complement current
offerings or extend the Company's portfolio of services.
After a year of restructuring and refocus, the Company is implementing its new,
broader services strategy and leaves 1998 committed to a program of growth. This
program will demand substantial new resources, particularly human resources and
cash. For these reasons, in the first quarter of 1999 the Company raised $10
million from the sale of equity, arranged a $20 million debt facility from an
affiliate of a major stockholder, entered into a key vendor financing
arrangement and plans to raise substantial amounts of additional capital during
the next two years. Growth in international telecommunications business often
results in a disparity between cash outlays and inflows during periods of
growth, with outlays far exceeding inflows. The Company has entered such a
period of growth.
Management expects to invest in growth. Cash will be the key element of that
investment - whether it takes the form of recruiting personnel, acquiring
technology, expanding facilities, or extending the business base through
marketing or acquisitions. In 1998, the Company made two principal investments
in growth - the acquisition of IDX and the investment in, and the acquisition of
a technology license for, unified messaging technology.
On December 2, 1998, the Company acquired IDX International, Inc. ("IDX")
which provides IP (Internet Protocol) voice and fax transmission services,
principally to telephone companies and ISP's. The Company acquired all of the
common and preferred stock of IDX for (a) 500,000 shares of Series B Convertible
Preferred Stock valued at $3.5 million which is convertible into a maximum of
2,500,000 shares (2,000,000 shares until stockholder approval is obtained) of
common stock; (b) warrants to purchase up to an additional 2,500,000 shares of
common stock
41
<PAGE>
(subject to stockholder approval and to IDX meeting "earnout" objectives
described below); (c) $5.4 million in 7.75% convertible subordinated promissory
notes ("IDX Notes") (subject to adjustment as described below); (d) $1.5 million
in bridge loan advances to IDX made by the Company prior the acquisition which
were converted into part of the purchase price plus accrued interest charges of
$0.04 million and (e) direct costs associated with the acquisition of $0.4
million. The Company plans to include the requests for the approval of the
warrants and additional stock as matters to be voted upon by the stockholders at
the next annual meeting. The acquisition has been accounted for under the
purchase method of accounting. The financial statements of the Company reflect
the preliminary allocation of the purchase price. The preliminary allocation has
resulted in acquired goodwill of $10.9 million, which is being amortized on a
straight-line basis over seven years. The allocation has not been finalized due
to several purchase price elements which are contingent upon working capital
levels, stockholder approvals subsequent to the date of acquisition, IDX's
ability to achieve certain revenue and EBITDA objectives twelve months after the
date of close and the stock price of the Company's common stock during the same
twelve month period. Based on the contingent price elements discussed above,
goodwill associated with the acquisition may materially increase when these
contingencies are resolved. (See Note 6 to the Consolidated Financial Statements
for further discussion).
The consolidated revenues and costs for the period ended December 31, 1998
included the IDX results of operations for the month of December which are not
material to the consolidated financial statements. For the fiscal year ending
December 31, 1999, however, the Company expects the IDX services to become a
significant source of revenue growth.
The Company made a cash investment of more than $1 million in unified
messaging technology in the nine months ended December 31, 1998. Most of those
funds consisted of advances to a software based service company in which the
Company is considering making a joint venture investment. For the investment,
the Company received a technology license and has participated in the
development and beta testing of the core software. The Company is preparing to
launch a new service in cooperation with some of its existing customers based on
this technology. While the Company does not expect significant revenues or
returns from this investment in 1999, it believes that IP and voice services
based on this technology will become a significant portion of its business in
2000 and beyond. For this reason, management plans to continue its investment in
this software in 1999 and may enter into a joint venture arrangement which will
give it a greater voice in the further development of the software.
Revenue. Through December 31, 1998, most of the revenue of the Company
resulted from providing services and was generated through contracts for card
services, the sale of international toll free services, and to a limited degree,
by use of the Company's legacy proprietary calling cards. The charge for service
is on a per call basis, determined primarily by minutes of use and the
originating and terminating points of the call. The charging structure for IDX
is substantially similar. Some contracts call for monthly minimums and almost
all contracts are multi-year agreements. As the Company begins to provide new
services, it expects its model for charging for services to remain basically the
same, although in certain new offerings, such as unified messaging, there are
likely to be basic monthly subscriber charges in addition to per transaction
charges. In prior years, the Company generated revenue from other sources,
generally sales of billing and platform systems and nonrecurring special
projects.
42
<PAGE>
Costs. The principal component of the cost of revenue for card services and
IP voice and fax services is transmission costs. The Company continues to pursue
strategies for reducing costs of transmission. These strategies include
establishing partnering arrangements with various carriers, negotiating more
cost-effective agreements with other carriers and routing traffic to the
lowest-cost, highest quality providers. Also, in fiscal year 1999 and
thereafter, the strategy will include cost effective provisioning of the
Company's own IP trunks.
Other components of operating costs are selling, general and administrative
expenses, which include personnel costs, consulting and legal fees, travel
expenses, bad debt allowances and other administrative expenses. Depreciation
and amortization expense includes the allocation of the cost of transmission
equipment, property and office equipment, and various intangible assets,
principally goodwill arising from several recent acquisitions, over their useful
lives.
RESULTS OF OPERATIONS
NINE MONTH PERIOD ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED MARCH 31, 1998
Overview. The Company incurred a net loss of $7.1 million for the nine
month period ended December 31, 1998 compared to a net loss of $13.3 million for
the year ended March 31, 1998. The table below shows a comparative summary of
certain significant charges to income in both periods, some of which are
nonrecurring, which affected net operating results:
<TABLE>
<CAPTION>
(in millions)
Nine month period ended Year Ended March
December 31, 1998 31, 1998
-------------------------------------------------------------
<S> <C> <C>
Corporate realignment costs $ - $ 3.1
Proxy-related litigation settlement costs 0.1 3.9
Settlement costs 1.0 -
Additional income tax provision - 1.5
Allowance and write-offs for bad debts 0.8 1.4
Warrants associated with debt 0.6 0.5
Other items 0.4 0.6
----- ------
$ 2.9 $ 11.0
===== ======
</TABLE>
After deducting these items, the loss for the nine month period ended
December 31, 1998 totaled $4.2 million compared to $2.3 million for the full
year ended March 31, 1998.
The principal factors in the loss for the nine month period are: (1)
reduction in business arrangements, including the termination of contracts or
business arrangements which did not fit with the focus of the Company; (2)
reduction in prices to provide more competitive offerings; (3) more aggressive
collection efforts, including demands for timely payments from customers with
outstanding delinquent accounts, which resulted in a substantial decline in
revenues from what had
43
<PAGE>
formerly been the largest customer of the Company; (4) a continuing decline in
revenue from non-core, but large, North American customers; (5) the inclusion of
revenue from a major card service contract which, in the first phase of this
contract in the fourth calendar quarter of 1998, was billed largely on a cost
reimbursable basis; and (6) continued weakness in our Asian customer base during
the entire nine month period. The negative effect of these factors on gross
profit contribution is estimated to be $2.2 million for the nine month period
ended December 31, 1998.
Management has taken steps to reverse this trend through the expansion of
its service offerings to its existing customers, expansion of the customer base
through revamped sales and marketing and through acquisitions. Management
believes that these steps will result in significant revenue growth throughout
1999 and an improvement in margins beginning in the second and third quarters of
1999.
Revenue. Revenue for the nine month period ended December 31, 1998 totaled
$22.5 million compared to $33.1 million for the full year ended March 31, 1998.
Of this total, $18.6 million was derived from the card services customer base
with which the Company began the period (the "legacy customer base"). For the
six months ended September 30, 1998, revenue from our legacy calling card
customer base averaged $7.2 million per quarter. (For the fiscal year ended
March 31, 1998 services revenue averaged approximately $7.7 million per
quarter). As discussed above, revenue from this legacy customer base declined
over the period and represented only $4.2 million in the quarter ended December
31, 1998. These declines from the legacy customer base are expected to be
permanent (with the exception of the decline in Asia) and are derived largely
from North American customers, including particularly the large customer which
had substantial delinquencies in payment. The legacy customers that represent
most of the decline are not crucial to the Company's network of operating
platforms nor to the global growth strategy and the extension of services upon
which management is focusing.
Offsetting this decline somewhat is the inclusion in revenue for the nine
month period ended December 31, 1998 of $2.0 million, mainly in the last three
months, from a significant card services contract with a new North American
customer. However, in the first phase of this contract, the Company agreed to
bill this customer on a cost-reimbursable basis for the major portion of this
business. Accordingly, this revenue source has contributed only a minor amount
of margin to the Company's operating results to date. In 1999, the Company has
begun a second phase of the contract which is expected to provide higher revenue
and margins than the cost-reimbursable basis experienced in the quarter ended
December 31, 1998.
Revenue from the Company's Asian card service base was $5.9 million for the
nine month period ended December 31, 1998 compared to $10.3 million for the year
ended March 31, 1998. Economic activity in most areas of the Asia-Pacific region
remains weak and the Company's near term outlook for card services revenue in
this market is that it will continue at current levels. However, the Company
anticipates that a significant portion of the expected revenue growth from new
services, such as those acquired with IDX, will come from this region.
Also included in the consolidated revenue for the nine month period ended
December 31, 1998 is $0.6 million, which represents IDX revenues for the month
of December 1998. Based on new
44
<PAGE>
contracts executed during late 1998 and the first quarter of 1999, revenue
contribution from IDX is expected to be significant in calendar 1999.
Gross Profit. Gross profit was 44% of total revenue or $9.9 million for the
nine month period ended December 31, 1998, compared to 43% or $14.3 million for
the full year ended March 31, 1998. Excluding the effects of the low margin
first phase of the large new card services contract described above, gross
profit from the Company's card service business was 46% for the nine month
period ended December 31, 1998. This margin improvement over that realized in
the previous year (43%) is due primarily to active efforts to reduce operating
costs. Cost of revenue is expected to continue to fluctuate as new pricing and
contractual arrangements are put in place and as the Company's revenue mix
continues to change. Transmission costs, the principal element of cost of
service, should also begin to show the positive impact in 1999 arising from use
of the expanding IP transmission network of IDX.
Selling, General and Administrative Expenses ("SG&A"). These expenses
totaled $12.6 million for the nine month period ended December 31, 1998 compared
to $14.0 million for the full year ended March 31, 1998. Included in the nine
month total is a $0.8 million provision for doubtful accounts compared to $1.4
million for the full year ended March 31, 1998. In the fourth calendar quarter
of 1998, the Company incurred a non-cash charge of $0.4 million for compensation
expense related to the IDX acquisition for a granting by the IDX stockholders of
acquisition consideration to a number of IDX employees. Excluding this charge,
other SG&A expenses, principally salaries and benefits, travel, legal and
professional fees and other overhead costs averaged $3.8 million per quarter
during the nine month period ended December 31, 1998, compared to $3.2 million
per quarter for the year ended March 31, 1998. The principal factors in this
increase are higher personnel costs resulting from recruitment and upgrading of
management and additions to the marketing and sales staff.
Settlement Costs. As described in Note 7 to the Consolidated Financial
Statements, the Company and its largest stockholder entered into a settlement
agreement to resolve all current and future claims. The difference in value
between the Convertible Preferred Stock issued to the stockholder and the common
stock surrendered by the stockholder was $1.0 million, which resulted in a
non-cash charge to the statement of operations in the quarter ended September
30, 1998.
Depreciation and Amortization Expense. This expense for the nine month
period ended December 31, 1998 totaled $2.3 million compared to $2.8 million for
the full year ended March 31, 1998. These charges are expected to increase
significantly in the future as the full effect of amortization of goodwill
arising from recent acquisitions is charged to the statement of operations.
Other Expenses (Income). Interest expense totaled $1.0 million for the nine
month period ended December 31, 1998 compared to $1.6 million for the full year
ended March 31, 1998. This cost will increase in future reporting periods due to
the increase in debt assumed as part of the acquisition program in 1998 and 1999
as well as the $7.0 million in financing finalized in April 1999.
The Company recorded a foreign currency transaction loss of $0.1 million
during the nine month period ended December 31, 1998 arising from foreign
currency cash and accounts receivable balances maintained by the Company during
the period in which the U.S. dollar strengthened. For the year ended March 31,
1998, this charge was $0.4 million. The Company's exposure to foreign
45
<PAGE>
currency losses is mitigated due to the variety of customers and markets which
comprise the Company's customer base, as well as geographic diversification of
that customer base. In addition, the majority of the Company's largest customers
settle their accounts in U.S. dollars.
During the nine months ended December 31, 1998, the Company incurred $0.1
million proxy related litigation expenses as compared to $3.9 million for the
year ended March 31, 1998. Related to the class action lawsuit for which a
settlement agreement was reached in April 1998. Of the amount recorded in the
year ended March 31, 1998, $3.5 million related to the escrow of 350,000 shares
of the Company's common stock, which have been valued at $10.00 per share
pursuant to the terms of the settlement agreement. Such value relates to the
Company's obligation to issue additional stock or cash if the market price of
the Company's stock is less than $10.00 per share during the defined periods.
See Note 8 to the Consolidated Financial Statements for further discussion.
Taxes on Income. No income tax provision was recorded for the nine month
period ended December 31, 1998 due to the operating losses incurred. Taxes on
income for the year ended March 31, 1998 were $1.6 million. The tax provision
for amounts currently due is primarily the result of the Company's completion of
a study to simplify its tax and corporate structure wherein it identified
potential tax issues arising out of its international subsidiaries. In
connection with this study, the Company realized it had potential tax
liabilities and recorded an additional tax provision of $1.5 million in the
fourth quarter of the year ended March 31, 1998. The Company's study was
completed in January, 1999 and no additional reserve for taxes was recorded as
of December 31, 1998. The eventual outcome cannot be predicted with certainty.
No tax claims have been asserted against the Company. See Note 12 to the
Consolidated Financial Statements for further discussion regarding taxes on
income.
YEAR ENDED MARCH 31, 1998 COMPARED TO YEAR ENDED MARCH 31, 1997
Overview. The Company incurred a net loss of $13.3 million for the year
ended March 31, 1998, of which $11.0 million is attributable to the following
charges:
<TABLE>
<CAPTION>
(in millions)
<S> <C>
Corporate realignment costs $ 3.1
Proxy-related litigation settlement costs 3.9
Additional income tax provision 1.5
Additional allowance for doubtful accounts 1.4
Warrants associated with debt 0.5
Other items 0.6
-----
$11.0
=====
</TABLE>
46
<PAGE>
Some of these charges resulted principally from a detailed review of the
Company's activities initiated by new management in the last few months of
fiscal 1998 and are described in more detail below.
Excluding these items, the Company incurred a net loss for the year ended
March 31, 1998 of $2.3 million compared to net income in fiscal 1997 of $0.8
million. The difference is principally due to a $1.6 million contribution to net
income in fiscal 1997 of revenues from non-services sources which did not recur
in fiscal 1998. Also in the year ended March 31, 1998, the Company's gross
profit from its services business remained flat compared to fiscal 1997 while it
incurred additional recurring operating expenses of $1.1 million, principally
depreciation and amortization. Interest expense, excluding a $0.5 million charge
related to the amortization of debt discount associated with warrants (see Note
11 to the Consolidated Financial Statements for further information), increased
by $0.3 million over fiscal 1997. Foreign exchange losses increased by $0.3
million over fiscal 1997.
New management has taken steps to increase revenues and improve margins.
They have completed a review of the operations and activities of the Company and
have refocused the Company's marketing and sales activities with an emphasis on
stabilizing and growing the existing core business and on adding new services.
In practical terms, this means that: (1) the Company refocused its resources on
both expanding its customer base and extending its line of services to realize
the value of its global network of operating platforms; (2) the Company
established a small staff devoted to improving its network structure and
reducing its marginal transmission costs (and, therefore, its cost of revenue),
and contracts were entered into which will help to reduce transmission costs in
the next fiscal year; (3) the Company increased its sales and marketing staff
and allocated additional funds for marketing and promotional activities; and (4)
staffing needs were assessed and reductions and realignments were completed. The
Company instituted a process to add new network and operations staff as
necessary to support new contracts.
A thorough review of corporate practices and procedures was completed in
1998. This review resulted in a number of improvements to internal reporting and
review procedures. The Company also undertook a study to simplify its
organizational and tax structure and identified potential international tax
issues. In connection with this study, the Company realized it had potential tax
liabilities and recorded an additional tax provision of $1.5 million in the
fiscal year ended March 31, 1998 to reserve against liabilities which might
arise under the existing structure. The Company's study was completed in January
1999 and no additional reserve for taxes was recorded as of December 31, 1998.
The eventual outcome cannot be predicted with certainty. No tax claims have been
asserted against the Company.
Revenue for the year ended March 31, 1998 was $33.1 million. By comparison,
revenue for the year ended March 31, 1997 was $34.0 million, including $2.0
million attributable to non-service
47
<PAGE>
revenue (principally billing and platform equipment sales, revenue from calling
card production and contract settlement charges related to disputes over special
projects). Although total revenue decreased from the year ended March 31, 1997
to the year ended March 31, 1998, services revenue increased $1.0 million or 3%.
The increase was due to increased customer usage partially offset by a
combination of three elements: a decline in revenue from the long distance
resale services of the Company; lower per minute revenue due to new pricing
programs which went into effect in the first and second quarters of the year
ended 1998; and a lack of new revenue generating contracts in the fiscal year
ended March 31, 1998.
Gross Profit. Gross profit was 43% or $14.3 million for the year ended
March 31, 1998, compared to 47% or $16.1 million for the year ended March 31,
1997. This decline was due partially to the positive margin contribution of
non-service revenues in the year ended March 31, 1997 which did not reoccur in
the year ended March 31, 1998. Excluding the effects of non-service revenue,
gross profit for services revenue was 43% for the year ended March 31, 1998
compared to 45% for fiscal 1997. This decrease was due to lower pricing related
to various customer contracts which was not offset by corresponding decreases in
transmission costs, the principal component of cost of revenue. Cost of revenue
was expected to fluctuate in the next few periods as new pricing and contractual
arrangements were put in place and as the Company worked to improve its network
structure and transmission costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $14.0 million for the year ended March 31, 1998,
compared to $11.9 million for the year ended March 31, 1997, an increase of $2.1
million or 18%. As a percentage of revenue, selling, general and administrative
expenses were 42% and 35% for the years ended March 31, 1998 and 1997,
respectively. A major factor in the increase was the addition of $1.3 million to
the allowance for doubtful accounts. Of this amount, half was related to one
customer who, in the Company's view, unilaterally took unsubstantiated credits
off invoiced amounts and refused to pay a large invoice for contract settlement
charges related to a special project. The Company had an allowance as of March
31, 1998 to reflect potential costs of collection. (In the quarter ending
December 31, 1998, the Company recovered $1.5 million in cash and a $0.4 million
usage credit from this customer. This settlement resulted in no additional
write-off for bad debts). The balance of the remaining increase in the allowance
was spread among several accounts, principally in the Asia-Pacific area, to
provide for collection issues that may arise from economic and other factors.
The Company incurred $0.8 million in other selling, general and administrative
expenses related to increases in payroll due to the hiring of new management and
other personnel, consulting and legal fees, travel expenses and for internal
communication costs.
Corporate Realignment Expense. The Company incurred various realignment
costs during the year ended March 31, 1998 resulting from the review of
operations and activities undertaken by new corporate management. These costs,
which totaled $3.1 million, include employee severance, legal and consulting
fees and the write down of certain investments made in the Company's Internet
service development program.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the year ended March 31, 1998 was $2.8 million compared to $1.7
million for the year ended March 31,
48
<PAGE>
1997, an increase of $1.1 million or 59%. In addition to an increase in the
asset base of $2.1 million in the year ended March 31, 1998, a full year's
depreciation was recorded in the year ended March 31, 1998 for fiscal 1997
property additions of $5.0 million, a significant portion of which occurred in
the latter part of fiscal 1997.
Other Expense (Income). Interest expense for the year ended March 31, 1998
was $1.6 million, compared to $0.8 million for the year ended March 31, 1997, an
increase of $0.8 million or 101%. This increase relates primarily to expenses of
$0.5 million related to additional interest expense associated with warrants to
purchase common stock issued in connection with debt obligations. Also, there
was an increase in average borrowings during the year ended March 31, 1998 and
the Company incurred additional finance charges relating to the extensions of a
term loan.
The Company recorded a foreign currency transaction loss of $0.4 million
for the year ended March 31, 1998 arising from foreign currency cash and
accounts receivable balances maintained by the Company during the year. The
Company's exposure to foreign currency losses is mitigated due to the variety of
customers and markets which comprise the Company's customer base, as well
geographic diversification of that customer base. In addition, most of the
Company's largest customers settle their accounts in U.S. dollars.
During the year ended March 31, 1998, the Company incurred proxy related
litigation expense of $3.9 million arising from the class action lawsuit for
which a settlement agreement was reached, as described earlier (see "Item 3 -
Legal Proceedings"). Of this amount, $3.5 million related to the escrow of
350,000 shares of the Company's common stock, which was valued at $10.00 per
share pursuant to the terms of the settlement agreement. Such value related to
the Company's obligation to issue additional stock or cash if the market price
of the Company's stock is less than $10.00 per share during the defined periods.
See Note 8 to the Consolidated Financial Statements for further discussion.
Taxes on Income. Taxes on income for the year ended March 31, 1998 were
$1.6 million, with no comparable tax provision for the year ended March 31,
1997. This tax provision was primarily the result of the Company's study to
simplify its tax structure wherein it identified potential international tax
issues and realized it had potential tax liabilities. Refer to Note 12 to the
Consolidated Financial Statements for further discussion regarding taxes on
income.
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA
As discussed above, management launched an aggressive growth plan toward
the end of 1998 and intends to pursue that plan into the foreseeable future. A
result of that plan will be increasing cash demands and the need for aggressive
cash management. To accomplish all that it seeks to do, management will have to
acquire significant financing, some of which it has already achieved in the
first quarter of 1999.
Cash and cash equivalents were $1.4 million at December 31, 1998 compared
to $2.4 million at March 31, 1998. Accounts payable totaled $5.8 million at
December 31, 1998 compared to $1.1 million at March 31, 1998, resulting
principally from deferrals of payments to certain vendors and
49
<PAGE>
professional service firms due to the Company's tight cash situation (see
discussion below for financings in the first quarter of 1999 which were used, in
part, to bring these companies and firms more current). Accrued expenses
increased by $2.0 million to $6.2 million at December 31, 1998 primarily due to
accruals for interest costs on debt payable only at maturity and costs accrued
for acquisitions and transmission for which no bills had been received as of
December 31, 1998. Cash inflows from operating activities for the nine month
period ended December 31, 1998 totaled $3.6 million, compared to outflows of
$2.5 million for the full year ended March 31, 1998. There was a net working
capital deficiency of $21.0 million at December 31, 1998 compared to positive
working capital of $2.4 million at March 31, 1998. In addition to the Company's
operating losses, this large change in working capital resulted principally from
the reclassification of $8.5 million of debt due in August 1999 ($7.5 million)
and December 1999 ($1.0 million) to a current liability as of December 31, 1998
and to short-term indebtedness totaling $6.3 million incurred primarily during
the fourth calendar quarter of 1998 related to acquisitions (see Note 6 to the
Consolidated Financial Statements). Of this latter amount, up to $5.4 million
(plus accrued interest) may be paid, at the Company's sole discretion, by
issuance of common stock. The first $1.0 million was repaid by the issuance of
common stock in March 1999.
In the nine month period ended December 31, 1998, in addition to the $2.2
million paid in connection with the acquisition of IDX, the Company acquired
property and equipment of approximately $2.0 million and made other investments,
principally advances totaling $1.0 million to the unified messaging company
which provides the software upon which the Company is basing its new messaging
service and in which the Company is considering making a joint venture
investment. This compares to $2.1 million in property and equipment additions
for the full year ended March 31, 1998. In both periods, the property and
equipment expenditures were principally for upgrades and additions to the global
network of operating platforms. Cash generated from financing activities totaled
$0.7 million during the nine month period ended December 31, 1998, mainly due to
proceeds from a $1.0 million loan from an existing stockholder received in June
1998, which is payable in December 1999. For the full year ended March 31, 1998,
cash generated from financing activities totaled $4.8 million, the primary
source being the issuance of common stock for $7.5 million reduced by the net
retirement of long-debt obligations of $3.0 million.
In January and February, 1999, the Company entered into two separate
financing transactions through the issuance of preferred stock and warrants
totaling $10.0 million (see Note 17 to the Consolidated Financial Statements).
Proceeds from these financings to date are $8.0 million with the remaining $2.0
million to be received upon registering the underlying common stock issuable on
conversion. Substantially all of the proceeds from these financings have been
used during the first quarter of 1999 to reduce accounts payable and to meet the
capital expenditure and working capital requirements of the business.
In February 1999, the Company acquired Telekey, a communications services
company, with a card based range of services including calling, e-mail,
voicemail and other features which will be incorporated in the expanded service
offerings of the Company. Telekey was acquired for cash, short-term notes of
$0.3 million and convertible preferred stock. See Note 17 to the Consolidated
Financial Statements.
50
<PAGE>
In April 1999, the Company obtained a financing commitment in the form of
long-term debt totaling $20.0 million from an affiliate of the Company's largest
stockholder. This commitment is subject to stockholder approval (see Note 18 to
the Consolidated Financial Statements). In addition, the lender provided a loan
of $7.0 million with a term of one year which is intended to serve as a bridge
to stockholder approval or the acquisition of other financing.
Current Funding Requirements. The Company has the following estimated firm
cash obligations and requirements during calendar 1999:
<TABLE>
<CAPTION>
(in millions)
<S> <C>
Repayment of loans due August and December $ 9.5
1999, including interest
Payment of promissory note issued in connection 0.5
with acquisition
Payment of estimated tax obligations related to prior 1.1
years
Y2K compliance program (see below) 1.0
-----
$12.1
=====
</TABLE>
Through April 14, 1999, the Company acquired new funding and commitments in
excess of $32.0 million: $10.0 million from the sale of convertible stock (of
which the $8.0 million has been received and $2.0 million will be advanced upon
registration of the underlying common shares); $20.0 million in committed
long-term debt which is subject to stockholder approval (under the commitment,
the Lender has provided a bridge loan of $7.0 million which the Company has
drawn down); and $2.0 million or more in vendor financing for network equipment
purchases. Assuming that stockholder approval is forthcoming for the long-term
debt, these funds might permit the Company to meet a modest baseline growth
plan. To achieve the growth, both short and long-term, that management is
targeting, however, will require additional capital. The plan under which the
Company is currently operating requires cash in the second half of the year
which the Company anticipates will come from (1) a capital markets financing of
debt or equity in the second half of the year of up to $30.0 million, and (2)
secured equipment based financing of up to $10.0 million.
The Company's growth plan contemplates, in addition to the firm cash
obligations noted above, additional capital needs of up to $38.0 million
(including expenditures for the first quarter which, as noted above, used most
of the $8.0 million in proceeds from the sale of convertible stock). Most of
these funds will be used for network expansion and upgrade, for the extension of
the line of services, for a few key acquisitions and investments, and, in
particular, for the launch of new services, such as the messaging service. If
significantly less capital is available, plans will need to be curtailed,
negatively affecting growth, particularly the launch of new services.
Of the financing currently committed, $13.0 million is subject to
stockholder approval at the Company's next annual meeting scheduled to occur in
the second quarter of 1999. The Company's management believes that there is a
high probability that stockholder approval will be obtained. However, if this
approval does not occur, the Company will be required to find additional sources
of
51
<PAGE>
capital in the short-term, principally to repay the indebtedness (including
interest) of $8.5 million due in August 1999. In that event, there can be no
assurance that the Company can raise additional capital or generate sufficient
funds from operations to meet its obligations. The lack of funds from these
sources would force the Company to curtail its existing and planned levels of
operations and would therefore have a material adverse effect on the Company's
business.
TAXES
During 1998, the Company undertook a study to simplify its organizational
and tax structure and identified potential international tax issues. In
connection with this study, the Company determined that it had potential tax
liabilities and recorded an additional tax provision of $1.5 million in the year
ended March 31, 1998 to reserve against liabilities which could have arisen
under the existing structure. The Company initiated discussions with the
Internal Revenue Service ("IRS") related to the U. S. Federal income tax issues
identified by the study and filed with the IRS returns for the Company for the
years ended March 31, 1991 through 1998 reflecting these findings. Neither the
eventual outcome of these discussions or of any other issues can be predicted
with certainty.
As of December 31, 1998, the Company has recorded a net deferred tax asset
of $8.3 million and has approximately $16.3 million of net operating loss
carryforwards available. The Company has recorded a valuation allowance equal to
the net deferred tax asset as management has not been able to determine that it
is more likely than not that the deferred tax asset will be realized based in
part on the foreign operations and availability of the operating loss
carryforwards to offset only U.S. tax provisions. In addition, included in the
net operating carryforwards are approximately $6.0 million acquired in the IDX
acquisition that are limited in use to approximately $0.3 million per year and
must be offset only by taxable income generated from IDX. See Note 12 to the
Consolidated Financial Statements regarding further discussion of taxes on
income.
EFFECT OF INFLATION
The Company believes that inflation has not had a material effect on the
results of operations to date.
ACCOUNTING PRONOUNCEMENTS AND YEAR 2000 ISSUES
Recent Accounting Pronouncements - The Financial Accounting Standards Board
("FASB") has issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 requires companies to record derivatives on
the balance sheet as assets or liabilities, measured at fair market value. Gains
or losses resulting from changes in the values of those derivatives are
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999 and is currently not applicable to the Company.
Year 2000 Issues - The Company is aware of the issues associated with the
programming code in existing computer systems as the year 2000 approaches. The
"Year 2000 Issue" or "Y2K Issue" arises because many computer and hardware
systems use only two digits to represent the year. As a
52
<PAGE>
result, these systems and programs may not process dates beyond the year 1999,
which may cause errors in information or system failures. Assessments of the
potential effects of the Y2K issue vary markedly among different companies,
governments, consultants, economists and commentators, and it is not possible to
predict what the actual impact may be. Because the Company uses Unix-based
systems for its platforms and operating systems to deliver service to customers,
the Company believes material modifications may not be required to ensure Y2K
compliance. However, the Company is in the process of assessing and testing the
software resident on all its system hardware to validate this assertion and
anticipate that testing will be completed by June 1999. The Company is in
various stages of its analysis, assessment, planning and remediation and is
using internal and external resources to identify, correct or reprogram, and
test the computer system for Y2K compliance. The Company anticipates completing
all reprogramming efforts, including testing, by June 1999. Management is
continuing to update and evaluate the financial impact of Y2K compliance and
expects that total costs will not exceed $1.0 million. The Company is proceeding
with an internal certification process of its propriety systems (e.g. Calling
card and billing systems). The Company intends to use external sources as
necessary to validate our certification of these critical systems. No material
costs have been incurred during the nine month period ended December 31, 1998
and management estimates that the Company will incur most of the costs during
1999.
The Company is also in the process of assessing Year 2000 readiness of
its key suppliers and customers. This project has been undertaken with a view
toward assuring that the Company has adequate resources to cover its various
telecommunications requirements. A failure of the Company's suppliers or
customers to address adequately their Year 2000 readiness could affect the
Company's business adversely. The Company's worst-case Year 2000 scenarios would
include: (i) undetected errors or uncorrected defects in its current product
offerings; (ii) corruption of data contained in its internal information
systems; and (iii) the failure of infrastructure services provided by External
Providers. The Company is in the process of reviewing its contingency planning
in all of these areas and expects the plans to include, among other things, the
availability of support personnel to assist with customer support issues, manual
"work arounds" for internal software failure, and substitution of systems, if
needed. The Company anticipates that it will have a contingency plan in place by
June 1999. In addition, the Company is aware of the potential for claims against
it for damages arising from products and services that are not Year 2000 ready.
The Company believes that such claims against it would be without merit.
Finally, the Year 2000 presents a number of risks and uncertainties that could
affect the Company, including utilities failures, competition for personnel
skilled in the resolution of Year 2000 issues and the nature of government
responses to the issues among others. The Company's expectations as to the
extent and timeliness of modifications required in order to achieve Year 2000
compliance is a forward-looking statement subject to risks and uncertainties.
Actual results may vary materially as a result of a number of factors,
including, among others, those described in this paragraph. There can be no
assurance however, that the Company will be able to successfully modify on a
timely basis such products, services and systems to comply with Year 2000
requirements, which failure could have a material adverse effect on the
Company's operating results.
53
<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 December 31, 1998, the
Company was exposed to some market risk through interest rates on its long-term
debt and preferred stock and foreign currency. At December 31, 1998, the
Company's exposure to market risk was not material. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Other Expenses
(Income)."
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
ITEM 8 - FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS:
<S> <C>
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of December 31, and March 31, 1998 F-3 - F-4
Consolidated Statements of Operations for the Nine Months Ended
December 31, 1998, and the Years Ended March 31, 1998, and 1997 F-5
Consolidated Statements of Stockholders' Equity for the Nine Months Ended
December 31, 1998, and the Years Ended March 31, 1998, and 1997 F-6
Consolidated Statements of Comprehensive Income (Loss) for the Nine Months
Ended December 31, 1998 and the Years Ended March 31, 1998 and 1997 F-7
Consolidated Statements of Cash Flows for the Nine Months Ended
December 31, 1998, and the Years Ended March 31, 1998, and 1997 F-8 - F-10
Summary of Accounting Policies F-11 - F-17
Notes to Consolidated Financial Statements F-18 - F-54
SCHEDULE -
II Valuation and Qualifying Accounts F-55
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Executive TeleCard, Ltd.
d/b/a eGlobe, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Executive
TeleCard, Ltd. (d/b/a eGlobe, Inc.) and subsidiaries as of December 31, 1998 and
March 31, 1998 and the related consolidated statements of operations,
stockholders' equity, comprehensive income (loss) and cash flows for the nine
months ended December 31, 1998 and for each of the two years in the period ended
March 31, 1998. We have also audited the schedule listed in the accompanying
index. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Executive TeleCard,
Ltd. (d/b/a eGlobe, Inc.) and subsidiaries at December 31, 1998 and March 31,
1998, and the results of their operations and their cash flows for the nine
month period ended December 31, 1998 and for each of the two years in the period
ended March 31, 1998, in conformity with generally accepted accounting
principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO SEIDMAN, LLP
--------------------
BDO SEIDMAN, LLP
March 19, 1999
except for Note 18, which is as of April 10, 1999
Denver, Colorado
F-2
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
CONSOLIDATED BALANCE SHEETS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1998
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents $ 1,407,131 $ 2,391,206
Restricted cash 100,438 --
Accounts receivable, less
allowance of $986,497 and
$1,472,197 for doubtful accounts 6,850,872 7,719,853
Other current assets 494,186 376,604
TOTAL CURRENT ASSETS 8,852,627 10,487,663
- - -------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT,
net of accumulated depreciation
and amortization (Note 1) 13,152,410 11,911,310
GOODWILL AND OTHER INTANGIBLE ASSETS,
net of accumulated amortization of
$926,465 and $725,884 12,106,603 203,875
OTHER:
Advances to a potential joint
venture (Note 17) 970,750 --
Deposits 518,992 233,901
Deferred financing and acquisition costs 736,071 --
Other assets 50,708 63,707
- - -------------------------------------------------------------------------------------------------------------
Total other assets 2,276,521 297,608
- - -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $36,388,161 $22,900,456
=============================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
CONSOLIDATED BALANCE SHEETS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1998
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable $ 5,798,055 $ 1,135,800
Accrued expenses (Note 2) 6,203,177 4,222,806
Income taxes payable (Note 12) 1,914,655 2,004,944
Notes payable, principally related to
acquisitions (Notes 5 and 6) 6,298,706 --
Current maturities of long-term debt (Note 4) 8,540,214 244,020
Other liabilities 1,053,292 436,545
- - -----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 29,808,099 8,044,115
LONG-TERM DEBT, net of current maturities (Note 4) 1,237,344 7,735,581
- - -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 31,045,443 15,779,696
- - -----------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
(Notes 3 - 9, 11, 12, 14, 15, 17 and 18)
STOCKHOLDERS' EQUITY (Note 11 and 17):
Preferred stock, authorized 5,000,000 shares:
Series B Convertible Preferred Stock, $.001
par value, 500,000 shares authorized and
outstanding (Note 6) 500 --
8% Series C Cumulative Preferred Stock,
$.001 par value, 275 shares authorized, 75
shares outstanding (Note 7) 1 --
Common stock, $.001 par value, 100,000,000
shares authorized, 16,362,966 and 17,346,766
shares outstanding 16,362 17,346
Additional paid-in capital 33,975,268 25,046,831
Stock to be subscribed (Note 8) -- 3,500,000
Accumulated deficit (28,566,346) (21,476,154)
Accumulated other comprehensive income (loss) (83,067) 32,737
- - -----------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 5,342,718 7,120,760
- - -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 36,388,161 $ 22,900,456
=================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Ended Years Ended March 31,
December 31,
1998 1998 1997
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE (Note 13) $ 22,490,642 $ 33,122,767 $ 33,994,375
COST OF REVENUE 12,619,245 18,866,292 17,913,995
- - -----------------------------------------------------------------------------------------------------------------
GROSS PROFIT 9,871,397 14,256,475 16,080,380
- - -----------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Selling, general and administrative 12,558,553 14,047,864 11,915,864
Settlement costs (Note 7) 996,532 -- --
Corporate realignment expense (Note 2) -- 3,139,191 --
Depreciation and amortization 2,255,945 2,769,844 1,740,952
- - -----------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 15,811,030 19,956,899 13,656,816
- - -----------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (5,939,633) (5,700,424) 2,423,564
- - -----------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (1,018,049) (1,651,236) (849,073)
Interest income 59,947 45,839 51,291
Foreign currency transaction loss (130,757) (409,808) (75,409)
Proxy related litigation expense (Note 8) (119,714) (3,900,791) (528,421)
Other income (expense), net 58,014 (33,490) --
- - -----------------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE (1,150,559) (5,949,486) (1,401,612)
- - -----------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE TAXES
ON INCOME (7,090,192) (11,649,910) 1,021,952
TAXES ON INCOME (Note 12) -- 1,640,000 248,000
- - -----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (7,090,192) $(13,289,910) $ 773,952
- - -----------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) PER SHARE (Note 5):
Basic $ (0.40) $ (0.78) $ 0.05
Diluted $ (0.40) $ (0.78) $ 0.05
- - -----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31, 1998 AND PREFERRED PREFERRED
YEARS ENDED MARCH 31, COMMON STOCK STOCK - SERIES B STOCK - SERIES C
1998 AND 1997 SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 1, 1996 15,849,488 $ 15,849 -- $ -- -- $ --
Stock issued in connection with
litigation
settlement 11,000 11 -- -- -- --
Exercise of stock options 752 1 -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- --
Net income for the year -- -- -- -- -- --
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 15,861,240 15,861 -- -- -- --
Stock issued in lieu of cash payments 42,178 42 -- -- -- --
Stock issued in connection with
private placement, net (Note 11) 1,425,000 1,425 -- -- -- --
Stock to be subscribed (Note 8) -- -- -- -- -- --
Exercise of stock appreciation rights 18,348 18 -- -- -- --
Issuance of warrants to purchase
stock (Note 11) -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- --
Net loss for the year -- -- -- -- -- --
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 17,346,766 17,346 -- -- -- --
Stock issued in connection with
litigation
settlement (Note 8) 28,700 28 -- -- -- --
Subscribed stock issued to common
escrow (Note 8) 350,000 350 -- -- -- --
Issuance of warrants to purchase stock
(Note 11) -- -- -- -- -- --
Stock issued in connection with
acquisitions (Note 6) 62,500 63 500,000 500 -- --
Exchange of common stock for Series C
Preferred (Note 7) (1,425,000) (1,425) -- -- 75 1
Compensation costs related to
acquisition
(Note 6) -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- --
Net loss for the period -- -- -- -- -- --
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 16,362,966 $ 16,362 500,000 $ 500 75 $ 1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCUMULATED
NINE MONTHS ENDED DECEMBER 31, STOCK TO BE ADDITIONAL ACCUMULATED OTHER TOTAL
1998 AND YEARS ENDED MARCH 31, SUBSCRIBED PAID- IN DEFICIT COMPREHENSIVE STOCKHOLDERS'
1998 AND 1997 CAPITAL INCOME (LOSS) EQUITY
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, APRIL 1, 1996 $ -- $ 15,901,574 $ (8,960,196) $ 82,782 $ 7,040,009
Stock issued in connection with
litigation
settlement -- 146,238 -- -- 146,249
Exercise of stock options -- -- -- -- 1
Foreign currency translation adjustment -- -- -- (939) (939)
Net income for the year -- -- 773,952 -- 773,952
- - ----------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 -- 16,047,812 (8,186,244) 81,843 7,959,272
Stock issued in lieu of cash payments -- 244,226 -- -- 244,268
Stock issued in connection with
private placement, net (Note 11) -- 7,481,075 -- -- 7,482,500
Stock to be subscribed (Note 8) 3,500,000 -- -- -- 3,500,000
Exercise of stock appreciation rights -- 137,530 -- -- 137,548
Issuance of warrants to purchase
stock (Note 11) -- 1,136,188 -- -- 1,136,188
Foreign currency translation adjustment -- -- -- (49,106) (49,106)
Net loss for the year -- -- (13,289,910) -- (13,289,910)
- - ----------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 3,500,000 25,046,831 (21,476,154) 32,737 7,120,760
Stock issued in connection with
litigation
settlement (Note 8) -- 81,600 -- -- 81,628
Subscribed stock issued to common
escrow (Note 8) (3,500,000) 3,499,650 -- -- --
Issuance of warrants to purchase stock
(Note 11) -- 328,231 -- -- 328,231
Stock issued in connection with
acquisitions (Note 6) -- 3,601,000 -- -- 3,601,563
Exchange of common stock for Series C
Preferred (Note 7) -- 997,956 -- -- 996,532
Compensation costs related to
acquisition
(Note 6) -- 420,000 -- -- 420,000
Foreign currency translation adjustment -- -- -- (115,804) (115,804)
Net loss for the period -- -- (7,090,192) -- (7,090,192)
- - ----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ -- $ 33,975,268 $(28,566,346) $ (83,067) $ 5,342,718
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED MARCH 31,
DECEMBER 31,
----------------------------------------------------
1998 1998 1997
<S> <C> <C> <C>
NET INCOME (LOSS) $ (7,090,192) $(13,289,910) $ 773,952
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS (115,804) (49,106) (939)
----------------------------------------------------
COMPREHENSIVE NET INCOME (LOSS) $ (7,205,996) $(13,339,016) $ 773,013
====================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements
F-7
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS NINE MONTHS ENDED YEARS ENDED MARCH 31,
DECEMBER 31, 1998 1998 1997
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (7,090,192) $(13,289,910) $ 773,952
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization 2,255,945 2,769,844 1,740,952
Provision for bad debts 789,187 1,433,939 404,410
Settlement costs (Note 7) 996,532 -- --
Common stock issued in lieu of cash payments -- 144,268 146,249
Issuance of options and warrants for services (Note 11) 190,417 220,000 --
Compensation costs related to acquisition (Note 6) 420,000 -- --
Amortization of debt discount (Note 4) 254,678 478,580 --
Proxy related litigation expense (Note 8) 81,628 3,500,000 --
Gain on sale of property and equipment (57,002) -- --
Impairment reserve for assets -- 143,668 --
Other, net -- 137,548 --
Changes in operating assets and liabilities:
Accounts receivable 886,768 (915,661) (2,359,402)
Other current assets 177,494 52,860 (318,437)
Accounts payable 3,248,364 444,673 37,174
Accrued expenses 1,033,420 2,414,406 (2,321,403)
Other liabilities 371,368 (39,008) (114,914)
- - -----------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,558,607 (2,504,793) (2,011,419)
- - -----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Acquisitions of property and equipment (1,990,368) (2,150,280) (5,043,062)
Proceeds from sale of property and equipment 126,638 -- --
Advances to a potential joint venture (Note 17) (970,750) -- --
Purchase of companies, net of cash acquired (Note 6) (2,207,447) -- --
Restricted cash (100,438) -- --
Other assets (108,863) 26,693 (151,013)
- - -----------------------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (5,251,228) (2,123,587) (5,194,075)
- - -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from notes payable (Notes 3 and 4) 1,450,000 7,810,000 10,297,429
Deferred financing and acquisition costs (524,154) -- --
Proceeds from issuance of common stock -- 7,482,500 --
Payments on capital leases (197,938) (447,997) --
Payments on notes payable (19,362) (9,997,397) (1,869,938)
- - -----------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 708,546 4,847,106 8,427,491
- - -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (984,075) 218,726 1,221,997
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,391,206 2,172,480 950,483
- - -----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,407,131 $ 2,391,206 $ 2,172,480
===================================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-8
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
DECEMBER 31, MARCH 31,
1998 1998 1997
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid during the period for:
Interest $ 176,095 $1,267,399 $ 654,180
Income taxes $ 96,000 $ 101,181 $ 79,352
- - --------------------------------------------------------------------------------------------------------------
Non-cash investing and financing activities:
Equipment acquired
under capital lease
obligations $ 329,421 $ 312,213 $ 705,660
- - --------------------------------------------------------------------------------------------------------------
Common stock issued
for acquisition of
equipment $ -- $ 100,000 $ --
- - --------------------------------------------------------------------------------------------------------------
Unamortized debt
discount related to
warrants $ 321,094 $ 437,608 $ --
==============================================================================================================
</TABLE>
F-9
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (CON'T)
IDX ACQUISITION, NET OF CASH ACQUIRED (Note 6)
<TABLE>
<CAPTION>
NINE MONTH
PERIOD ENDED YEARS ENDED
DECEMBER 31, MARCH 31, MARCH 31,
1998 1998 1997
--------------------------------------------------------
<S> <C> <C> <C>
Working capital deficit, other
than cash acquired $ (930,634) $ - $ -
Property and equipment 975,009 - -
Purchase price in excess of the
net assets acquired 10,917,867 - -
Other assets 163,229 - -
Notes payable issued in
acquisition (5,418,024) - -
Capital stock issued in
acquisition (3,500,000) - -
--------------------------------------------------------------------------------------------------------------------
Net cash used to acquire IDX $ 2,207,447 $ - $ -
--------------------------------------------------------------------------------------------------------------------
<CAPTION>
UCI ACQUISITION, NET OF CASH ACQUIRED (Note 6)
NINE MONTH
PERIOD ENDED YEARS ENDED
DECEMBER 31, MARCH 31, MARCH 31,
1998 1998 1997
---------------------------------------------------------
<S> <C> <C> <C>
Purchase price in excess of the
net assets acquired $ 1,176,563 $ -- $ --
Accrued cash payment due in 1999 (75,000) -- --
Note payable issued in acquisition (1,000,000) -- --
Common stock issued for
Acquisition (101,563) -- --
------------------------------------------------------------------------------------------------------------------
Net cash used to acquire UCI $ -- $ -- $ --
------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-10
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES
- - --------------------------------------------------------------------------------
ORGANIZATION AND Executive TeleCard, Ltd. (d/b/a eGlobe, Inc.) and
BUSINESS subsidiaries, (collectively, the "Company") provide
services to large telecommunications companies,
primarily to telephone companies which are dominant in
their national markets and to specialized telephone
companies and to Internet Service Providers as well. The
services of the Company enable its customers to provide
global reach for "enhanced" or "value added" services
that they are supplying, to their end user customers.
Prior to 1998, the entire focus was on supporting
calling card services. In 1998, that focus began to
change.
The key assets of the Company - its operating platforms
in more than 40 countries, its ability to originate
telephone calls (and in many cases, provide data access)
in more than 90 countries and territories, and its
customer and operating arrangements around the world --
permit extension of the Company's line of services at
incremental cost. In 1998, the Company began that
extension of services through acquisition and
investment.
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. This
acquisition allows the Company to offer two additional
services, IP voice and IP, fax to its customer base.
Also, in December 1998 the Company acquired UCI Tele
Network, Ltd. ("UCI"), a development stage calling card
business with contracts to provide calling card services
in Cyprus and Greece (See Note 6).
During the nine months ending December 31, 1998, the
Company advanced approximately $1.0 million to a
software based service company in which the Company is
considering making a joint venture investment. For these
advances, the Company received a technology license and
has participated in the development and beta testing of
the core software. This investment provides the basis
for a new set of IP and voice services which the Company
expects to launch in 1999. (See Note 17).
MANAGEMENT'S As of December 31, 1998, the Company had a net working
PLAN capital deficiency of $21.0 million resulting
principally from a net loss of $7.1 million for the nine
months ended December 31, 1998, reclassification of $8.5
million of debt due in August 1999 ($7.5 million) and
December 1999 ($1.0 million) to a current liability as
of December 31, 1998 and short-term indebtedness of $6.3
million incurred during the fourth calendar quarter of
1998 primarily related to two acquisitions (see Note 6
for further discussion). Of this latter amount, up to
$5.4 million (plus accrued interest) may be paid, at the
Company's sole discretion, by the issuance of common
stock. The first $1.0 million was repaid by the issuance
of common stock in March 1999.
F-11
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES
- - --------------------------------------------------------------------------------
MANAGEMENT'S In January and February 1999, the Company raised $8.0
PLAN (CON'T) million in cash through the issuance of convertible
preferred stock and warrants. The Company will receive
an additional $2.0 million upon registration of the
common stock underlying the convertible preferred stock.
(See Note 17 for additional information on these
issuances). Substantially all of the $8.0 million of
proceeds was used in the first calendar quarter of 1999
to support current operations and capital expenditure
requirements for equipment to support new customer
contracts and to pay-down accounts payable, principally
to telecommunications vendors and professional service
firms. On April 9, 1999, the Company entered into a
financing commitment totaling $20.0 million with an
affiliate of the Company's largest stockholder in the
form of long-term debt. This commitment is subject to
approval by the Company's stockholders at its annual
meeting scheduled to occur in the second calendar
quarter of 1999. The Company's management believes that
there is a high probability that stockholder approval
will be obtained (see Note 18 for additional information
on this financing). However, if stockholder approval is
not obtained, the Company will be required to pursue
additional sources of capital, to repay the indebtedness
due in August 1999 of $8.5 million, including accrued
interest of approximately $1.0 million, and to support
the business plan of the Company.
Under the terms of this commitment, the lender provided
the Company with a $7.0 million unsecured loan which is
due on the earlier of one year or approval of the $20.0
million facility by the stockholders.
The estimated capital requirements for 1999 needed to
meet the Company's pre-existing cash obligations of
approximately $12.1 million and to finance its growth
plan are approximately $50.0 million. Through April 10,
1999, the Company acquired new funding and commitments
in excess of $32.0 million: $10 million from the sale of
convertible stock (of which the $8.0 million has been
received and $2.0 million will be advanced upon
registration of the underlying common shares); $20.0
million in committed long-term debt which is subject to
stockholder approval (under the commitment the lender
has provided a bridge loan of $7.0 million which the
Company has drawn down); and $2.0 million or more in
vendor financing for network equipment purchases.
Assuming that stockholder approval is forthcoming for
the long-term debt, these funds should permit the
Company to meet a modest baseline growth plan. To
achieve the growth, both in the short and long term,
that the business plan anticipates, however, will
require additional capital of $18.0 million. The Company
anticipates that these cash needs in the latter part of
the year will come from (1) a capital market financing
of debt or equity in the second half of the year of up
to $30.0 million and (2) secured equipment-based
financing of up to $10.0 million. Should the Company be
unable to raise additional funds from these or other
sources, then its plans will be sharply curtailed and
its business adversely affected.
F-12
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES
- - --------------------------------------------------------------------------------
Although the Company's management believes that
stockholder approval for the financing by the lender
described above is probable, in the event approval is
not obtained, there can be no assurance that the Company
will raise additional capital or generate funds from
operations sufficient to meet its obligations and
planned requirements. The lack of sufficient funds from
these sources would force the Company to curtail both
its existing and planned levels of operations and would
therefore have an adverse effect on the Company's
business.
CHANGE OF Effective with the period ended December 31, 1998, the
FISCAL YEAR stockholders of the Company approved the change of the
fiscal year to a December 31 fiscal year end. Therefore,
the period ended December 31, 1998 represents a
nine-month period as compared to a twelve month period
for fiscal years ended March 31, 1998 and 1997.
Information for the comparable nine month period ended
December 31, 1997 is summarized below (unaudited):
Revenue $ 25,583,730
Gross profit $ 10,905,014
Taxes on income $ 140,000
Net loss $ (5,335,692)
Net loss per common share:
Basic $ (0.31)
Diluted $ (0.31)
BASIS OF The consolidated financial statements have been prepared
PRESENTATION in accordance with generally accepted accounting
AND principles and include the accounts of the Company and
CONSOLIDATION its wholly-owned subsidiaries. All material intercompany
transactions and balances have been eliminated in
consolidation.
FOREIGN For subsidiaries whose functional currency is the local
CURRENCY currency and which do not operate in highly inflationary
TRANSLATION economies, all net monetary and non-monetary assets and
liabilities are translated at current exchange rates and
translation adjustments are included in stockholders'
equity. Revenues and expenses are translated at the
weighted average rate for the period. Foreign currency
gains and losses resulting from transactions are
included in the results of operations in the period in
which the transactions occurred.
F-13
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES
- - --------------------------------------------------------------------------------
USE OF The preparation of financial statements in conformity
ESTIMATES with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the
reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
FINANCIAL Financial instruments, which potentially subject the
INSTRUMENTS Company to concentrations of credit risk consist
AND principally of cash and cash equivalents and trade
CONCENTRATIONS accounts receivable.
OF CREDIT RISK
The Company places its cash and temporary cash
investments with quality financial institutions.
Concentrations of credit risk with respect to trade
accounts receivable are limited due to the variety of
customers and markets which comprise the Company's
customer base, as well as the geographic diversification
of the customer base. The Company routinely assesses the
financial strength of its customers and, as a
consequence, believes that its trade accounts receivable
credit risk exposure is limited. Generally, the Company
does not require collateral or other security to support
customer receivables. As of December 31, 1998, the
Company had approximately 30% and 12% in trade accounts
receivable from two customers. In addition, a few of the
Company's card services customers, who accounted for
approximately 40% of revenues during the fiscal year
ended March 31, 1998, have during the nine month period
ended December 31, 1998 substantially reduced their use
of the Company's services and can be expected to end
their use of such services in the near future. As a
result, the Company has experienced a decline in card
service revenue. At December 31, 1998, there were no
other significant concentrations of credit risk.
Some of the Company's customers are permitted to choose
the currency in which they pay for calling services from
among several different currencies determined by the
Company. Thus, the Company's earnings may be materially
affected by movements in the exchange rate between the
U.S. dollar and such other currencies. The Company does
not engage in the practice of entering into foreign
currency contracts in order to hedge the effects of
foreign currency fluctuations.
The carrying amounts of financial instruments, including
cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses approximated fair value
because of the immediate or short-term maturity of these
instruments. The difference between the carrying amount
and fair value of the Company's notes payable and
long-term debt is not significant.
F-14
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES
- - --------------------------------------------------------------------------------
RESTRICTED Restricted cash consists of $0.1 million on deposit with
CASH a financial institution to secure a letter of credit
issued to a transmission vendor related to a new
agreement whereby the Company will perform platform and
transmission services.
PROPERTY, Property and equipment are recorded at cost. Additions,
EQUIPMENT, installation costs and major improvements of property
DEPRECIATION and equipment are capitalized. Expenditures for
AND maintenance and repairs are expensed as incurred. The
AMORTIZATION cost of property and equipment retired or sold, together
with the related accumulated depreciation or
amortization, are removed from the appropriate accounts
and the resulting gain or loss is included in the
statement of operations.
Depreciation and amortization is computed using the
straight-line method over the estimated useful lives of
the related assets ranging from five to twenty years.
The Company follows the provisions of the Financial
Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment of Long-lived Assets and
for Long-lived Assets to Be Disposed Of ". Long-lived
assets and certain identifiable intangibles to be held
and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be
recoverable. The Company continuously evaluates the
recoverability of its long-lived assets based on
estimated future cash flows from and the estimated
liquidation value of such long-lived assets, and
provides for impairment if such undiscounted cash flows
are insufficient to recover the carrying amount of the
long-lived asset.
SOFTWARE SFAS No. 86, "Accounting for the Costs of Computer
DEVELOPMENT Software to be Sold, Leased, or Otherwise Marketed",
COSTS requires the capitalization of certain software
development costs incurred subsequent to the date when
technological feasibility is established and prior to
the date when the product is generally available for
licensing. The Company defines technological feasibility
as being attained at the time a working model of a
software product is completed. Capitalized software
development costs will be amortized using the
straight-line method over the estimated economic life of
approximately three years.
RESEARCH AND Research and development costs are expensed as incurred.
DEVELOPMENT
GOODWILL AND Intangible assets consist primarily of goodwill arising
INTANGIBLE ASSETS from acquisitions and licenses and trademarks which are
recorded at cost. Goodwill of $10.9 million and $1.1
million was recorded in connection with the acquisition
of IDX and UCI on December 2, 1998 and December 31,
1998, respectively. See Note 6 for discussion of
acquisitions.
F-15
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES
- - --------------------------------------------------------------------------------
Amortization of goodwill is provided over seven years on
a straight-line basis. Amortization is provided on the
straight-line method over ten years for licenses and
trademarks. Amortization expense for the nine months
ended December 31, 1998 and the fiscal years ended March
31, 1998 and 1997 was $0.2 million, $0.05 million and
$0.19 million, respectively. At December 31, 1998 and
March 31, 1998, accumulated amortization of goodwill and
other intangible assets was $0.93 million and $0.73
million, respectively. The carrying value of intangible
assets is periodically reviewed and impairments, if any,
are recognized when the expected future benefit to be
derived from individual intangible assets is less than
its carrying value. The carrying value of goodwill will
be periodically reviewed based on the future estimated
undiscounted cash flows to determine if any impairment
should be recognized.
DEFERRED Deferred financing and acquisition costs represent third
FINANCING AND party costs and expenses incurred which are directly
ACQUISITION traceable to pending acquisitions and financing efforts.
COSTS The costs and expenses will be matched with completed
financings and acquisitions and accounted for according
to the underlying transaction. The costs and expenses
associated with unsuccessful efforts will be expensed in
the period in which the acquisition or financing has
been deemed to be unsuccessful. The Company evaluates
all pending acquisition and financing costs quarterly to
determine if any deferred costs should be expensed in
the period.
REVENUE Revenue from the provision of calling card and IP
RECOGNITION transmission services is recognized as utilized by
customers. Billings to customers are based upon
established tariffs filed with the United States Federal
Communications Commission, or for usage outside of the
tariff requirements, at rates established by the
Company.
TAXES ON INCOME The Company accounts for income taxes under SFAS No.
109, "Accounting for Income Taxes". Under SFAS No. 109,
deferred tax assets and liabilities are determined based
on the temporary differences between the tax basis of
assets and liabilities and their reported amounts in the
financial statements using enacted tax rates in effect
for the year in which the differences are expected to
reverse.
NET EARNINGS The Company applies SFAS No. 128, "Earnings Per Share"
(LOSS) PER SHARE for the calculation of "Basic" and "Diluted" earnings
(loss) per share. Basic earnings (loss) per share
includes no dilution and is computed by dividing income
(loss) available to common stockholders by the weighted
average number of common shares outstanding for the
period. Diluted earnings (loss) per share reflects the
potential dilution of securities that could share in the
earnings (loss) of an entity.
F-16
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES
- - --------------------------------------------------------------------------------
STOCK OPTIONS The Company applies Accounting Principles Board ("APB")
Opinion 25, "Accounting for Stock Issued to Employees,"
and related Interpretations in accounting for all stock
option plans. Under APB Opinion 25, no compensation cost
has been recognized for stock options granted to
employees as the option price equals or exceeds the
market price of the underlying common stock on the date
of grant.
SFAS No. 123, "Accounting for Stock-Based Compensation,"
requires the Company to provide pro forma information
regarding net income (loss) as if compensation cost for
the Company's stock option plans had been determined in
accordance with the fair value based method prescribed
in SFAS No. 123. To provide the required pro forma
information, the Company estimates the fair value of
each stock option at the grant date by using the
Black-Scholes option-pricing model. See Note 11 for
required disclosures.
Under SFAS No. 123, compensation cost is recognized for
stock options granted to non-employees at the grant date
by using the Black-Scholes option-pricing model.
CASH The Company considers cash and all highly liquid
EQUIVALENTS investments purchased with an original maturity of three
months or less to be cash equivalents.
COMPREHENSIVE During the period ended December 31, 1998, the Company
INCOME (LOSS) adopted SFAS No. 130, "Reporting Comprehensive Income".
The implementation of SFAS No. 130 required comparative
information for earlier years to be restated.
Comprehensive income (loss) is comprised of net income
(loss) and all changes to stockholders' equity, except
those due to investments by stockholders, changes in
paid-in capital and distributions to stockholders. The
Company has elected to report comprehensive income
(loss) in a consolidated statement of comprehensive
income (loss).
RECENT The FASB has recently issued SFAS No. 133, "Accounting
ACCOUNTING for Derivative Instruments and Hedging Activities". SFAS
PRONOUNCEMENTS No. 133 requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair
market value. Gains or losses resulting from changes in
the values of those derivatives are accounted for
depending on the use of the derivative and whether it
qualifies for hedge accounting. The key criterion for
hedge accounting is that the hedging relationship must
be highly effective in achieving offsetting changes in
fair value or cash flows. SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999 and is
currently not applicable to the Company.
RECLASSIFICATIONS Certain consolidated financial amounts have been
reclassified for consistent presentation.
F-17
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
1. PROPERTY AND Property and equipment at December 31, and March 31,
EQUIPMENT 1998 consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1998
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 122,300 $ 192,300
Buildings and improvements 983,053 941,458
Calling card platform equipment 13,480,369 12,424,718
IP transmission equipment 887,540 -
Operations center equipment and furniture 8,085,517 7,142,360
Call diverters 1,400,855 1,400,855
Equipment under capital leases (Note 4) 1,278,743 949,322
Internet communications equipment 562,700 563,175
-------------------------------------------------------------------------------------------------
26,801,077 23,614,188
Less accumulated depreciation and amortization 13,648,667 11,702,878
-------------------------------------------------------------------------------------------------
$13,152,410 $11,911,310
-------------------------------------------------------------------------------------------------
</TABLE>
Property and equipment at December 31, 1998 and March
31, 1998, includes certain telephone, IP transmission
equipment and office equipment under capital lease
agreements with an original cost of approximately $1.3
million and $1.0 million, respectively and accumulated
depreciation of $0.4 million and $0.3 million,
respectively. Depreciation expense for the nine month
period ended December 31, 1998 and the years ended March
31, 1998 and 1997 was $2.1 million, $2.7 million and
$1.6 million, respectively.
2. ACCRUED Accrued expenses at December 31, 1998 and March 31, 1998
EXPENSES consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1998
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Telephone carriers $3,091,457 $2,591,511
Corporate realignment expenses 350,830 754,849
Legal and professional fees 387,130 320,341
Salaries and benefits 513,230 267,681
Interest expense 646,360 64,714
Costs associated with acquisitions 696,955 -
Other 517,215 223,710
------------------------------------------------------------------------------------------------------
$6,203,177 $4,222,806
------------------------------------------------------------------------------------------------------
</TABLE>
The Company incurred various realignment expenses during
the year ended March 31, 1998 resulting from the review
of operations and activities undertaken by new corporate
management. These costs, which totaled $3.1 million,
included primarily employee severance, legal and
consulting fees and the write down of certain
investments made in the Company's Internet service
development program. The Company does not anticipate
further realignment expenses in the future. Costs
associated with acquisitions primarily consists of $0.4
million for billing system development costs for a
pending acquisition and $0.2 million for legal fees
related to the issuance of certain preferred stock
subsequent to December 31, 1998.
F-18
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
3. NOTES At December 31 and March 31, 1998, current notes payable
PAYABLE, consisted of the following:
PRINCIPALLY
RELATED TO
ACQUISITIONS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
12 % unsecured term note payable to an investor, net of
unamortized discount of $26,351, interest and principal
repaid in March 1999 (1) $ 223,649 $ -
Convertible subordinated promissory note for acquisition of
IDX, interest and principal repaid in March 1999 through
issuance of common stock. (2) (See Note 6) 1,000,000 -
Convertible subordinated promissory note for acquisition of
IDX, interest and principal payable May 1999. (2) (See Note
6) 418,024 -
Convertible subordinated promissory note for acquisition of
IDX, interest and principal payable June 1999. (2) (See
Note 6) 1,500,000 -
Convertible subordinated promissory note for acquisition of
IDX, interest and principal payable October 1999. (2) (See
Note 6) 2,500,000 -
8% promissory note for acquisition of UCI, interest and
principal payable June 1999, net of unamortized discount of
$42,967 (3) (See Note 6) 457,033 -
Short-term loan from two officers (See Note 10) 100,000 -
Short-term note payable to an investor in April 1999. 100,000 -
--------------------------------------------------------------------------------------------------------
Total notes payable $6,298,706 $ -
--------------------------------------------------------------------------------------------------------
</TABLE>
F-19
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
3. NOTES (1) In September 1998, a subsidiary of the Company
PAYABLE, entered into a bridge loan agreement with an
PRINCIPALLY investor for $250,000. The proceeds were advanced
RELATED TO to a company that is developing messaging
ACQUISITIONS technology. The Company is in the process of
(CON'T) negotiating a joint venture arrangement whereby it
would own 50% of this software technology. (See
Note 17). 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 will be amortized through March 1999 as
additional interest expense. The warrants expire on
September 1, 2003 and as of December 31, 1998,
these warrants have not been exercised. The Company
is currently negotiating with the lender to extend
this loan. However, there can be no assurance that
such extension will be received.
(2) In December 1998, the Company acquired IDX. In
connection with this transaction, convertible
subordinated promissory notes were issued in the
amount of $5.0 million. An additional note of $0.4
million for accrued but unpaid dividends owed by
IDX was also issued by the Company and is due May
31, 1999. The notes bear interest at LIBOR plus
2.5% (7.75% at December 31, 1998). Each of the
notes, plus accrued interest, may be paid in cash
or shares of the Company's common stock, at the
sole discretion of the Company. If the Company
elects to pay the notes with common stock, the
price of the common stock on the due date of the
notes determines the number of shares to be issued.
In March 1999, the Company elected to pay the first
note (including interest) in shares of common stock
and issued approximately 474,000 shares of common
stock to discharge this indebtedness. (See Note 6
for a description of a possible reduction in the
principal amount of the convertible subordinated
promissory notes payable).
(3) On December 31, 1998, the Company acquired UCI. In
connection with this transaction, the Company
issued a promissory note for $0.5 million bearing
interest at 8% due June 27, 1999. In connection
with the note, UCI was granted warrants to purchase
50,000 shares of the Company's common stock at a
price of $1.63 per share. The warrants expire on
December 31, 2003. The value assigned to the
warrants of $42,967 was recorded as a discount to
the note and will be amortized through June 1999 as
additional interest expense. At December 31, 1998,
these warrants have not been exercised. (See Note 6
for further discussion).
F-20
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
4. LONG-TERM At December 31 and March 31, 1998 long-term debt
DEBT consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
8.875% unsecured term note payable to a telecommunications
company, interest and principal payable August 1999, net of
unamortized discount of $205,932 and $437,608 (1) $7,294,068 $7,062,392
8.87% unsecured term note payable to a stockholder, interest
and principal payable December 1999, net of unamortized
discount of $45,844 (2) 954,156 -
8% promissory note for acquisition of UCI, interest and
principal payable June 2000 (See Note 6) 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 305,135 310,000
Capitalized lease obligations 724,199 607,209
-----------------------------------------------------------------------------------------------------------
Total 9,777,558 7,979,601
Less current maturities, net of unamortized discount of
$251,776 and $437,608 8,540,214 244,020
-----------------------------------------------------------------------------------------------------------
Total long-term debt $1,237,344 $ 7,735,581
-----------------------------------------------------------------------------------------------------------
</TABLE>
F-21
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
4. LONG-TERM (1) In February 1998, the Company borrowed $7.5 million
DEBT from a telecommunications company. In connection
(CON'T) with this transaction, the lender was granted
warrants to purchase 500,000 shares of the
Company's common stock at a price of $3.03 per
share. The warrants expire on February 23, 2001.
The value assigned to such warrants when granted in
connection with the above note agreement was
approximately $0.5 million and was recorded as a
discount to long-term debt. The discount is being
amortized over the term of the note as interest
expense. At December 31, 1998, these warrants have
not been exercised.
(2) In June 1998, the Company borrowed $1.0 million
from an existing stockholder. In connection with
this transaction, the lender was granted warrants
to purchase 67,000 shares of the Company's common
stock at a price of $3.03 per share. The warrants
expire in June 2001. The stockholder also received
as consideration for the loan the repricing and
extension of a warrant for 55,000 shares which is
now exercisable on or before February 2001 at a
price of $3.75 per share. The value assigned to
such warrants, including the revision of terms, was
approximately $68,846 and was recorded as a
discount to the note payable. The discount is being
amortized over the term of the note as interest
expense. At December 31, 1998, these warrants have
not been exercised. Subsequent to year end, the
exercise price of 122,000 warrants was lowered to
$1.5125 per share and the expiration dates were
extended through January 31, 2002. The value
assigned to the revision in terms will be recorded
as additional interest expense in 1999.
F-22
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
4. LONG-TERM Future maturities of long-term debt and future minimum
DEBT (CON'T) lease payments under capital lease obligations at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
LONG-TERM CAPITAL
YEARS ENDING DECEMBER 31, DEBT LEASES TOTAL
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 $8,506,956 $ 362,545 $ 8,869,501
2000 507,534 321,115 828,649
2001 8,159 189,939 198,098
2002 8,836 - 8,836
2003 9,569 - 9,569
Thereafter 264,081 - 264,081
--------------------------------------------------------------------------------------------------------
Total payments 9,305,135 873,599 10,178,734
Less amounts
representing interest - 149,400 149,400
--------------------------------------------------------------------------------------------------------
Principal payments 9,305,135 724,199 10,029,334
Less current maturities 8,506,956 285,034 8,791,990
--------------------------------------------------------------------------------------------------------
Total Long-Term Debt $ 798,179 $ 439,165 $ 1,237,344
--------------------------------------------------------------------------------------------------------
</TABLE>
Subsequent to December 31, 1998, the Company entered
into additional capital lease obligations requiring
future minimum lease payments of approximately $0.6
million through 2001.
F-23
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
5. EARNINGS (LOSS) Earnings per share are calculated in accordance with
PER SHARE SFAS No. 128, "Earnings Per Share". Under SFAS No. 128,
basic earnings (loss) per share is calculated as income
(loss) available to common stockholders divided by the
weighted average number of common shares outstanding.
Diluted earnings per share is calculated as net income
(loss) divided by the diluted weighted average number of
common shares. The diluted weighted average number of
common shares is calculated using the treasury stock
method for common stock issuable pursuant to outstanding
stock options and common stock warrants. Common stock
options and warrants of 44,234 and 203,782 were not
included in diluted earning (loss) per share for the
nine months ended December 31, 1998 and the fiscal year
ended March 31, 1998, respectively, as the effect was
antidilutive due to the Company recording a loss for
these periods. In addition, convertible preferred stock
and convertible subordinated promissory notes
convertible into 5,323,926 shares of common stock were
not included in diluted earnings (loss) per share for
the nine month period ended December 31, 1998 due to the
loss for the period.
Options and warrants to purchase 2,017,317 shares of
common stock at exercise prices ranging from $2.56 to
$6.61 per share and convertible preferred stock
convertible into 1,875,000 shares of common stock were
outstanding at December 31, 1998 but were not included
in the computation of diluted earnings (loss) per share
because the exercise prices or conversion price were
greater than the average market price of the common
stock. Options and warrants to purchase 2,049,315 shares
of common stock at exercise prices from $3.00 to $6.94
per share were outstanding at March 31, 1998 but were
not included in the computation of diluted earnings
(loss) per share because the exercise prices were
greater than the average market price of the common
shares. Options and warrants to purchase 821,087 shares
of common stock at exercise prices from $5.75 to $14.88
per share were outstanding at March 31, 1997 but were
not included in the computation of diluted earnings
(loss) per share because the exercise prices were
greater than the average market price of the common
shares.
Contingently issuable warrants to purchase up to
2,500,000 shares of common stock (subject to stockholder
approval) related to a recent acquisition have not been
included in the computation of diluted earnings (loss)
per share as the contingency had not been met as of
December 31, 1998. See Note 6.
Various issuances of convertible preferred stock,
relating to financings and acquisitions, have been
completed both prior to and subsequent to December 31,
1998 that could have a significant effect on the
weighted average number of common shares in future
periods. See Notes 11 and 17 for further disclosure.
F-24
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5. EARNINGS (LOSS) PER SHARE (CON'T) NINE
MONTHS ENDED YEARS ENDED
DECEMBER 31, MARCH 31, MARCH 31,
1998 1998 1997
-----------------------------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE:
NUMERATOR
Net earnings (loss) $ (7,090,192) $ (13,289,910) $ 773,952
DENOMINATOR
Weighted average shares outstanding 17,736,654 17,082,495 15,861,240
-----------------------------------------------------------------
PER SHARE AMOUNTS
Basic earnings (loss) $ (0.40) $ (0.78) $ 0.05
-----------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER SHARE:
NUMERATOR
Net earnings (loss) $ (7,090,192) $ (13,289,910) $ 773,952
DENOMINATOR
Weighted average shares outstanding 17,736,654 17,082,495 15,861,240
Effect of dilutive securities
Options and warrants - - 297,390
-----------------------------------------------------------------
Weighted average common shares and
assumed conversions outstanding 17,736,654 17,082,495 16,158,630
-----------------------------------------------------------------
PER SHARE AMOUNTS
Diluted earnings (loss) $ (0.40) $ (0.78) $ 0.05
-----------------------------------------------------------------
</TABLE>
F-25
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
6. BUSINESS All acquisitions, have been accounted for under the
ACQUISITIONS purchase method of accounting. The results of operations
of the acquired businesses are included in the
consolidated financial statements from the date of
acquisition.
IDX - On December 2, 1998, the Company acquired all of
the common and preferred stock of IDX, a privately-held
IP based fax and telephony company, for (a) 500,000
shares of the Company's Series B Convertible Preferred
Stock ("Series B Preferred") valued at $3.5 million
which are convertible into 2,500,000 shares (2,000,000
shares until stockholder approval is obtained and
subject to adjustment as described below) of common
stock; (b) warrants ("IDX Warrants") to purchase up to
an additional 2,500,000 shares of common stock (subject
to stockholder approval as well as adjustment as
described below); (c) $5.0 million in 7.75% convertible
subordinated promissory notes ("IDX Notes") (subject to
adjustment as described below); (d) $1.5 million in
bridge loan advances to IDX made by the Company prior to
the acquisition which were converted into part of the
purchase price plus associated accrued interest of $0.04
million; (e) $0.4 million for IDX dividends accrued and
unpaid on IDX's Preferred Stock under a convertible
subordinated promissory note and (f) direct costs
associated with the acquisition of $0.4 million. The
Company also advanced approximately $0.4 million to IDX
prior to acquisition under an agreement to provide IDX
up to $2.3 million for working capital purposes over the
next twelve months. These pre-acquisition advances were
not considered part of the purchase price.
The Company plans to include these requests for the
approval of the warrants and additional stock as matters
to be voted upon by the stockholders at the next annual
meeting. This acquisition has been accounted for under
the purchase method of accounting. The financial
statements of the Company reflect the preliminary
allocation of the purchase price. The preliminary
allocation has resulted in acquired goodwill of $10.9
million that is being amortized on a straight-line basis
over seven years. The purchase price allocation has not
been finalized pending resolution of several purchase
price elements, which are contingent upon the following:
(a) The amounts of Series B Preferred Stock and
IDX Warrants to be issued are subject to
stockholder approval subsequent to the date of
acquisition.
F-26
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
6. BUSINESS (b) IDX's ability to achieve certain revenue and EBITDA
ACQUISITIONS (EBITDA represents operating income before interest
(CON'T) expense, income taxes, depreciation and
amortization) objectives twelve months after the
acquisition date may limit the amount of warrants
to be granted as well as eliminate the Company's
price guarantee as discussed in (d) below.
(c) The shares of Series B Preferred stock are
convertible at the holders' option at any time at
the then current conversion rate. The shares of
Series B Preferred stock will automatically convert
into shares of common stock on the earlier to occur
of (a) the first date that the 15 day average
closing sales price of common stock is equal to or
greater than $8.00 or (b) 30 days after the later
to occur of (i) December 2, 1999 or (ii) the
receipt of any necessary stockholder approval
relating to the issuance of the common stock upon
such conversion. The Company has guaranteed a price
of $8.00 per share on December 2, 1999, subject to
IDX's achievement of certain revenue and EBITDA
objectives. If the market price of the common stock
is less than $8.00 on December 2, 1999, and IDX has
met its performance objectives, the Company will
issue additional shares of common stock upon
conversion of the Series B Preferred stock (subject
to the receipt of any necessary stockholder
approval) based on the ratio of $8.00 to the market
price (as defined, but not less than $3.3333 per
share), but not more than 3.5 million additional
shares of common stock will be issued.
(d) The Company has guaranteed a price of $8.00 per
common stock share relative to the warrants
issuable as of December 2, 1999, subject to IDX's
achievement of certain revenue and EBITDA
objectives. If these objectives are achieved and
the market price of the common stock is less than
$8.00 on December 2, 1999, the Company will issue
additional shares of common stock upon exercise of
the IDX Warrants based on the ratio of $8.00 to the
market price (as defined, but not less than $3.3333
per share), up to a maximum of 3.5 million
additional shares of common stock. However, if the
average closing sales price of the common stock for
any 15 consecutive days equals or is greater than
$8.00 per share prior to December 2, 1999 there is
no price guarantee upon exercise of the warrants.
The IDX warrants cannot be issued until stockholder
approval is obtained.
F-27
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
6. BUSINESS (e) IDX must meet certain working capital levels at the
ACQUISITIONS date of acquisition. To the extent that IDX has a
(CON'T) working capital deficiency, as defined, as of the
date of acquisition, the Company may reduce the
number of shares of the Series B Preferred Stock
currently held by the stockholders and may in some
circumstances reduce the amount outstanding on the
principal balance of the third IDX note referred to
below.
(f) The Company is obligated to pay accrued but unpaid
dividends ("Accrued Dividends") on IDX's previously
outstanding preferred stock under an interest
bearing convertible subordinated promissory note in
the principal amount of approximately $0.4 million
due May 31, 1999. The Company, however, is entitled
to reduce the $2.5 million principal balance of the
third IDX Note as discussed below and in Note 3 by
the amount of the Accrued Dividends and certain
defined amounts unless offset by proceeds from the
sale of an IDX subsidiary and a note issued to IDX
by an option holder. The Company may also elect to
pay this obligation in cash or in shares of common
stock.
(g) The IDX Notes consist of four separate notes and
are payable in cash or common stock at the
Company's sole discretion. The notes have varying
maturity dates through October 31, 1999. See Note 3
for the terms and conditions of the IDX Notes.
Payment of the IDX Notes is subject to adjustment
upon the resolution of certain contingencies as
discussed above.
Based on the contingent purchase price elements as
listed above, goodwill associated with the acquisition
may materially increase when these contingencies are
resolved.
The holders of the Series B Preferred Stock are not
entitled to dividends unless declared by the Board of
Directors. The shares of Series B Preferred Stock are
not redeemable. Further, the Company has agreed to
register for resale the shares of common stock
underlying the conversion rights of the holders of the
Series B Preferred Stock, the IDX warrants and the IDX
Notes.
F-28
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
6. BUSINESS At the acquisition date, the stockholders of IDX
ACQUISITIONS received Series B Preferred Stock and warrants as
(CON'T) discussed above, which are ultimately convertible into
common stock subject to IDX meeting its performance
objectives. These stockholders in turn granted preferred
stock and warrants, each of which is convertible into a
maximum of 240,000 shares of the Company's common stock,
to IDX employees. The underlying common stock granted by
the IDX stockholders to certain employees has been
initially valued as $420,000 of compensation . The
actual number of common shares issued upon conversion of
the preferred stock and warrants will ultimately be
determined by stockholder approval, the achievement, by
IDX, of certain performance goals and the market price
of the Company's stock over the contingency period of up
to twelve months from the date of acquisition. The stock
grants are performance based and will be adjusted each
reporting period (but not below zero) for the changes in
stock price until the shares and/or warrants (if and
when) issued are converted to common stock.
The following unaudited pro forma consolidated results
of operations are presented as if the IDX acquisition
had been made at the beginning of the periods presented.
For March 31, 1998 pro forma results, IDX amounts
include its December 31, 1997 year end as compared to
the Company's March 31, 1998 year end. The one month
period of IDX for December 1998, is included in the
Company's results of operations for the nine months
ended December 31, 1998. As a result, for comparative
purposes, the Company has included an eight month period
of IDX from April 1, 1998 through November 30, 1998 in
its nine months ended December 31, 1998 pro forma
results below.
<TABLE>
<CAPTION>
PERIODS ENDED
DECEMBER 31, 1998 MARCH 31, 1998
-------------------------------------------
<S> <C> <C>
NET REVENUES $ 24,251,500 $ 33,690,777
NET LOSS $(10,053,116) $(16,548,510)
BASIC AND DILUTED LOSS PER SHARE $ (0.47) $ (0.85)
</TABLE>
F-29
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
6. BUSINESS UCI - On December 31, 1998, the Company acquired all of
ACQUISITIONS the common stock issued and outstanding of UCI, a
(CON'T) privately-held corporation established under the laws of
the Republic of Cyprus, for 125,000 shares of common
stock (50% delivered at the acquisition date and 50% to
be delivered February 1, 2000, subject to adjustment),
and $2.1 million payable as follows: (a) $75,000 payable
in cash in January 1999; (b) $0.5 million in the form of
a note, with 8% interest payable monthly due June 30,
1999; (c) $0.5 million in the form of a note, with 8%
interest payable monthly due no later than June 30,
2000; (d) $1.0 million in the form of a non-interest
bearing note ("Anniversary Payment") to be paid on
February 1, 2000 or December 31, 2000, depending on the
percentage of projected revenue achieved, subject to
adjustment; and (e) warrants to purchase 50,000 shares
of common stock with an exercise price of $1.63 per
share. See Note 3 for the terms and conditions of the
two $0.5 million UCI Notes. The 62,500 shares of common
stock issued at the acquisition date were valued at
$101,563. The Company has agreed to register for resale
the shares of common stock and UCI warrants.
This acquisition has been accounted for under the
purchase method of accounting. The financial statements
of the Company reflect the preliminary purchase price
allocation. The purchase price allocation has not been
finalized pending resolution of several purchase price
elements, which are contingent upon the following:
(a) If the closing sales price on NASDAQ of the
Company's common stock on February 1, 2000 is
less than $8.00, additional shares will be
issued determined by subtracting (i) $1.0
million divided by the closing sales price on
February 1, 2000 from (ii) 125,000. These
shares as well as the 62,500 shares to be
delivered are subject to adjustment as
discussed below.
(b) If UCI does not achieve 100% of its $3.0
million projected revenue target as of
February 1, 2000, for each 10% by which the
projected revenue is less than 100% of the
projected revenue target, there will be a 10%
reduction in the Anniversary Payment and the
number of shares issuable pursuant to (a).
(c) If UCI achieves more than 100% of its $3.0
million projected revenue target as of
December 31, 1999, there will be a 10%
increase in the Anniversary Payment, not to
exceed $0.3 million due and payable as of
December 31, 2000.
(d) If the Company completes a private financing
and receives between $10 million to $19.9
million or $20 million, it will be required to
repay 50% or 100%, respectively, of the
outstanding principal and interest of the
first note as discussed above.
F-30
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
6. BUSINESS (e) If after the date of acquisition, a contract
ACQUISITIONS with a major customer of UCI is cancelled and
(CON'T) it is not reinstated or replaced by June 30,
1999, the principal amount of the first and
second note as discussed above will be
adjusted. F-30
Based on the contingent purchase price elements as
listed above, goodwill associated with the acquisition
may increase when these contingencies are resolved. UCI
had minimal operations prior to the acquisition and the
aggregate value of the non-contingent consideration of
$1.2 million has been recorded as goodwill and will be
amortized, on a straight-line basis, over seven years.
The effects of the acquisition of UCI are not material
to net revenues, net earnings or earnings per share for
pro forma information purposes and, accordingly, has not
been included in the pro forma presentation presented
for IDX above.
7. SETTLEMENT In November 1998, the Company reached an agreement with
WITH PRINCIPAL its former chairman, Mr. Ronald Jensen, who is also the
STOCKHOLDER Company's largest stockholder. The agreement concerned
settlement of his unreimbursed costs and other potential
claims.
Mr. Jensen had purchased $7.5 million of eGlobe's common
stock in a private placement in June 1997 and later was
elected Chairman of the Board of Directors. After
approximately three months, Mr. Jensen resigned his
position citing both other business demands and the
demands presented by the challenges of the Company.
During his tenure as Chairman, Mr. Jensen incurred staff
and other costs which were not billed to the Company.
Also, Mr. Jensen subsequently communicated with the
Company's current management indicating that there were
a number of issues raised during his involvement with
the Company relating to the provisions of his share
purchase agreement which could result in claims against
the Company.
In order to resolve all current and potential issues,
Mr. Jensen and the Company agreed to exchange his
current holding of 1,425,000 shares of common stock for
75 shares of 8% Series C Cumulative Convertible
Preferred Stock ("Series C Preferred"), which management
estimated to have a fair market value of approximately
$3.4 million and a face value of $7.5 million. The terms
of the Series C Preferred stock permit Mr. Jensen to
convert the face value of the preferred stock to common
stock at 90% of market price, subject to a minimum
conversion price of $4.00 per share and a maximum of
$6.00 per share. The difference between the estimated
fair value of the preferred stock issued and the market
value of the common stock surrendered resulted in a
one-time non-cash charge to the Company's statement of
operations of approximately $1.0 million for the quarter
ended September 30, 1998, with a corresponding credit to
stockholders' equity. See Note 11 for further discussion
of the terms of the Series C Preferred.
F-31
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
7. SETTLEMENT In February 1999, contemporaneous with a financing
WITH PRINCIPAL transaction between the Company and Mr. Jensen, the
STOCKHOLDER conversion terms of the Series C Preferred were amended
(CON'T) and Mr. Jensen agreed to exchange his Series C Preferred
for 3,000,000 shares of common stock. See Note 17 for
further discussion.
8. PROXY RELATED The Company, its former auditors, certain of its present
LITIGATION AND and former directors and others were defendants in a
SETTLEMENT consolidated securities class action which alleged that
COSTS certain public filings and reports made by the Company,
including its Forms 10-K for the 1991, 1992, 1993 and
1994 fiscal years (i) did not present fairly the
financial condition of the Company and its earnings; and
(ii) failed to disclose the role of a consultant to the
Company.
The Company and its former auditors vigorously opposed
the action, however, the Company decided it was in the
stockholders' best interest to curtail costly legal
proceedings and settle the case.
Under the Stipulation of Settlement dated April 2, 1998,
the Company issued 350,000 shares of its common stock
into a Settlement Fund that will be distributed among
the Class. Settlement becomes effective only upon entry
of a final judgment by the Court and upon entry of final
judgments in two related Delaware Actions (which as of
March 31, 1999 have not yet been received), and upon the
expiration of the time to appeal or upon exhaustion of
appellate review in this action, were any appeal to be
taken.
As a result of the above action and related matters, the
Company recorded $0.1 million, $3.9 million and $0.5
million in costs and expenses during the nine months
ended December 31, 1998 and the years ended March 31,
1998 and 1997. Included in the March 31, 1998 amount, is
a charge of $3.5 million which represented the value
assigned to the 350,000 shares of common stock referred
to above, which were valued at $10.00 per share pursuant
to the terms of the settlement agreement. Such value
relates to the Company's obligation to issue additional
stock if the market price of the Company's stock is less
than $10.00 per share during the defined periods. The
Company has no obligation to issue additional stock if
its share price is above $10.00 per share for fifteen
consecutive days during the two year period after all
shares have been distributed to the Class. As of
December 31, 1998, all of the shares have not been
distributed to the Class and therefore the start of the
two year window has not commenced.
Additionally, the Company settled with another
stockholder related to the same securities class action
in May 1998 and issued that stockholder 28,700 shares of
common stock at the market price at the date of
settlement for a total value of $0.08 million.
F-32
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
9. OTHER The Company is a defendant in an action brought by a
LITIGATION Colorado reseller of transmission services. The lawsuit
arises out of a transaction wherein the plaintiff and
the Company contemplated forming a limited liability
company for purposes of developing sales opportunities
generated by the plaintiff. The Company and the
plaintiff were unable to arrive at a definitive
agreement on their arrangement and the plaintiff sued,
claiming breach of a noncircumvention agreement,
notwithstanding the fact that the plaintiff agreed to
and was a part of the transaction. The Company believes
this claim is without merit and plans to defend this
action vigorously.
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
Company is defending this action vigorously and believes
that it ultimately will prevail.
The Company and its subsidiaries are also parties to
various other legal actions and various claims arising
in the ordinary course of business. Management of the
Company believes that the disposition of such other
actions and claims will not have a material effect on
the financial position, operating results or cash flows
of the Company.
10. RELATED PARTY On December 31, 1998, two officers of the Company each
TRANSACTIONS loaned $0.05 million to the Company for short term
needs. The loans were repaid, including a 1% fee, in
February 1999.
In June 1998, an existing stockholder loaned the Company
$1.0 million. See Note 4 for a description of this
transaction. Subsequent to December 31, 1998, this same
stockholder loaned $0.2 million to the Company for short
term needs. This $0.2 million note was subsequently
converted into 125,000 shares of common stock. See Note
17 for further discussion.
As described in Notes 17 and 18, an affiliate of the
Company's largest stockholder made two financing
commitments to the Company subsequent to year end
totaling $25.0 million.
F-33
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
11. STOCKHOLDERS' COMMON STOCK
EQUITY
On June 3, 1997, the Board of Directors approved the
sale of 1,425,000 shares of the Company's common stock
for $7.5 million to Mr. Ronald Jensen. Proceeds of $3.0
million from the sale were used to reduce long-term
debt. The remainder of the proceeds was used for working
capital. In November 1998, the Company agreed to issue
shares of Series C Preferred Stock in exchange for the
1,425,000 shares of common stock as described in Note 7.
In February 1999, contemporaneous with a financing
transaction between the Company and Mr. Jensen (see Note
17), Mr. Jensen agreed to exchange his Series C
Preferred for 3,000,000 shares of common stock.
As described in Note 8, during the nine months period
ended December 31, 1998 and year ended March 31, 1998,
the Company agreed to issue 28,700 shares and 350,000
shares of common stock in connection with the settlement
of litigation.
As described below and in Note 6, in December 1998 the
Company made two acquisitions. The equity consideration
paid to date for these acquisitions includes the
issuance of Series B Preferred Stock convertible into
2,000,000 (subject to stockholder approval the preferred
will be convertible into 2,500,000) shares of common
stock and the issuance of 62,500 shares of common stock.
Equity consideration paid for these acquisitions is
subject to adjustment upon resolution of certain
contingencies as discussed in Note 6.
PREFERRED STOCK
Per the Company's restated certificate of incorporation
and as approved by the Company's stockholders on May 14,
1996, the Board of Directors was given the authority to
issue up to 5,000,000 shares of preferred stock without
obtaining further stockholder approval. The preferred
stock can be issued in series. The rights and
preferences of preferred stock are established by the
Company's Board of Directors upon issuance of each
series. As of December 31, 1998, the following series of
stock were authorized by the Board of Directors.
F-34
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
11. STOCKHOLDERS' SERIES B CONVERTIBLE PREFERRED STOCK
EQUITY (CON'T)
In connection with the IDX acquisition, the Company
issued 500,000 shares of Series B Convertible Preferred
Stock ("Series B"), certain warrants and promissory
notes in the original principal amount of $5.0 million
subject to adjustment in exchange for all the
outstanding common and preferred shares of IDX. (See
Note 6 for further information regarding the IDX
acquisition). The shares of Series B stock are
convertible at the holders' option at any time at the
then current conversion rate (currently at a 4 to 1
ratio of common stock to preferred). The shares of
Series B will automatically convert into shares of
common stock on the earlier to occur of (a) the first
date that the 15 day average closing sales price of
common stock is equal to or greater than $8.00 or (b) 30
days after the later to occur of (i) December 2, 1999 or
(ii) the receipt of any necessary stockholder approval
relating to the issuance of the common stock upon such
conversion. The Company has guaranteed a price of $8.00
per share on December 2, 1999, subject to IDX's
achievement of certain revenue and EBITDA objectives. If
the market price of the common stock is less than $8.00
per share on December 2, 1999 and IDX has met its
performance objectives, the Company will issue
additional shares of common stock upon conversion of the
Series B stock (subject to stockholder approval) based
on the ratio of $8.00 to the market price (as defined,
but not less than $3.3333 per share), but not more the
3.5 million additional shares of common stock will be
issued. The Series B stock has no stated liquidation
preferences, is not redeemable and has weighted voting
rights equal to 25% of the number of common shares into
which it can be converted. The holders of the Series B
stock are not entitled to dividends unless declared by
the Board of Directors.
8% SERIES C CUMULATIVE CONVERTIBLE PREFERRED STOCK
The Company authorized 275 shares of 8% Series C
Cumulative Convertible Preferred Stock ("Series C"),
with a par value of $.001 per share. These shares can be
issued in different series. All series have identical
rights, preferences, privileges and restrictions. The
holders of Series C stock are entitled to receive
cumulative annual dividends at 8% of the liquidation
price ($0.1 million per share) when declared by the
Board of Directors. Dividends accrue from the issuance
date of the stock and are fully cumulative. Cumulative
dividends shall be payable quarterly beginning September
30, 2000 when declared by the Board of Directors. The
terms of the Series C stock permit the holders to
convert the Series C stock into the number of common
shares equal to the face value of the preferred stock
divided by 90% of the market price, but with a minimum
conversion price of $4.00 per share and an maximum
conversion price of $6.00 per share, subject to
adjustment if the Company issues common stock for less
than the conversion price. If the holder of the Series C
stock converts the Series C stock to common stock, all
rights to
F-35
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
11. STOCKHOLDERS' accrued dividends shall be waived. If the Company does
EQUITY (CON'T) not achieve certain gross revenue targets by a specific
date, the Company will issue warrants to purchase 5,000
shares of common stock for each share of Series C stock
at an exercise price of $0.01 per share. The warrants
will be issuable and exercisable only if the last
reported sales price of the common stock has not
exceeded a price per share equal to 125% of the initial
conversion price of the Series C stock to common stock.
The Series C has no voting rights unless the dividend
payments are in arrears for six quarters. Should that
occur, the holders of the Series C stock have the right
to elect a director to the Board. The Company must
obtain an affirmative vote representing at least 66 2/3%
of the outstanding shares of Series C stock before the
Company can issue any preferred stock which would be
senior to or pari passu with the Series C stock. This
condition excludes Series A preferred stock.
In November 1998, in connection with a settlement with
the Company's largest stockholder (see Note 7), 75
shares of Series C stock were issued to Mr. Ronald
Jensen in exchange for 1,425,000 shares of common stock
to resolve issues relating to the provisions of his
share purchase agreement which could have resulted in
claims against the Company. Under the Series C stock
agreement, if at July 1, 1999 the Company did not
achieve certain revenue tests, 5,000 warrants would be
issued for each share of Series C stock held by Mr.
Jensen. These warrants would have had an exercise price
of $0.01 per share and would have been issuable and
exercisable contingent upon certain stock prices of the
Company's common stock. Mr. Jensen waived all rights to
accrued dividends and warrants upon conversion of the
Series C stock into 3,000,000 shares of common stock.
See Note 17 for further discussion.
SERIES A PARTICIPATING PREFERRED STOCK
In February 1997, the Company adopted a rights plan and
entered into a stockholders rights agreement that
provides for the issuance of rights for each share of
common stock outstanding on February 28, 1997. Each
right represents the right to purchase one one-hundredth
of a share of the Company's Series A Participating
Preferred Stock ("Series A") at a price of $70 per
one-hundredth of a share of Series A, subject to
adjustment. All shares issued between the date of
adoption of the Rights Agreement and the distribution
date (as defined in the Rights Agreement) will have the
Rights attached to them. The Rights become exerciseable
upon the occurrence of certain defined change of control
triggering events. The Rights will have certain
anti-takeover effects, as they will cause substantial
dilution to a person or group that acquires a
substantial interest in the Company without the prior
approval of the Company's Board of Directors.
F-36
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
11. STOCKHOLDERS' EMPLOYEE STOCK OPTION AND APPRECIATION RIGHTS PLAN
EQUITY (CON'T)
On December 14, 1995, the Board of Directors adopted the
Employee Stock Option and Appreciation Rights Plan (the
"Employee Plan"), expiring December 15, 2005, reserving
for issuance 1,000,000 shares of the Company's common
stock. The Employee Plan was amended and restated in its
entirety during the year ended March 31, 1998, including
an increase in the number of shares available for grant
to 1,750,000 representing an increase of 750,000 shares.
The Employee Plan provides for grants to key employees,
advisors or consultants to the Company at the discretion
of the Compensation Committee of the Board of Directors,
of stock options to purchase common stock of the
Company. The Employee Plan provides for the grant of
both "incentive stock options," as defined in the
Internal Revenue Code of 1986, as amended, and
nonqualified stock options. Options that are granted
under the Employee Plan that are incentive stock options
may only be granted to employees (including
employee-directors) of the Company.
Stock options granted under the Employee Plan must have
an exercise price equal in value to the fair market
value, as defined, of the Company's common stock on the
date of grant. Any options granted under the Employee
Plan must be exercised within ten years of the date they
were granted. Under the Employee Plan, Stock
Appreciation Rights ("SAR's") may also be granted in
connection with the granting of an option and may be
exercised in lieu of the exercise of the option. A SAR
is exercisable at the same time or times that the
related option is exercisable. The Company will pay the
SAR in shares of common stock equal in value to the
excess of the fair market value, at the date of
exercise, of a share of common stock over the exercise
price of the related option. The exercise of a SAR
automatically results in the cancellation of the related
option on a share-for-share basis.
During the nine months ended December 31, 1998 and the
fiscal years ended March 31, 1998 and 1997, the
Compensation Committee of the Board of Directors granted
options to purchase an aggregate of 996,941, 1,584,629
and 439,600, respectively, shares of common stock to its
employees under the Employee Plan at exercise prices
from $1.469 to $3.813 per share for the nine months
ended December 31, 1998, $2.32 to $3.12 per share for
the year ended March 31, 1998 and $5.75 to $9.00 per
share for 1997. The employees were also granted SAR's in
tandem with the options granted to them in connection
with grants prior to December 5, 1997.
F-37
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
11. STOCKHOLDERS' As of December 31, 1998, options outstanding under this
EQUITY (CON'T) Employee Plan exceeded the shares available for grant by
390,109 shares. It is management's intention to request
stockholder approval to merge the Director Plan (see
below) into the Employee Plan, thereby permitting shares
currently reserved for issuance under the Director Plan
to be used to remedy this deficiency.
DIRECTORS STOCK OPTION AND APPRECIATION RIGHTS PLAN
On December 14, 1995, the Board of Directors adopted the
Directors Stock Option and Appreciation Rights Plan (the
"Director Plan"), expiring December 14, 2005. There are
870,000 shares of the Company's common stock reserved
for issuance under the Director Plan. The Director Plan
was amended and restated in its entirety during the year
ended March 31, 1998 so that it now closely resembles
the Employee Plan. In the nine month period ended
December 31, 1998, the Director Plan was amended so that
grants of options to directors are at the discretion of
the Board of Directors or the Compensation Committee. In
November 1997 and April 1998, each director (other than
members of the Compensation Committee) was granted an
option under the Director Plan, each to purchase 10,000
shares of common stock, with each option being effective
for five years commencing on April 1, 1998 and 1999,
respectively, and with each option vesting only upon the
achievement of certain corporate economic and financial
goals. By December 31, 1998, all of these options,
totaling 120,000 options, were forfeited because not all
of the corporate and financial goals were met. Prior to
the amendments to the Director Plan, each director
received an automatic grant of ten year options and a
corresponding SAR to purchase 10,000 shares of common
stock on the third Friday in December in each calendar
year. During the nine months ended December 31, 1998 and
the fiscal years ended March 31, 1998 and 1997, the
Compensation Committee of the Board of Directors
confirmed the grant of total options (including options
with vesting contingencies, to purchase 240,000, 85,000,
and 60,000, respectively, shares of common stock to its
directors pursuant to the Company's Director Plan at
exercise prices of $1.81 to $3.19 per share for the nine
month period ended December 31, 1998, $2.63 to $2.69 per
share for the year ended March 31, 1998 and $5.75 per
share for 1997. These exercise prices were equal to the
fair market value of the shares on the date of grants.
During the nine months ended December 31, 1998, the
Company recorded $184,788 in compensation expense
related to these director warrants.
F-38
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
11. STOCKHOLDERS' WARRANTS
EQUITY (CON'T)
In connection with the issuance of debt, the Board of
Directors granted warrants to purchase an aggregate of
92,000, 949,267 and 466,667 shares of common stock,
respectively, during the nine months ended December 31,
1998 and the two fiscal years ended March 31, 1998 and
1997, at exercise prices ranging from $2.00 to $3.03 per
share for the nine months ended December 31, 1998, $0.01
to $6.61 per share for year ended March 31, 1998 and
$7.88 to $14.88 for fiscal 1997. As a result of the 10%
stock split in 1996, certain warrants were increased
from 150,000 to 165,000. During the year ended March 31,
1998, 466,667 of the warrants granted above were
cancelled as the terms of the related debt were
renegotiated. The fair value of warrants at the grant
date was recorded as unamortized discount against the
related debt. These discounts are being amortized to
interest expense over the term of the loans using the
effective interest method. Additional interest expense
related to these warrants for the nine month period
ended December 31, 1998 and the year ended March 31,
1998 was $254,678 and $478,580, respectively. There was
no unamortized interest expense for the year ended March
31, 1997.
In the nine months ended December 31, 1998 and the years
ended March 31, 1998 and 1997, the Board of Directors
granted warrants to purchase an aggregate of 2,500,
91,200 and 238,800 shares of common stock, respectively,
to non-affiliates at exercise prices of $2.00 per share
for the nine month period ended December 31, 1998, $2.75
per share for the years ended March 31, 1998 and $6.88
to $6.98 for 1997. The fair value of these warrants at
the date of grant was recorded based on the underlying
transactions. The warrants are exercisable for periods
ranging from 12 to 60 months. During the nine months
ended December 31, 1998, 318,000 of the warrants granted
above expired.
During the nine months ended December 31, 1998, the
Board of Directors granted warrants to purchase an
aggregate of 2,550,000 (2,050,000 until stockholder
approval) shares of common stock to the stockholders or
owners of companies acquired as an element of the
purchase price at exercise prices of $0.01 to $1.63.The
warrants to purchase 2,500,000 (2,000,000 until
stockholder approval) shares of common stock are
exercisable contingent upon the acquired company meeting
certain revenue and EBITDA objectives twelve months from
the date of acquisition. See Note 6 for further
information.
F-39
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
11. STOCKHOLDERS' SFAS No. 123, "Accounting for Stock-Based Compensation"
EQUITY (CON'T) requires the Company to provide pro forma information
regarding net income (loss) and net earnings (loss) per
share as if compensation costs for the Company's stock
option plans and other stock awards had been determined
in accordance with fair value based method prescribed in
SFAS No. 123. The Company estimates the fair value of
each stock award by using the Black-Scholes
option-pricing model with the following weighted-average
assumptions used for grants in the nine months ended
December 31, 1998 and the fiscal years ended March 31,
1998 and 1997, respectively: no expected dividend yields
for all periods; expected volatility of 55%, 55% and
65%; risk-free interest rates of 4.51%, 5.82% and 5.91%;
and expected lives of 3.65 years, 2 years and 1.5 years
for the Plans and stock awards.
Under the accounting provisions for SFAS No. 123, the
Company's net earnings (loss) and per earnings (loss)
per share would have been decreased by the pro forma
amounts indicated below:
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
DECEMBER 31, MARCH 31, MARCH 31,
1998 1998 1997
------------------------------------------------------------------
<S> <C> <C> <C>
NET EARNINGS (LOSS)
AS REPORTED $ (7,090,192) $ (13,289,910) $ 733,952
PRO FORMA $ (7,440,099) $ (13,457,713) $ (801,214)
EARNINGS (LOSS) PER SHARE
BASIC:
AS REPORTED $ (0.40) $ (0.78) $ 0.05
PRO FORMA $ (0.42) $ (0.79) $ (0.05)
DILUTED:
AS REPORTED $ (0.40) $ (0.78) $ 0.05
PRO FORMA $ (0.42) $ (0.79) $ (0.05)
</TABLE>
F-40
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
11. STOCKHOLDERS' A summary of the status of the Company's stock option
EQUITY (CON'T) plans and outstanding warrants as of December 31, 1998
and March 31, 1998 and 1997 and changes during the nine
months and years ending on those dates is presented
below:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, MARCH 31,
1998 1998 1997
------------------------ ------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OUTSTANDING, BEGINNING OF PERIOD 3,412,489 $ 3.96 1,706,832 $ 6.58 1,000,042 $5.55
GRANTED 4,256,441 $ 0.78 2,710,096 $ 3.47 849,267 $7.64
EXPIRED (1,037,604) $ 4.13 (986,091) $ 6.87 (141,725) $5.52
EXERCISED - - (18,348) $ 5.75 (752) $5.26
OUTSTANDING, END OF PERIOD 6,631,326 $ 1.92 3,412,489 $ 3.96 1,706,832 $6.58
EXERCISABLE, END OF PERIOD 1,991,216 $ 3.86 1,875,860 $ 5.02 1,302,095 $6.78
- - ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE FAIR
VALUE OF OPTIONS AND WARRANTS
GRANTED DURING THE PERIOD $ 1.43 $ 1.41 $ 1.85
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Included in the above table are certain options and warrants that are contingent
based on various future performance measures. (See Notes 5 and 11).
The following table summarizes information about stock options and warrants
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
---------------------------------------------------------------------------
WEIGHTED WEIGHTED
REMAINING REMAINING
RANGE OF EXERCISE NUMBER OF CONTRACTUAL CONTRACTUAL
PRICES SHARES LIFE (YEARS) NUMBER OF SHARES LIFE (YEARS)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.01 2,890,000 0.91 15,000 0.11
$ 1.47-2.03 776,209 4.19 420,599 4.37
$ 2.25-2.88 656,500 4.96 240,000 4.37
$ 3.00-4.50 1,620,000 3.04 627,000 1.40
$ 5.45-6.61 688,617 3.99 688,617 3.99
------------------------------------------------------------------------------------------------------
TOTAL $ 0.01-6.61 6,631,326 2.54 1,991,216 3.75
------------------------------------------------------------------------------------------------------
</TABLE>
F-41
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
12. TAXES ON During the year ended March 31, 1998, the Company
INCOME undertook a study to simplify its organizational and tax
structure and identified potential international tax
issues. In connection with this study, the Company
determined that it had potential tax liabilities and
recorded an additional tax provision of $1.5 million to
reserve against liabilities which might arise under the
existing structure. Upon completion of this study in
January 1999, the Company initiated discussions with the
Internal Revenue Service related to the U. S. Federal
income tax issues identified by the study and filed with
the IRS returns for the Company for the years ended
March 31, 1991 through 1998 reflecting these findings.
No additional tax reserve was recorded as of December
31, 1998 after completion of the study. The eventual
outcome of these discussions and of any other issues
cannot be predicted with certainty.
Taxes on income for the nine months ended December 31,
1998 and the years ended March 31, 1998 and 1997,
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, MARCH 31,
1998 1998 1997
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ 70,000
Foreign -- 140,000 166,000
State -- -- 12,000
Other -- 1,500,000 --
------------------------------------------------------------------------------------------------------------
Total Current 1,640,000 248,000
------------------------------------------------------------------------------------------------------------
Deferred:
Federal (416,000) (1,830,000) (584,000)
State (37,000) (163,000) (52,000)
------------------------------------------------------------------------------------------------------------
(453,000) (1,993,000) (636,000)
Change in
valuation allowance 453,000 1,993,000 636,000
------------------------------------------------------------------------------------------------------------
Total $ -- $ 1,640,000 $ 248,000
------------------------------------------------------------------------------------------------------------
</TABLE>
F-42
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
12. TAXES ON As of December 31, 1998 and March 31, 1998 and 1997, the
INCOME (CON'T.) net deferred tax asset recorded and its approximate tax
effect consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, MARCH 31,
1998 1998 1997
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net operating loss carry-
forwards $ 6,041,000 $ 3,496,000 $ 3,036,000
Nondeductible expense
accruals 1,525,000 1,295,000 --
Foreign net operating loss
carryforwards 260,000 -- --
Other 431,000 269,000 31,000
- - ------------------------------------------------------------------------------------------------------------------------------------
8,257,000 5,060,000 3,067,000
Valuation allowance (8,257,000) (5,060,000) (3,067,000)
- - ------------------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ -- $ -- $ --
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-43
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
12. TAXES ON The acquisition of IDX in December 1998 included a net
INCOME deferred tax asset of $2.7 million. This net deferred
(CON'T) tax asset consists primarily of U.S. and foreign net
operating losses. The acquisition also included a
valuation allowance equal to the net deferred tax asset
acquired.
For the years ended December 31, 1998 and March 31, 1998
and 1997, a reconciliation of the United States Federal
statutory rate to the effective rate is shown below:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998 1997
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FEDERAL TAX (BENEFIT), COMPUTED
AT STATUTORY RATE (34.0) % (34.0)% 34.0%
STATE TAX (BENEFIT), NET OF FEDERAL
TAX BENEFIT (1.0) (1.0) 1.0
EFFECT OF FOREIGN OPERATIONS 29.0 19.0 (74.0)
ADDITIONAL TAXES -- 13.0 --
CHANGE IN VALUATION ALLOWANCE 6.0 17.0 62.0
- - ----------------------------------------------------------------------------------------------------------------------------------
TOTAL 0% 14.0% 23.0%
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1998, the Company has net operating
loss carryforwards available of approximately $16.3
million which can offset future years U.S. taxable
income. Such carryforwards expire in various years
through 2018 and are subject to limitation under the
Internal Revenue Code of 1986, as amended.
Included in the net operating loss carryforwards are
approximately $6.0 million acquired in the IDX
acquisition. As a result of the change in ownership, as
defined by Section 382 of the Internal Revenue Code, the
net operating loss carryforwards acquired are limited in
use to approximately $330,000 per year and must be
offset only by taxable income generated from IDX.
F-44
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
13. SEGMENT The Company is engaged in one business segment -
INFORMATION Telecommunications Services. For purposes of allocating
revenues by country, the Company uses the physical
location of its customers as its basis.
The following table presents information about the
Company by geographic area:
<TABLE>
<CAPTION>
ASIA NORTH LATIN
EUROPE PACIFIC AMERICA AMERICA OTHER TOTALS
(EXCLUDING
MEXICO)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE NINE
MONTHS ENDING
DECEMBER 31, 1998
REVENUE
$ 1,966,765 $ 5,949,077 $ 9,009,306 $ 5,243,688 $ 321,806 $ 22,490,642
OPERATING LOSS $ (482,628) $ (1,460,017) $ (2,631,110) $ (1,286,901) $ (78,977) $ (5,939,633)
IDENTIFIABLE LONG
LIVED ASSETS $ 5,687,947 $ 4,962,397 $ 11,237,235 $ 1,470,903 $ 923,076 $ 24,281,558
------------------------------------------------------------------------------------------------------------
FOR THE YEARS
ENDING
MARCH 31, 1998
REVENUE $ 3,468,336 $ 10,294,483 $ 10,061,519 $ 8,248,078 $ 1,050,351 $ 33,122,767
OPERATING LOSS $ (596,900) $ (1,771,679) $ (1,731,586) $ (1,419,494) $ (180,765) $ (5,700,424)
IDENTIFIABLE LONG $ 4,880,910 $ 7,169,872 $ 8,616,014 $ 1,032,352 $ 997,433 $ 22,696,581
LIVED ASSETS
------------------------------------------------------------------------------------------------------------
FOR THE YEARS
ENDING
MARCH 31, 1997
REVENUE $ 6,169,378 $ 10,574,659 $ 8,220,081 $ 1,486,779 $ 7,543,478 $ 33,994,375
OPERATING INCOME
(LOSS) $ 439,834 $ 753,900 $ 586,034 $ 537,797 $ 105,999 $ 2,423,564
IDENTIFIABLE LONG $ 6,744,909 $ 4,734,010 $ 10,417,279 $ 1,219,323 $ 564,165 $ 23,679,686
LIVED ASSETS
------------------------------------------------------------------------------------------------------------
</TABLE>
F-45
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
13. SEGMENT For the nine months ended December 31, 1998 and the
INFORMATION years ended March 31, 1998 and 1997 revenues from
(CON'T) significant customers consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1998 MARCH 31, 1997
----------------------------------------------------------------------
<S> <C> <C> <C>
CUSTOMER:
A 19% 18% 15%
B 16% 14% 9%
C 10% 11% 12%
</TABLE>
14. COMMITMENTS EMPLOYMENT AGREEMENTS
AND
CONTINGENCIES The Company and certain of its subsidiaries have
agreements with certain key employees expiring at
varying times over the next three years. The Company's
remaining aggregate commitment at December 31, 1998
under such agreements is approximately $1.2 million.
CARRIER ARRANGEMENTS
The Company has entered into agreements with certain
long-distance carriers in the United States and with
telephone utilities in various foreign countries to
transmit telephone signals domestically and
internationally. The Company is entirely dependent upon
the cooperation of the telephone utilities with which it
has made arrangements for its operational and certain of
its administrative requirements. The Company's
arrangements are nonexclusive and take various forms.
Although some of these arrangements are embodied in
formal contracts, a telephone utility could cease to
accommodate the Company's arrangements at any time. The
Company does not foresee any threat to existing
arrangements with these utilities, however, depending
upon the location of the telephone utility, such action
could have a material adverse affect on the Company's
financial position, operating results or cash flows.
F-46
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
14. COMMITMENTS TELECOMMUNICATION LINES
AND
CONTINGENCIES In its normal course of business, the Company enters
(CON'T) into agreements for the use of long distance
telecommunication lines. As of December 31, 1998, future
minimum annual payments under such agreements are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, TOTAL
-------------------------------------------------------------------------------------------------
<S> <C>
1999 $ 1,705,412
2000 535,109
2001 421,728
2002 70,288
-------------------------------------------------------------------------------------------------
$ 2,732,537
-------------------------------------------------------------------------------------------------
</TABLE>
LEASE AGREEMENTS
The Company leases office space and equipment under
various operating leases. As of December 31, 1998,
remaining minimum annual rental commitments under
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, TOTAL
-------------------------------------------------------------------------------------------------
<S> <C>
1999 $ 1,230,586
2000 344,294
2001 233,377
2002 176,895
2003 180,895
-------------------------------------------------------------------------------------------------
$ 2,166,047
-------------------------------------------------------------------------------------------------
</TABLE>
Rent expense for the periods ended December 31, 1998 and
March 31, 1998 and 1997 was approximately $0.5 million,
$0.6 million, and $0.4 million, respectively.
F-47
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
15. GOVERNMENT The telecommunications card industry is highly
REGULATIONS competitive and subject to extensive government
regulations, both in the United States and abroad.
Pursuant to the Federal Communications Act, the Federal
Communications Commission ("FCC") is required to
regulate the telecommunications industry in the United
States. Under current FCC policy, telecommunication
carriers, including the Company, who resell the domestic
services of other carriers and who do not own
telecommunication facilities of their own, are
considered to be non-dominant and, as a result, are
subject to the least rigorous regulation.
Telecommunications activities are also subject to
government regulations in every country throughout the
world. The Company has numerous licenses, agreements, or
equipment approvals in foreign countries where
operations are conducted. To date, the Company has not
been required to comply or been notified that it cannot
comply with any material international regulations in
order to pursue its existing business activities. There
can be no assurances, however, that in the current
United States regulatory environment, including the
present level of FCC regulations, that the Company will
continue to be considered non-dominant and that various
foreign governmental authorities will not seek to assert
jurisdiction over the Company's rates or other aspects
of its services. Such changes could have a material
adverse affect on the Company's financial condition,
operating results or cash flows.
In certain countries where the Company, through its
subsidiary IDX, has current or planned operations, the
Company may not have the necessary regulatory approvals
to conduct all or part of its voice and fax
store-and-forward services. In these jurisdictions, the
requirements and level of telecommunications
deregulation is varied, including internet protocol
telephony. Management believes that the degree of active
monitoring and enforcement of such regulation is
limited. Statutory provisions for penalties vary, but
could include fines and/or termination of the Company's
operations in the associated jurisdiction. Management
believes that the likelihood of significant penalties or
injunctive relief is remote. To date, the Company has
not been required to comply or been notified that it
cannot comply with any material international
regulations in order to pursue its existing business
activities. There can be no assurance, however, that
regulatory action against the Company will not occur.
Such action could have a material adverse affect on the
Company's financial condition, operating results or cash
flows.
F-48
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
15. GOVERNMENT The regulation of IP telephony is still evolving. To the
REGULATIONS Company's, knowledge, there currently are no domestic
(CON'T) laws or regulations that govern voice communications
over the Internet. The FCC is currently considering
whether to impose surcharges or additional regulation
upon providers of IP telephony. In addition, several
efforts have been made to enact U.S. federal legislation
that would either regulate or exempt from regulation
services provided over the Internet. State public
utility commissions also may retain intrastate
jurisdiction and could initiate proceedings to regulate
the intrastate aspects of IP telephony. A number of
countries currently prohibit IP telephony. Other
countries permit but regulate IP telephony. If foreign
governments, Congress, the FCC, or state utility
commissions prohibit or regulate IP telephony, the
Company could be subject to a variety of new regulations
or, in certain circumstances, to penalties under foreign
or U.S. law, including without limitation, orders to
cease operations or to limit future operations, loss of
licenses or of license opportunities, fines, seizure of
equipment and, in certain foreign jurisdictions,
criminal prosecution.
16. FOURTH The Company recorded in the fourth quarter of the year
QUARTER ended March 31, 1998 certain adjustments relative to
ADJUSTMENTS - warrants issued in connection with debt, proxy related
MARCH 31, 1998 litigation settlement costs and taxes amounting to an
aggregate of $5.5 million which are discussed in Notes
8, 11 and 12 to the consolidated financial statements.
17. SUBSEQUENT FINANCINGS
EVENTS
SERIES D CUMULATIVE CONVERTIBLE PREFERRED STOCK
In January 1999, the Company issued 30 shares of Series
D Cumulative Convertible Preferred Stock ("Series D
Preferred") to a private investment firm for $3.0
million. The holder has agreed to purchase 20 additional
shares of Series D Preferred stock for $2.0 million upon
registration of the common stock issuable upon
F-49
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
17. SUBSEQUENT conversion of this preferred stock. In connection with
EVENTS (CON'T) 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 Company will issue additional warrants to
purchase 75,000 shares of common stock, with an exercise
price of $0.01 per share and warrants to purchase 40,000
shares of common stock with an exercise price of $1.60
per share upon the issuance of the 20 additional shares
of Series D Preferred stock. The Series D Preferred
stock carries an annual dividend of 8%, payable
quarterly beginning December 31, 1999. The shares of
Series D Preferred stock are convertible, at the
holder's option, into shares of the Company's common
stock any time after April 13, 1999 at a conversion
price equal to the lesser of $1.60 or, in the case of
the Company's failure to achieve positive EBITDA or to
close a $20 million public offering by the third fiscal
quarter of 1999, the market price just prior to the
conversion date. The shares of Series D Preferred stock
will automatically convert into common stock upon the
earliest of (i) the first date on which the market price
of the common stock is $5.00 or more per share for any
20 consecutive trading days, (ii) the date on which 80%
or more of the Series D Preferred stock has been
converted into common stock, or (iii) the date the
Company closes a public offering of equity securities at
a price of at least $3.00 per share with gross proceeds
of at least $20 million.
As additional consideration, the Company agreed to issue
to the investor for no additional consideration,
additional warrants to purchase the number of shares of
common stock equal to $0.3 million (based on the market
price of the common stock on the last trading day prior
to June 1, 1999 or July 1, 2000, as the case may be), or
pay $0.3 million in cash, if the Company does not (i)
consummate a specified merger transaction by May 30,
1999, or (ii) achieve, in the fiscal quarter commencing
July 1, 2000, an aggregate amount of gross revenues
equal to or in excess of 200% of the aggregate amount of
gross revenues achieved by the Company in the fiscal
quarter ended December 31, 1998.
The shares of Series D Preferred stock must be redeemed
if it ceases to be convertible (which would happen if
the number of shares of common stock issuable upon
conversion of the Series D Preferred stock exceeded
19.9% of the number of shares of common stock
outstanding when the Series D Preferred stock was
issued, less shares reserved for issuance under
warrants). Redemption is in cash at a price equal to the
liquidation preference of the Series D Preferred stock
at the holder's option or the Company's option 45 days
after the Series D Preferred stock ceases to be
convertible. If the Company receives stockholder
approval to increase the number of shares issuable, it
will issue the full amount of common stock upon
conversion of the Series D Preferred stock even if the
number of shares exceeds the 19.9% maximum number.
F-50
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
17. SUBSEQUENT SERIES E CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED
EVENTS STOCK
(CON'T)
In February 1999, the Company issued 50 shares of Series
E Cumulative Convertible Redeemable Preferred stock
("Series E Preferred") to an affiliate of Mr. Ronald
Jensen, the Company's largest stockholder, for $5.0
million. The Series E Preferred carries an annual
dividend of 8%, payable quarterly beginning December 31,
2000. As additional consideration, the Company agreed to
issue to the holder three year warrants to purchase
723,000 shares of common stock at $2.125 per share and
277,000 shares of common stock at $0.01 per share.
The Series E Preferred holder may elect to make the
shares of Series E Preferred stock convertible into
shares of common stock (rather than redeemable) at any
time after issuance. The Company may elect to make the
shares of Series E Preferred stock are convertible, but
only if (i) it has positive EBITDA for at least one of
the first three fiscal quarters of 1999 or (ii)
completes a public offering of equity securities for a
price of at least $3.00 per share and with gross
proceeds to the Company of at least $20 million on or
before the end of the third fiscal quarter of 1999. The
shares of Series E Preferred stock will automatically be
converted into shares of the Company's common stock, on
the earliest to occur of (x) the first date as of which
the last reported sales price of the Company's common
stock on Nasdaq is $5.00 or more for any 20 consecutive
trading days during any period in which the Series E
Preferred stock is outstanding, (y) the date that 80% or
more of the Series E Preferred stock has been converted
into common stock, or (z) the Company completes a public
offering of equity securities at a price of at least
$3.00 per share and with gross proceeds to the Company
of at least $20 million. The initial conversion price
for the Series E Preferred stock is $2.125, subject to
adjustment if the Company issues common stock for less
than the conversion price. The shares of the Series E
Preferred stock may be redeemed at a price equal to the
liquidation preference plus accrued dividends in cash or
in common stock, at the Company's option or at the
option of any holder, provided that the holder has not
previously exercised the convertibility option
described, at any time after February, 2004. In
connection with a debt placement concluded in April
1999, the Series E Preferred holder elected to make such
shares convertible. Accordingly, such shares are no
longer redeemable. See Note 18 for additional
discussion.
Contemporaneous with this financing, the Company agreed
to issue 3,000,000 shares of common stock in exchange
for the 75 shares of Series C Preferred (convertible
into 1,875,000 shares of common stock on the exchange
date) held by Mr. Jensen. The market value of the
1,125,000 incremental shares of common stock issued will
be recorded in the first calendar quarter of 1999 as a
preferred stock dividend of approximately $2.7 million
with a corresponding credit to paid-in capital.
F-51
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
17. SUBSEQUENT STOCKHOLDER EQUITY FINANCING
EVENTS (CON'T)
In January 1999, the Company borrowed $0.2 million from
an existing stockholder due February 4, 1999. The note
had a maturity date of the earlier of (a) 30 days from
the date the note was signed, (b) completion of
financing by the Company of not less than $3.0 million,
or (c) the completion of the bridge financing by the
Company of not less than $1.0 million. The note carried
a service fee of 1% of the principal. The agreement
provided that if the note was not paid at maturity, the
holder would receive 40,000 warrants with an exercise
price of $1.00 and a term of 5 years. The note was
junior to all existing debt. In March 1999 (maturity
date), the stockholder agreed to convert the bridge loan
into 125,000 shares of common stock and was granted the
40,000 warrants and an additional 40,000 warrants,
exercisable at $1.60 per share with a term of 5 years.
The value of the warrants of $0.09 million will be
recognized as interest expense in the first quarter of
fiscal 1999.
ACQUISITIONS
As described in paragraph (2) to Note 3, subsequent to
December 31, 1998, the Company decided to pay the first
of the Convertible Subordinated Promissory Notes due to
IDX in common stock.
In February 1999, the Company completed the acquisition
of Telekey, Inc. ("Telekey"), for which it paid: (i)
$0.1 million at closing; (ii) issued a promissory note
for $0.2 million payable in equal monthly installments
over one year; (iii) issued 1,010,000 shares of Series F
Convertible Preferred Stock ("Series F Preferred"); and
(iv) agreed to issue at least 505,000 and up to an
additional 1,010,000 shares of Series F Preferred two
years from the date of closing (or upon a change of
control or certain events of default if they occur
before the end of two years), subject to Telekey meeting
certain revenue and EBITDA objectives.
The shares of Series F Preferred initially issued will
automatically convert into shares of common stock on the
earlier to occur of (a) the first date that the 15 day
average closing sales price of the common stock is equal
to or greater than $4.00 or (b) July 1, 2001. The
Company has guaranteed a price of $4.00 per share at
December 31, 1999 to recipients of the common stock
issuable upon the conversion of the Series F Preferred,
subject to Telekey's achievement of certain defined
revenue and EBITDA objectives. If the market price is
less that $4.00
F-52
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
17. SUBSEQUENT on December 31, 1999, the Company will issue additional
EVENTS (CON'T) shares of common stock upon conversion of the Series F
Preferred based on the ratio of $4.00 to the market
price, but not more than an aggregate of 600,000
additional shares of common stock. The Series F
Preferred carries no dividend obligation.
POTENTIAL JOINT VENTURE
The Company is in the process of negotiating a joint
venture arrangement whereby it would have a 50%
ownership interest of certain software technology
related to commercial development of messaging
technology. The software developer's current parent
company would retain a 50% ownership interest under the
proposed arrangement. If this transaction is
consummated, the Company will assume its pro rata share
of the software development funding needs for working
capital and payment of outstanding liabilities. The
Company's funding requirement under this proposed
arrangement is currently estimated to average $0.2
million per month through the year ending December 31,
1999.
As of December 31, 1998, the Company had advanced
approximately $1.0 million to this software company.
Through March 19, 1999, the Company has made additional
advances of $0.5 million. The Company owns a
non-exclusive license for the technology, the value of
which is currently estimated by management to exceed the
advances made to date.
In the event that the joint venture transaction does not
occur and the Company is unable to use or sell the
licensed technology to generate revenues, the Company
will evaluate the recoverability of these advances.
18. FINANCING In April 1999, the Company received a financing
COMMITMENT commitment of $20.0 million in the form of long-term
debt from an affiliate of its largest stockholder
("Lender"). This financing is subject to stockholder
approval; but under the terms of the Loan and Note
Purchase Agreement ("Agreement"), the Company initially
received an unsecured loan ("Loan") of $7.0 million
bearing interest at 8% payable monthly with principal
due April 2000. As additional consideration, the Lender
received warrants to purchase 1,500,000 shares of the
Company's common stock at an exercise price of $0.01 per
share, of which 500,000 warrants are immediately
exercisable and 1,000,000 warrants are exercisable only
in the event that the stockholders do not approve the
$20.0 million facility or the Company elects not to draw
it down.
F-53
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
Under the Agreement, the Lender also agreed to purchase
$20.0 million of 5% Secured Notes ("Notes,") at the
Company's request, provided that the Company obtains
stockholder approval to issue the Notes at its next
stockholder meeting, currently planned to occur during
the second quarter of 1999. If stockholder approval is
obtained and the Company elects to issue the Notes, the
initial $7.0 million Loan must be repaid from the
proceeds. Principal and interest on the Notes are
payable over three years in monthly installments of
$377,000 with a balloon payment of the outstanding
balance due on the third anniversary date. However, the
Company may elect to pay up to 50% of the original
principal amount of the Notes in shares of the Company's
common stock, at its option, if: (i) the closing price
of the Company's common stock is $8.00 per share for
more than 15 consecutive trading days; (ii) the Company
completes a public offering of equity securities at a
price of at least $5.00 per share and with proceeds of
at least $30.0 million; or (iii) the Company completes
an offering of securities with proceeds in excess of
$100.0 million. These Notes, if issued, will be secured
by substantially all of the Company's existing operating
assets, although the Company can pursue certain
additional financing, including senior debt or lease
financing for future capital expenditures and working
capital requirements in furtherance of its growth plan.
As additional consideration for the Notes, if issued,
the Lender will receive warrants to purchase 5,000,000
shares of the Company's common stock at an exercise
price of $1.00 per share.
The Agreement contains certain debt covenants and
restrictions by and on the Company.
F-54
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A/ EGLOBE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- - --------------------------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND AT END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NINE MONTHS ENDED DECEMBER 31, 1998 $1,472,197 $ 789,187 $1,274,887 $ 986,497
- - ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1998 $ 372,988 $1,433,939 $ 334,730 $1,472,197
- - ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1997 $ 625,864 $ 404,410 $ 657,286 $ 372,988
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-55
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
- - --------------------------------------------------------------------------------
None.
54
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE, INC.
PART III
- - --------------------------------------------------------------------------------
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- - --------------------------------------------------------------------------------
Shown below are the names of all Directors and executive officers of
eGlobe, all positions and offices held by each such person, the period during
which each person has served as such, and the principal occupations and
employment of each such person during the last five years:
DIRECTORS AND EXECUTIVE OFFICERS
CHRISTOPHER J. VIZAS, age 49, has been a Director of eGlobe since October
25, 1997 and the Chairman of the Board of Directors since November 10, 1997. Mr.
Vizas served as eGlobe's acting Chief Executive Officer from November 10, 1997
to December 5, 1997, on which date he became eGlobe's Chief Executive Officer.
Before joining eGlobe, Mr. Vizas was a co-founder of, and since October 1995,
has served as Chief Executive Officer of Quo Vadis International, an investment
and financial advisory firm. Before forming Quo Vadis International, he was
Chief Executive Officer of Millennium Capital Development, a merchant banking
firm, and of its predecessor Kouri Telecommunications & Technology. Before
joining Kouri, Mr. Vizas shared in the founding and development of a series of
technology companies, including Orion Network Systems, Inc. of which he was a
founder and a principal executive. From April 1987 to 1992, Mr. Vizas served as
Vice Chairman of Orion, an international a satellite communications company, and
served as a Director from 1982 until 1992. Mr. Vizas has also held various
positions in the United States government.
EDWARD J. GERRITY, JR., age 75, has been a Director of eGlobe since our
inception. He is a business consultant and President of Ned Gerrity &
Associates, a consulting firm, begun in 1985. Mr. Gerrity has also served as
Chairman of our Board of Directors. Mr. Gerrity served as an officer of ITT
Corp. from 1961 to 1985. While at ITT Corp., he was a member of the Management
Policy Committee, Director of Corporate and Government Relations on a worldwide
basis and a Director of several ITT Corp. subsidiaries. He retired from ITT
Corp. in February 1985. Mr. Gerrity was the President of American National
Collection Corp., a New York corporation, from 1993 to 1995 and he was a
director of Residual Corporation from 1987 until October 1994. See "Certain
Relationships and Related Transactions" below.
ANTHONY BALINGER, age 45, has been a Director of eGlobe since March 15,
1995. He served as eGlobe's President from April 25, 1995 to November 10, 1997
and also served as eGlobe's Chief Executive Officer from January 3, 1997 to
November 10, 1997. On November 10, 1997, he was appointed Senior Vice President
and Vice Chairman of eGlobe. Mr. Balinger has held a variety of positions at
eGlobe since his arrival in September 1993, including Chief Operating Officer
and Director of eGlobe's Asia-Pacific Operations. Mr. Balinger started his
career in 1971 with British Telecom as a digital systems design engineer. In
1983, he joined the Cable and Wireless Federation, an international alliance of
companies that provide telephone, cable and wireless operations in over 50
countries, where he performed much of the early design work for the Mercury
Communications Optical Fiber National Digital Network. In 1989, Mr. Balinger
moved to New York where he headed the Banking and Finance division for Cable and
Wireless Americas, Inc. from 1989 to 1992. In 1992, while still at Cable and
Wireless, Mr. Balinger was appointed International Product Manager for Optus
Communications, where he remained until he joined the Company. Mr. Balinger is a
Director and 45% stockholder of Executive Card Services HK Ltd. which provides
printing services to an affiliate of eGlobe in Hong Kong.
55
<PAGE>
DAVID W. WARNES, age 52, has been a Director of eGlobe since June 30, 1995.
Mr. Warnes has been the Chief Operating Officer of Global Light
Telecommunications Inc. since September 1997 and a Director since June 1997. He
has been the President and Chief Executive Officer of Vitacom, a subsidiary of
Highpoint, since December 1995, and President and CEO of Highpoint since April
1998. Previously, Mr. Warnes held various senior management and executive
positions with Cable and Wireless or its affiliated companies for two decades.
From October 1992 through October 1995, he was Vice President, Operations and
Chief Operating Officer, and from August 1994 through October 1995, he was
Assistant Managing Director of Tele 2, a telecommunications service provider in
Sweden partially owned Cable and Wireless. From August 1988 through June 1992,
he was a principal consultant and General Manager, Business Development of IDC,
an international telecommunications service provider based in Japan and
partially owned by Cable and Wireless. Mr. Warnes is a Chartered Engineer, a
Fellow of the Institution of Electrical Engineers, and a graduate of the
University of East London.
RICHARD A. KRINSLEY, age 68, has been a Director of eGlobe since June 30,
1995. Mr. Krinsley retired in 1991 as the Executive Vice President and Publisher
of Scholastic Corporation; a publicly held company traded on the Nasdaq Stock
Market. He is presently, and has been since 1991, a member of Scholastic's Board
of Directors. While employed by Scholastic between 1983 and 1991, Mr. Krinsley,
among many other duties, served on that company's management committee. From
1961 to 1983, Mr. Krinsley was employed by Random House where he held, among
other positions, the post of Executive Vice President. At Random House, Mr.
Krinsley also served on that company's executive committee.
JAMES O. HOWARD, age 56, has been a Director of eGlobe since January 16,
1998. Since 1990, Mr. Howard has served as the Chief Financial Officer and a
member of the management committee of Benton International, Inc., a wholly owned
subsidiary of Perot Systems Corporation. From 1981 to 1990, Mr. Howard was
employed by Benton International, Inc. as a consultant and sector manager.
Before joining Benton International, Inc., Mr. Howard held a number of legal
positions in the federal government, including General Counsel of the National
Commission on Electronic Fund Transfers.
MARTIN SAMUELS, age 55, has been a Director of eGlobe since October 25,
1997. Mr. Samuels is an entrepreneur, strategic business planner and
professional investor with over twenty years of experience. Mr. Samuels' current
project is Y2K Strategies Corp. ("YSC"), a liaison company that Mr. Samuels
co-founded in 1997. Mr. Samuels is a principal, director and senior vice
president of YSC. Mr. Samuels' responsibilities at YSC include identifying,
negotiating with and contracting with the Year 2000 service providers and
systems integrators that YSC assists with their marketing, proposal development
and ongoing business relationship management. YSC also works with significant
public and private sector institutions in identifying, coordinating and
fulfilling their Year 2000 remediation requirements.
DONALD H. SLEDGE, age 58 has been a Director of eGlobe since November 10,
1997. Mr. Sledge has served as vice chairman, President and Chief Executive
Officer of TeleHub Communications Corp., a privately held technology development
company, since 1996. Mr. Sledge served as President and Chief Operating Officer
of West Coast Telecommunications, Inc., a long distance company, from 1994 to
1995. From 1993 to 1994, Mr. Sledge was employed by New T&T,
56
<PAGE>
a Hong Kong-based company, as head of operations. Mr. Sledge was Chairman and
Chief Executive Officer of Telecom New Zealand International from 1991 to 1993
and the Managing Director of Telecom New Zealand International's largest local
carrier from 1988 to 1991. Mr. Sledge is currently Chairman of the Board of
United Digital Network, a small interexchange carrier that operates primarily in
Texas, Oklahoma, Arizona and California. Mr. Sledge is a member of the Board of
Advisors of DataProse and serves as a director of AirCell Communications, Inc.
He also serves as advisor and board member to several small technology-based
start-up companies.
JOHN E. KOONCE, age 56, has been a Director of eGlobe since March 27, 1998.
In April 1998, Mr. Koonce was also engaged to serve as a financial advisor to
eGlobe and effective September 1, 1998 became the Company's Chief Financial
Officer. Mr. Koonce served as Chief Financial Officer of Orion from 1990 to
1993. During 1981-89, Mr. Koonce was employed by Biotech Capital Corporation and
its successor, Infotechnology, Inc. where he served in the positions of Chief
Financial Officer and President. During this time, he also served on the boards
of several public and private companies. Before 1981, Mr. Koonce worked for the
accounting firm Price Waterhouse at various domestic and foreign offices.
HSIN YEN, age 40, has been a Director of eGlobe since December 2, 1998. Mr.
Yen is the President and a founder of IDX and has served as the primary
architect of its growth. Before founding IDX, he served as founder and CEO of
InteliSys, Inc., the predecessor of IDX. Mr. Yen has had a 15-year career in
management information systems, including complex Internet/intranet global
network development.
RICHARD CHIANG, age 43, has been a Director of eGlobe since December 2,
1998. Mr. Chiang has been the Chairman and President of Princeton Technology,
Corp. since 1986 and Chairman since 1996. He has been on the Board of Directors
of Taitron Companies, Inc. and Buslogic, Inc. since 1989 and Alliance Venture
Capital Corp since 1996. Mr. Chiang served as Chairman for IDX International,
Inc. from 1997 to 1998. Mr. Chiang currently sits on the Board of Proware
Technology, Corp. which is a RAID subsystem business and as a Chairman at
Advanced Communication Devices, Corp. whose primary business is Networking
Switch Controller Chips. He has served with these two companies since 1996.
ALLEN MANDEL, age 60, was named Senior Vice President in 1991 and a
Director of eGlobe in 1990. He resigned from the Board of Directors on March 29,
1995 and as Senior Vice President on August 18, 1995 in connection with the then
ongoing proxy contest. Mr. Mandel was engaged to serve as a consultant to eGlobe
concerning accounting and financial matters on August 18, 1995 and was renamed
an officer of eGlobe on September 27, 1995, when he became Executive Vice
President - Finance and Administration and Chief Financial Officer, in which
posts he served until December 1997. Mr. Mandel currently serves as Senior Vice
President, Corporate Affairs of eGlobe. Mr. Mandel is a Certified Public
Accountant. He was an officer of Residual Corporation from 1991 to March 1995.
COLIN SMITH, age 55, was named Vice President of Legal Affairs and General
Counsel of eGlobe on February 1, 1998. From 1972 to February 1998, Mr. Smith was
a professor of law at the New England School of Law. Mr. Smith's areas of legal
expertise include business organizations, dispute resolution and practice
management. In addition to his teaching, Mr. Smith also ran a private consulting
practice that specialized in issues of corporate governance and entrepreneurial
ventures.
57
<PAGE>
ANNE HAAS, age 48, was appointed Vice President, Controller and Treasurer
of eGlobe on October 21, 1997. Ms. Haas served as the Vice President of Finance
of Centennial Communications Corp., a start-up multi-national two way radio
company, during 1996-97. From 1992 to 1996, Ms. Haas served as Controller of
Quark, Inc., a multi-national desk top publishing software company. Before 1992,
Ms. Haas worked for the accounting firm of Price Waterhouse in San Jose,
California and Denver, Colorado.
Directors are elected annually and hold office until the next annual
meeting of stockholders and until their successors are elected and qualified.
Executive Officers serve at the pleasure of the Board or until the next annual
meeting of stockholders. There are no family relationships between eGlobe's
Directors and Executive Officers.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our executive officers and
directors, and persons who own more than ten percent of the common stock of
eGlobe, to file reports of ownership and changes in ownership with the SEC and
the exchange on which the common stock is listed for trading. Those persons are
required by regulations promulgated under the Exchange Act to furnish us with
copies of all reports filed pursuant to Section 16(a). Based solely upon our
review of the copies of such reports furnished to eGlobe by our directors and
officers during and with respect to the nine month period ended December 31,
1998; we noted that, Hsin Yen and Richard Chiang did not file their Form 3s on a
timely basis. Since Messrs. Yen and Chiang became directors of eGlobe in
connection with the acquisition of IDX International they have neither acquired
nor disposed of any securities of eGlobe. We believe that all other reports were
submitted on a timely basis.
ITEM 11 - EXECUTIVE COMPENSATION
- - --------------------------------------------------------------------------------
The following table summarizes the compensation for the three most recent
fiscal periods ended December 31, 1998, March 31, 1998 and March 31, 1997 of our
Chief Executive Officer and the most highly compensated other executive officers
whose total annual salary and bonus exceed $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation Awards
Name and Principal Position Year Salary ($) Bonus ($) Other Annual Restricted Securities Underlying
Compensation ($) Stock Awards Options/SARs (#)
($)
<S> <C> <C> <C> <C> <C> <C>
Christopher J. Vizas *1998 153,847 0 0 0 110,000
CEO (1)
1998 62,308 0 0 0 520,000
1997 0 0 0 0 0
W. P. Colin Smith *1998 91,539 25,000 0 0 25,000
Vice President
Legal Affairs (2)
1998 11,538 0 0 0 100,000
1997 0 0 0 0 0
Anthony Balinger *1998 103,846 0 9,600 0 45,000
Senior Vice President and
Vice Chairman (4)
1998 150,000 0 0 7,875 84,310
1997 109,612 8,000 28,500 0 50,000
</TABLE>
* Nine month period ended December 31, 1998
(1) Mr. Vizas has served as our Chief Executive Officer since December 5, 1997.
From November 10, 1997 to December 5, 1997, Mr. Vizas served as our acting
Chief Executive Officer. Mr. Vizas' employment agreement provides for a
base salary of $200,000, performance based bonuses of up to 50% of base
salary and options to purchase up to 500,000 shares, subject to various
performance criteria. See "Employment Agreements and Termination of
Employment and Change in Control Arrangements."
(2) Mr. Smith has served as our Vice President of Legal Affairs since February
1, 1998. Mr. Smith's employment agreement provides for a base salary of
$135,000, performance based bonuses of up $50,000 and options to purchase
up to 100,000 shares, subject to various performance criteria. See
"Employment Agreements and Termination of Employment and Change in Control
Arrangements."
(3) Mr. Balinger served as our President from April 1995 until November 10,
1997. Mr. Balinger served as Chief Executive Officer from January 3, 1997
through November 10, 1997. Mr. Balinger has served as our Senior Vice
President and Vice Chairman since November 6, 1997. Amounts shown as Other
Annual Compensation consist of an annual housing allowance paid to Mr.
Balinger while he resided in the United States and while he resides in Hong
Kong. See "Employment Agreement and Termination of Employment and Change of
Control Agreements."
58
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL PERIOD
The following table sets forth the information concerning individual grants
of stock options and stock appreciation rights ("SARs") during the last periods
to each of the named Executive Officers during such periods.
OPTION/SAR GRANTS IN LAST FISCAL PERIODS
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
Name Number of Percent of Total Exercise or Expiration Potential Realizable Value
Securities Options/SARs Granted Base Price Date at Assumed Annual Rates of
Underlying to Employees in ($/share) Stock Price Appreciation
Options/SARs Fiscal Period (2) for Option Term
Granted (#) (1) 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Christopher J. Vizas 10,000 1.06% $3.18 04/01/03 $8,808 $19,463
100,000 10.55% $1.57 12/27/03 $ 0 $ 0
W. P. Colin Smith 25,000 2.64% $1.57 12/27/03 $ 0 $ 0
Anthony Balinger 10,000 1.06% $3.18 04/01/03 $8,808 $19,463
10,000 1.06% $3.68 04/16/03 $10,269 $22,596
25,000 2.64% $1.57 12/27/03 $ 0 $ 0
</TABLE>
(1) All of the options and related SARs granted in the nine month period ended
December 31, 1998 to the named Executive Officers have a five year term.
(2) A total of 947,500 options were granted to employees of the Company in the
nine month period ended December 31, 1998 under eGlobe's 1995 Employee
Stock Option and Appreciation Rights Plan (the "Employee Stock Option
Plan").
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL PERIOD
AND FISCAL PERIOD-END OPTION/SAR VALUES
The following table sets forth information concerning each exercise of
stock options during the last fiscal period by each of the named Executive
Officers during such fiscal period and the fiscal period end value of
unexercised options.
59
<PAGE>
<TABLE>
<CAPTION>
Name Shares Acquired Value Number of Securities Underlying Value of Unexercised
on Exercise (#) Realized ($) Unexercised Options/SARs at Fiscal In-the-Money Options at Fiscal
Period-End (#) (1) Period-End ($)/SARS (2)
Unexercisable Exercisable Unexercisable Exercisable
<S> <C> <C> <C> <C> <C>
Christopher J. Vizas 0 0 110,000 - $ (10,050) $ -
W. P. Colin Smith 0 0 25,000 - $ 1,375 $ -
Anthony Balinger 0 0 45,000 - $ (34,725) $ -
</TABLE>
(1) Represents the aggregate number of stock options held as of December 31,
1998, including those which can and those which cannot be exercised
pursuant to the terms and provisions of eGlobe's current stock option
plans.
(2) Values were calculated by multiplying the closing transaction price of the
common stock as reported on the Nasdaq National Market on December 31, 1998
of $1.625 by the respective number of shares of common stock and
subtracting the exercise price per share, without any adjustment for any
termination or vesting contingencies.
COMPENSATION OF DIRECTORS
Effective November 10, 1997, and contingent upon eGlobe experiencing a
fiscal quarter of profitability, members of the Board receive a Director's fee
of $500 for each regular meeting and committee meeting attended. Our directors
are also reimbursed for expenses incurred in connection with attendance at Board
meetings.
During the fiscal periods ended 1995, 1996 and 1997, under eGlobe's 1995
Directors Stock Option and Appreciation Rights Plan (as amended, the "Directors
Stock Option Plan"), which then provided for automatic annual grants, each
Director received an annual grant of ten year options to purchase 10,000 shares
at an exercise price equal to the fair market value of our common stock on the
date of grant. Commencing with the amendments to the Directors Stock Option Plan
which were approved by our stockholders at the 1997 annual meeting held on
February 26, 1998, options to Directors may be made at the discretion of the
Board of Directors or Compensation Committee and there are no automatic grants.
Effective November 10, 1997, each Director who continued to serve on the
Board after subsequent stockholder meetings (other than members of the
Compensation Committee) was granted two options under the Directors Stock Option
Plan, each to purchase 10,000 shares of common stock with each option being
effective for five years terms commencing on April 1, 1998 and 1999,
respectively, with each such option vesting only upon the achievement of certain
corporate economic
60
<PAGE>
and financial goals to be set by the Board and having an exercise price per
share equal to the market price per share at the close of trading on the date
they become effective.
On June 18, 1998 Mr. Sledge and Mr. Warnes were granted options to purchase
15,000 shares of common stock at $2.719 per share, the fair market value on the
date of the grant, which vested on the date of grant and has a term of five
years. On December 16, 1998, each of Messrs. Gerrity, Warnes, Krinsley, Sledge,
Samuels and Howard received an option to purchase 25,000 shares of common stock
at $1.813 per share, the fair market value on the date of the grant, which
vested on the grant date and has a term of five years. On December 27, 1998,
options to purchase 10,000 shares of common stock that were granted on November
10, 1997 to each of Messrs. Gerrity, Warnes, Krinsley, Balinger, Samuels, and
Sledge expired. On December 31, 1998, options to purchase 10,000 shares of
common stock that were granted on April 1, 1998 to each of Messrs. Gerrity,
Warnes, Krinsley, Sledge, Samuels and Howard expired. Both groups of the expired
options, noted above, vested only upon the achievement of certain corporate
economic and financial goals which were not achieved.
On April 16, 1998, Mr. Balinger was granted options to purchase an
aggregate of 10,000 shares of common stock. Such options have a term of five
years and vest in three equal annual installments, beginning on April 16, 1999,
at an exercise price per share equal to $3.68, the fair market value on the date
of the grant. These options vest only upon the achievement of certain
performance goals to be set by the Chief Executive Officer.
On December 27, 1998, Mr. Vizas was granted bonus options to purchase an
aggregate of 50,000 shares of common stock. Such options have a term of five
years and vest in ninety days from the grant date, at an exercise price per
share equal to $1.57, the fair market value on the date of the grant. In
addition, Mr. Vizas was granted options on December 27, 1998 to purchase an
aggregate of 50,000 shares of common stock at $1.57 per share, the fair market
value on the date of the grant. Such options have a term of five years and vest
in three equal annual installments, beginning on December 27, 1999. These
options vest only upon the achievement of certain performance goals to be set by
the Board. On December 5, 1998 options to purchase 100,000 shares of common
stock that were granted on December 5, 1997 to Mr. Vizas expired. These options
vested only upon the achievement of certain performance goals which were not
achieved.
On December 27, 1998, Mr. Balinger was granted bonus options to purchase an
aggregate of 10,000 shares of common stock. Such options have a term of five
years and vest in ninety days from the grant date, at an exercise price per
share equal to $1.57, the fair market value on the date of the grant. In
addition, Mr. Balinger was granted options on December 27, 1998 to purchase an
aggregate of 15,000 shares of common stock at $1.57 per share, the fair market
value on the date of the grant. Such options have a term of five years and vest
in three equal annual installments, beginning on December 27, 1999. These
options vest only upon the achievement of certain performance goals to be set by
the Chief Executive Officer.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
Effective December 5, 1997, we entered into a three year employment agreement
with Christopher J. Vizas, our Chief Executive Officer. Mr. Vizas' employment
agreement provides for a minimum salary of $200,000 per annum, reimbursement of
certain expenses, annual bonuses based on financial
61
<PAGE>
performance targets to be adopted by eGlobe and Mr. Vizas, and the grant of
options to purchase an aggregate of 500,000 shares of common stock. The options
granted to Mr. Vizas pursuant to his employment agreement are comprised of
options to purchase 50,000 shares of common stock at an exercise price of $2.32
which vested upon their grant, options to purchase 50,000 shares of common stock
at an exercise price of $2.32 which vested on December 5, 1998 (contingent upon
Mr. Vizas' continued employment as of such date), options to purchase up to
100,000 shares of common stock at an exercise price of $2.32 which vested on
December 5, 1998, but which expired due to the company's failure to achieve
certain financial performance targets. Options to purchase 50,000 shares at an
exercise price of $3.50 which vest on December 5, 1999 (contingent upon Mr.
Vizas' continued employment as of such date), options to purchase up to 100,000
shares of common stock at an exercise price of $3.50 which vest on December 5,
1999 (contingent upon Mr. Vizas' continued employment as of such date and the
attainment of certain financial performance targets), options to purchase 50,000
shares at an exercise price of $4.50 which vest on December 5, 2000 (contingent
upon Mr. Vizas' continued employment as of such date), and options to purchase
up to 100,000 shares of common stock at an exercise price of $4.50 which vest on
December 5, 2000 (contingent upon Mr. Vizas' continued employment as of such
date and the attainment of certain financial performance targets). Each of the
options has a term of five years.
Mr. Vizas' employment agreement provides that, if eGlobe terminates Mr.
Vizas' employment other than pursuant to a "termination for cause", Mr. Vizas
shall continue to receive, for one year commencing on the date of such
termination, his full base salary, any bonus that is earned after the
termination of employment, and all other benefits and compensation that Mr.
Vizas would have been entitled to under his employment agreement in the absence
of termination of employment (the "Vizas Severance Amount"). "Termination for
cause" is defined as termination by eGlobe because of personal dishonesty,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law,
rule, or regulation (other than traffic violations or similar offenses), or
material breach of any provision of his employment agreement.
If there is an early termination of Mr. Vizas' employment following a
"change of control," Mr. Vizas would be entitled to a lump cash payment equal to
the Vizas Severance Amount. Additionally, if during the term of Mr. Vizas'
employment agreement there is a "change in control" of eGlobe and in connection
with or within two years after such change of control eGlobe terminates Mr.
Vizas' employment other than "termination for cause," all of the options
described above will vest in full to the extent and at such time that such
options would have vested if Mr. Vizas had remained employed for the remainder
of the term of his employment agreement. A "change of control" is deemed to have
taken place under Mr. Vizas employment agreement, among other things, if (i) any
person becomes the beneficial owner of 20% or more of the total number of voting
shares of eGlobe; (ii) any person becomes the beneficial owner of 10% or more,
but less than 20%, of the total number of voting shares of eGlobe, if the Board
of Directors makes a determination that such beneficial ownership constitutes or
will constitute control of eGlobe; or (iii) as the result of any business
combination, the persons who were directors of eGlobe before such transaction
shall cease to constitute at least two-thirds of the Board of Directors.
On September 22, 1997, we entered into a new three year employment
agreement with Anthony Balinger. Pursuant to his new employment agreement, Mr.
Balinger served as eGlobe's
62
<PAGE>
President and Chief Executive Officer until November 10, 1997 when he resigned
that position and was appointed Senior Vice President and Vice Chairman of
eGlobe. Mr. Balinger's employment agreement provides for a minimum salary of
$150,000 per annum, reimbursement of certain expenses, a $1,600 per month
housing allowance, and payment for health, dental and disability insurance and
various other benefits. Mr. Balinger's employment agreement also provides for
payment of one year severance pay paid out over time, relocation to the
Philippines, buy-out of his auto lease and a 90 day exercise period for his
vested options after termination if eGlobe terminates Mr. Balinger without
"cause." "Cause" is defined as any criminal conviction for an offense by Mr.
Balinger involving dishonesty or moral turpitude, any misappropriation of
Company funds or property or a willful disregard of any directive of eGlobe's
Board of Directors. This employment agreement superseded a prior employment
agreement.
On February 1, 1998, the Company entered into an employment agreement with
Colin Smith pursuant to which Mr. Smith agreed to serve as Vice President of
Legal Affairs and General Counsel of the Company through December 31, 2000. Mr.
Smith's employment agreement provides for a minimum salary of $125,000 per
annum, reimbursement of certain expenses, annual and quarterly bonuses based on
financial performance targets to be adopted by the Chairman and Chief Executive
and Mr. Smith, and the grant of options to purchase an aggregate of 100,000
shares of Common Stock. The options granted to Mr. Smith pursuant to his
employment agreement are comprised of options to purchase 33,333 shares of
Common Stock at an exercise price of $3.125 which vested on February 1, 1999 but
which expired due to the Company's failure to achieve certain financial
performance targets, 33,333 shares of Common Stock at an exercise price of
$3.125 which will vest on February 1, 2000 (contingent upon Mr. Smith's
continued employment as of such date and the attainment of certain financial
performance targets) and 33,334 shares of Common Stock at an exercise price of
$3.125 which will vest on February 1, 2001 (contingent upon Mr. Smith's
continued employment as of such date and the attainment of certain financial
performance targets). Each of the options have a term of five years. Vesting of
all options will accelerate in the event that the current Chairman and Chief
Executive Officer (Christopher J. Vizas) ceases to be the Chief Executive
Officer of the Company and Mr. Smith's employment terminates or reasonable
advance notice of such termination is given.
Mr. Smith's employment agreement provides that, if the Company terminates
Mr. Smith's employment other than pursuant to a "termination for cause" or after
a material breach of the employment agreement by the Company, Mr. Smith shall
continue to receive, for six months (in all cases thereafter) commencing on the
date of such termination, his full base salary, any annual or quarterly bonus
that has been earned before termination of employment or is earned after the
termination of employment (where Mr. Smith met the applicable performance goals
prior to termination and the Company meets the applicable Company performance
goals after termination), and all other benefits and compensation that Mr. Smith
would have been entitled to under his employment agreement in the absence of
termination of employment (the "Smith Severance Amount"). A "termination for
cause" is defined as termination by the Company because of Mr. Smith's (i) fraud
or material misappropriation with respect to the business or assets of the
Company; (ii) persistent refusal or willful failure materially to perform his
duties and responsibilities to the Company, which continues after Mr. Smith
receives notice of such refusal or failure; (iii) conduct that constitutes
disloyalty to the Company and which materially harms the Company or conduct that
63
<PAGE>
constitutes breach of fiduciary duty involving personal profit; (iv) conviction
of a felony or crime, or willful violation of any law, rule, or regulation,
involving moral turpitude; (v) the use of drugs or alcohol which interferes
materially with Mr. Smith's performance of his duties; or (vi) material breach
of any provision of his employment agreement.
If during the term of Mr. Smith's employment agreement there is a "change
in control" of the Company and in connection with or within two years after such
change of control the Company terminates Mr. Smith's employment other than
"termination for cause" or Mr. Smith terminates with good reason, the Company
shall be obligated, concurrently with such termination, to pay the Smith
Severance Amount in a single lump sum cash payment to Mr. Smith. A "change of
control" is deemed to have taken place under Mr. Smith's employment agreement,
among other things, if (i) any person becomes the beneficial owner of 35% or
more of the total number of voting shares of the Company, (ii) the Company sells
substantially all of its assets, (iii) the Company merges or combines with
another company and immediately following such transaction the persons and
entities who were stockholders of the Company before the merger own less than
50% of the stock of the merged or combined entity, or (iv) the current Chairman
and Chief Executive Officer (Christopher J. Vizas) ceases to be the Chief
Executive Officer of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Vizas, our Chief Executive Officer, serves as a member of the
Compensation Committee of the Board of Directors. Although Mr. Vizas makes
recommendations to the Compensation Committee of the Board of Directors with
regard to the other executive officers, including Named Executive Officers, he
did not participate in the Compensation Committee's deliberations with respect
to his own compensation.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee, which includes Messrs. Vizas, Gerrity, and
Krinsley, is responsible for approving all compensation for senior officers and
employees, making recommendations to the Board with respect to the grant of
stock options and eligibility requirements, including grants under and the
requirements of our stock option plans and may make grants to directors under
the Directors Stock Option Plan. The Compensation Committee believes that the
actions of each executive officer have the potential to impact our short-term
and long-term profitability and considers the impact of each executive officer's
performance in designing and administering the executive compensation program.
During the nine month period ended December 31, 1998, under the direction
of our new Chairman and Chief Executive Officer (retained in December 1997), we
hired a number of new executive officers. We negotiated compensation with each
officer. The Compensation Committee has obtained two salary surveys, obtained by
eGlobe regarding the compensation practices of other companies in the
communications or related industries and believes that the new executive
officers' compensation is consistent with salary surveys. In setting
compensation, the Compensation Committee adhered to the following philosophy,
objectives and policies:
64
<PAGE>
PHILOSOPHY AND OBJECTIVES. The purpose of our executive compensation
program is to: (i) attract, motivate and retain key executives responsible for
our success of as a whole; (ii) increase stockholder value; (iii) increase our
overall performance; and (iv) increase the performance of the individual
executive.
EXECUTIVE COMPENSATION POLICIES. The Compensation Committee's executive
compensation policies are designed to provide competitive levels of compensation
that integrate compensation with our short-term and long-term performance goals,
reward above-average corporate performance, recognize individual initiative and
achievements, and assist us in attracting and retaining qualified executives.
The two salary surveys, indicate that the levels of executive officers' overall
compensation is at or below the mid range of salaries of similarly situated
senior executives in the communications or related industries. In determining
the incentive portions of executive compensation levels, particular factors
apart from industry comparables which the Compensation Committee believes are
important are growth in revenues, completion of our financing plans, or other
major transactions or corporate goals, implementation of our strategic plan and,
on a longer term basis, growth in stockholder value measured by stock price.
Our executive compensation structure is comprised of base salary, annual
cash performance bonuses, long-term compensation in the form of stock option
grants, and various benefits, including medical, and other benefits generally
available to all our employees.
BASE SALARY. In establishing appropriate levels of base salary, the
Compensation Committee negotiated with its new executives, considering their
functions, the significant level of commitment required to advance eGlobe to a
higher level of competitiveness, our size and growth rate and other factors. The
Compensation Committee has obtained the salary surveys of similar companies in
the local area. According to the surveys, executive base salaries generally were
in the mid range salary levels of similarly sized companies in similar
industries.
Annual Performance Bonuses. During the nine month period ended December 31,
1998, the Compensation Committee placed increased reliance on cash bonuses as a
significant portion of compensation for executives. Generally, potential bonuses
have ranged up to 50% of a senior executive's annual base salary and are paid on
an quarterly or annual basis. The actual amount of a bonus grant is determined
based upon performance criteria detailed in written performance goals
established based upon discussions between the senior executive and the
Company's human resource and/or senior management. Performance criteria include
the achievement of financial targets expressed in gross revenues and EBITDA and
other criteria based upon the Company's performance and the individual's
achievements during the course of the year.
Salary Increases and Bonus Awards: The Compensation Committee expects that
future salary increases and bonuses will be based on performance, either by
eGlobe or individual performance by the executive officer.
Stock Options and Stock Appreciation Rights: The Compensation Committee
expects that stock options will continue to play an important role in executive
officer compensation. The Compensation Committee has decided not to grant any
more tandem stock appreciation rights with stock options. The members of the
Committee believe that stock options not only encourage
65
<PAGE>
performance by our executive officers but they align the interests of our
executive officers with the interests of our stockholders. The number of stock
options granted to each senior executive officer is determined subjectively,
both at the time we hire that executive and subsequently for performance
achievement, based on a number of factors, including the individual's
anticipated degree of responsibility, salary level, performance milestones
achieved and stock option awards by other similarly sized communications or
related companies. Stock option grants by the Compensation Committee generally
are under our employee stock option and appreciation rights plan at the
prevailing market value and will have value only if our stock price increases.
Grants made by the Compensation Committee generally vest in equal annual
installments over the five year grant period; executives must be employed by
eGlobe at the time of vesting to exercise the options. Option grants to Messrs.
Vizas, Smith and Balinger are discussed above under "Employment Agreements and
Termination of Employment and Change in Control Arrangements."
Employment Agreements. The compensation committee has previously authorized
the agreements with the named executive officers above under "Employment
Agreements and Termination of Employment and Change in Control Arrangements."
The compensation committee did not, however, authorize new employment
arrangements with any of the named executive officers during the nine months
ended December 31, 1998.
COMPENSATION COMMITTEE
Christopher J. Vizas
Edward J. Gerrity, Jr.
Richard A. Krinsley
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- - --------------------------------------------------------------------------------
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the number and percentage of shares of
eGlobe's common stock owned beneficially, as of March 31, 1999, by each Director
and executive officer of eGlobe, and by all Directors and executive officers of
eGlobe as a group. Information as to beneficial ownership is based upon
statements furnished to the Company by such persons.
<TABLE>
<CAPTION>
Name and Address Number of Shares Percent of
of Beneficial Owner Owned of Record Common Stock
and Beneficially (1) Outstanding (2)
<S> <C> <C>
Christopher J. Vizas 214,768 (3) 1.00%
2000 Pennsylvania Avenue, N.W.
Suite 4800
Washington, D.C. 20006
Edward J. Gerrity, Jr. 107,150 (4) *
7 Sunset Lane
Rye, New York 10580
Anthony Balinger 91,043 (5) *
CLI Building, Room 2503
313-317 Hennessy Road
Wanchai, Hong Kong
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
Name and Address Number of Shares Percent of
of Beneficial Owner Owned of Record Common Stock
and Beneficially (1) Outstanding (2)
<S> <C> <C>
David W. Warnes 61,000 (6) *
1330 Charleston Road
Mountain View, California 94043
Richard A. Krinsley 110,182 (7) *
201 West Lyon Farm
Greenwich, Connecticut 06831
Martin L. Samuels 87,000 (8) *
3675 Delmont Avenue
Oakland, California 94605
Donald H. Sledge 60,000 (9) *
27 Cherry Hills Court
Alamo, CA 94507
James O. Howard 35,000 (10) *
2601 Airport Drive, Suite 370
Torrance, California 90505
John E. Koonce 78,525 (11) *
11416 Empire Lane
Rockville, Maryland 20852
Hsin Yen 61,302 (12) *
IDX, International
11410 Isaac Newton Square,
Suite 100
Reston, Virginia 20190
Richard Chiang 858,292 (13) 3.87%
Princeton Technology Corporation
2F, No. 233-1, Bao Chiao Road
Hsin Tien, Taipei Hsien, Taiwan, R.O.C.
Allen Mandel 52,265 (14) *
9362 S. Mountain Brush Street
Highlands Ranch, Colorado 80126
Colin Smith 10,000 (15) *
4260 E. Evans Avenue
Denver, CO 80222
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
Name and Address Number of Shares Percent of
of Beneficial Owner Owned of Record Common Stock
and Beneficially (1) Outstanding (2)
<S> <C> <C>
Anne Haas 15,616 (16) *
4260 E. Evans Avenue
Denver, CO 80222
All Named Executive Officers and Directors 1,864,343 (17) 7.22 %
as a Group (14 persons)
</TABLE>
- - ----------
* Less than 1%
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
be a "beneficial owner" of a security if he or she has or shares the power
to vote or direct the voting of such security or the power to dispose or
direct the disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which that person has the right to
acquire beneficial ownership within 60 days from March 31, 1999. More than
one person may be deemed to be a beneficial owner of the same securities.
All persons shown in the table above have sole voting and investment power,
except as otherwise indicated. This table includes shares of common stock
subject to outstanding options granted pursuant to eGlobe's option plans.
(2) For the purpose of computing the percentage ownership of each beneficial
owner, any securities which were not outstanding but which were subject to
options, warrants, rights or conversion privileges held by such beneficial
owner exercisable within 60 days were deemed to be outstanding in
determining the percentage owned by such person, but were deemed not to be
outstanding in determining the percentage owned by any other person.
(3) Includes options to purchase 174,768 shares of common stock exercisable
within 60 days from March 31, 1999. Does not include options to purchase
360,000 shares of common stock which are not exercisable within such
period.
(4) Includes 1,100 shares held by Mr. Gerrity as a trustee and options to
purchase 96,050 shares of common stock exercisable within 60 days from
March 31, 1999. Does not include options to purchase 11,331 shares of
common stock which are not exercisable within such period.
(5) Includes options to purchase 90,043 shares of common stock exercisable
within 60 days from March 31, 1999. Does not include options to purchase
31,667 shares of common stock which are not exercisable within such period.
(6) Consists solely of options to purchase common stock exercisable within 60
days from March 31, 1999. Does not include options to purchase 10,000
shares of common stock which are not exercisable within such period.
(7) Includes options to purchase 46,000 shares of common stock exercisable
within 60 days from March 31, 1999. Does not include options to purchase
10,000 shares of common stock which are not exercisable within such period.
(8) Includes options to purchase 30,000 shares of common stock exercisable
within 60 days from March 31, 1999. Does not include options to purchase
10,000 shares of common stock which are not exercisable within such period.
68
<PAGE>
(9) Consists solely of options to purchase common stock exercisable within 60
days from March 31, 1999. Does not include options to purchase 10,000
shares of common stock which are not exercisable within such period.
(10) Consists solely of options to purchase common stock exercisable within 60
days from March 31, 1999. Does not include options to purchase 10,000
shares of common stock which are not exercisable within such period.
(11) Consists solely of options to purchase common stock exercisable within 60
days from March 31, 1999. Does not include options to purchase 95,000
shares of common stock which are not exercisable within such period.
(12) Includes (i) 57,696 shares of common stock issuable within 60 days from
March 31, 1999 upon the conversion of the Series B Convertible Preferred
Stock and (ii) warrants to purchase 3,606 shares of common stock owned by
HILK International, Inc. of which Mr. Yen is the sole stockholder. Does not
include warrants owned by HILK International, Inc. to purchase 72,120
shares of common stock not exercisable within such period.
(13) Includes (i) 807,804 shares of common stock issuable within 60 days from
March 31, 1999 upon the conversion of the Series B Convertible Preferred
Stock (ii) warrants to purchase 50,488 shares of common stock owned by
Chatwick Investments, Ltd., of which Mr. Chiang is the sole stockholder.
Does not include warrants owned by Chatwick Investments, Ltd. to purchase
1,009,755 shares of common stock not exercisable with such period.
(14) Includes options to purchase 44,355 shares of common stock exercisable
within 60 days from March 31, 1999. Does not include options to purchase
75,121 shares of common stock which are not exercisable within such period.
(15) Consists solely of options to purchase common stock exercisable within 60
days from March 31, 1999. Does not include options to purchase 81,667
shares of common stock not exercisable within 60 days from May 31, 1998.
(16) Consists solely of options to purchase common stock exercisable within 60
days from March 31, 1999. Does not include options to purchase 21,667
shares of common stock which are not exercisable within such period.
(17) Includes (i) options to purchase 746,581 shares of common stock exercisable
within 60 days from March 31, 1999 and (ii) 865,000 shares of common stock
issuable upon conversion of the Series B Convertible Preferred Stock within
60 days from March 31, 1999. Does not include (i) options to purchase
968,454 shares of common stock or (ii) warrants to purchase 1,135,969
shares of common stock not exercisable within such period.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth the number and percentage of shares of our
common stock owned beneficially, as of March 31, 1999, by any person who is
known to us to be the beneficial owner of 5% or more of our common stock.
Information as to beneficial ownership is based upon statements furnished to us
by such persons.
69
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Percent of
Name and Address Owned of Record Common Stock
of Beneficial Owner and Beneficially (1) Outstanding (2)
<S> <C> <C>
Ronald L. Jensen (3) 4,555,000 19.9%
5215 N. O'Connor, #300
Irving, Texas 75039
2,047,500 8.75%
Vintage Products, Ltd. (4)
111 Arlosorov Street
Tel Aviv, Israel
</TABLE>
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
be a "beneficial owner" of a security if he or she has or shares the power
to vote or direct the voting of such security or the power to dispose or
direct the disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which that person has the right to
acquire beneficial ownership within 60 days from March 31, 1999. More than
one person may be deemed to be a beneficial owner of the same securities.
All persons shown in the table above have sole voting and investment power,
except as otherwise indicated.
(2) For the purpose of computing the percentage ownership of each beneficial
owner, any securities which were not outstanding but which were subject to
options, warrants, rights or conversion privileges held by such beneficial
owner exercisable within 60 days were deemed to be outstanding in
determining the percentage owned by such person, but were not deemed
outstanding in determining the percentage owned by any other person.
(3) Includes 1,555,000 shares of common stock issuable within 60 days from
March 31, 1999 upon the conversion of the 8% Series E Cumulative
Convertible Redeemable Preferred Stock owned by EXTL Investors LLC ("EXTL
Investors"), of which Mr. Jensen and his wife, Gladys Jensen, are the sole
members. Does not include (i) 1,052,941 shares of common stock issuable
upon conversion of the 8% Series E Cumulative Convertible Redeemable
Preferred Stock owned by EXTL Investors and (ii) warrants owned by EXTL
Investors to purchase 1,000,000 shares of common stock which may not be
issued unless shareholder approval is obtained. These amounts do not
reflect warrants to purchase 1,500,000 shares of common stock issued to
EXTL Investors in connections with the debt placement completed on April 9,
1999. Mr. Jensen has disclaimed beneficial ownership of all of the shares
owned by EXTL Investors in his statement filed with the Company. If none of
the shares owned by EXTL Investors were included, then Mr. Jensen would
beneficially own 3,000,000 shares (14.06%).
(4) Includes (i) 1,875,000 shares of common stock issuable within 60 days from
March 31, 1999 upon the conversion of 8% Series D Cumulative Convertible
Preferred Stock and (ii) warrants to purchase 172,500 shares of common
stock exercisable within 60 days from March 31, 1999.
70
<PAGE>
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- - --------------------------------------------------------------------------------
In November 1998, we reached an agreement with Mr. Ronald Jensen, who is
also our largest shareholder. The agreement concerned settlement of unreimbursed
costs and potential claims. Mr. Jensen had purchased $7.5 million of our Common
Stock in a private placement in June 1997 and later was elected Chairman of our
Board of Directors. After approximately three months, Mr. Jensen resigned his
position, citing both other business demands and the challenges of managing our
business. During his tenure as Chairman, Mr. Jensen incurred staff and other
costs that were not billed to eGlobe. Also, Mr. Jensen subsequently communicated
with our current management, indicating there were a number of issues raised
during his involvement with eGlobe relating to the provisions of his share
purchase agreement which could result in claims against us.
To resolve all current and potential issues, Mr. Jensen agreed with us to
exchange his current holding of 1,425,000 shares of Common Stock for 75 shares
of our 8% Series C Cumulative Convertible Preferred Stock ("Series C Preferred
Stock"), which management estimated to have a fair market value of approximately
$3.4 million and a face value of $7.5 million. The terms of the Series C
Preferred Stock permit Mr. Jensen to convert the Series C Preferred Stock into
the number of shares equal to the face value of the preferred stock divided by
90% of common stock market price, but with a minimum conversion price of $4.00
per share and a maximum of $6.00 per share, subject to adjustment if we issue
Common Stock for less than the conversion price. The difference between the
estimated fair value of the Series C Preferred Stock to be issued and the market
value of the Common Stock surrendered resulted in a one-time non-cash charge to
our statement of operations of $1.0 million in the quarter ended September 30,
1998 with a corresponding credit to stockholders' equity.
In connection with subsequent issuances of securities which are convertible
into or exercisable for our Common Stock, we discussed with Mr. Jensen the
extent to which the conversion price of the Series C Preferred Stock should be
adjusted downward. The parties agreed to exchange all of the outstanding Series
C Preferred Stock (convertible into 1,875,000 shares of Common Stock) for shares
of Common Stock, which exchange would have the same economic effect as if the
Series C Preferred Stock had been converted into Common Stock with an effective
conversion price of $2.50 per share. On February 16, 1999, we agreed to exchange
75 shares of Series C Preferred Stock then held by Mr. Jensen for 3,000,000
shares of Common Stock. The market value of the 1,125,000 incremental shares of
common stock will be recorded as a dividend in the first quarter of 1999.
On December 31, 1998 two officers of the Company each loaned $50,000 to the
Company for short term needs. The loans were repaid, including a 1% fee, in
February, 1999.
In February 1999, we concluded a private placement of $5 million with EXTL
Investors. We sold 50 shares of our 8% Series E Cumulative Convertible
Redeemable Preferred Stock (the "Series E Preferred Stock"), and warrants (the
"Series E Warrants") to purchase (i) 723,000 shares of Common Stock with an
exercise price of $2.125 per share and (ii) 277,000 shares of Common Stock with
an exercise price of $.01 per share to the Jensen affiliate.
The Series E Preferred Stock agreement allowed for the shares of the Series
E Preferred Stock to be redeemed at a redemption price equal to the face value
plus accrued dividends, in cash or in
71
<PAGE>
Common Stock, at our option or at the option of any holder, provided that the
holder had not previously exercised the convertibility option described, at any
time following the date that is five years after we issue the Series E Preferred
Stock. On April 9, 1999, in connection with the financing describe below, the
holder exercised the convertibility option, as a result, the Series E Preferred
Stock is no longer redeemable.
The shares of Series E Preferred Stock will automatically be converted into
shares of our Common Stock, on the earliest to occur of (x) the first date as of
which the last reported sales price of our Common Stock on Nasdaq is $5.00 or
more for any 20 consecutive trading days during any period in which Series E
Preferred Stock is outstanding, (y) the date that 80% or more of the Series E
Preferred Stock we have issued has been converted into Common Stock, or (z) we
complete a public offering of equity securities at a price of at least $3.00 per
share and with gross proceeds to us of at least $20 million. The initial
conversion price for the Series E Preferred Stock is $2.125, subject to
adjustment if we issue Common Stock for less than the conversion price.
On April 9, 1999, we and our wholly owned subsidiary eGlobe Financing
Corporation entered into a Loan and Note Purchase Agreement with EXTL Investors
(which, together with its affiliates, is our largest stockholder). eGlobe
Financing initially borrowed $7 million from EXTL Investors and we granted EXTL
Investors warrants (1/3 of which are presently exercisable) to purchase
1,500,000 shares of our Common Stock at an exercise price of $.01 per share. As
a condition to receiving this $7 million loan, we entered into a Subscription
Agreement with eGlobe Financing under which we have irrevocably agreed to
subscribe for eGlobe Financing stock for an aggregate subscription price of up
to $7,560,000 (the amount necessary to repay the loan and accrued interest).
As part of the Loan and Note Purchase Agreement, EXTL Investors agreed to
purchase $20 million of 5% Secured Notes from eGlobe Financing, upon our
request, provided that we first obtain any required stockholder approval at our
next stockholder meeting. If we issue the Secured Notes to EXTL Investors, we
must repay the $7 million initial loan. We also must grant EXTL Investors
warrants to purchase 5,000,000 shares of our Common Stock at an exercise price
of $1.00 per share, although 2/3 of the initial warrants to purchase 1,500,000
shares will expire at that time.
If eGlobe Financing does not issue Secured Notes for the $20 million after
we obtain stockholder approval (or if we do not obtain approval at our next
annual stockholder meeting), the $7 million loan must be repaid on the earliest
to occur of (i) April 9, 2000, (ii) the date that we complete an offering of
debt or equity securities from which we receive net proceeds of at least $30
million or (iii) the occurrence of an event of default. Also, 2/3 of the initial
warrants to purchase 1,500,000 shares will become exercisable at that time.
The Secured Notes, if sold, must be repaid in 36 specified monthly
installments commencing on the first month following issuance, with the
remaining unpaid principal and accrued interest being due in a lump sum with the
last payment. The entire amount becomes due earlier if we complete an offering
of debt or equity securities from which we receive net proceeds of at least $100
million (a "Qualified Offering"). The principal and interest of the Secured
Notes may be paid in cash. However, up to 50% of the original principal amount
of the Notes may be paid in our Common Stock at our option if (i) the closing
price of our Common Stock on Nasdaq is $8.00 or more for any 15
72
<PAGE>
consecutive trading days, (ii) we close a public offering of our equity
securities at a price of at least $5.00 per share and with gross proceeds to us
of at least $30 million, or (iii) we close a Qualified Offering (at a price of
at least $5.00 per share, in the case of an offering of equity securities).
The proceeds of these financings will be used by us to fund capital
expenditures relating to our network of IP trunks and intelligent platforms for
calling card and unified messaging services, and for working capital and general
corporate purposes. The proceeds of the Secured Notes would also be used to
repay the $7 million initial loan and our approximately $8 million of senior
indebtedness to IDT Corporation.
If eGlobe Financing issues the Secured Notes, we will transfer
substantially all of our operating assets to eGlobe Financing so that EXTL
Investors can have a security interest in our assets to secure payment under the
Secured Notes. The security interest would be subject to certain exceptions for
existing debt and vendor financing. We and our operating subsidiaries would
guarantee payment of the Secured Notes.
EXTL Investors also has agreed, under the Loan and Note Purchase Agreement,
to make advances to eGlobe Financing from time to time based upon eligible
accounts receivable. These advances may not exceed the lesser of 50% of eligible
accounts receivable and the aggregate amount of principal payments made by
eGlobe Financing under the Secured Notes. We will guarantee repayment of these
advances, which also will be secured by the same security arrangement as the
Secured Notes.
The Loan and Note Purchase Agreement contains several covenants which we
believe are fairly customary, including prohibitions on:
(i) mergers and sales of substantially all assets;
(ii) sales of material assets other than on an arm's length basis and in
the ordinary course;
(iii) encumbering any of our assets (except for certain permitted liens);
(iv) incurring or having outstanding indebtedness other than certain
permitted debt (which includes certain existing debt and future equipment and
facilities financing), or prepaying any subordinated indebtedness; or
(v) paying any dividends or distributions on any class of our capital stock
(other than any dividend on outstanding preferred stock or additional preferred
stock issued in the future) or repurchasing any shares of our capital stock
(subject to certain exceptions).
The Loan and Note Purchase Agreement contains several fairly standard
events of default, including:
(i) non-payment of any principal or interest on the $7 million loan or the
Secured Notes, or non- payment of $250,000 or more on any other indebtedness;
73
<PAGE>
(ii) failure to perform any obligation under the Loan and Note Purchase
Agreement or related documents;
(iii) breach of any representation or warranty in the Loan and Note
Purchase Agreement;
(iv) inability to pay our debts as they become due, or initiation or
consent to judicial proceedings relating to bankruptcy, insolvency or
reorganization;
(vi) dissolution or winding up, unless approved by EXTL Investors; and
(vi) final judgment ordering payment in excess of $250,000.
74
<PAGE>
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE, INC.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
- - --------------------------------------------------------------------------------
a) 1. The financial statements are included in Part II, Item 8 beginning at
Page F-1:
2. Financial Statement Schedule
[] Schedule II Valuation and Qualifying Accounts
b) Reports on Form 8-K:
1. A report on Form 8-K dated June 24, 1998 under Item 5 was filed
with the Commission on June 24, 1998 to report the signing of the
definitive agreement to acquire IDX International, Inc.
2. A report on Form 8-K dated August 12, 1998 under Item 5 was filed
with the Commission on August 12, 1998 to report the signing of the
definitive agreement to acquire Connectsoft Communications
Corporation.
3. A report on Form 8-K dated December 17, 1998 under Item 2 was
filed with the Commission on December 17, 1998 to report the closing
of the acquisition of IDX International, Inc.
4. A report on Form 8-K dated March 1, 1999 under Item 2 was filed
with the Commission on March 1, 1999 to report the closing of the
acquisition of Telekey, Inc.
Exhibits:
2.1 Agreement and Plan of Merger, dated June 10, 1998, by and among
Executive TeleCard, Ltd., IDX International, Inc., EXTEL Merger Sub
No. 1, Inc. and the stockholders of IDX International, Inc.
(Incorporated by reference to Exhibit 2.1 in Current Report on Form
8-K of Executive TeleCard, Ltd. dated June 24, 1998).
2.2 Consent and Extension, dated August 27, 1998, by and among Executive
TeleCard, Ltd., IDX International, Inc., EXTEL Merger Sub No. 1, Inc.
and Jeffey Gee, as representative of the stockholders of IDX
International, Inc. (Incorporated by reference to Exhibit 2.2 in
Current Report on Form 8-K of Executive TeleCard, Ltd. dated December
17, 1998).
75
<PAGE>
2.3 Amendment No. 2 to Agreement and Plan of Merger, dated October __,
1998, by and among Executive TeleCard, Ltd., IDX International, Inc.,
EXTEL Merger Sub No. 1, Inc. and the stockholders of IDX
International, Inc. (Incorporated by reference to Exhibit 2.3 in
Current Report on Form 8-K of Executive TeleCard, Ltd. dated December
17, 1998).
2.4 Agreement and Plan of Acquisition, dated September 30, 1998, by and
among Executive TeleCard, Ltd., UCI Tele Networks, Ltd. and United
Communications International LLC.
2.5 Agreement and Plan of Merger, dated February 3, 1999, by and among
Executive TeleCard, Ltd., Telekey, Inc., eGlobe Merger Sub No. 2, Inc.
and the stockholders of Telekey, Inc. (Incorporated by reference to
Exhibit 2.1 in Current Report on Form 8-K of Executive TeleCard, Ltd.
dated March 1, 1999).
3.1 Restated Certificate of Incorporation as amended July 26, 1996 and
August 29, 1996 (Incorporated by reference to Exhibit 3.1 in Quarterly
Report on Form 10-Q of Executive TeleCard, Ltd. for period ended
September 30, 1996).
3.2 Certificate of Correction to Certificate of Amendment to the Restated
Certificate of Incorporation dated July 31, 1998 (Incorporated by
reference to Exhibit 3 in Quarterly Report on Form 10-Q of Executive
TeleCard, Ltd. for period ended June 30, 1998).
3.3 Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.4
in Annual Report on Form 10-K of Executive TeleCard, Ltd. for the
fiscal year ended March 31, 1998).
3.4 Amendment to Bylaws.
4.1 Rights Agreement dated as of February 18, 1997 between Executive
TeleCard, Ltd. and American Stock Transfer & Trust Company, which
includes the form of Certificate of Designations setting forth the
terms of the Series A Participating Preference Stock of Executive
TeleCard, Ltd. as Exhibit A, the form of right certificate as Exhibit
B and the Summary of Rights to Purchase Preference Shares as Exhibit C
(Incorporated by reference to Exhibit 1 in Registration Statement on
Form 8-A of Executive TeleCard, Ltd. dated February 26, 1997).
4.2 Form of Letter from the Board of Directors of Executive TeleCard, Ltd.
to Stockholders mailed with copies of the Summary of Rights
(Incorporated by reference to Exhibit 2 in Registration Statement on
Form 8-A of Executive TeleCard, Ltd. dated February 26, 1997).
76
<PAGE>
4.3 Certificate of Designations, Rights and Preferences of Series B
Convertible Preferred Stock of Executive TeleCard, Ltd. (Incorporated
by reference to Exhibit 4.1 in Current Report on Form 8-K of Executive
TeleCard, Ltd. dated December 17, 1998).
4.4 Form of Warrant by and between Executive TeleCard, Ltd. and each of
the stockholders of IDX International, Inc. (Incorporated by reference
to Exhibit 4.2 in Current Report on Form 8-K of Executive TeleCard,
Ltd. dated June 24, 1998).
4.5 Forms of Convertible Subordinated Promissory Notes payable to the
stockholders of IDX International, Inc. in the aggregate principal
amount of $5,000,000 (Incorporated by reference to Exhibit 4.3 in
Current Report on Form 8-K of Executive TeleCard, Ltd. dated December
17, 1998).
4.6 Form of Convertible Subordinated Promissory Note payable to the
preferred stockholders of IDX International, Inc. in the aggregate
principal amount of $418,024 (Incorporated by reference to Exhibit 4.4
in Current Report on Form 8-K of Executive TeleCard, Ltd. dated
December 17, 1998).
4.7 Forms of Promissory Notes payable to United Communications
International LLC in the aggregate principal amount of $2,025,000.
4.8 Forms of Warrant to purchase shares of common stock of Executive
TeleCard, Ltd.
4.9 Certificate of Designations, Rights and Preferences of 8% Series C
Cumulative Convertible Preferred Stock of Executive TeleCard, Ltd.
4.10 Certificate of Designations, Rights and Preferences of 8% Series D
Cumulative Convertible Preferred Stock of Executive TeleCard, Ltd. and
Certificate of Correction of Series D Preferred Stock Certificate of
Designations.
4.11 Certificate of Designations, Rights and Preferences of 8% Series E
Cumulative Convertible Redeemable Preferred Stock of Executive
TeleCard, Ltd.
4.12 Certificate of Designations, Rights and Preferences of Series F
Convertible Preferred Stock of Executive TeleCard, Ltd. (Incorporated
by reference to Exhibit 4.1 in Current Report on Form 8-K of Executive
TeleCard, Ltd. dated March 1, 1999).
4.13 Compensation Agreement dated September 2, 1998 between Executive
TeleCard, Ltd., C-Soft Acquisition Corp. and Brookshire Securities
Corp., providing a warrant to purchase 2,500 shares of common stock of
Executive TeleCard, Ltd.
4.14 Agreement dated June 18, 1998 by and between Executive TeleCard, Ltd.
and Seymour Gordon.
77
<PAGE>
4.15 Promissory Note in the original principal amount of $1,000,000 dated
June 18, 1998 between Executive TeleCard, Ltd. and Seymour Gordon.
4.16 Warrant to purchase 500,000 shares of common stock of Executive
TeleCard, Ltd. dated February 23, 1998 issued to IDT Corporation
(Incorporated by reference to Exhibit 10.15 in Annual Report on Form
10-K of Executive TeleCard, Ltd. for the fiscal year ended March 31,
1998).
4.17 Promissory Note of C-Soft Acquisition Corp., as maker, and Executive
TeleCard, Ltd., as guarantor, payable to Dr. J. Soni in the original
principal amount of $250,000 dated September 1, 1998, providing a
warrant to purchase 25,000 shares of common stock of Executive
TeleCard, Ltd.
4.18 Form of Warrant to purchase 1,500,000 shares of common stock of
Executive TeleCard, Ltd. issued to EXTL Investors LLC.
10.1 Agreement between Executive TeleCard S.A. (Switzerland) and Telstra
Corporation Limited (Australia) for Enhancement of Telecom Australia
Calling Card dated August 3, 1993 (Incorporated by reference to
Exhibit 10.12 in Form 10-K of Executive TeleCard, Ltd. for the fiscal
year ended March 31, 1996). This Agreement is subject to a grant of
confidential treatment filed separately with the U.S. Securities and
Exchange Commission.
10.2 Promissory Note and Stock Option Agreement between Executive TeleCard,
Ltd. and World Wide Export, Ltd. dated February 28, 1996 (Incorporated
by reference to Exhibit 10.20 in Form 10-K of Executive TeleCard, Ltd.
for the fiscal year ended March 31, 1996).
10.3 Promissory Note and Stock Option Agreement between Executive TeleCard,
Ltd. and Seymour Gordon dated February 28, 1996 (Incorporated by
reference to Exhibit 10.21 in Form 10-K of Executive TeleCard, Ltd.
for the fiscal year ended March 31, 1996).
10.4 Promissory Note and Stock Option Agreement between Executive TeleCard,
Ltd. and Network Data Systems, Limited dated June 27, 1996
(Incorporated by reference to Exhibit 10.2 in Quarterly Report on Form
10-Q of Executive TeleCard, Ltd. for the period ended June 30, 1996).
10.5 Settlement Agreement dated April 2, 1998 between Executive TeleCard,
Ltd. and parties to In re: Executive TeleCard, Ltd. Securities
Litigation, Case No. 94 Civ. 7846 (CLB), U.S.D.C., S.D.N.Y.
(Incorporated by reference to Exhibit 10.8 in Annual Report on Form
10-K of Executive TeleCard, Ltd. for the fiscal year ended March 31,
1998).
78
<PAGE>
10.6 1995 Employee Stock Option and Appreciation Rights Plan, as amended
and restated (Incorporated by reference to Exhibit 10.9 in Annual
Report on Form 10-K of Executive TeleCard, Ltd. for the fiscal year
ended March 31, 1998).
10.7 1995 Directors Stock Option and Appreciation Rights Plan, as amended
and restated. (Incorporated by reference to Exhibit 10.10 in Annual
Report on Form 10-K of Executive TeleCard, Ltd. for the fiscal year
ended March 31, 1998).
10.8 Employment Agreement for Christopher J. Vizas dated December 5, 1997
(Incorporated by reference to Exhibit 10 in Quarterly Report on Form
10-Q of Executive TeleCard, Ltd. for the period ended December 31,
1997).
10.9 Employment Agreement for Colin Smith dated February 1, 1998
(Incorporated by reference to Exhibit 10.12 in Annual Report on Form
10-K of Executive TeleCard, Ltd. for the fiscal year ended March 31,
1998).
10.10 Employment Agreement for Hsin Yen, as Chief Executive Officer of IDX
International, Inc. dated December 2, 1998.
10.11 Promissory Note dated February 23, 1998 between Executive TeleCard,
Ltd. and IDT Corporation (Incorporated by reference to Exhibit 10.14
in Annual Report on Form 10-K of Executive TeleCard, Ltd. for the
fiscal year ended March 31, 1998).
10.12 Contract of Services, dated January 5, 1995, between Executive
TeleCard, Ltd. and Telefonos de Mexico, S.A. de C.V. (Incorporated
by reference to Exhibit 10.19 in Annual Report on Form 10-K/A of
Executive TeleCard, Ltd. for the fiscal year ended March 31, 1998).
10.13 Modification Agreement, dated as of June 17, 1996, by and between
Executive TeleCard, Ltd. and Telefonos de Mexico, S.A. de C.V.
(Incorporated by reference to Exhibit 10.20 in Annual Report on Form
10-K/A of Executive TeleCard, Ltd. for the fiscal year ended March
31, 1998).
10.14 Agreement (Facility Lease) dated December 1, 1998 between Swiftcall
Equipment and Services (USA) Inc. and Executive TeleCard, Ltd.
10.15 Form of Promissory Note payable to the former stockholders of
Telekey, Inc. in the aggregate principal amount of $150,000.
(Incorporated by reference to Exhibit 4.2 in Current Report on Form
8-K of Executive TeleCard, Ltd. dated March 1, 1999).
79
<PAGE>
10.16 Loan and Note Purchase Agreement dated April 9, 1999 between EXTL
Investors LLC, eGlobe Financing Corporation and Executive TeleCard,
Ltd.
10.17 Form of Promissory Note in the original principal amount of
$7,000,000 dated April 9, 1999 of eGlobe Financing Corporation
payable to EXTL Investors LLC.
10.18 Subscription Agreement dated April 9, 1999 between Executive
TeleCard, Ltd. and eGlobe Financing Corporation.
21 Subsidiaries of Executive TeleCard, Ltd.
23 Consent of BDO Seidman, LLP
27 Financial Data Schedule
99.1 Section 214 Authorization for Executive TeleCard, Ltd. (Incorporated
by reference to Exhibit 10.5 in Form S-1 Registration Statement of
Executive TeleCard, Ltd. (No. 33-25572)).
99.2 Assignment of Section 214 Authorization for IDX International, Inc.
80
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EXECUTIVE TELECARD, LTD.
d/b/a eGlobe, Inc.
Dated: April 14, 1999 BY: /s/ Anne E. Haas
-----------------------------------
Anne E. Haas
Vice President, Controller and Treasurer
(Principal Accounting Officer)
Pursuant to the requirement of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in
capacities and on the dates indicated.
Dated: April 14, 1999 BY: /s/ Christopher J. Vizas
--------------------------------
Christopher J. Vizas
Chairman of the Board of Directors, and Chief
Executive Officer (Principal Executive Officer)
Dated: April 14, 1999 BY: /s/ Anthony Balinger
--------------------------------
Anthony Balinger,
Vice Chairman and Director
Dated: April 14, 1999 BY: /s/ Richard Chiang
--------------------------------
Richard Chiang, Director
Dated: April 14, 1999 BY: /s/ Edward J. Gerrity
--------------------------------
Edward J. Gerrity, Director
Dated: April 14, 1999 BY: /s/ James O. Howard
--------------------------------
James O. Howard, Director
Dated: April 14, 1999 BY: /s/ John E. Koonce
--------------------------------
John E. Koonce,
Director and Chief Financial Officer
Dated: April 14, 1999 BY: /s/ Richard A. Krinsley
--------------------------------
Richard A. Krinsley, Director
81
<PAGE>
Signatures Continued
Dated: April 14, 1999 BY: /s/ Martin L. Samuels
--------------------------------
Martin L. Samuels, Director
Dated: April 14, 1999 BY: /s/ Donald H. Sledge
--------------------------------
Donald H. Sledge, Director
Dated: April 14, 1999 BY: /s/ David W. Warnes
--------------------------------
David W. Warnes, Director
Dated: April 14, 1999 BY: /s/ Hsin Yen
--------------------------------
Hsin Yen, Director
82
<PAGE>
GLOSSARY
"ATM" shall mean a commercialized switching and transmission technology
that is one of a general class of packet technologies that relay traffic by way
of an address contained within the first five bits of a standard fifty-three
bit-long packet or cell. ATM-based packet transport was specifically developed
to allow switching and transmission of mixed voice, data and video (sometimes
referred to as "multi-media" information) at varying rates. The ATM format can
be used by many different networks, including LANs.
"Bit" shall mean the smallest unit in data communications.
"Calling Card Platforms" shall mean interactive call processing platforms
from which the Company runs its proprietary routing, application and data access
software.
"Carriers" shall mean providers of telecommunications services locally or
between local exchanges on a interstate or intrastate basis.
"Data packets" shall mean blocks of information being sent or received over
a network.
"800 Services" shall mean toll free services to the person making the call.
The call is billed to the recipient.
83
<PAGE>
"FCC" shall mean Federal Communications Commission.
"Frame relay" shall mean a high speed, data packet switching service used
to transmit digital information, including, but not limited to voice and data
between Frame Relay Access Devices (FRADs). Frame relay supports data units of
variable lengths at access speeds ranging from 56 kilobits per second to 1.5
megabits per second. "Gateway" shall mean the connection between otherwise
incompatible networks, such as technology necessary to translate or convert the
code and protocol used by PSTN networks for use on IP networks.
"IP" or "Internet protocol" shall mean the method of transmission of
electronic data typically utilized across the Internet
"IP fax" shall mean the ability to route fax transmission over a data
packet switched network, including the Internet.
"IP telephony" shall mean the technology and the techniques to communicate
via voice, video or image at varying speeds from real-time to time-delayed over
a data packet switched network, generally referring to the Internet.
"IP voice" shall mean the ability to route voice calls over a data packet
switched network, including the Internet.
"ISPs" or "Internet Service Providers" shall mean a vendor who provides
access for customers to the Internet and World Wide Web.
"ISDN" or "Integrated Services Digital Network" shall mean a complex
network concept designed to provide a variety of voice, data and digital
interface standards. Incorporated into ISDN are many new enhanced services, such
as high speed data file transfer, desk top video conferencing, telepublishing,
telecommuting, telepresence learning (distance learning), remote collaboration
(screened sharing), data network linking and home information services.
"Kilobit" shall mean one thousand bits of information. The information
carrying capacity of a circuit may be measured in "kilobits per second."
"Low cost routing or transmission" shall mean the use of a carrier's
facilities that, based on cost advantages are preferable to use by a carrier of
its own facilities.
"Megabit" shall mean one million bits of information. The information
carrying capacity of a circuit may be measured in "megabits per second."
"Node" shall mean an individual point of origination and termination of
data on the network transported using frame relay or similar technology.
"PIN" or "personal identification number" shall mean a code used by a
customer to complete a call with a calling card.
84
<PAGE>
"Post-paid calling card services" shall mean the service that entitles a
customer to make telephone calls by using a telephone card and be billed
subsequently for the service. The customer periodically pays for time actually
used in the same way a customer would pay for local telephone service from their
home. Mobile professionals and other high volume and repetitive users often use
these services because the amount of telephone calling time is not limited.
"Prepaid calling card services" shall mean the service that entitles a
customer to purchase in advance a specified amount of telephone calling time.
Generally companies sell prepaid telephone cards in many denominations up to $50
and the value of the card decreases as the customer makes calls.
"PSTN" or "Public Switched Telephone Network" shall mean the world wide
voice telephone network available to anyone with a telephone and access
privileges.
"PTTs" or "Postal, Telegraph and Telephone Authorities" shall mean the
telephone and telecommunication providers in most foreign countries which are
usually controlled by their governments.
"Remote office services" shall mean technology which enables access from
personal computers or telephones to a corporate LAN to enable a mobile
professional to access voice, electronic mail and fax messages from outside
their office.
"Switch" shall mean a device that opens or closes circuits or selects the
paths or circuits to be used for transmission of information. Switching is a
process of interconnecting circuits to form a transmission path between users.
"Unified messaging" shall mean a platform which provides a single source
access to voice, electronic mail and fax messages.
"World Direct" shall mean the network over which the Company originates
voice traffic in 88 countries and territories and terminates traffic anywhere in
the world.
85
EXHIBIT 2.4
-----------
AGREEMENT AND PLAN OF ACQUISITION
THIS AGREEMENT AND PLAN OF ACQUISITION (this "Agreement") is entered
into this 30TH day of September, 1998, by and among Executive Telecard, Ltd.
d/b/a eGlobe, Inc., a Delaware corporation ("Acquiror"), UCI Tele Networks,
Ltd., a corporation established under the laws of the Republic of Cyprus
("UCI"), and United Communications International LLC, a Wyoming limited
liability company ("UCI Sole Shareholder").
WHEREAS, the parties hereto wish to provide that, upon the terms and
subject to the conditions of this Agreement, Acquiror will acquire all issued
and outstanding shares of UCI from UCI Sole Shareholder.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties hereto agree as follows:
ARTICLE I.
THE ACQUISITION
SECTION 1.1. THE ACQUISITION.
Upon the terms and subject to the conditions set forth in this
Agreement, on the Closing Date (as defined in Section 1.2) Acquiror shall
acquire all of the common stock issued and outstanding of UCI (the
"Acquisition") from UCI Sole Shareholder.
SECTION 1.2. CLOSING DATE.
At the Closing (as defined in Section 1.3), the parties hereto shall
cause the Acquisition to be consummated in accordance with the provisions of
this Agreement and applicable law. Such date is referred to herein as the
"Closing Date."
SECTION 1.3. CLOSING.
Subject to the terms and conditions of this Agreement, the closing of
the Acquisition (the "Closing") will take place as promptly as practicable after
satisfaction of the latest to occur or, if permissible, waiver of the conditions
set forth in Article IX hereof (the "Closing Date"), at the offices of Acquiror,
1720 S. Bellaire
<PAGE>
Street, Denver, CO 80222, unless another date or place is agreed to in writing
by the parties hereto.
ARTICLE II.
PURCHASE PRICE
SECTION 2.1. PURCHASE PRICE.
At the Closing Date, all of the shares of UCI Common Stock shall be
purchased by Acquiror for the following purchase price:
(a) Purchase Price. Subject to the adjustments set forth in Section
2.1(b), all of the shares of common stock, par value one Cyprus pound per share,
of UCI ("Company Common Stock") owned by UCI Sole Shareholder shall be purchased
by Acquiror for (i) 125,000 shares of common stock of Acquiror ("Acquiror Common
Stock"), plus (ii) the amount of U.S. TWO MILLION ONE HUNDRED THOUSAND DOLLARS
($2,100,000) payable as follows and subject to the adjustments as set forth
below (the "Purchase Price"). The $2,100,000 portion of the Purchase Price shall
be paid as follows:
(i) U.S.$75,000 will be payable on the Closing Date.
(ii) U.S.$500,000 shall be paid in the form of a note ("Purchase
Note") with interest to accrue at the rate of 8% per annum, which
Purchase Note shall be due and payable on any date that is no
later than 180 days following the Closing Date. UCI shall receive
on the Closing Date as additional consideration Warrants
("Warrants") to purchase 50,000 shares of Acquiror Common Stock,
with an exercise price equal to the closing sales price of a
share of Acquiror Common Stock as reported on NASDAQ NMS at the
close of business on the Closing Date. In the event that Acquiror
defaults on the Purchase Note, Acquiror shall pay off the
Purchase Note with Acquiror Common Stock, the number of shares of
Acquiror Common Stock to be issued upon such default to be
determined by dividing (x) the amount of unpaid principal and
interest on the Purchase Note on the date of default by (y) the
closing sales price of Acquiror Common Stock as reported on
NASDAQ NMS on the date of default. The shares of Acquiror Common
stock issuable upon such default shall be in addition to the
Warrants and shall not be subject to the trading restrictions set
forth in Section 2.1(b)(i) of this Agreement. In the event that
Acquiror defaults on the Purchase Note and Acquiror's closing
stock price as quoted on the NASDAQ NMS on the date of default is
below
-2-
<PAGE>
$1.00 per share on the day of default, then UCI Sole Shareholder
shall be entitled to either (i) a number of shares of Acquiror
Common Stock determined in the manner set forth in the preceding
sentence or (ii) the return of the UCI shares purchased
hereunder. The Purchase Note will serve as security and as an
escrow account for the payment of any items referenced as
covenants, conditions, warranties and indemnifications set forth
herein by UCI and UCI Sole Shareholder.
(iii)U.S.$500,000 shall be paid in the form of a note ("Escrow Note")
with interest to accrue at the rate of 8% per annum, which Escrow
Note together with accrued interest shall be due and payable on
the date that is 18 months following the Closing Date. The Escrow
Note will serve as security and as an escrow account for the
payment of any items referenced as covenants, conditions,
warranties and indemnifications set forth herein, commencing 181
days after the Closing Date.
(iv) U.S.$1,025,000 ("Anniversary Payment"), shall be paid on the
first anniversary of the Closing Date or December 1, 1999 (such
date being referred to as the "Adjustment Date"), whichever is
later shall be adjusted as set forth below. On the Closing Date,
Acquiror shall issue a note ("Anniversary Payment Note") to UCI
Sole Shareholder evidencing its obligation to make the
Anniversary Payment. There shall be no interest payable under
this Note.
(v) Interest on the two U.S.$500,000 notes (parts (ii) and (iii)
above) shall be paid monthly.
(b) Delivery of 125,000 Shares of Acquiror Common Stock. The Purchase
Price shall be subject to the following adjustments:
(i) The UCI Sole Shareholder shall receive 50% of the shares of
Acquiror Common Stock (62,500) on the Closing Date and 50% of the shares of
Acquiror Common Stock (62,500) 12 months after the Closing Date. Acquiror shall
register all stock transferred to UCI Sole Shareholder under this Agreement by
promptly filing an S-3 Registration Statement with the Securities and Exchange
Commission covering all shares and shares issuable upon exercise of the Warrants
under this Agreement. UCI Sole Shareholder and its owners, officers or nominees
agree not to trade more than 10,000 shares of Acquiror Common Stock in any one
calendar month, provided, however, that any unsold shares below the 10,000 per
calendar month shall cumulate and be saleable in later months. The provisions of
this paragraph not withstanding, trading on any one day shall not exceed 10,000
shares.
-3-
<PAGE>
(c) Adjustment to Purchase Price.
(i) In the event that the closing sales price on NASDAQ NMS of
the Acquiror Common Stock on the Adjustment Date is less than $8.00, on the
Adjustment Date Acquiror shall issue to UCI Sole Shareholder additional shares
of Acquiror Common Stock (in addition to the 125,000 shares of Acquiror Common
Stock) determined by subtracting (x) $1,000,000 divided by the closing sales
price on NASDAQ NMS of the Acquiror Common Stock on the Adjustment Date, from
(y) 125,000.
(ii) In the event that UCI does not achieve 100% of its projected
revenue of U.S.$3,000,000 (THREE MILLION U.S. DOLLARS) for the 12 month period
ending on the Adjustment Date, the number of shares of Acquiror Common Stock
issuable to UCI Sole Shareholder and the payment of the Anniversary Payment of
the Purchase Price payable on the Adjustment Date shall be adjusted so that
Acquiror shall pay less cash and shall issue fewer shares of Acquiror Common
Stock as an adjustment to the Purchase Price (the "Projection Adjustment"). For
each 10% by which the projected revenue is less than 100% of the $3,000,000
amount to be achieved, there shall be a 10% reduction both in 1) the Anniversary
Payment, and 2) the number of shares of Acquiror Common Stock issuable to UCI
Sole Shareholder pursuant to Section 2.1(c)(i) of this Agreement; provided,
however, the reduction in the number of shares of Acquiror Common Stock pursuant
to (2) above shall be determined by multiplying (x) the percentage by which
projected revenue for the 12 months ending on the Adjustment Date is less than
$3,000,000 by (y) the number of shares of Acquiror Common Stock issuable to UCI
Sole Shareholder according to the formula set forth above in Section 2.1(c)(i).
The parties agree that Acquiror, in its sole discretion, may reject or accept
proposed business based on commercial feasibility and that neither UCI nor UCI
Sole Shareholder shall make any claim that declined business be included in the
revenue calculation on the Adjustment Date.
(iii) In the event that UCI achieves more than 100% of its
projected revenue of $3,000,000 for the 12 month period ending on the Adjustment
Date, the payment of the Anniversary Payment payable on the Adjustment Date
shall be adjusted so that Acquiror shall pay more cash as an adjustment to the
Purchase Price. For each 10% by which projected revenue exceeds 100% of the
$3,000,000 to be achieved, there shall be a 10% increase in the Anniversary
Payment of the Purchase Price payable on the Adjustment Date; provided, however,
such additional cash payment shall not exceed $300,000.00.
(iv) For purposes of the Projection Adjustment, if any, projected
revenue includes only business that is actually recorded as revenue and is
likely to be collected by UCI. Noting that adjustments are based on revenue
alone, Acquiror in its sole discretion may decline business that does not meet
projected margin targets or is commercially unreasonable for UCI or Acquiror.
(v) Acquiror shall pay to UCI U.S.$20,000 per month as a working
capital contribution. Such payments shall be made on the first day of each month
following the execution of this Agreement and shall be retroactive to
-4-
<PAGE>
September 1, 1998 and shall be paid each month for six months until the Purchase
Note is paid. Amounts paid under this subsection will not be deducted from the
purchase price.
(vi) In the event that Acquiror consummates its private placement
financing, the following shall apply: (a) if Acquiror receives a gross amount of
U.S.$10 million to U.S.$19,999,999 in such private placement, Acquiror shall
repay on the closing date of the private placement financing fifty percent (50%)
of outstanding principal and interest on the Purchase Note; and (b) if Acquiror
receives a gross amount of U.S.$20 million in such private placement, Acquiror
shall repay on the closing date of the private placement financing one hundred
percent (100%) of outstanding principal and interest on the Purchase Note.
SECTION 2.2. EXCHANGE OF CERTIFICATES AND NOTES.
At the Closing, UCI shall deliver to Acquiror certificates evidencing
all of the outstanding shares of Company Common Stock as of the Closing Date
duly endorsed in blank or with duly executed stock powers attached. In exchange
therefor, Acquiror shall deliver to UCI Sole Shareholder at Closing a
certificate evidencing the whole shares of Acquiror Common Stock issuable
pursuant to Section 2.1(a), any cash payments to be paid to UCI Sole Shareholder
pursuant to Article II, and the Purchase Note, the Escrow Note and the
Anniversary Payment Note.
SECTION 2.3. STOCK TRANSFER BOOKS.
At the Closing Date, the stock transfer books of UCI with respect to
all shares of capital stock of UCI shall be closed and no further registration
of transfers of such shares of capital stock shall thereafter be made on the
records of UCI.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF UCI
AND UCI SOLE SHAREHOLDER
UCI and UCI Sole Shareholder hereby jointly and severally represent
and warrant to Acquiror as follows:
SECTION 3.1. ORGANIZATION AND QUALIFICATION.
UCI is a corporation duly organized, validly existing and in good
standing under the laws of Cyprus. UCI has the requisite power and authority to
own, operate, lease and otherwise to hold and operate its assets and properties
and to carry on its business as now being conducted and as proposed to be
conducted
-5-
<PAGE>
and to perform the terms of this Agreement and the transactions contemplated
hereby. UCI is duly qualified to conduct its business, and is in good standing,
in each jurisdiction in which the character of its properties owned, operated or
leased or the nature of its activities makes such qualification necessary. UCI
has no subsidiaries or any equity interest or other investment in any person.
SECTION 3.2. MEMORANDUM AND ARTICLES OF ASSOCIATION.
UCI has heretofore delivered to Acquiror a complete and correct copy
of the memorandum of association and articles of association of UCI, each as
amended to date. Such memorandum of association and articles of association are
in full force and effect. UCI is not in violation of any of the provisions of
its memorandum and articles of association.
SECTION 3.3. CAPITALIZATION.
(a) The authorized capital stock of UCI consists of fifty thousand
(50,000) shares of Company Common Stock, (50,000 Cyprus pounds or 1 pound each)
of which fifty thousand (50,000) shares are issued and outstanding. All of the
issued and outstanding shares of Company Common Stock are owned beneficially and
of record by UCI Sole Shareholder, free and clear of all Encumbrances, except
that, as required by Cyprus law, one share is registered in the name of a
nominee. There are no options, warrants or other rights, agreements,
arrangements or commitments of any character relating to the issued or unissued
capital stock of UCI or obligating UCI to issue or sell any shares of capital
stock of, or other equity interests in UCI, including any securities directly or
indirectly convertible into or exercisable or exchangeable for any capital stock
or other equity securities of UCI. There are no outstanding obligations of UCI
to repurchase, redeem or otherwise acquire any shares of its capital stock or
make any investment (in the form of a loan, capital contribution or otherwise)
in any other person. All of the issued and outstanding shares of Company Common
Stock have been duly authorized and validly issued in accordance with applicable
laws and are fully paid and nonassessable and not subject to preemptive rights.
No shares of capital stock of UCI have been reserved for any purpose.
(b) UCI has no outstanding indebtedness for borrowed money, except for
operating expenses incurred in the ordinary course of business.
SECTION 3.4. AUTHORITY.
Except for UCI Stockholder Approval (as defined in Section 3.21), the
execution and delivery of this Agreement by UCI and the consummation by UCI of
the transactions contemplated hereby have been duly and validly authorized by
all necessary corporate action and no other corporate proceedings on the part of
UCI
-6-
<PAGE>
are necessary to authorize this Agreement or to consummate the transactions
contemplated hereby. This Agreement has been duly executed and delivered by UCI
and constitutes a legal, valid and binding obligation of UCI, enforceable in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium and other similar laws of
general applicability relating to or affecting creditors' rights generally and
by the application of general principles of equity.
SECTION 3.5. NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) Except as set forth in Schedule 3.5, the execution and delivery of
this Agreement by UCI do not, and the performance by UCI of its obligations
under this Agreement will not, (i) conflict with or violate the memorandum and
articles of association of UCI, (ii) conflict with or violate any Law applicable
to UCI or the Assets, or (iii) result in any breach of or constitute a default
(or an event which with notice or lapse of time or both would become a default)
under any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which UCI is a party or
by which UCI is bound or by which any of the Assets is subject.
(b) Except as set forth in Schedule 3.5, the execution and delivery of
this Agreement by UCI does not, and the performance of this Agreement by UCI
will not, require any consent, approval, authorization or permit of, or filing
with or notification to, any Government Entity.
SECTION 3.6. FINANCIAL STATEMENTS.
UCI has prepared the financial statements attached hereto as Schedule
3.6. UCI has no liabilities, contingent or absolute, matured or unmatured, known
or unknown, except for liabilities incurred in the ordinary course of business,
and those liabilities described on Schedule 3.6. These liabilities, if any,
would not have a Company Material Adverse Effect.
SECTION 3.7. ACCOUNTS RECEIVABLE.
The accounts receivable of UCI shown on Schedule 3.6, if any, or
thereafter acquired by UCI, have been collected or are collectible in amounts
not less than the amounts thereof carried on the books of UCI.
SECTION 3.8. ABSENCE OF CERTAIN CHANGES OR EVENTS.
Since July 28, 1998 (the "Letter of Intent Date"), there has been no
Company Material Adverse Effect. Since the Letter of Intent Date, UCI has
conducted its business in the ordinary course, and UCI has not (a) paid any
dividend or distribution in respect of, or redeemed or repurchased any of, its
capital
-7-
<PAGE>
stock; (b) incurred loss of, or significant injury to, any of the Assets,
whether as the result of any natural disaster, labor trouble, accident, other
casualty, or otherwise; (c) incurred, or become subject to, any obligation or
liability (absolute or contingent, matured or unmatured, known or unknown),
except current liabilities incurred in the ordinary course of business; (d)
mortgaged, pledged or subjected to any Encumbrance any of the Assets; (e) sold,
exchanged, transferred or otherwise disposed of any of the Assets except in the
ordinary course of business, or canceled any debts or claims; (f) written down
the value of any Assets or written off as uncollectible any Accounts Receivable,
except write downs and write-offs in the ordinary course of business, none of
which, individually or in the aggregate, are material; (g) entered into any
transactions other than in the ordinary course of business; (h) made any change
in any method of accounting or accounting practice; or (i) made any agreement to
do any of the foregoing.
SECTION 3.9. OWNERSHIP AND CONDITION OF THE ASSETS.
(a) UCI is the sole and exclusive legal and equitable owner of and has
good and marketable title to the Assets and, except as set forth in Schedule
3.9(a), such Assets are free and clear of all Encumbrances. No person or
Government Entity has an option to purchase, right of first refusal or other
similar right with respect to all or any part of the Assets. All of the personal
property of UCI is in good working order and repair, ordinary wear and tear
excepted, and is suitable and adequate for the uses for which it is intended or
is being used.
(b) UCI represents and warrants that it owns no hardware, computer
software, and other technology (collectively, the "Company Technology").
SECTION 3.10. LEASES.
Schedule 3.10 lists and briefly describes all leases and other
agreements under which UCI is lessee or lessor of any Asset, or holds, manages
or operates any Asset owned by any third party, or under which any Asset owned
by UCI is held, operated or managed by a third party. UCI is the owner and
holder of all leasehold estates purported to be granted to UCI by the leases
described in Schedule 3.10 and UCI is the owner of all equipment, machinery and
other Assets thereon or in buildings and structures thereon, in each case free
and clear of all Encumbrances. Each such lease and other agreement is in full
force and effect and constitutes a legal, valid and binding obligation of, and
is legally enforceable against, the respective parties thereto and grants the
leasehold estate it purports to grant free and clear of all Encumbrances. All
necessary governmental approvals with respect thereto have been obtained, all
necessary filings or registrations therefor have been made, and there have been
no threatened cancellations thereof and are no outstanding disputes thereunder.
UCI has performed in all material respects all obligations thereunder required
to be performed by UCI to date. No party is in default in any material respect
under any of the foregoing, and there has
-8-
<PAGE>
not occurred any event which (whether with or without notice, lapse of time or
the happening or occurrence of any other event) would constitute such a default.
SECTION 3.11. OTHER AGREEMENTS.
Schedule 3.11 lists all agreements to which UCI is a party or by which
UCI is bound, and UCI has delivered to Acquiror true and correct copies of all
such agreements. Each such agreement is in full force and effect and constitutes
a legal, valid and binding obligation of, and is legally enforceable against,
the respective parties thereto. All necessary governmental approvals with
respect thereto have been obtained, all necessary filings or registrations
therefor have been made, and there have been no threatened cancellations thereof
and are no outstanding disputes thereunder. UCI has in all material respects
performed all the obligations thereunder required to be performed by UCI to
date. No party is in default in any material respect under any of the agreements
described in Schedule 3.11, and there has not occurred any event which (whether
with or without notice, lapse of time or the happening or occurrence of any
other event) would constitute such a default.
SECTION 3.12. REAL PROPERTY.
Schedule 3.12 contains a list and brief description of all leasehold
interests in real estate, easements, rights to access, rights-of-way and other
real property interests which are owned, leased, used or held for use by UCI
(collectively, the "Real Property"). The Real Property described in Schedule
3.12 constitutes all real property interests necessary to conduct the business
and operations of UCI as now conducted. UCI is not aware of any easement or
other real property interest, other than those described in Schedule 3.12, that
is required, or that has been asserted by a Government Entity or other person to
be required, to conduct the business and operations of UCI. UCI has delivered to
Acquiror true and complete copies of all deeds, leases, easements, rights-of-way
and other instruments pertaining to the Real Property (including any and all
amendments and other modifications of such instruments). All Real Property
(including the improvements thereon) (i) is in good condition and repair
consistent with its present use, (ii) is available to UCI for immediate use in
the conduct of UCI's business and operations, and (iii) complies in all material
respects with all applicable building or zoning codes and the regulations of any
Government Entity having jurisdiction.
SECTION 3.13. ENVIRONMENTAL MATTERS.
(a) UCI represents and warrants that it has no physical plant or other
fixed assets, owned or leased, and has conducted no activities that would entail
compliance or non-compliance with any Environmental Laws (as defined below).
There are no pending or, to the knowledge of UCI or UCI Sole Shareholder,
threatened actions, suits, claims, legal proceedings or other proceedings based
on, and UCI has not directly or indirectly received any notice of any complaint,
order,
-9-
<PAGE>
directive, citation, notice of responsibility, notice of potential
responsibility, or information request from any Government Entity or any other
person arising out of or attributable to: (i) the current or past presence at
any part of the Real Property of Hazardous Materials (as defined below) or any
substances that pose a hazard to human health or an impediment to working
conditions; (ii) the current or past release or threatened release into the
environment from the Real Property (including, without limitation, into any
storm drain, sewer, septic system or publicly owned treatment works) of any
Hazardous Materials or any substances that pose a hazard to human health or an
impediment to working conditions; (iii) the off-site disposal of Hazardous
Materials originating on or from the Real Property; (iv) any facility operations
or procedures of UCI which do not conform to requirements of the Environmental
Laws; or (v) any violation of Environmental Laws at any part of the Real
Property or otherwise arising from UCI's activities involving Hazardous
Materials.
(b) As used herein, these terms shall have the following meanings:
(i) "Environmental Laws" means all applicable foreign, federal,
state and local laws (including the common law), rules, requirements and
regulations relating to pollution, the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or subsurface
strata) or protection of human health as it relates to the environment
including, without limitation, laws and regulations relating to releases of
Hazardous Materials, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials or relating to management of asbestos in buildings.
(ii) "Hazardous Materials" means wastes, substances, or materials
(whether solids, liquids or gases) that are deemed hazardous, toxic, pollutants,
or contaminants, including without limitation, substances defined as "hazardous
substances", "toxic substances", "radioactive materials", or other similar
designations in, or otherwise subject to regulation under, any Environmental
Laws.
SECTION 3.14. LITIGATION.
There is no action, suit, investigation, claim, arbitration or
litigation pending or, to the knowledge of UCI and UCI Sole Shareholder,
threatened against or involving UCI, the Assets or the business and operations
of UCI, at law or in equity, or before or by any court, arbitrator or Government
Entity. UCI is not operating under or subject to any judgment, writ, order,
injunction, award or decree of any court, judge, justice or magistrate,
including any bankruptcy court or judge, or any order of or by any Government
Entity.
SECTION 3.15. COMPLIANCE WITH LAWS; LICENSES AND PERMITS.
UCI has complied and is in compliance with all laws, ordinances,
regulations, awards, orders, judgments, decrees and injunctions applicable to
UCI,
-10-
<PAGE>
the Assets and UCI's business and operations, including all federal, state and
local laws, ordinances, regulations and orders pertaining to employment or
labor, safety, health, environmental protection, zoning and other matters. UCI
has obtained and holds all permits, licenses and approvals (none of which has
been modified or rescinded and all of which are in full force and effect) from
all governmental authorities necessary to conduct the business and operations of
UCI as now conducted and as proposed to be conducted and to own, use and
maintain the Assets.
SECTION 3.16. INTELLECTUAL PROPERTY.
(a) UCI owns, or is licensed or otherwise possesses all necessary
rights to use all patents, trademarks, trade names, service marks, copyrights
and any applications therefor, maskworks, net lists, schematics, technology,
know-how, trade secrets, inventory, ideas, algorithms, processes, computer
software programs and applications (in both source code and object code form),
and tangible or intangible proprietary information or material ("Intellectual
Property") that are used or marketed in the business of UCI as presently
conducted and as proposed to be conducted or included or proposed to be included
in UCI's products or proposed products.
(b) Schedule 3.16 lists all (i) patents, registered and unregistered
trademarks, trade names and service marks, registered and unregistered
copyrights, and maskworks, included in the Intellectual Property, including the
jurisdictions in which each such Intellectual Property right has been issued or
registered or in which any application for such issuance and registration has
been filed, (ii) licenses, sublicenses and other agreements as to which UCI is a
party and pursuant to which any person is authorized to use any Intellectual
Property, and (iii) licenses, sublicenses and other agreements as to which UCI
is a party and pursuant to which UCI is authorized to use any third party
patents, trademarks or copyrights, including software ("Third Party Intellectual
Property Rights") which are incorporated in, are or form a part of any UCI
product.
(c) To the knowledge of UCI, there is no unauthorized use, disclosure,
infringement or misappropriation of any Intellectual Property rights of UCI, any
trade secret material to UCI, or any Intellectual Property right of any third
party to the extent licensed by or through UCI, by any third party, including
any employee or former employee of UCI. Except as set forth in Schedule 3.16,
UCI has not entered into any agreement to indemnify any other person against any
charge of infringement of any Intellectual Property. Except as set forth in
Schedule 3.16, there are no royalties, fees or other payments payable by UCI to
any person by reason of the ownership, use, sale or disposition of Intellectual
Property.
(d) UCI is not, nor will it be as a result of the execution and
delivery of this Agreement or the performance of it obligations under this
Agreement, in breach of any license, sublicense or other agreement relating to
the Intellectual Property or Third Party Intellectual Property Rights.
-11-
<PAGE>
(e) UCI (i) has not been served with process, and is not aware that
any person is intending to serve process on UCI, in any suit, action or
proceeding which involves a claim of infringement of any patents, trademarks,
service marks, copyrights or violation of any trade secret or other proprietary
right of any third party and (ii) has not brought any action, suit or proceeding
for infringement of Intellectual Property or breach of any license or agreement
involving Intellectual Property against any third party. The business of UCI as
presently conducted and as proposed to be conducted, and UCI's products or
proposed products do not infringe any patent, trademark, service mark,
copyright, trade secret or other propriety right of any third party.
SECTION 3.17. TAXES AND ASSESSMENTS.
UCI has (i) duly and timely paid all Taxes (as defined below) which
have become due and payable by it; (ii) UCI has received no notice of, nor does
UCI have any knowledge of, any notice of deficiency or assessment or proposed
deficiency or assessment from any taxing Government Entity; and (iii) to UCI's
knowledge, there are no audits pending and there are no outstanding agreements
or waivers by UCI that extend the statutory period of limitations applicable to
any federal, state, local, or foreign tax returns or Taxes. As used herein, the
term "Taxes" shall mean all federal, state, local and foreign taxes (including,
without limitation, income, profit, franchise, sales, use, VAT, real property,
personal property, ad valorem, excise, employment, social security and wage
withholding taxes) and installments of estimated taxes, assessments,
deficiencies, levies, imports, duties, license fees, registration, fees,
withholdings or other similar charges of every kind, character or description
imposed by any governmental authorities, and any interest, penalties or
additions to tax imposed thereon or in connection therewith.
SECTION 3.18. EMPLOYMENT MATTERS.
(a) UCI does not have any Employee Benefit Plan.
(b) There are no collective bargaining agreements applicable to any
UCI employees and UCI has no duty to bargain with any labor organization with
respect to any such persons. There is not pending any demand for recognition or
any other request or demand from a labor organization for representative status
with respect to any persons employed by UCI.
(c) UCI has no employees.
SECTION 3.19. TRANSACTIONS WITH RELATED PARTIES.
Except as set forth in Schedule 3.19, neither any present or former
officer, director, stockholder or person known by UCI or UCI Sole Shareholder to
be an affiliate of UCI, nor any person known by UCI or UCI Sole Shareholder to
be an
-12-
<PAGE>
affiliate of any such person, is currently a party to any transaction or
agreement with UCI, including, without limitation, any agreement providing for
the employment of, furnishing of services by, rental of Assets from or to, or
otherwise requiring payments to, any such officer, director, stockholder or
affiliate.
SECTION 3.20. INSURANCE.
UCI represents and warrants that it has no insurance policies in force
and effect.
SECTION 3.21. VOTING REQUIREMENTS.
UCI Sole Shareholder owns all of the issued and outstanding capital
stock of UCI. The affirmative vote of the UCI Sole Shareholder (the "Company
Stockholder Approval") is the only vote of the holders of any class or series of
UCI's capital stock necessary to approve and adopt this Agreement and the
transactions contemplated hereby, including the Acquisition.
SECTION 3.22. BROKERS.
Except as set forth on Schedule 3.23, no broker, finder or investment
banker is entitled to any brokerage, finder's or other fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of UCI or UCI Sole Shareholder.
SECTION 3.23. DISCLOSURE.
No representations or warranties by UCI or UCI Sole Shareholder in
this Agreement and no statement or information contained in the Schedules hereto
or any certificate furnished or to be furnished by UCI or UCI Sole Shareholder
to Acquiror pursuant to the provisions of this Agreement (taken collectively),
contains or will contain any untrue statement of a material fact or omits or
will omit to state any material fact necessary, in light of the circumstances
under which it was made, in order to make the statements herein or therein not
misleading.
-13-
<PAGE>
ARTICLE IV
ADDITIONAL REPRESENTATIONS AND WARRANTIES
OF UCI SOLE SHAREHOLDER AND UCI
SECTION 4.1. TITLE TO COMPANY COMMON STOCK.
The UCI Sole Shareholder is and as of the Closing Date will be the
sole legal, beneficial and record owner of all of the issued and outstanding
shares of capital stock of UCI.
SECTION 4.2. AUTHORITY AND CAPACITY.
UCI Sole Shareholder has full legal right, capacity, power and
authority to execute and deliver this Agreement and all other documents,
instruments, certificates and agreements executed or to be executed by it
pursuant hereto, and to consummate the transactions contemplated hereby and
thereby.
SECTION 4.3. ABSENCE OF VIOLATION.
Except as set forth on Schedule 3.5, the execution, delivery and
performance by UCI Sole Shareholder of this Agreement and all other documents,
instruments, certificates and agreements contemplated hereby to which it is a
party, the fulfillment of and the compliance with the respective terms and
provisions hereof and thereof, and the consummation of the transactions
contemplated hereby and thereby, do not and will not (a) conflict with, or
violate any provision of, any Laws having applicability to it; or (b) conflict
with, or result in any breach of, or constitute a default under, any agreement
to which it is a party.
SECTION 4.4. RESTRICTIONS AND CONSENTS.
There are no agreements, Laws or other restrictions of any kind to
which UCI Sole Shareholder is party or subject that would prevent or restrict
the execution, delivery or performance of this Agreement by it.
SECTION 4.5. BINDING OBLIGATION.
This Agreement constitutes, and each document, instrument, certificate
and agreement to be executed by UCI Sole Shareholder pursuant hereto, when
executed and delivered in accordance with the provisions hereof, shall
constitute, a valid and binding obligation of it, enforceable in accordance with
its terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and other similar laws of general
applicability relating
-14-
<PAGE>
to or affecting creditors' rights generally and by the application of general
principles of equity.
SECTION 4.6. COMPLIANCE WITH FOREIGN CORRUPT PRACTICES ACT.
UCI and UCI Sole Shareholder represent and warrant that they are not
in violation of the Foreign Corrupt Practices Act of 1977, as amended, which
prohibits businesses and businesspeople from providing any payment or gratuity
to foreign officials in exchange or obtaining or retaining business.
SECTION 4.7. CYTA CONTRACT AND ANTICIPATED CONTRACTS.
UCI and UCI Sole Shareholder represent and warrant that the UCI Sole
Shareholder's contract with CYTA is lawfully executed and duly authorized by all
necessary authorities and entities and has been assigned to UCI. UCI and UCI
Sole Shareholder represent and warrant that the ownership of UCI by Acquiror as
a result of the Acquisition shall not cause the CYTA contract to be cancelled.
Additionally UCI and UCI Sole Shareholder represent and warrant that the pending
contracts of UCI with NetFon S.A. and Amerikios Corp. and other anticipated
contracts are and shall be duly authorized and executed by appropriate officers
and executives of the contracting parties and will have all necessary regulatory
and governmental approvals.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ACQUIROR
Acquiror represents and warrants to UCI and UCI Sole Shareholder as
follows:
SECTION 5.1. ORGANIZATION AND QUALIFICATION.
Acquiror is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. Acquiror has the requisite
power and authority to own, lease and operate its assets and properties, to
carry on its business as now being conducted and to perform the terms of this
Agreement and the transactions contemplated hereby. Acquiror is duly qualified
to conduct its business, and is in good standing, in each jurisdiction where the
ownership or leasing of its properties or the nature of its activities in
connection with the conduct of its business makes such qualification necessary.
SECTION 5.2. CERTIFICATE OF INCORPORATION AND BYLAWS.
Acquiror has heretofore delivered to UCI a complete and correct copy
of the certificate of incorporation and the bylaws of Acquiror, each as amended
to date.
-15-
<PAGE>
Such certificate of incorporation and bylaws are in full force and effect.
Acquiror is not in violation of any of the provisions of its certificate of
incorporation or bylaws or other organizational or governing document.
SECTION 5.3. CAPITALIZATION.
The authorized capital stock of Acquiror consists of: (i) one hundred
million (100,000,000) shares of Acquiror Common Stock of which _______ shares
are issued and outstanding on the date of execution of this Agreement; and (ii)
five million (5,000,000) shares of preferred stock, par value $.01 per share, of
which [___] shares are issued and outstanding. Except as set forth in Schedule
5.3, there are no options, warrants or other rights, agreements, arrangements or
commitments of any character relating to the issued or unissued capital stock of
Acquiror or obligating Acquiror to issue or sell any shares of capital stock of,
or other equity interests in Acquiror, including any securities directly or
indirectly convertible into or exercisable or exchangeable for any capital stock
or other equity securities of Acquiror. Except as set forth in Schedule 5.3,
there are no outstanding obligations of Acquiror to repurchase, redeem or
otherwise acquire any shares of its capital stock or make any investment (in the
form of a loan, capital contribution or otherwise) in any other person.
SECTION 5.4. AUTHORITY.
The execution and delivery of this Agreement by Acquiror has been
approved by all corporate authority of Acquiror including approval by Acquiror's
Board of Directors. The execution and delivery of this Agreement by Acquiror and
the consummation by Acquiror of the transactions contemplated hereby have been
duly and validly authorized by all necessary corporate actions and no other
corporate proceedings on the part of Acquiror are necessary to authorize this
Agreement or to consummate the transactions contemplated hereby. This Agreement
has been duly executed and delivered by Acquiror and constitutes a legal, valid
and binding obligation of Acquiror, enforceable in accordance with its terms,
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws of general applicability
relating to or affecting creditors' rights generally and by the application of
general principles of equity.
SECTION 5.5. NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) Except as set forth in Schedule 5.5, the execution and delivery of
this Agreement by Acquiror do not, and the performance by Acquiror of its
obligations under this Agreement will not, (i) conflict with or violate the
certificate of incorporation or bylaws of Acquiror, (ii) conflict with or
violate any Law applicable to Acquiror or its assets and properties, or (iii)
result in any breach of or
-16-
<PAGE>
constitute a default under any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which Acquiror is a party or by which Acquiror is bound, or by which any of
its properties or assets is subject.
(b) Except as set forth in Schedule 5.5, the execution and delivery of
this Agreement by Acquiror do not, and the performance of this Agreement by
Acquiror will not, require any consent, approval, authorization or permit of, or
filing with or notification to, any Government Entity.
SECTION 5.6. FINANCIAL STATEMENTS.
The audited balance sheet of Acquiror as of the end of the fiscal year
ending March 31, 1998, and the audited statement of income and cash flows for
such fiscal year fairly present, in all material respects, the financial
condition of Acquiror as of the respective dates and the results of operations
and cash flows for the respective periods indicated and will have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis. Except as reflected in the audited balance sheet of Acquiror
as of March 31, 1998 (the "Acquiror Balance Sheet Date"), Acquiror has no
liabilities, contingent or absolute, matured or unmatured, known or unknown,
except for liabilities incurred in the ordinary course of business since the
Acquiror Balance Sheet Date that would not have an Acquiror Material Adverse
Effect.
SECTION 5.7. ABSENCE OF CERTAIN CHANGES OR EVENTS.
Except as set forth in Schedule 5.7, since March 31, 1998, Acquiror
has not incurred any material liability, except in the ordinary course of its
business consistent with its past practices, and Acquiror has conducted its
business in the ordinary course consistent with its past practices. Except as
set forth in Schedule 5.7, since March 31, 1998, there has not been any change
in the business, condition (financial or otherwise) or results of operations of
Acquiror, including any transaction, commitment, dispute, damage, destruction or
loss, whether or not covered by insurance, or other event of any character
(whether or not in the ordinary course of business) individually or in the
aggregate which has had, or is reasonably likely to have, an Acquiror Material
Adverse Effect.
SECTION 5.8. AGREEMENTS.
Except as set forth in Schedule 5.8, all agreements that are or will
be required to be filed as exhibits to the Form S-3 (collectively, the "Acquiror
Material Contracts") to be filed by Acquiror with the SEC registering all shares
of Acquiror Common Stock issuable pursuant to this Agreement are valid and in
full force and effect on the date hereof, and Acquiror has not (and has no
knowledge that any
-17-
<PAGE>
party thereto has) violated any provision of, or committed or failed to perform
any act which with or without notice, lapse of time or both would constitute a
default under the provisions of, any Acquiror Material Contract, except for
defaults which would not reasonably be expected to have an Acquiror Material
Adverse Effect.
SECTION 5.9. LITIGATION.
Except as set forth in Schedule 5.9, there is no action, suit,
investigation, claim, arbitration or litigation pending or, to the knowledge of
Acquiror, threatened against or involving Acquiror or the business and
operations of Acquiror, at law or in equity, or before or by any court,
arbitrator or Government Entity. Acquiror is not operating under or subject to
any judgment, writ, order, injunction, award or decree of any court, judge,
justice or magistrate, including any bankruptcy court or judge, or any order of
or by any Government Entity.
SECTION 5.10. TAXES AND ASSESSMENTS.
Acquiror has (i) duly and timely paid all Taxes which have become due
and payable by it; (ii) Acquiror has received no notice of, nor does Acquiror
have any knowledge of, any notice of deficiency or assessment or proposed
deficiency or assessment from any taxing Government Entity; and (iii) to
Acquiror's knowledge, there are no audits pending and there are no outstanding
agreements or waivers by Acquiror that extend the statutory period of
limitations applicable to any federal, state, local, or foreign tax returns or
Taxes.
SECTION 5.11. VOTING REQUIREMENTS.
The affirmative vote of Acquiror Board of Directors is the only vote
necessary to approve, adopt and consummate the transactions under this
Agreement, which vote has been obtained prior to Acquiror's execution of this
Agreement.
SECTION 5.12. BROKERS.
No broker, finder or investment banker is entitled to any brokerage,
finder's or other fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
Acquiror.
SECTION 5.13. DISCLOSURE.
No representations or warranties by Acquiror in this Agreement and no
statement or information contained in the Schedules hereto or in Form S-3 to be
filed by Acquiror with the SEC or any certificate furnished or to be furnished
by Acquiror to UCI pursuant to the provisions of this Agreement (taken
collectively), contains or will contain any untrue statement of a material fact
or omits or will
-18-
<PAGE>
omit to state any material fact necessary, in light of the circumstances under
which it was made, in order to make the statements herein or therein not
misleading.
ARTICLE VI
COVENANTS
SECTION 6.1. AFFIRMATIVE COVENANTS OF UCI.
UCI and UCI Sole Shareholder hereby covenant and agree that, prior to
the Closing Date, unless otherwise expressly contemplated by this Agreement or
consented to in writing by Acquiror, UCI shall (a) operate its business in the
usual and ordinary course consistent with past practices and in accordance with
applicable Laws; (b) preserve substantially intact its business organization,
maintain its rights and franchises, use its best efforts to retain the services
of its respective principal officers and key employees and maintain its
relationship with its respective suppliers, contractors, distributors, customers
and others having business relationships with it; and (c) maintain and keep its
properties and assets in as good repair and condition as at present, ordinary
wear and tear excepted.
SECTION 6.2. NEGATIVE COVENANTS OF UCI.
Except as expressly contemplated by this Agreement or otherwise
consented to in writing by Acquiror, from the date hereof until the Closing
Date, UCI shall not, and UCI Sole Shareholder shall cause UCI not to, do any of
the following:
(a) (i) increase the compensation payable to or to become payable to
any of its directors, officers or employees, except for increases in salary,
wages or bonuses payable or to become payable in the ordinary course of business
and consistent with past practice; (ii) grant any severance or termination pay
to, or enter into or modify any employment or severance agreement with, any of
its directors, officers or employees; or (iii) adopt or amend any employee
benefit plan or arrangement, except as may be required by applicable Law;
(b) declare, set aside or pay any dividend on, or make any other
distribution in respect of, any of its capital stock;
(c) (i) redeem, repurchase or otherwise reacquire any share of its
capital stock or any securities or obligations convertible into or exchangeable
for any share of its capital stock, or any options, warrants or conversion or
other rights to acquire any shares of its capital stock or any such securities
or obligations; (ii) effect any reorganization or recapitalization; or (iii)
split, combine or reclassify
-19-
<PAGE>
any of its capital stock or issue or authorize or propose the issuance of any
other securities in respect of, in lieu of, or in substitution for, shares of
its capital stock;
(d) (i) issue, deliver, award, grant or sell, or authorize or propose
the issuance, delivery, award, grant or sale (including the grant of any
Encumbrances) of, any shares of any class of its capital stock (including shares
held in treasury) or other equity securities, any securities or obligations
directly or indirectly convertible into or exercisable or exchangeable for any
such shares or securities, or any rights, warrants or options directly or
indirectly to acquire any such shares or securities; or (ii) amend or otherwise
modify the terms of any such securities, obligations, rights, warrants or
options in a manner inconsistent with the provisions of this Agreement or the
effect of which shall be to make such terms more favorable to the holders
thereof;
(e) acquire or agree to acquire, by merging or consolidating with, by
purchasing an equity interest in or a portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any assets of any other person (other than the purchase of inventory in
the ordinary course of business and consistent with past practice), or make or
commit to make any capital expenditures other than capital expenditures in the
ordinary course of business consistent with past practice and in amounts which
are set forth and described in UCI's 1998 Capital Budget, a true and complete
copy of which has been provided to Acquiror and other than expenditures in
connection with the consummation of the Acquisition;
(f) sell, lease, exchange, mortgage, pledge, transfer or otherwise
dispose of, or agree to sell, lease, exchange, mortgage, pledge, transfer or
otherwise dispose of, any of its assets except for dispositions in the ordinary
course of business and consistent with past practice;
(g) propose or adopt any amendments to its memorandum and articles of
association;
(h) (i) change any of its methods of accounting in effect at January
1, 1998, or (ii) make or rescind any express or deemed election relating to
taxes, settle or compromise any claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to taxes, except, in
the case of clause (i) or clause (ii), as may be required by law or generally
accepted accounting principles, consistently applied;
(i) prepay, before the scheduled maturity thereof, any of its
long-term debt, or incur any obligation for borrowed money, whether or not
evidenced by a note, bond, debenture or similar instrument, other than trade
payables incurred in the ordinary course of business consistent with past
practices and payables in connection with consummation of the Acquisition;
-20-
<PAGE>
(j) enter into or modify in any material respect any agreement which,
if in effect as of the date hereof, would have been required to be disclosed on
Schedule 3.11;
(k) take any action that would or could reasonably be expected to
result in any of its representations and warranties set forth in this Agreement
being untrue or in any of the conditions to the Acquisition set forth in Article
VIII not being satisfied; or
(l) agree in writing or otherwise to do any of the foregoing.
ARTICLE VII.
ADDITIONAL AGREEMENTS
SECTION 7.1. PREPARATION OF THE FORM S-3.
As soon as practicable following the date of this Agreement, UCI and
Acquiror shall prepare and Acquiror shall file with the Securities and Exchange
Commission (the "SEC") a registration statement on Form S-3 (the "Form S-3
Registration Statement") registering all shares of Acquiror Common Stock to be
issued to UCI Sole Shareholder under this Agreement.
SECTION 7.2. CONSENTS AND APPROVALS; FILINGS AND NOTICES.
UCI and UCI Sole Shareholder shall use reasonable efforts to as
promptly as possible make all filings with, provide all notices to and obtain
all consents and approvals from third parties required to be obtained by UCI in
connection with the transactions contemplated hereunder, including, without
limitation, all filings, if any, with notices to and consents and approvals from
Government Entities and other persons.
SECTION 7.3. ACCESS AND INFORMATION.
From the date hereof to the Closing Date, UCI shall afford to Acquiror
and its officers, employees, accountants, consultants, legal counsel,
representatives of current and prospective sources of financing for the
Acquisition (which Acquiror shall advise UCI in writing of such sources) and
other representatives of Acquiror full and complete access during normal
business hours to the properties, books, records, contracts, facilities,
premises, and equipment relating to the Assets and UCI (including without
limitation, operating and financial information with respect to UCI) as Acquiror
may reasonably request, provided that Acquiror and its agents, employees and
financing sources enter into a commercially reasonable confidentiality and
nondisclosure agreement with UCI and UCI Sole Shareholder.
-21-
<PAGE>
SECTION 7.4. CONFIDENTIALITY.
Each party shall hold in strict confidence all documents and
information concerning the other and its business and properties (except that
either party may disclose such documents and information to any Government
Entity reviewing the transactions contemplated hereby or as required in either
party's judgment pursuant to any legal requirement or in furtherance of the
transactions contemplated herein), and if the transactions contemplated hereby
should not be consummated, such confidence shall be maintained, and all such
documents and information (in whatever form) and copies thereof shall
immediately thereafter be destroyed, or returned to the party originally
furnishing same.
SECTION 7.5. FURTHER ACTION; REASONABLE BEST EFFORTS.
Each of the parties shall use reasonable best efforts to take, or
cause to be taken, all appropriate action, and do, or cause to be done, all
things necessary, proper or advisable under applicable Laws or otherwise to
consummate and make effective the transactions contemplated by this Agreement as
promptly as practicable, including, without limitation, using its reasonable
best efforts to obtain all licenses, permits, consents, approvals,
authorizations, qualifications and orders of Government Entities and parties to
contracts with UCI and Acquiror as are necessary for the transactions
contemplated herein.
SECTION 7.6. PUBLIC ANNOUNCEMENTS.
Each of UCI Sole Shareholder, UCI, Acquiror and Acquisition Sub shall
consult with each other before issuing any press release or otherwise making any
public statements with respect to the Acquisition and shall not issue any such
press release or make any such public statement prior to such consultation,
except as may be required by Law.
SECTION 7.7. NO SOLICITATION.
During the term of this Agreement, neither UCI, UCI Sole Shareholder
nor any of their affiliates or any person acting on behalf of such party shall
(a) solicit or favorably respond to indications of interest from, or enter into
negotiations with, any third party for any proposed merger, consolidation, sale
or acquisition of UCI, the Assets or any capital stock of UCI or (b) furnish or
cause to be furnished any nonpublic information concerning UCI to any person
other than in the ordinary course of business or pursuant to applicable Law and
after prior written notice to Acquiror.
-22-
<PAGE>
SECTION 7.8. STOCK ACQUISITION LISTING.
Acquiror shall use all reasonable efforts to cause the shares of
Acquiror Common Stock to be issued pursuant to this Agreement and registered
under the Form S-3 Registration Statement to be approved for listing on the
Nasdaq NMS, subject to official notice of issuance, prior to the first date on
which such shares of Acquiror Common Stock are issuable.
SECTION 7.9. BLUE SKY.
Acquiror shall use reasonable efforts to obtain prior to the Closing
Date any necessary blue sky permits and approvals required to permit the
distribution of the shares of the Acquiror Common Stock to be issued in
accordance with the provisions of this Agreement.
ARTICLE VIII.
CLOSING CONDITIONS
SECTION 8.1. CONDITIONS TO OBLIGATIONS OF ACQUIROR, UCI AND UCI SOLE
SHAREHOLDER TO EFFECT THE ACQUISITION.
The respective obligations of Acquiror, UCI and UCI Sole Shareholder
to effect the Acquisition and the other transactions contemplated herein shall
be subject to the satisfaction at or prior to the Closing Date of the following
conditions, any or all of which may be waived, in whole or in part, to the
extent permitted by applicable law:
(a) Approvals. UCI Sole Shareholder shall have approved this
Acquisition. The Board of Directors of Acquiror has approved the Acquisition
prior to the date of execution of this Agreement.
(b) No Order. No Government Entity or federal or state court of
competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive order, decree, judgment,
injunction or other order (whether temporary, preliminary or permanent), in any
case which is in effect and which prevents or prohibits consummation of the
Acquisition or any other transactions contemplated in this Agreement; provided,
however, that the parties shall use their reasonable efforts to cause any such
decree, judgment, injunction or other order to be vacated or lifted, and any
such action or proceeding to be dismissed.
-23-
<PAGE>
SECTION 8.2. ADDITIONAL CONDITIONS TO OBLIGATIONS OF ACQUIROR.
The obligations of Acquiror to effect the Acquisition and the other
transactions contemplated in this Agreement are also subject to the following
conditions, any or all of which may be waived, in whole or in part, to the
extent permitted by applicable law:
(a) Representations and Warranties. The representations and warranties
of UCI and UCI Sole Shareholder made in this Agreement shall be true and correct
in all material respects, on and as of the Closing Date with the same effect as
though such representations and warranties had been made on and as of the
Closing Date (provided that any representation or warranty contained herein that
is qualified by a materiality standard shall not be further qualified hereby),
except for representations and warranties that speak as of a specific date or
time other than the Closing Date (which need only be true and correct in all
material respects as of such date or time). Acquiror shall have received a
certificate of UCI and a certificate of UCI Sole Shareholder to that effect.
(b) Agreements and Covenants. The agreements and covenants of UCI and
UCI Sole Shareholder required to be performed on or before the Closing Date
shall have been performed in all material respects. Acquiror shall have received
a certificate of UCI and a certificate of UCI Sole Shareholder to that effect.
(c) Legal Proceedings. No action or proceeding before any Government
Entity shall have been instituted or threatened (and not subsequently settled,
dismissed, or otherwise terminated) which is reasonably expected to restrain,
prohibit or invalidate the Acquisition or other transactions contemplated by
this Agreement other than an action or proceeding instituted or threatened by
Acquiror.
(d) No Company Material Adverse Effect. Since the date of this
Agreement, no Company Material Adverse Effect shall have occurred and be
continuing.
(e) Required Consents. UCI shall have delivered to Acquiror at or
before Closing all consents, assignments or notices necessary to be obtained or
made by UCI in connection with the transactions contemplated by this Agreement.
(f) Noncompetition Agreement. UCI Sole Shareholder and Messrs.
Critides and Adamides shall have executed and delivered to Acquiror at or before
Closing a noncompetition agreement in form and substance reasonably satisfactory
to Acquiror providing, among other things, that UCI Sole Shareholder and/or
Messrs. Critides and Adamides shall not compete with the business of Acquiror or
UCI for a period of three (3) years after the Closing Date. The non-competition
-24-
<PAGE>
agreement with Adamides will not restrict him from representing
telecommunications companies as a lawyer.
(g) Employment Agreement and Consulting Agreements. Mr. Christos
Mouroutis shall have executed and delivered to Acquiror at or before Closing an
employment agreement in form and substance reasonably satisfactory to Acquiror.
Each of James Critides and Adamos Adamides shall have executed and delivered at
or before Closing a consulting agreement in form and substance reasonably
satisfactory to Acquiror.
(h) Legal Opinions. Acquiror shall have received an opinion from
Scordis, Papapetrou & Co., special Cyprus counsel to UCI in form and substance
reasonably satisfactory to Acquiror.
(i) Other Closing Documents. The Stockholders and UCI shall have
executed and/or delivered to Acquiror such additional documents, certificates,
opinions and agreements as Acquiror may reasonably request, including but not
limited to the assignment of the CYTA contract from UCI Sole Shareholder to UCI
including all necessary approvals, and (ii) UCI and NetFon S.A. and duly
authorized and executed contracts between (i) UCI and Amerikios Corp.
SECTION 8.3. ADDITIONAL CONDITIONS TO OBLIGATIONS OF UCI AND UCI SOLE
SHAREHOLDER.
The obligations of UCI and UCI Sole Shareholder to effect the
Acquisition and the other transactions contemplated in this Agreement are also
subject to the following conditions any or all of which may be waived, in whole
or in part, to the extent permitted by applicable law:
(a) Representations and Warranties. The representations and warranties
of Acquiror made in this Agreement shall be true and correct in all material
respects, on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of the Closing Date
(provided that any representation or warranty contained herein that is qualified
by a materiality standard shall not be further qualified hereby), except for
representations and warranties that speak as of a specific date or time other
than the Closing Date (which need only be true and correct in all material
respects as of such date or time). UCI shall have received a certificate of the
Chief Executive Officer or Chief Financial Officer of Acquiror.
(b) Agreements and Covenants. The agreements and covenants of Acquiror
required to be performed on or before the Closing Date shall have been performed
in all material respects. UCI shall have received a certificate of the Chief
Executive Officer or Chief Financial Officer of Acquiror to that effect.
-25
<PAGE>
(c) Legal Proceedings. No action or proceeding before any Government
Entity shall have been instituted or threatened (and not subsequently settled,
dismissed, or otherwise terminated) which is reasonably expected to restrain,
prohibit or invalidate the Acquisition or other transactions contemplated by
this Agreement other than an action or proceeding instituted or threatened by
UCI or UCI Sole Shareholder.
(d) Other Closing Documents. Acquiror shall have executed and/or
delivered to UCI Sole Shareholder and UCI such additional documents,
certificates, opinions and agreements as UCI Sole Shareholder and UCI may
reasonably request including but not limited to an employment agreement for Mr.
Christos Mouroutis. Each of James Critides and Adamos Adamides shall have
executed and delivered at or before Closing a consulting agreement in form and
substance reasonably satisfactory to them.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.1. TERMINATION.
This Agreement may be terminated at any time prior to the Closing
Date:
(a) by mutual written consent of Acquiror and UCI;
(b) by Acquiror if UCI or UCI Sole Shareholder shall have breached any
of its representations, warranties, covenants or agreements contained in this
Agreement, or any such representation or warranty shall have become untrue, in
any such case such that the conditions precedent to the obligations of Acquiror
to close specified in Section 9.2 will not be satisfied;
(c) by UCI if Acquiror shall have breached any of its representations,
warranties, covenants or agreements contained in this Agreement, or any such
representation or warranty shall have become untrue, in any such case such that
the conditions precedent to the obligation of UCI to close specified in Section
9.3, will not be satisfied;
(d) by either Acquiror or UCI if any decree, permanent injunction,
judgment, order or other action by any court of competent jurisdiction or any
Government Entity preventing or prohibiting consummation of the Acquisition
shall have become final and nonappealable;
(e) by either Acquiror or UCI if the Closing has not occurred on or
prior to December 31, 1998 (unless such date shall be extended by the mutual
-26-
<PAGE>
written consent of the parties); provided, that the right to terminate this
Agreement under this Section 10.1(e) shall not be available to any party whose
breach of representations, warranties, covenants or agreements contained in this
Agreement has been the cause of, or resulted in, the failure of the Closing to
occur by such date or the inability of such condition to be satisfied; or
(f) by Acquiror upon written notice to UCI at anytime until October
20, 1998 if Acquiror in its sole and absolute discretion is not satisfied with
the results of its due diligence investigation of UCI or the Assets.
SECTION 9.2. EFFECT OF TERMINATION.
If this Agreement is terminated pursuant to Section 10.1, this
Agreement shall forthwith become void and there shall be no liability or
obligation on the part of any party hereto, except that the provisions of
Sections 8.4 and 12.11 shall not be extinguished but shall survive such
termination, and nothing herein shall relieve any party from liability for any
breach hereof and each party shall be entitled to any remedies at law or in
equity for such breach.
SECTION 9.3. AMENDMENT.
This Agreement may not be amended except by an instrument in writing
signed by the parties hereto.
SECTION 9.4. WAIVER.
At any time prior to the Closing Date, the parties may (a) extend the
time for the performance of any of the obligations or other acts of the other
party, (b) waive any inaccuracies in the representations and warranties
contained in this Agreement or in any document delivered pursuant to this
Agreement and (c) waive compliance by the other party with any of the agreements
or conditions contained in this Agreement. Any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party. No delay or failure on the part of any party hereto in exercising any
right, power or privilege under this Agreement or under any other instrument or
document given in connection with or pursuant to this Agreement shall impair any
such right, power or privilege or be construed as a waiver of any default or any
acquiescence therein. No single or partial exercise of any such right, power or
privilege shall preclude the further exercise of such right, power or privilege,
or the exercise of any other right, power or privilege.
-27-
<PAGE>
ARTICLE X
SURVIVAL OF REPRESENTATIONS;
INDEMNIFICATION; REMEDIES
SECTION 10.1. SURVIVAL OF REPRESENTATIONS.
All representations, warranties, covenants, indemnities and other
agreements made by any party to this Agreement herein or pursuant hereto, shall
be deemed made on and as of the Closing Date as though such representations,
warranties, covenants, indemnities and other agreements were made on and as of
such date, and all such representations, warranties, covenants, indemnities and
other agreements shall survive the Closing Date and any investigation, audit or
inspection at any time made by or on behalf of any party hereto, as follows: (a)
unless otherwise specified below, representations and warranties shall survive
for a period of two (2) years after the Closing Date; (b) representations and
warranties with respect to Taxes shall survive until the expiration of the
applicable statute of limitations; (c) representations, warranties and covenants
for matters relating to title to the capital stock of UCI and the Assets shall
continue in full force and effect in perpetuity; and (d) the covenants and
agreements in this Article XI and the covenants and agreements which by their
terms survive the Closing Date shall continue in full force and effect until
fully discharged. Notwithstanding anything herein to the contrary, any
representation, warranty, covenant or agreement which is the subject of a claim
which is asserted in writing prior to the expiration of the applicable period
set forth above shall survive with respect to such claim or dispute until the
final resolution thereof.
SECTION 10.2. AGREEMENT OF UCI SOLE SHAREHOLDER TO INDEMNIFY.
Subject to the conditions and provisions of this Article XI, UCI Sole
Shareholder hereby agrees to indemnify, defend and hold harmless Acquiror and
its officers, directors, employees, agents and representatives (collectively,
the "Acquiror Indemnified Persons") from and against and in respect of all
Losses resulting from, imposed upon or incurred by the Acquiror Indemnified
Persons, directly or indirectly, by reason of or resulting from any
misrepresentation or breach of any representation or warranty, or noncompliance
with any conditions or other agreements, given or made by it or UCI in this
Agreement or in any document, certificate or agreement furnished by or on behalf
of any such party pursuant to this Agreement up to an aggregate limit of Five
Hundred Thousand U.S. Dollars ($500,000). UCI Sole Shareholder's indemnification
shall supported until maturity by the Purchase Note and Escrow Note each in the
amount of $500,000 due UCI Sole Shareholder under this agreement, provided that
at any time no more than one of such Notes shall be escrowed. It shall be a
condition to the right of any Acquiror Indemnified Person to indemnification
pursuant to this Section that such Acquiror
-28-
<PAGE>
Indemnified Person shall assert a claim for such indemnification within the
applicable survival periods set forth in Section 11.1 hereof.
SECTION 10.3. AGREEMENT OF ACQUIROR TO INDEMNIFY.
Subject to the conditions and provisions of this Article XI, Acquiror
hereby agrees to indemnify, defend and hold harmless UCI Sole Shareholder and
its members and managers from and against and in respect of all Losses resulting
from, imposed upon or incurred by UCI Sole Shareholder and its members and
managers, directly or indirectly, by reason of or resulting from any
misrepresentation or breach of any representation or warranty, or noncompliance
with any conditions or other agreements, given or made by Acquiror in this
Agreement or in any document, certificate or agreement furnished by or on behalf
of Acquiror pursuant to this Agreement up to an aggregate limit of Five Hundred
Thousand U.S. Dollars ($500,000). It shall be a condition to the rights of UCI
Sole Shareholder and its members and managers to indemnification pursuant to
this Section that such party shall assert a claim for such indemnification
within the applicable survival periods set forth in Section 11.1 hereof.
SECTION 10.4. CONDITIONS OF INDEMNIFICATION.
The obligations and liabilities of UCI Sole Shareholder and Acquiror
hereunder with respect to their respective indemnities pursuant to this Article
XI, resulting from any Third Party Claim shall be subject to the following terms
and conditions:
(a) The party seeking indemnification (the "Indemnified Party") must
give the other party (the "Indemnifying Party"), notice of any Third Party Claim
which is asserted against, imposed upon or incurred by the Indemnified Party and
which may give rise to liability of the Indemnifying Party pursuant to this
Article XI, stating (to the extent known or reasonably anticipated) the nature
and basis of such Third Party Claim and the amount thereof; provided that the
failure to give such notice shall not affect the rights of the Indemnified Party
hereunder except to the extent that the Indemnifying Party shall have suffered
actual material damage by reason of such failure.
(b) Subject to Section 11.4(c) below, the Indemnifying Party shall
have the right to undertake, by counsel or other representatives of its own
choosing, the defense of such Third Party Claim at the Indemnifying Party's risk
and expense.
(c) In the event that (i) the Indemnifying Party shall elect not to
undertake such defense, (ii) within a reasonable time after notice from the
Indemnified Party of any such Third Party Claim, the Indemnifying Party shall
fail to undertake to defend such Third Party Claim, or (iii) there is a
reasonable
-29-
<PAGE>
probability that such Third Party Claim may materially and adversely affect the
Indemnified Party other than as a result of money damages or other money
payments, then the Indemnified Party (upon further written notice to the
Indemnifying Party) shall have the right to undertake the defense, compromise or
settlement of such Third Party Claim, by counsel or other representatives of its
own choosing, on behalf of and for the account and risk of the Indemnifying
Party. In the event that the Indemnified Party undertakes the defense of a Third
Party Claim under this Section 11.4(c), the Indemnifying Party shall pay to the
Indemnified Party, in addition to the other sums required to be paid hereunder,
the reasonable costs and expenses incurred by the Indemnified Party in
connection with such defense, compromise or settlement as and when such costs
and expenses are so incurred.
(d) Anything in this Section 11.4 to the contrary notwithstanding, (i)
the Indemnifying Party shall not, without the Indemnified Party's written
consent, settle or compromise such Third Party Claim or consent to entry of any
judgment which does not include as an unconditional term thereof the giving by
the claimant or the plaintiff to the Indemnified Party of a release from all
liability in respect of such Third Party Claim in form and substance
satisfactory to the Indemnified Party; (ii) in the event that the Indemnifying
Party undertakes the defense of such Third Party Claim, the Indemnified Party,
by counsel or other representative of its own choosing and at its sole cost and
expense, shall have the right to participate in the defense, compromise or
settlement thereof and each party and its counsel and other representatives
shall cooperate with the other party and its counsel and representatives in
connection therewith; and (iii) in the event that the Indemnifying Party
undertakes the defense of such Third Party Claim, the Indemnifying Party shall
have an obligation to keep the Indemnified Party informed of the status of the
defense of such Third Party Claim and furnish the Indemnified Party with all
documents, instruments and information that the Indemnified party shall
reasonably request in connection therewith.
(e) Claims for indemnification by Acquiror Indemnified Persons up to
the $500,000 limitation shall be satisfied solely by a reduction in amounts due
under the Purchase Note or Escrow Note, as applicable. No claim for
indemnification may be made by Acquiror Indemnified Persons until the amount of
the claim or claims exceeds $25,000.
SECTION 10.5. NO RECOURSE AGAINST UCI.
The UCI Sole Shareholder hereby irrevocably waives any and all right
to recourse against UCI with respect to any misrepresentation or breach of any
representation, warranty or indemnity, or noncompliance with any conditions or
covenants, given or made by UCI Sole Shareholder or UCI in this Agreement or any
document, certificate or agreement entered into or delivered pursuant hereto.
The Stockholders shall not be entitled to contribution from, subrogation to or
recovery
-30-
<PAGE>
against UCI with respect to any liability of UCI Sole Shareholder or UCI that
may arise under or pursuant to this Agreement or the transactions contemplated
hereby.
SECTION 10.6. REMEDIES CUMULATIVE.
The remedies provided herein shall be cumulative and shall not
preclude the assertion by the parties hereto of any other rights or the seeking
of any other remedies against the other, or their respective successors or
assigns.
ARTICLE XI
GENERAL PROVISIONS
SECTION 11.1. NOTICES.
All notices and other communications given or made pursuant hereto
shall be in writing and shall be deemed to have been duly given or made as of
the date delivered, mailed or transmitted, and shall be effective upon receipt,
if delivered personally, mailed by registered or certified mail (postage
prepaid, return receipt requested) to the parties at the following addresses (or
at such other address for a party as shall be specified by like changes of
address) or sent by electronic transmission to the telecopier number specified
below:
(a) If to Acquiror:
eGlobe, Inc.
Telecopier No.: (303) 782-9628
Attention: Ronald Fried and Colin Smith
(b) If to UCI:
UCI Tele Networks, Ltd.
Telecopier No.: (212) 843-9435 and 011 3575 372 282
Attention: Christos Mouroutis, James Critides, Adamos
Adamides
-31-
<PAGE>
(c) If to UCI Sole Shareholder
United Communications International LLC
Address: c/o William T. Cruse & Company
425 Park Avenue, 27th Floor
New York, NY 10022
Telecopier No. (212) 843-9435
Attention: James Critides, Adamos Adamides, Christos
Mouroutis
SECTION 11.2. CERTAIN DEFINITIONS.
For purposes of this Agreement, the term:
(a) "affiliate" means a person that directly or indirectly, through
one or more intermediaries, controls, is controlled by, or is under common
control with, the first mentioned person.
(b) "Assets" shall mean the assets, rights and properties, whether
owned, leased or licensed, real, personal or mixed, tangible or intangible, that
are used, useful or held for use in connection with the business of UCI.
(c) "Acquiror Material Adverse Effect" means any material adverse
effect on the assets, business, financial condition or results of operations of
the Acquiror and its subsidiaries, taken as a whole.
(d) "Company Material Adverse Effect" means any material adverse
effect on the Assets or on the business, financial condition or results of
operations of UCI.
(e) "control" (including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly or as trustee or
executor, of the power to direct or cause the direction of the management or
policies of a person, whether through the ownership of stock or as trustee or
executor, by contract or credit arrangement or otherwise.
(f) "Encumbrances" means mortgages, liens, pledges, encumbrances,
security interests, deeds of trust, options, encroachments, reservations,
orders, decrees, judgments, restrictions, charges, contract rights, claims or
equity of any kind.
(g) "Government Entity" means any United States or other national,
state, municipal or local government, domestic or foreign, any subdivision,
agency, entity, commission or authority thereof, or any quasi-governmental or
private body exercising any regulatory, taxing, importing or other governmental
or quasi-governmental authority.
-32-
<PAGE>
(h) "Laws" means all foreign, federal, state and local statues, laws,
ordinances, regulations, rules, resolutions, orders, determinations, writes,
injunctions, awards (including, without limitation, awards of any arbitrator),
judgments and decrees applicable to the specified persons or entities.
(i) "Losses" means all demands, losses, claims, actions or causes of
action, assessments, damages, liabilities, costs and expenses, including,
without limitation, interest, penalties and reasonable attorneys' fees and
disbursements.
(j) "person" means an individual, corporation, partnership,
association, trust, unincorporated organization, other entity or group.
(k) "subsidiary" means a corporation, partnership, joint venture or
other entity of which UCI owns, directly or indirectly, at least 50% of the
outstanding securities or other interests the holders of which are generally
entitled to vote for the election of the board of directors or other governing
body or otherwise exercise control of such entity.
(l) "Third Party Claim" means any claim or other assertion of
liability by a third party.
SECTION 11.3. HEADINGS.
The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.
SECTION 11.4. SEVERABILITY.
If any term or other provision of this Agreement is invalid, illegal
or incapable of being enforced by any rule of law or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that
transactions contemplated hereby are fulfilled to the extent possible.
SECTION 11.5. ENTIRE AGREEMENT.
This Agreement (together with the Exhibits, the Schedules and the
other documents delivered pursuant hereto) constitutes the entire agreement of
the parties and supersede all prior agreements and undertakings, both written
and
-33-
<PAGE>
oral, between the parties, or any of them, with respect to the subject matter
hereof, including, without limitation, the Letter of Intent entered into as of
March 20, 1998 by the parties hereto and, except as otherwise expressly provided
herein, are not intended to confer upon any other person any rights or remedies
hereunder.
SECTION 11.6. SPECIFIC PERFORMANCE.
The transactions contemplated by this Agreement are unique.
Accordingly, each of the parties acknowledges and agrees that, in addition to
all other remedies to which it may be entitled, each of the parties hereto is
entitled to a decree of specific performance, provided such party is not in
material default hereunder.
SECTION 11.7. ASSIGNMENT.
Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto (whether by operation
of law or otherwise) without the prior written consent of the other party.
Subject to the preceding sentence, this Agreement shall be binding upon, inure
to the benefit of and be enforceable by the parties and their respective
successors and assigns.
SECTION 11.8. THIRD PARTY BENEFICIARIES.
This Agreement shall be binding upon and inure solely to the benefit
of each party hereto, and nothing in this Agreement, express or implied, is
intended to or shall confer upon any other person any right, benefit or remedy
of any nature whatsoever under or by reason of this Agreement, except for the
Acquiror Indemnified Persons under Article XI hereof.
SECTION 11.9. GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of New York.
SECTION 11.10. COUNTERPARTS.
This Agreement may be executed and delivered in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed and delivered shall be deemed to be an original but all
of which taken together shall constitute one and the same agreement.
-34-
<PAGE>
SECTION 11.11. FEES AND EXPENSES.
Except as otherwise provided for in this Agreement, each party hereto
shall pay its own fees, costs and expenses incurred in connection with this
Agreement and in the preparation for and consummation of the transactions
provided for herein.
IN WITNESS WHEREOF, the parties hereto have caused this AGREEMENT AND
PLAN OF MERGER to be executed and delivered as of the date first written above.
EXECUTIVE TELECARD, LTD. D/B/A
EGLOBE, INC.
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
UCI TELE NETWORKS, LTD.
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
-35-
<PAGE>
UNITED COMMUNICATIONS INTERNATIONAL LLC
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
-36-
EXHIBIT 3.4
-----------
BYLAW AMENDMENT
RESOLVED, that pursuant to Section 10.1 of the Bylaws and
Article VII of the Restated Certificate of Incorporation, as amended,
of the Corporation, Section 4.1 of the Bylaws is hereby amended to read
in its entirety as follows:
SECTION 4.1. EXECUTIVE COMMITTEE. The Board of
Directors may, by resolution passed by a majority of the whole
Board, designate directors of the Corporation in such number
as the Board shall see fit, but not less than two (2), as an
Executive Committee which shall have and may exercise, during
intervals between meetings of the Board, the powers of the
Board of Directors in the management of the business and
affairs of the Corporation (including, but without limitation,
the authority, pursuant to Section 141(c) of the Delaware
General Corporation Law, to adopt, authorize and approve
changes to each certificate of designations that may be
approved by the Board of Directors on and after January 10,
1999, and the powers of the Board of Directors as specified in
these By-Laws), and may authorize the seal of the Corporation
to be affixed to all papers which may require it; but such
committee shall not have the power or authority in reference
to approving or adopting, or recommending to the stockholders,
any action or matter expressly required by the Delaware
General Corporation Law to be submitted to stockholders for
approval or adopting, amending or repealing any bylaw of the
Corporation; and unless these bylaws or the Certificate of
Incorporation expressly so provide, such committee shall not
have the power or authority to declare a dividend, to
authorize the issuance of stock (except in connection with a
certificate of designations previously approved by the whole
Board), or to adopt a certificate of ownership and merger
pursuant to Section 253 of the Delaware General Corporation
Law. The Board of Directors shall designate one of the members
of the Executive Committee to be the Chairman of said
Committee. Each member of the Executive Committee shall
continue to act as such only so long as he shall be a director
of the Corporation and only during the pleasure of a majority
of the total number of directors of the Corporation at the
time in office. In the absence or disqualification of a member
of the Executive Committee, the member or members present at
any meeting and not disqualified from voting, whether or not
he/she or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting
in the place of any such absent or disqualified member.
<PAGE>
The undersigned, Secretary of Executive TeleCard, Ltd., does
hereby certify that the foregoing Bylaw Amendment was duly adopted by the Board
of Directors on March 12, 1999.
/s/ W.P. Colin Smith
-----------------------------------------
W.P. Colin Smith
Vice President of Legal Affairs,
General Counsel and Secretary
Executive TeleCard, Ltd.
-2-
EXHIBIT 4.7
-----------
PROMISSORY NOTE
$1,025,000.00 December 31, 1998
FOR VALUE RECEIVED, Executive TeleCard, Ltd. d/b/a eGlobe,
Inc., a Delaware corporation (the "Maker"), promises to pay to the order of
UNITED COMMUNICATIONS INTERNATIONAL LLC, (the "Holder"), at c/o William T. Cruse
& Company, 425 Park Avenue, New York, New York 10022, or at such other place as
the Holder of this Note may from time to time designate, on December 1, 1999
(the "Maturity Date"), the principal amount of One Million Twenty Five Thousand
United States Dollars ($1,025,000.00). There shall be no interest due or payable
under this note. Payment hereunder shall be made in lawful money of the United
States of America.
The unpaid principal amount of this Note may be prepaid in
whole or in part at any time or times without premium or penalty.
The occurrence of any one or more of the following shall
constitute an event of default ("Event of Default") hereunder:
(1) Failure to pay, when due, the principal, any interest, or
any other sum payable hereunder (whether upon maturity hereof, upon
prepayment date, upon acceleration, or otherwise).
(2) The failure of the Maker generally to pay its debts as
such debts become due, the admission by the Maker in writing of its
inability to pay its debts as such debts become due, or the making by
Maker of any general assignment for the benefit of creditors;
(3) The commencement by the Maker of any case, proceeding, or
other action seeking reorganization, arrangement, adjustment,
liquidation, dissolution, or composition of its debts under any law
relating to bankruptcy, insolvency, or reorganization, or relief of
debtors, or seeking appointment of a receiver, trustee, custodian, or
other similar official for all or any substantial part of its property;
(4) The commencement of any case, proceeding, or other action
against Maker seeking to have any order for relief entered against the
Maker as debtor, or seeking reorganization, arrangement, adjustment,
liquidation, dissolution, or composition of the Maker or its debts
under any law relating to bankruptcy, insolvency, reorganization, or
relief of debtors, or seeking appointment of a receiver, trustee,
custodian, or other similar official for the
<PAGE>
Maker or for all or any substantial part of the property of the Maker,
and (i) the Maker shall, by any act or omission, indicate its consent
to, approval of, or acquiescence in such case, proceeding or action;
or (ii) such case, proceeding, or action results in the entry of an
order for relief which is not fully stayed within seven business days
after the entry thereof.
Upon the occurrence of any such Event of Default hereunder,
the entire principal amount hereof, and all accrued and unpaid interest thereof,
shall be accelerated, and shall be immediately due and payable, at the option of
the Holder without demand or notice, and in addition thereto, and not in
substitution therefor, the Holder shall be entitled to exercise any one or more
of the rights and remedies provided by applicable law. Failure to exercise said
option or to pursue such other remedies shall not constitute a waiver of such
option or such other remedies or of the right to exercise any of the same in the
event of any subsequent Event of Default hereunder.
In the event that the principal amount hereof, any interest or
any other sum due hereunder is not paid when due and payable, the whole of the
unpaid principal amount evidenced hereby and all unpaid accrued interest thereon
shall from the date when such payment was due and payable until the date of
payment in full thereof, bear interest at the higher of the rate of interest
hereinbefore provided for or the rate of thirteen percent (13%) per annum, which
rate, if applicable, shall commence, without notice, immediately upon the date
when said payment was due and payable.
The Maker promises to pay all costs and expenses (including,
without limitation, attorneys' fees and disbursements) incurred in connection
with the collection thereof.
Any payment on this Note coming due on a Saturday, a Sunday,
or a day which is a legal holiday in the place at which a payment is to be made
hereunder shall be made on the next succeeding day which is a business day in
such place, and any such extension of the time of payment shall be included in
the computation of interest hereunder.
THIS NOTE IS NOT A NEGOTIABLE INSTRUMENT AND THEREFORE IS NOT
SUBJECT TO ARTICLE 3 OF THE UNIFORM COMMERCIAL CODE.
The Agreement and Plan of Acquisition among Executive
TeleCard, Ltd. d/b/a eGlobe, Inc., UCI Tele Networks, Ltd., and United
Communications International LLC dated as of September 30, 1998 ("Agreement") is
incorporated by reference. This Note is security for representations, warranties
and indemnifications made by UCI Tele Networks, Ltd. and United Communications
International LLC. Maker is entitled to set-off against this Note for
indemnification or for breach of the above-referenced Agreement. Additionally,
the
-2-
<PAGE>
amount due under this note shall be adjusted in accordance with the Agreement's
provisions for Adjustment as they relate to revenue generated.
Whenever used herein, the words "Maker" and "Holder" shall be
deemed to include their respective successors and assigns.
This Note shall be governed by and construed under and in
accordance with the laws of the state of New York (but not including the choice
of law rules thereof).
IN WITNESS WHEREOF, the undersigned has duly executed this
Note, or have caused this Note to be duly executed on their behalf, as of the
day and year first hereinabove set forth.
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE, INC.
By:
-----------------------------------
Name:
Title:
Wiring instructions for payments of interest and principal under this note:
Ionian Bank s.a.
Head Office - 49, Panepistimiou Street
Athens - Greece
Account Name: United Communications International llc
Account Number: 5992
-3-
<PAGE>
PROMISSORY NOTE
$500,000.00 December 31, 1998
FOR VALUE RECEIVED, Executive TeleCard, Ltd. d/b/a eGlobe,
Inc., a Delaware corporation (the "Maker"), promises to pay to the order of
UNITED COMMUNICATIONS INTERNATIONAL LLC, (the "Holder"), at c/o William T. Cruse
& Company, 425 Park Avenue, New York, New York 10022, or at such other place as
the Holder of this Note may from time to time designate, on the date that is
Eighteen (18) Months after the date hereof (the "Maturity Date"), the principal
amount of Five Hundred Thousand United States Dollars ($500,000.00), together
with interest on the unpaid principal amount hereof from the date hereof until
paid in full, said interest to be due and payable monthly, at a rate per annum
equal to eight percent (8%), simple interest. All payments hereunder shall be
made in lawful money of the United States of America.
The unpaid principal amount of this Note may be prepaid in
whole or in part at any time or times without premium or penalty.
The occurrence of any one or more of the following shall
constitute an event of default ("Event of Default") hereunder:
(1) Failure to pay, when due, the principal, any interest, or
any other sum payable hereunder (whether upon maturity hereof, upon
prepayment date, upon acceleration, or otherwise).
(2) The failure of the Maker generally to pay its debts as
such debts become due, the admission by the Maker in writing of its
inability to pay its debts as such debts become due, or the making by
Maker of any general assignment for the benefit of creditors;
(3) The commencement by the Maker of any case, proceeding, or
other action seeking reorganization, arrangement, adjustment,
liquidation, dissolution, or composition of its debts under any law
relating to bankruptcy, insolvency, or reorganization, or relief of
debtors, or seeking appointment of a receiver, trustee, custodian, or
other similar official for all or any substantial part of its property;
(4) The commencement of any case, proceeding, or other action
against Maker seeking to have any order for relief entered against the
Maker as debtor, or seeking reorganization, arrangement, adjustment,
liquidation, dissolution, or composition of the Maker or its debts
under any law relating to bankruptcy, insolvency, reorganization, or
relief of debtors, or seeking
-4-
<PAGE>
appointment of a receiver, trustee, custodian, or other similar
official for the Maker or for all or any substantial part of the
property of the Maker, and (i) the Maker shall, by any act or
omission, indicate its consent to, approval of, or acquiescence in
such case, proceeding or action; or (ii) such case, proceeding, or
action results in the entry of an order for relief which is not fully
stayed within seven business days after the entry thereof.
Upon the occurrence of any such Event of Default hereunder,
the entire principal amount hereof, and all accrued and unpaid interest thereof,
shall be accelerated, and shall be immediately due and payable, at the option of
the Holder without demand or notice, and in addition thereto, and not in
substitution therefor, the Holder shall be entitled to exercise any one or more
of the rights and remedies provided by applicable law. Failure to exercise said
option or to pursue such other remedies shall not constitute a waiver of such
option or such other remedies or of the right to exercise any of the same in the
event of any subsequent Event of Default hereunder.
In the event that the principal amount hereof, any interest or
any other sum due hereunder is not paid when due and payable, the whole of the
unpaid principal amount evidenced hereby and all unpaid accrued interest thereon
shall from the date when such payment was due and payable until the date of
payment in full thereof, bear interest at the higher of the rate of interest
hereinbefore provided for or the rate of thirteen percent (13%) per annum, which
rate, if applicable, shall commence, without notice, immediately upon the date
when said payment was due and payable.
The Maker promises to pay all costs and expenses (including,
without limitation, attorneys' fees and disbursements) incurred in connection
with the collection thereof.
Any payment on this Note coming due on a Saturday, a Sunday,
or a day which is a legal holiday in the place at which a payment is to be made
hereunder shall be made on the next succeeding day which is a business day in
such place, and any such extension of the time of payment shall be included in
the computation of interest hereunder.
THIS NOTE IS NOT A NEGOTIABLE INSTRUMENT AND THEREFORE IS NOT
SUBJECT TO ARTICLE 3 OF THE UNIFORM COMMERCIAL CODE.
The Agreement and Plan of Acquisition among Executive
TeleCard, Ltd. d/b/a eGlobe, Inc., UCI Tele Networks, Ltd., and United
Communications International LLC dated as of September 30, 1998 ("Agreement") is
incorporated by reference. This Note is security for representations, warranties
and indemnifications made by UCI Tele Networks, Ltd. and United Communications
-5-
<PAGE>
International LLC. Maker is entitled to set-off against this Note for
indemnification or for breach of the above-referenced Agreement.
Whenever used herein, the words "Maker" and "Holder" shall be
deemed to include their respective successors and assigns.
This Note shall be governed by and construed under and in
accordance with the laws of the state of New York (but not including the choice
of law rules thereof).
IN WITNESS WHEREOF, the undersigned has duly executed this
Note, or have caused this Note to be duly executed on their behalf, as of the
day and year first hereinabove set forth.
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE, INC.
By:
------------------------------------
Name:
Title:
Wiring instructions for payments of interest and principal under this note:
Ionian Bank s.a.
Head Office - 49, Panepistimiou Street
Athens - Greece
Account Name: United Communications International llc
Account Number: 5992
-6-
<PAGE>
PROMISSORY NOTE
$500,000.00 December 31, 1998
FOR VALUE RECEIVED, Executive TeleCard, Ltd. d/b/a eGlobe,
Inc., a Delaware corporation (the "Maker"), promises to pay to the order of
UNITED COMMUNICATIONS INTERNATIONAL LLC, (the "Holder"), at c/o William T. Cruse
& Company, 425 Park Avenue, New York, New York 10022, or at such other place as
the Holder of this Note may from time to time designate, on the date that is One
Hundred Eighty (180) Days after the date hereof (the "Maturity Date"), the
principal amount of Five Hundred Thousand United States Dollars ($500,000.00),
together with interest on the unpaid principal amount hereof from the date
hereof until paid in full, said interest to be due and payable monthly, at a
rate per annum equal to eight percent (8%), simple interest. All payments
hereunder shall be made in lawful money of the United States of America.
The unpaid principal amount of this Note may be prepaid in
whole or in part at any time or times without premium or penalty.
The occurrence of any one or more of the following shall
constitute an event of default ("Event of Default") hereunder:
(1) Failure to pay, when due, the principal, any interest, or
any other sum payable hereunder (whether upon maturity hereof, upon
prepayment date, upon acceleration, or otherwise).
(2) The failure of the Maker generally to pay its debts as
such debts become due, the admission by the Maker in writing of its
inability to pay its debts as such debts become due, or the making by
Maker of any general assignment for the benefit of creditors;
(3) The commencement by the Maker of any case, proceeding, or
other action seeking reorganization, arrangement, adjustment,
liquidation, dissolution, or composition of its debts under any law
relating to bankruptcy, insolvency, or reorganization, or relief of
debtors, or seeking appointment of a receiver, trustee, custodian, or
other similar official for all or any substantial part of its property;
(4) The commencement of any case, proceeding, or other action
against Maker seeking to have any order for relief entered against the
Maker as debtor, or seeking reorganization, arrangement, adjustment,
liquidation, dissolution, or composition of the Maker or its debts
under any law relating to bankruptcy, insolvency, reorganization, or
relief of debtors, or seeking
-7-
<PAGE>
appointment of a receiver, trustee, custodian, or other similar
official for the Maker or for all or any substantial part of the
property of the Maker, and (i) the Maker shall, by any act or
omission, indicate its consent to, approval of, or acquiescence in
such case, proceeding or action; or (ii) such case, proceeding, or
action results in the entry of an order for relief which is not fully
stayed within seven business days after the entry thereof.
Upon the occurrence of any such Event of Default hereunder,
the entire principal amount hereof, and all accrued and unpaid interest thereof,
shall be accelerated, and shall be immediately due and payable, at the option of
the Holder without demand or notice, and in addition thereto, and not in
substitution therefor, the Holder shall be entitled to exercise any one or more
of the rights and remedies provided by applicable law. Failure to exercise said
option or to pursue such other remedies shall not constitute a waiver of such
option or such other remedies or of the right to exercise any of the same in the
event of any subsequent Event of Default hereunder.
In the event that the principal amount hereof, any interest or
any other sum due hereunder is not paid when due and payable, the whole of the
unpaid principal amount evidenced hereby and all unpaid accrued interest thereon
shall from the date when such payment was due and payable until the date of
payment in full thereof, bear interest at the higher of the rate of interest
hereinbefore provided for or the rate of thirteen percent (13%) per annum, which
rate, if applicable, shall commence, without notice, immediately upon the date
when said payment was due and payable.
The Maker promises to pay all costs and expenses (including,
without limitation, attorneys' fees and disbursements) incurred in connection
with the collection thereof.
Any payment on this Note coming due on a Saturday, a Sunday,
or a day which is a legal holiday in the place at which a payment is to be made
hereunder shall be made on the next succeeding day which is a business day in
such place, and any such extension of the time of payment shall be included in
the computation of interest hereunder.
THIS NOTE IS NOT A NEGOTIABLE INSTRUMENT AND THEREFORE IS NOT
SUBJECT TO ARTICLE 3 OF THE UNIFORM COMMERCIAL CODE.
The Agreement and Plan of Acquisition among Executive
TeleCard, Ltd. d/b/a eGlobe, Inc., UCI Tele Networks, Ltd., and United
Communications International LLC dated as of September 30, 1998 ("Agreement") is
incorporated by reference. This Note is security for representations, warranties
and indemnifications made by UCI Tele Networks, Ltd. and United Communications
International LLC. Maker is entitled to set-off against this Note for
-8-
<PAGE>
indemnification or for breach of the above-referenced Agreement. In the event
that Maker defaults under this note and, at the time of default, Maker's share
price as quoted on the NASDAQ Exchange is under $1.00 per share, then Holder is
entitled to take back its shares in UCI Tele Networks, Ltd. in full satisfaction
of Maker's obligations under this and other Notes related to Maker's purchase of
UCI Tele Networks, Ltd.
Whenever used herein, the words "Maker" and "Holder" shall be
deemed to include their respective successors and assigns.
This Note shall be governed by and construed under and in
accordance with the laws of the state of New York (but not including the choice
of law rules thereof).
IN WITNESS WHEREOF, the undersigned has duly executed this
Note, or have caused this Note to be duly executed on their behalf, as of the
day and year first hereinabove set forth.
EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE, INC.
By:
------------------------------------
Name:
Title:
Wiring instructions for payments of interest and principal under this note:
Ionian Bank s.a.
Head Office - 49, Panepistimiou Street
Athens - Greece
Account Name: United Communications International llc
Account Number: 5992
-9-
EXHIBIT 4.8
-----------
RESTRICTION ON TRANSFER
-----------------------
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") OR APPLICABLE STATE SECURITIES LAWS, AND
CANNOT BE RESOLD UNLESS SUBSEQUENTLY REGISTERED UNDER THE ACT AND SUCH LAWS OR
UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
WARRANT
To purchase _______ shares of Common Stock of
Executive TeleCard, Ltd.
1. Grant of Warrant. This is to certify that, for value
received, __________________________ (the "Holder") is entitled to purchase,
subject to the provisions of this Warrant, from Executive TeleCard, Ltd. d/b/a
eGlobe, Inc., a Delaware corporation ("eGlobe"), an aggregate of ______ shares
of common stock, par value $.001 per share, of eGlobe (the "eGlobe Common
Stock") at a purchase price per share equal to $____ (the "Exercise Price"). The
number of shares of eGlobe Common Stock that may be received upon exercise of
this Warrant and the Exercise Price are subject to adjustment from time to time
as hereinafter set forth.
2. Term. This Warrant may be exercised in whole or in part at
any time or from time to time until _____________.
3. Exercise Procedures. In order to exercise this Warrant, the
Holder shall send a written notice of exercise to eGlobe on any business day at
eGlobe's principal office, addressed to the attention of the Treasurer of
eGlobe, which notice shall specify the number of shares for which this Warrant
is being exercised, and shall be accompanied by payment in full of the Exercise
Price of the shares for which this Warrant is being exercised. Payment of the
Exercise Price for the shares of eGlobe Common Stock purchased pursuant to the
exercise of this Warrant shall be made either in cash, by certified check or by
wire transfer. If the person or entity exercising this Warrant is not the
Holder, such person or entity shall also deliver, with the notice of exercise,
appropriate proof of the right of such person or entity to exercise this
Warrant. An attempt to exercise this Warrant granted hereunder other than as set
forth above shall be invalid and of no force and effect. Promptly after exercise
of this Warrant as provided for above, eGlobe shall deliver to the person
exercising this Warrant a certificate or certificates for the shares of eGlobe
Common Stock being purchased. In the event this Warrant is exercised in part
only, eGlobe shall, upon surrender of this Warrant for cancellation, execute and
deliver to the Holder a new Warrant of like tenor
<PAGE>
evidencing the right of the Holder to purchase the balance of the shares of
eGlobe Common Stock subject to purchase hereunder. Such stock certificate or
certificates shall be appropriately legended to the extent required by federal
or state securities laws. All shares of eGlobe Common Stock issued upon exercise
of this Warrant shall be duly authorized and validly issued, fully paid and
nonassessable.
4. Transferability. This Warrant may not be transferred by the
Holder in whole or in part, other than to an affiliate of the Holder and the
managers, members and debt holders of Holder, without the prior written consent
of eGlobe.
5. Reservation of Stock; Compliance. eGlobe hereby agrees that
at all times there shall be reserved for issuance and/or delivery upon exercise
of this Warrant, free from preemptive rights, such number of shares of
authorized but unissued or treasury shares of eGlobe Common Stock as shall be
required for issuance or delivery upon exercise of this Warrant. eGlobe further
agrees (i) that it will not, by amendment to its certificate of incorporation or
bylaws or through any other action, avoid or seek to avoid the observance or
performance of any of the covenants or conditions to be observed or performed
hereunder by eGlobe, and (ii) promptly to take all action as may from time to
time be required in order to permit the Holder to exercise this Warrant and
eGlobe to duly and effectively to issue shares of eGlobe Common Stock hereunder.
6. Effect of Changes in Capitalization.
A. Changes in Stock. If the outstanding shares of eGlobe
Common Stock are increased or decreased or changed into or exchanged for a
different number or kind of shares or other securities of eGlobe by reason of
any recapitalization, reclassification, stock split-up, reverse stock split,
combination of shares, exchange of shares, stock dividend or other distribution
payable in capital stock, or other increase or decrease in such shares effected
without receipt of consideration by eGlobe occurring after the date hereof, a
proportionate and appropriate adjustment shall be made by eGlobe in the number
and kind of shares subject to this Warrant, so that the proportionate interest
of the Holder immediately following such event shall, to the extent practicable,
be the same as immediately prior to such event. Any such adjustment in this
Warrant shall not change the total Exercise Price with respect to shares subject
to the unexercised portion of this Warrant but shall include a corresponding
proportionate adjustment in the Exercise Price per share.
B. Merger, Consolidation or Sale. Subject to Subsection C
of this Section 6, in the event of any Sale Transaction (as defined below), this
Warrant shall pertain to and apply to the cash, securities or other
consideration to which a holder of the number of shares of eGlobe Common Stock
subject to this Warrant would have been entitled immediately following such Sale
Transaction.
-2-
<PAGE>
For purposes of this Warrant, a "Sale Transaction" shall
mean (i) the dissolution or liquidation of eGlobe, (ii) a merger, consolidation
or reorganization of eGlobe with one or more other corporations in which
stockholders of eGlobe receive cash or securities of another corporation for
their stock in eGlobe, (iii) a sale of substantially all of the assets of eGlobe
to another corporation, or (iv) another transaction (including, without
limitation, a merger or reorganization in which eGlobe is the surviving
corporation) approved by the Board of Directors of eGlobe which results in any
person or entity owning a majority of the combined voting power of all classes
of stock of eGlobe.
C. Adjustments. Adjustments specified in this Section 6
shall be made by the Board of Directors of eGlobe, whose determination in that
respect shall be final, binding and conclusive. No fractional shares of eGlobe
Common Stock or units of other securities shall be issued pursuant to any such
adjustment, and any fractions resulting from any such adjustment shall be
eliminated in each case, with cash being paid (at fair market value as
reasonably determined by the Board of Directors of eGlobe) in lieu of such
fraction.
7. General Restrictions. eGlobe shall not be required to issue
any shares of eGlobe Common Stock under this Warrant Agreement if the issuance
of such shares would constitute a violation by eGlobe of any provision of any
law or regulation of any governmental authority, including without limitation,
the registration or qualification requirement of applicable federal and state
securities laws or regulations. If at any time eGlobe shall determine, based
upon a written opinion of securities counsel, that the registration or
qualification of any shares subject to this Warrant under any applicable state
or federal law is necessary as a condition of, or in connection with, the
issuance of shares, this Warrant may not be exercised in whole or in part unless
such registration or qualification shall have been effected or obtained free of
any conditions not reasonably acceptable to eGlobe, and any delay caused thereby
shall in no way affect the date of termination of this Warrant. Specifically in
connection with the Securities Act of 1933 (as now in effect or as hereafter
amended) (the "Securities Act"), unless a registration statement under the
Securities Act is in effect with respect to the shares of eGlobe Common Stock
covered by this Warrant, eGlobe shall not be required to issue such shares
unless the Board of Directors of eGlobe has received evidence reasonably
satisfactory to it that the holder of this Warrant may acquire such shares
pursuant to an exemption from registration under the Securities Act. As to any
jurisdiction that expressly imposes the requirement that this Warrant shall not
be exercisable unless and until the shares of eGlobe Common Stock covered by
this Warrant are registered or are subject to an available exemption from
registration, the exercise of this Warrant (under circumstances in which the
laws of such jurisdiction apply) shall be deemed conditioned upon the
effectiveness of such registration or the availability of such an exemption.
-3-
<PAGE>
8. Registration of Shares for Resale. Promptly after the date
this Warrant is issued to the Holder, eGlobe shall take all reasonable steps
necessary to file a registration statement on Form S-3 under the Securities Act
(to the extent eGlobe is then eligible to register its securities on such form)
to register for resale the shares of eGlobe Common Stock issued upon exercise of
this Warrant. eGlobe shall take all reasonable steps necessary to cause such
registration statement to become effective as promptly as practicable, and shall
maintain the effectiveness of such registration statement until the shares
registered thereunder have been transferred pursuant to such registration
statement or such shares become transferable under Rule 144(k) under the
Securities Act. eGlobe shall retain the right to cause the Holder, upon written
notice from eGlobe to Holder, to suspend sales under such registration statement
for reasonable periods when necessary to permit eGlobe to correct or update the
disclosure contained or incorporated into such registration statement or when
eGlobe reasonably believes that such disclosure may have become false or
misleading due to the occurrence of a significant event or the pendency of a
significant corporate transaction.
9. Applicable Law. This Warrant shall be governed by and
construed in accordance with the laws of the State of Delaware except to the
extent federal law may be applicable.
10. Reports. eGlobe shall deliver to the Holder, promptly upon
the mailing thereof to the stockholders of eGlobe generally, copies of all
financial statements, reports and proxy statements so mailed, and shall deliver
to the Holder such other information that eGlobe may produce in written form in
the ordinary course of its business which is available to stockholders of eGlobe
generally and which the Holder reasonably requests.
IN WITNESS WHEREOF, eGlobe has caused this Warrant to be duly
executed on the day and year set forth below.
DATED: _____________ __, ____
[SEAL] EXECUTIVE TELECARD, LTD.
D/B/A EGLOBE, INC.
ATTEST:
By:
- - ---------------------------------- ----------------------------------
Its:
---------------------------------
-4-
<PAGE>
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:
NO.:
WARRANT TO PURCHASE
SHARES OF
COMMON STOCK
OF
EXECUTIVE TELECARD, LTD.
Executive Telecard, Ltd. (also d/b/a eGlobe), a Delaware corporation
(the "Company"), hereby issues to __________ (the "Holder") this warrant to
purchase from the Company, for a price per share equal to $_____, __________
shares of common stock, $.001 par value per share of the Company (the "Common
Stock").
1. Exercise. The rights represented by this warrant may be exercised,
in whole or in part at any time beginning on the date that is _____ days after
the date hereof until 5:00 PM (New York, New York time) on the _____ 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. 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
-5-
<PAGE>
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.
2. Antidilution. In case the Company shall (i) pay a dividend in shares
of Common Stock or make a distribution in shares of Common Stock, (ii) subdivide
its outstanding shares of Common Stock (including, without limitation, by way of
stock splits and the like), (iii) combine its outstanding shares of Common Stock
into a smaller number of shares of Common Stock or (iv) issue by
reclassification of its shares of Common Stock other securities of the Company
(including any such reclassification in connection with a consolidation or
merger in which the Company is the surviving corporation), the number of shares
of Common Stock purchasable upon exercise of this warrant immediately prior
thereto shall be adjusted so that the Holder shall be entitled to receive the
number of shares of Common Stock or the kind and number of other securities of
the Company which it would have owned or have been entitled to receive after the
happening of any of the events described above had this warrant been exercised
immediately prior to the happening of such event or any record date with respect
thereto, and the exercise price per share shall be adjusted appropriately. An
adjustment made pursuant to this section 2 shall become effective immediately
after the effective date of each such event retroactive to the record date, if
any, for such event, without amendment or modification required to this
document.
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. Any
transfer shall be effected by the surrender of this warrant, along with the form
of assignment attached as Exhibit B, 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
-6-
<PAGE>
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.
6. Miscellaneous.
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: 1720 S. Bellaire Street, 10th Floor, Denver, CO 80222, Fax No. (303)
691-1861, Attention: Chief Executive Officer, 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.
-7-
<PAGE>
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.
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.
EXECUTIVE TELECARD, LTD.
By:
----------------------------------
Name:
Title:
-8-
<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 Executive Telecard, Ltd., and herewith makes
payment therefor, 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)
-9-
<PAGE>
EXHIBIT B
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 Executive Telecard, Ltd.
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 Executive Telecard,
Ltd. maintained for the purpose, with full power of substitution in the
premises.
Dated: Print Name:
----------------- ----------------------------------
Signature:
-----------------------------------
Witness:
-------------------------------------
-10-
EXHIBIT 4.9
-----------
CERTIFICATE OF DESIGNATIONS
RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS
OF 8% SERIES C CUMULATIVE CONVERTIBLE
PREFERRED STOCK BY RESOLUTION OF
THE BOARD OF DIRECTORS OF
EXECUTIVE TELECARD, LTD.
PURSUANT TO SECTION 151 OF THE GENERAL
CORPORATION LAW OF THE STATE OF DELAWARE
8% SERIES C CUMULATIVE CONVERTIBLE
PREFERRED STOCK
I, Christopher J. Vizas, Chairman of the Board of Executive TeleCard,
Ltd. (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 22, 1998, providing for the creation of the 8% Series C
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 275 shares
having a par value of $.001 per share, which series shall be titled "8% Series C
Cumulative Convertible Preferred Stock."
The designations, rights, preferences, privileges and restrictions of
the 8% Series C 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 C Cumulative Convertible Preferred Stock"
(the "Series C Preferred Stock") and shall consist of 275 shares. The shares of
the Series C Preferred Stock may be issued in different series if more than one
Closing shall occur. All the series of the Series C Preferred Stock shall have
identical rights, preferences, privileges and restrictions as set forth below,
except with respect to the date of the Closing, the First Conversion Date and
the Conversion Price. The par value of the Series C Preferred Stock shall be
$.001 per share. Certain defined terms used herein are defined in paragraph 11
below.
2. Voting. (a) Except as may be otherwise provided by these terms of
the Series C Preferred Stock or by law, the holders of Series C Preferred Stock
shall
<PAGE>
have no voting rights unless dividends payable on the shares of Series C
Preferred Stock are in arrears for six quarterly periods, in which case the
holders of Series C 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 C 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 C 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 C Convertible Preferred Stock (other than the Series A
Preferred Stock), each par value $.001 per share, authorized as of the date
hereof) as to dividends or rights on liquidation, winding up and dissolution.
(b) Whenever holders of Series C 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 C 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. (a) The holders of the Series C 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 C 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 September 30, 2000, when, as and if declared by the Board of
Directors.
(b) On each Dividend Payment Date commencing September 30, 2000,
Accruing Dividends, may at the option of the Corporation, be payable (i) in
cash, (ii) in kind in additional fully paid nonassessable shares of Series C
Preferred Stock (including fractional shares, as necessary) at the rate of .01
share of Series C Preferred Stock for each $1,000 of such dividend not made in
cash, or (iii) a combination thereof.
(c) All shares of Series C Preferred Stock which may be issued as a
dividend will thereupon be duly authorized, validly issued, fully paid and
nonassessable.
(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
-2-
<PAGE>
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
(e) No dividends shall be granted on any Common Stock or Preferred
Stock junior to Series C Preferred Stock unless and until all accrued but unpaid
dividends with respect to the Series C Preferred Stock have been paid in full.
4. Liquidation. (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 C Preferred Stock shall first be entitled, before
any distribution or payment is made upon any Junior Stock (as herein defined),
to be paid, in the case of each such share, an amount equal to $100,000 per
share of Series C 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 C Preferred Stock shall be insufficient to permit payment in full to all
holders of Series C 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 C 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 C Preferred Stock and
the holders of any other class or series of Preferred Stock ranking on parity
with the Series C Preferred Stock as to liquidation, in accordance with the
respective amounts payable on liquidation upon the shares of Series C Preferred
Stock and such Preferred Stock ranking on parity with the Series C Preferred
Stock as to liquidation. After payment in full to the holders of Series C
Preferred Stock of the aggregate Liquidation Preference as aforesaid, holders of
the Series C 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 C Preferred
Stock, such notice to be addressed to each such holder at its address as shown
by the records of the Corporation.
(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.
-3-
<PAGE>
5. Conversion. The holders of shares of Series C Preferred Stock shall
have the following conversion rights:
5A. Right to Convert. Subject to the terms and conditions of this
paragraph 5, the holder of any share or shares of Series C Preferred Stock shall
have the right at the option of the holder to convert any such share or shares
of Series C Preferred Stock, at any time following the 180th day following the
relevant Closing (the "First Conversion Date"), into such number of fully paid
and nonassessable shares of Common Stock (the "Conversion Rate") as is obtained
by (i) multiplying the number of shares of Series C Preferred Stock by the
Liquidation Amount and (ii) dividing the result by the initial conversion price
equal to the greater of (x) 90% of the average of the last reported sales price
of the Common Stock on Nasdaq for the ten trading days prior to the First
Conversion Date, provided, however, that the Conversion Price shall for the
purposes of this clause (x) neither be less than $4 nor greater than $6 per
share, and (y) the last reported sales price of the Common Stock on Nasdaq on
the trading day prior to the relevant Closing (such conversion price, as it may
have last been adjusted pursuant to the terms hereof, is referred to herein as
the "Conversion Price").
Upon any Change of Control, however, each holder of Series C 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 "Market Price") is less than the Conversion Price, have a one time right to
convert such holder's shares of Series C Preferred Stock into shares of the
Common Stock at a conversion price equal to the Market 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 Market Price.
Such 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 C Preferred Stock into Common Stock and by surrender of a
certificate or certificates for the shares to be so converted, duly endorsed to
the Corporation or in blank, 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 C Preferred Stock) at any time
during its usual business hours on the date or dates set forth in such notice,
together 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 C Preferred Stock being
converted unless all requirements for transfer of Series C Preferred Stock have
been complied with. Conversion shall be effective upon receipt by the
Corporation of the notice and the share certificate or certificates contemplated
by
-4-
<PAGE>
the preceding sentence; provided, that the holder may, but shall not be required
to deliver such notice and such certificate or certificates on the same date.
In case of (i) the redemption of any shares of Series C Preferred Stock
pursuant to paragraph 6, such right of conversion shall cease and terminate, as
to the shares to be redeemed, at the close of business on the second business
day preceding the date fixed for such redemption, unless the Corporation shall
thereafter default in the payment of the Redemption Price for the shares to be
so redeemed or (ii) any liquidation of the Corporation, such right 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 C
Preferred Stock pursuant to paragraph 4.
The number of shares into which the Series C Preferred Stock is
convertible will be determined without giving effect to any Accruing Dividends
on the Series C Preferred Stock, no consideration will be payable in respect of
any Accrued Dividends that may exist with respect to any Series C Preferred
Stock that the holder elects to convert into Common Stock and the exercise by a
holder of Series C Preferred Stock into Common Stock shall constitute a waiver
in all respects of any and all rights that the holder may have to such Accruing
Dividends.
Common Stock issued upon conversion will include rights to purchase
Series A Participating Preferred Stock of the Company (the "Rights") in
accordance with the terms of the Corporation's Rights Agreement, if such
conversion occurs prior to the distribution of such Rights or the redemption or
expiration thereof.
5B. Issuance of Certificates; Time Conversion Effected. Promptly after
the receipt of the written notice referred to in subparagraph 5A and surrender
of the certificate or certificates for the share or shares of Series C Preferred
Stock to be converted, the Corporation shall issue and deliver or cause to be
issued and delivered, to such holder of Series C 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 5C below, fractional shares, as
necessary, issuable upon the conversion of such share or shares of Series C
Preferred Stock. Such conversion shall be deemed to have been effected as of the
close of business on the date on which such written notice shall have been
received by the Corporation and the certificate or certificates for such share
or shares of Series C Preferred Stock to be so converted shall have been
surrendered as aforesaid, and at such time the rights of the holder of such
share or shares of Series C Preferred Stock 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.
-5-
<PAGE>
5C. Fractional Shares; Partial Conversion. In the event that the
computation pursuant to subparagraph 5A of the number of shares of Common Stock
issuable upon conversion of shares of Series C 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 C Preferred Stock represented by the certificate or
certificates surrendered pursuant to subparagraph 5A 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 C 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 C Preferred Stock represented thereby to the same extent as if the
Certificate theretofore covering such unconverted shares had not been
surrendered for conversion.
5D. Adjustment of Price Upon Issuance of Common Stock. Except as
provided in subparagraph 5M below or in the case of any Permitted Issuance, if
and whenever the Corporation shall issue or sell, or is, in accordance with
subparagraphs 5D(1) through 5D(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
5D(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 5D(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
Closing (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 Closing), 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,
-6-
<PAGE>
and (iii) shares of Series B Convertible Preferred Stock of the Corporation
which may be designated and issued in connection with the acquisition of IDX
International, Inc.
For purposes of this subparagraph 5D, the following subparagraphs 5D(1)
to 5D(5) shall also be applicable:
5D(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 5D(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.
5D(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
-7-
<PAGE>
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 5D(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
made pursuant to other provisions of this subparagraph 5D, no further adjustment
of the Conversion Price shall be made by reason of such issue or sale.
5D(3). Change in Option Price or Conversion Rate. If (i) the exercise
price provided for in any Option referred to in subparagraph 5D(1), (ii) the
additional consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in subparagraph 5D(1) or 5D(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
5D(1), (iv) the number of shares of Common Stock issuable upon the exercise of
Options referred to in subparagraph 5D(1), or (v) the rate at which Convertible
Securities referred to in subparagraph 5D(1) or 5D(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 5D(1) or the expiration
or termination of any right to convert or exchange Convertible Securities
referred to in subparagraphs 5D(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;
5D(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
-8-
<PAGE>
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.
5D(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 5D. 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.
5E. Subdivision or Combination of Common Stock or Series C 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 C
Preferred Stock) without or for de minimus consideration shall be deemed to be a
subdivision for purposes of this subparagraph 5E. In the event of a subdivision
or combination of the Series C Preferred Stock, the Liquidation Amount shall be
proportionately reduced or increased, as the case may be.
5F. 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
-9-
<PAGE>
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 C 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 C
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 5F 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 5D or 5E upon the occurrence of such distribution, reorganization,
reclassification, consolidation, merger, sale or conveyance.
5G. 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 C 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.
5H. 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;
-10-
<PAGE>
(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 C 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.
5I. 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 C Preferred Stock as
herein provided, such number of shares of Common Stock as shall then be issuable
upon the conversion of all outstanding shares of Series C 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
-11-
<PAGE>
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 C Preferred Stock would exceed the total number of
shares of Common Stock then authorized by the Certificate of Incorporation.
5J. Reissuance of Preferred Stock. Shares of Series C 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.
5K. Issue Tax. The issuance of certificates for shares of Common Stock
upon conversion of Series C 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 C Preferred Stock which is
being converted.
5L. Closing of Books. The Corporation will at no time close its
transfer books against the transfer of any Series C Preferred Stock or of any
shares of Common Stock issued or issuable upon the conversion of any shares of
Series C Preferred Stock in any manner which interferes with the timely
conversion of such Series C Preferred Stock, except as may otherwise be required
to comply with applicable securities laws.
5M. 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 5M 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 C
Preferred Stock under this paragraph 5 shall be rounded to the nearest three
decimal points.
6. Redemption. The shares of Series C Preferred Stock shall be subject
to redemption, at the option of the Corporation, as follows:
6A. Optional Redemption. The shares of Series C Preferred Stock may not
be redeemed prior to two years from the Issue Date. On or after the second
anniversary of the Issue Date, the shares of the Series C Preferred Stock may be
redeemed, in whole or in part, at the option of the Corporation, (i) in cash,
(ii) by delivery of such number of fully paid shares of Common Stock, valued at
the average of the last reported sales price of the Common Stock on Nasdaq for
ten
-12-
<PAGE>
trading days before the Redemption Date or (iii) a combination thereof, at the
redemption price set forth below:
Years After Percentage of Liquidation
Issue Date Preference
during Year 3 105%
during Year 4 104%
during Year 5 103%
during Year 6 102%
during Year 7 101%
Year 8 and beyond 100%
6B. Redemption Mechanics. The Corporation shall give a redemption
notice (the "Redemption Notice") not less than thirty (30) and not more than
sixty (60) days prior to the Redemption Date (i) by certified mail, postage
prepaid, (ii) by a nationally known overnight delivery service or (iii)
delivered by hand, addressed to each holder of record of shares of Series C
Preferred Stock, notifying such holder of the redemption and specifying the
Redemption Price applicable to the Series C Preferred Stock, the Redemption Date
and the place where said Redemption Price shall be payable. The Redemption
Notice shall be addressed to each holder at his address as shown by the records
of the Corporation. Except as provided in paragraph 8 below, on or after the
Redemption Date fixed in such Redemption Notice, each holder of shares of Series
C Preferred Stock to be so redeemed shall present and surrender the certificate
or certificates for such shares to the Corporation at the place designated in
said notice and thereupon the Redemption Price of such shares shall be paid to,
or to the order of, the Person whose name appears on such certificate or
certificates as the owner thereof. From and after the close of business on the
Redemption Date, unless (i) there shall have been a default in the payment of
the Redemption Price upon surrender of a certificate or certificates
representing shares of Series C Preferred Stock to be redeemed or (ii) the
provisions of paragraph 8 below shall be applicable, all rights of holders of
shares of Series C Preferred Stock subject to redemption on the Redemption Date
(except the right to receive the Redemption Price upon surrender of a
certificate or certificates representing shares of Series C Preferred Stock to
be redeemed, but without interest) shall cease with respect to such shares, and
such shares shall not thereafter be transferred on the books of the Corporation
or be deemed to be outstanding for any purpose whatsoever.
7. Certain Approvals. The Corporation acknowledges that as a
prerequisite to the conversion of Series C Preferred Stock as contemplated
hereby it may be necessary for a holder of Series C 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 C Preferred Stock to require only one such filing), the
requirements of any exchange or market on which
-13-
<PAGE>
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 C
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 C 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 C Preferred Stock shall remain outstanding and be entitled to
all rights and preferences provided herein; provided, however, that if such
prerequisite has not been met by the end of the six months following the
Redemption Date at which time the Series C Preferred Stock may be redeemed at
the Redemption Price, if applicable, then in effect in any manner in accordance
with applicable law, rule or regulation and the provisions of paragraph 6 above.
8. Registration. The holders of Series C Preferred Stock shall be
entitled to the benefit of the Registration Rights Agreement to be entered into
between each holder and the Corporation at each Closing.
9. Warrant. In the event the Corporation does not achieve for the four
calendar quarters beginning July 1, 1999 an aggregate amount of gross revenues
in excess of 150% of the aggregate amount of gross revenues achieved by the
Corporation in the four calendar quarters ended June 30, 1998 as reported in the
Corporation's publicly filed financial statements, the Corporation will issue,
for no additional consideration, to the holders of outstanding Series C
Preferred Stock, a warrant (the "Warrant") to purchase 5,000 shares of Common
Stock for each share of Series C Preferred Stock of which the holder is the
record owner as of June 30, 2000, appropriately adjusted for stock splits, stock
dividends and reclassifications as therein provided. The Warrants will have an
exercise price of $0.01 per share and shall be issuable and exercisable only
insofar as the last reported sales price of the Common Stock on Nasdaq has not
exceeded for 20 consecutive trading days or is not trading June 30, 2000 at a
price per share equal to 125% of the Conversion Price. The form of Warrant will
be as attached hereto as Annex A.
10. Information Rights. Each holder of Series C 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.
11. Definitions.
(a) "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.
-14-
<PAGE>
(b) "Board of Directors" shall mean the Board of Directors of the
Corporation.
(c) "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.
(d) "Closing" shall mean the date of closing of a purchase and sale of
shares of Series C Preferred Stock, which may occur on one or more dates.
(e) "Common Stock" shall mean the common stock, $.001 par value, of the
Corporation.
(f) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
(g) "Issue Date" shall mean the date of original issuance of any share
of Series C Preferred Stock.
(h) "Junior Stock" shall mean any class or series of capital stock of
the Corporation other than Series A Convertible Preferred Stock of the
Corporation which may be issued which, at the time of issuance, is not declared
to be on a parity with or senior to the Series C Preferred Stock as to dividends
and rights upon liquidation and which has received the consent required by
Section 2(a) hereto.
(i) "Nasdaq" shall mean the Nasdaq Stock Market.
(j) "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.
-15-
<PAGE>
(k) "Preferred Stock" shall mean any class or series of preferred stock
of the Corporation.
(l) "Redemption Date" shall mean the date fixed for redemption of
Series C Preferred Stock at any time two years from the Issue Date.
(m) "Registration Rights Agreement" shall mean the Registration Rights
Agreement dated the date of the Closing entered into between each holder of the
shares of Series C Preferred Stock and the Corporation.
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 _____ day of _______________, 1998.
---------------------------------------
Christopher J. Vizas
Chairman of the Board and President
[SEAL]
ATTEST:
- - -----------------------------------
W.P. Colin Smith
Secretary
-16-
EXHIBIT 4.10
------------
CERTIFICATE OF DESIGNATIONS
RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS
OF 8% SERIES D CUMULATIVE CONVERTIBLE
PREFERRED STOCK BY RESOLUTION OF
THE BOARD OF DIRECTORS OF
EXECUTIVE TELECARD, LTD.
PURSUANT TO SECTION 151 OF THE GENERAL
CORPORATION LAW OF THE STATE OF DELAWARE
8% SERIES D CUMULATIVE CONVERTIBLE
PREFERRED STOCK
I, Christopher J. Vizas, Chairman of the Board of Executive TeleCard,
Ltd. (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 January 12, 1999 providing for the creation of the 8% Series D
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 125 shares
having a par value of $.001 per share, which series shall be titled "8% Series D
Cumulative Convertible Preferred Stock."
The designations, rights, preferences, privileges and restrictions of
the 8% Series D 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 D Cumulative Convertible Preferred Stock"
(the "Series D Preferred Stock") and shall consist of 125 shares. The shares of
the Series D Preferred Stock may be issued in different series if more than one
Closing shall occur. All the series of the Series D Preferred Stock shall have
identical rights, preferences, privileges and restrictions as set forth below,
except with respect to the date of the Closing, the First Conversion Date and
the Conversion Price. The par value of the Series D 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 D Preferred Stock or by law, the holders of Series D Preferred Stock
shall
<PAGE>
have no voting rights unless dividends payable on the shares of Series D
Preferred Stock are in arrears for six quarterly periods, in which case the
holders of Series D 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 D 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 D 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 D Convertible Preferred Stock (other than the Series A
Preferred Stock and Series C Preferred 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 D 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 D 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 D 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 D 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 dividends that would accrue through December 31, 2000 on each
share of Series D Preferred Stock (whether or not then accrued) 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 D Preferred Stock (subject to Section 5(a)(vi)),
Accruing Dividends, may at the option of the Corporation, be payable (i) in
cash, (ii) in kind in additional fully paid nonassessable shares of Series D
Preferred Stock (including fractional shares, as necessary) at the rate of .01
share of Series D Preferred Stock for each $1,000 of such dividend not made in
cash, or (iii) a combination thereof.
-2-
<PAGE>
3(c) All shares of Series D Preferred 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 D 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.
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 D 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, to be
paid, in the case of each such share, an amount equal to $100,000 per share of
Series D 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 D
Preferred Stock shall be insufficient to permit payment in full to all holders
of Series D 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 D 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 D Preferred Stock and the
holders of any other class or series of Preferred Stock ranking on parity with
the Series D Preferred Stock as to liquidation, in accordance with the
respective amounts payable on liquidation upon the shares of Series D Preferred
Stock and such Preferred Stock ranking on parity with the Series D Preferred
Stock as to liquidation. After payment in full to the holders of Series D
Preferred Stock of the aggregate Liquidation Preference as aforesaid, holders of
the Series D 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 D Preferred
Stock,
-3-
<PAGE>
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 D 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), the holder of any share or shares
of Series D Preferred Stock shall have the right at the option of the holder to
convert any such share or shares of Series D Preferred Stock, at any time
following the 90th day following the relevant Closing (the "First Conversion
Date"), 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 D Preferred Stock by the Liquidation Amount and (2) dividing the
result by the initial conversion price equal to the lesser of (x) $1.60 and (y)
in the event (and only in the event) that the Corporation does not have positive
EBITDA for any fiscal quarter commencing with the quarter in which the first
Closing occurs and the third fiscal quarter of the Corporation's 1999 fiscal
year and does not complete a public offering of equity securities at a price of
at least $3.00 per share and with gross proceeds to the Corporation of at least
$20 million on or prior to the end of the third fiscal quarter of the
Corporation's 1999 fiscal year, the last reported closing bid price of the
Common Stock on Nasdaq on the last trading day prior to the Corporation's
receipt of the written notice referred to in subparagraph 5(a)(iv) of such
conversion (such conversion price, as it may have last been adjusted pursuant to
the terms hereof, is referred to herein as the "Conversion Price").
Notwithstanding the foregoing, except as provided below, the Series D Preferred
Stock (including any shares issued in payment of dividends) may be converted
into a maximum of 3,260,091 shares of Common Stock (reduced by the number of
shares that are issued upon the exercise of any Additional Warrants), and from
and after issuance of such number of shares of Common Stock upon conversion of
the Series D Preferred Stock, all shares of the Series D Preferred Stock
(whether or not then outstanding) shall cease to be convertible (a "Cessation of
Conversion Event"). On or after forty-five (45) days following the Cessation of
Conversion Event, the Corporation shall, upon written election by the
Corporation or any holder, redeem the number of outstanding shares of Series D
Preferred Stock as are indicated in such written election for an amount equal to
the Liquidation Preference of such shares. Any redemption by the Corporation
shall be made ratably among the holders of Series D Preferred Stock. In the
event that the Company receives all requisite shareholder approvals to issue
-4-
<PAGE>
more than the maximum number of shares of Common Stock set forth above, the
Company shall issue all shares of Common Stock issuable upon conversion of the
Series D Preferred Stock, even if such number exceeds the maximum share
limitation set forth above.
(ii) Each share of Series D 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 D Preferred Stock is
outstanding, (2) the date that 80% or more of the Series D Preferred Stock
issued by the Corporation, cumulatively from and after the date hereof
(including without limitation all Series D Preferred Stock issued in the first
Closing), whether or not such Series D 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 D 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 D
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 D 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) Such rights of conversion (other than automatic 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 D 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 D 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
-5-
<PAGE>
in any name other than the name or names set forth on the certificates for the
shares of Series D Preferred Stock being converted unless all requirements for
transfer of Series D 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).
(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 D Preferred Stock pursuant to paragraph 4.
(vi) The number of shares into which the Series D Preferred Stock is
convertible will be determined without giving effect to any Accruing Dividends
on the Series D Preferred Stock. No consideration will be payable in respect of
any Accrued Dividends that may exist with respect to any Series D Preferred
Stock that the holder elects to convert into Common Stock and the exercise by a
holder of Series D Preferred Stock into Common Stock shall constitute a waiver
in all respects of any and all rights that the holder may have to such Accruing
Dividends, except for Accruing Dividends which accrue through December 31, 2000,
which shall be payable in full upon conversion, as provided in the last sentence
of paragraph 3(a).
(vii) Notwithstanding anything herein to the contrary, a holder shall
not have the right, and the Corporation shall not have the obligation, to
convert all or any portion of the Series D Preferred Stock (and the Corporation
shall not have the right to pay dividends on the Series D Preferred Stock in
shares of Common Stock at a time when the Common Stock underlying the Series D
Preferred Stock is not registered for resale under the Securities Act) if and to
the extent that the issuance to the holder of shares of Common Stock upon such
conversion (or payment of dividends) would result in the holder owning more than
9.9% of the shares of Common Stock outstanding after such conversion.
(viii) Common Stock issued upon conversion will include rights to
purchase Series A Preferred Stock (the "Rights") in accordance with the terms of
the Corporation's Rights Agreement, if such conversion occurs prior to the
distribution of such Rights or the redemption or expiration thereof.
5(b). Issuance of Certificates; Time Conversion Effected. (i) Promptly
after the receipt of the written notice referred to in subparagraph 5(a)(iv) and
surrender of the certificate or certificates for the share or shares of Series D
Preferred Stock to be converted, the Corporation shall issue and deliver or
cause to be issued and delivered, to such holder of Series D 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
-6-
<PAGE>
subparagraph 5(c) below, fractional shares, as necessary, issuable upon the
conversion of such share or shares of Series D Preferred Stock. Such conversion
shall be deemed to have been effected as of the close of business on the date on
which such written notice shall have been received by the Corporation and its
transfer agent (by mail or telecopier); provided that the original notice and
the certificate or certificates for such share or shares of Series D Preferred
Stock to be so converted shall have been surrendered to the Corporation and the
transfer agent within five (5) days of the date of receipt of such notice, and
at such time the rights of the holder of such share or shares of Series D
Preferred Stock 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) In the case of automatic conversion, the outstanding shares of
Series D Preferred Stock shall be converted into Common Stock automatically
without any further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the Corporation or its
transfer agent; provided, however, that 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 D 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 D Preferred
Stock at the office of the Corporation or any transfer agent for the Series D
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 D 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 D 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 5(a) of the number of shares of Common
Stock issuable upon conversion of shares of Series D 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 D Preferred Stock represented by the certificate or
certificates surrendered pursuant to subparagraph 5(a) exceeds the number of
shares converted, the
-7-
<PAGE>
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 D 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 D 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
Closing (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 Closing), 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:
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
-8-
<PAGE>
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
-9-
<PAGE>
Options to purchase any such Convertible Securities for which adjustments of the
Conversion Price have been or are to be 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
-10-
<PAGE>
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.
5(e). Subdivision or Combination of Common Stock or Series D 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 D
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 D 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 D 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
-11-
<PAGE>
share or shares of Series D 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, Redemption. 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 D 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.
Any election of redemption pursuant to paragraph 5(a) shall be by a
written redemption notice (the "Redemption Notice"), delivered (i) by certified
or registered mail, postage prepaid, (ii) by a nationally known overnight
delivery service or (iii) delivered by hand, addressed to the Corporation or
each holder of shares of Series D Preferred Stock at the address of such holder
as shown on the books of the Corporation, as applicable, notifying such holders
or the Corporation of the redemption and specifying the redemption price
applicable to the Series D Preferred Stock and the redemption date (which shall
not be earlier than 30 days following delivery of the Redemption Notice). On or
after the redemption date fixed in such Redemption Notice, each holder of shares
of Series D Preferred Stock to be so redeemed shall present and surrender the
certificate or certificates for such shares to the Corporation at its principal
place of business and thereupon the redemption price of such shares shall be
paid to, or to the order of, the holder whose name appears on such certificate
or certificates as the owner thereof. From and after the close of business on
the redemption date, unless (i) there shall have been a default in the payment
of the redemption price upon surrender of a certificate or certificates
representing shares of Series D Preferred Stock to be redeemed or (ii) the
provisions
-12-
<PAGE>
of paragraph 6 below shall be applicable, all rights of holders of shares of
Series D Preferred Stock subject to redemption on the redemption date (except
the right to receive the redemption price upon surrender of a certificate or
certificates representing shares of Series D Preferred Stock to be redeemed, but
without interest) shall cease with respect to such shares, and such shares shall
not thereafter be transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever.
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 D 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
-13-
<PAGE>
purpose of issuance upon the conversion of Series D Preferred Stock as herein
provided, such number of shares of Common Stock as shall then be issuable upon
the conversion of all outstanding shares of Series D 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 D 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 D 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 D 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 D 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 D Preferred Stock or of any
shares of Common Stock issued or issuable upon the conversion of any shares of
Series D Preferred Stock in any manner which interferes with the timely
conversion of such Series D 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 D
-14-
<PAGE>
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 D Preferred Stock as contemplated
hereby it may be necessary for a holder of Series D 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 D 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 D 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 D 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 D Preferred Stock
shall remain outstanding and be entitled to all rights and preferences provided
herein.
7. Information Rights. Each holder of Series D 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.
"Additional Warrants" shall have the meaning set forth in the Stock
Purchase Agreement dated January 12, 1999.
"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.
"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,
-15-
<PAGE>
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.
"Closing" shall mean the date of closing of a purchase and sale of
shares of Series D Preferred Stock, which may occur on one or more dates.
"Common Stock" shall mean the common stock, $.001 par value, of the
Corporation.
"EBITDA" means the earnings before interest, taxes, depreciation and
amortization of the Corporation, determined in accordance with applicable
generally accepted accounting principles, applied in a manner consistent with
the Corporation's publicly filed financial statements.
"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 D Preferred Stock.
"Junior Stock" shall mean any class or series of capital stock
(including Common Stock) of the Corporation (other than Series A Preferred Stock
and Series C Preferred Stock) which may be issued which, at the time of
issuance, is not declared to be on a parity with or senior to the Series D
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.
"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.
-16-
<PAGE>
"Senior Stock" shall mean any class or series of Preferred Stock of the
Corporation (including Series A Preferred Stock and Series C Preferred Stock)
which, at the time of issuance, is declared to be senior to the Series D
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.
"Series A Preferred Stock" shall mean the Series A Participating
Preferred Stock, par value $.001 per share, of the Corporation.
"Series C Preferred Stock" shall mean the 8% Series C Cumulative
Convertible Preferred Stock, par value $.001 per share, of the Corporation.
-17-
<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 _____ day of January, 1999.
---------------------------------------
Christopher J. Vizas
Chairman of the Board and President
[SEAL]
ATTEST:
- - -----------------------------------
John Koonce
Assistant Secretary
-18-
<PAGE>
CERTIFICATE OF CORRECTION
OF JANUARY 12, 1999 CERTIFICATE OF DESIGNATIONS
OF EXECUTIVE TELECARD, LTD.
Executive Telecard, Ltd. (the "Corporation"), a corporation
organized and existing under the General Corporation Law of the State of
Delaware (the "DGCL"), hereby certifies that:
1. The Certificate of Designations, Rights, Preferences,
Privileges and Restrictions of 8% Series D Cumulative Convertible Preferred
Stock by Resolution of the Board of Directors of the Corporation filed with the
Secretary of State of the State of Delaware on January 12, 1999 (the
"Certificate of Designations") is an inaccurate record of the corporate action
therein referred to and requires correction as permitted by subsection (f) of
Section 103 of the DGCL.
2. The inaccuracy or defect of said Certificate of
Designations to be corrected is specified as follows. The word "Additional" was
not actually intended to precede the word "Warrants" in numbered paragraph
5(a)(i) and in the first paragraph of numbered paragraph 8 of the Certificate of
Designations. The inclusion of the word "Additional" preceding the word
"Warrants" in numbered paragraph 5(a)(i) and in the first paragraph of numbered
paragraph 8 was inadvertent.
3. Numbered paragraph 5(a)(i) of the Certificate of
Designations is hereby corrected to read, and in corrected form reads, as set
forth below:
"5(a). Right to Convert. (i) Subject to the terms and
conditions of paragraph 5, including this paragraph 5(a)(i),
the holder of any share or shares of Series D Preferred
Stock shall have the right at the option of the holder to
convert any such share or shares of Series D Preferred
Stock, at any time following the 90th day following the
relevant Closing (the "First Conversion Date"), 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 D Preferred Stock
by the Liquidation Amount and (2) dividing the result by the
initial conversion price equal to the lesser of (x) $1.60
and (y) in the event (and only in the event) that the
Corporation does not have positive EBITDA for any fiscal
quarter commencing with the quarter in which the first
Closing occurs and the third fiscal quarter of the
Corporation's 1999 fiscal year and
-19-
<PAGE>
does not complete a public offering of equity securities at
a price of at least $3.00 per share and with gross proceeds
to the Corporation of at least $20 million on or prior to
the end of the third fiscal quarter of the Corporation's
1999 fiscal year, the last reported closing bid price of the
Common Stock on Nasdaq on the last trading day prior to the
Corporation's receipt of the written notice referred to in
subparagraph 5(a)(iv) of such conversion (such conversion
price, as it may have last been adjusted pursuant to the
terms hereof, is referred to herein as the "Conversion
Price"). Notwithstanding the foregoing, except as provided
below, the Series D Preferred Stock (including any shares
issued in payment of dividends) may be converted into a
maximum of 3,260,091 shares of Common Stock (reduced by the
number of shares that are issued upon the exercise of any
Warrants), and from and after issuance of such number of
shares of Common Stock upon conversion of the Series D
Preferred Stock, all shares of the Series D Preferred Stock
(whether or not then outstanding) shall cease to be
convertible (a "Cessation of Conversion Event"). On or after
forty-five (45) days following the Cessation of Conversion
Event, the Corporation shall, upon written election by the
Corporation or any holder, redeem the number of outstanding
shares of Series D Preferred Stock as are indicated in such
written election for an amount equal to the Liquidation
Preference of such shares. Any redemption by the Corporation
shall be made ratably among the holders of Series D
Preferred Stock. In the event that the Company receives all
requisite shareholder approvals to issue more than the
maximum number of shares of Common Stock set forth above,
the Company shall issue all shares of Common Stock issuable
upon conversion of the Series D Preferred Stock, even if
such number exceeds the maximum share limitation set forth
above."
4. The first paragraph of numbered paragraph 8 of the
Certificate of Designations is hereby corrected to read, and in corrected form
reads, as set forth below:
-20-
<PAGE>
8. Definition
"Warrants' shall have the meaning set forth in the Stock
Purchase Agreement dated January 12, 1999."
IN WITNESS WHEREOF, Executive Telecard, Ltd. has caused this
Certificate of Correction to be duly executed and acknowledged in accordance
with Section 103 of the DGCL.
EXECUTIVE TELECARD, LTD.
By:
------------------------------------
Name:
Title:
-21-
EXHIBIT 4.11
------------
CERTIFICATE OF DESIGNATIONS
RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS
OF 8% SERIES E CUMULATIVE CONVERTIBLE REDEEMABLE
PREFERRED STOCK BY RESOLUTION OF
THE BOARD OF DIRECTORS OF
EXECUTIVE TELECARD, LTD.
PURSUANT TO SECTION 151 OF THE GENERAL
CORPORATION LAW OF THE STATE OF DELAWARE
8% SERIES E CUMULATIVE CONVERTIBLE
REDEEMABLE PREFERRED STOCK
I, Christopher J. Vizas, Chairman of the Board of Executive TeleCard,
Ltd. (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 January 10, 1999 providing for the creation of the 8% Series E
Cumulative Convertible Redeemable 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 Redeemable Preferred Stock consisting of 125
shares having a par value of $.001 per share, which series shall be titled "8%
Series E Cumulative Convertible Redeemable Preferred Stock."
The designations, rights, preferences, privileges and restrictions of
the 8% Series E Cumulative Convertible Redeemable Preferred Stock shall be made
as follows:
1. Designation and Amount. This series of Preferred Stock shall be
designated and known as "8% Series E Cumulative Convertible Redeemable Preferred
Stock" (the "Series E Preferred Stock") and shall consist of 125 shares. The par
value of the Series E Preferred Stock shall be $.001 per share. Certain defined
terms used herein are defined in paragraph 10 below.
2. Voting. 2(a) Except as may be otherwise provided by these terms of
the Series E Preferred Stock or by law, the holders of Series E Preferred Stock
shall have no voting rights unless dividends payable on the shares of Series E
Preferred Stock are in arrears for six quarterly periods, in which case the
holders of Series E Preferred Stock voting separately as a class with the shares
of any other Preferred
<PAGE>
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
E 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 E 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 E
Convertible Preferred Stock (other than the Series A Preferred Stock, Series C
Preferred Stock and Series D Preferred 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 E 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 E 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 E 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 E 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, 2000, when, as and if declared by the Board of
Directors. All dividends that would accrue through December 31, 2000 on each
share of Series E Preferred Stock (whether or not then accrued) 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 E Preferred Stock (subject to Section 5(a)(viii)),
Accruing Dividends, may at the option of the Corporation, be payable (i) in
cash, (ii) in kind in additional fully paid nonassessable shares of Series E
Preferred Stock (including fractional shares, as necessary) at the rate of .01
share of Series E Preferred Stock for each $1,000 of such dividend not made in
cash, or (iii) a combination thereof; 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.
-2-
<PAGE>
3(c) All shares of Series E Preferred 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 E 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 E 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 E 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 E 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 E Preferred Stock shall be insufficient
to permit payment in full to all holders of Series E 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 E
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 E
Preferred Stock and the holders of any other class or series of Preferred Stock
ranking on parity with the Series E Preferred Stock as to liquidation, in
accordance with the respective amounts payable on liquidation upon the shares of
Series E Preferred Stock and such Preferred Stock ranking on parity with the
Series E Preferred Stock as to liquidation. After payment in full to the holders
of Series E Preferred Stock of the aggregate Liquidation Preference as
aforesaid, holders of the Series E 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
-3-
<PAGE>
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 E 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 E 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 Convertibility
Date (as defined below), any share or shares of Series E 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 E Preferred Stock by the Liquidation Amount and (2) dividing
the result by an initial conversion price equal to $2.125 (such conversion
price, as it may have last been adjusted pursuant to the terms hereof, is
referred to herein as the "Conversion Price"). The Convertibility Date shall
mean the earliest to occur of (1) an election by the holder (a "Convertibility
Election"), by written notice to the Corporation to make such share or shares
convertible (which election may be made at any time following the Issue Date of
such shares), (2) an election by the Corporation, by written notice to the
holders, to make all such shares of Series E Preferred Stock convertible (which
election may be made at any time in the event (and only in the event) that the
Corporation has positive EBITDA for at least one of the first, second or third
fiscal quarters of the Corporation's 1999 fiscal year or the Corporation
completes a public offering of equity securities at a price of at least $3.00
per share and with gross proceeds to the Corporation of at least $20 million on
or prior to the end of the third fiscal quarter of the Corporation's 1999 fiscal
year), or (3) immediately prior to the automatic conversion of the Series E
Preferred Stock into Common Stock pursuant to Section 5(a)(ii).
(ii) Each share of Series E 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 E Preferred Stock is
outstanding, (2) the date that 80% or more of the Series E Preferred Stock
issued by the Corporation, cumulatively from and after the date hereof, whether
or not such Series E Preferred Stock is then outstanding, has been converted
into Common Stock, the holders
-4-
<PAGE>
thereof have agreed with the Corporation in writing to convert such Series E
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 E
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 E 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 E 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 E
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 E Preferred Stock being
converted unless all requirements for transfer of Series E 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).
(v) The Corporation's rights of conversion shall be exercised by the
Corporation by giving written notice to all holders of Series E Preferred Stock
that the Corporation elects to convert a stated number of shares of Series E
Preferred Stock into Common Stock. If the Corporation elects to convert less
than all of the then outstanding Series E Preferred Stock into Common Stock,
such conversion shall be effected ratably among the holders of Series E
Preferred Stock. Such written notice may be given by mailing to such holders, at
their addresses on the
-5-
<PAGE>
records of the Corporation, together with a copy to the Corporation's transfer
agent. Upon receipt of such notice of conversion, the holders shall surrender to
the Corporation the 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 E Preferred Stock being converted unless all requirements for transfer
of Series E Preferred Stock have been complied with. Conversion shall be
effective five days after mailing by the Corporation, to the holders of Series E
Preferred Stock Corporation and the transfer agent, of the notice of conversion.
(vi) In the case of automatic conversion, the outstanding shares of
Series E 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.
(vii) 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 E Preferred Stock pursuant to paragraph 4.
(viii) The number of shares into which the Series E Preferred Stock is
convertible will be determined without giving effect to any Accruing Dividends
on the Series E Preferred Stock. No consideration will be payable in respect of
any Accrued Dividends that may exist with respect to any Series E Preferred
Stock that the holder elects to convert into Common Stock and the exercise by a
holder of Series E Preferred Stock into Common Stock shall constitute a waiver
in all respects of any and all rights that the holder may have to such Accruing
Dividends, except for Accruing Dividends which accrue through December 31, 2000,
which shall be payable in full upon conversion, as provided in the last sentence
of paragraph 3(a).
(ix) Common Stock issued upon conversion will include rights to
purchase Series A Preferred Stock (the "Rights") in accordance with the terms of
the Corporation's Rights Agreement, if such conversion occurs prior to the
distribution of such Rights or the redemption or expiration thereof.
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
5(a)(v), or upon automatic conversion as referred to in subparagraph 5(a)(vi),
as applicable, and surrender of the certificate or certificates for the share or
shares of Series E Preferred Stock to be converted, the Corporation shall issue
and deliver or cause to
-6-
<PAGE>
be issued and delivered, to such holder of Series E 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 E
Preferred Stock. Upon the effectiveness of conversion the rights of the holder
of such share or shares of Series E 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 E 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 E Preferred Stock at the
office of the Corporation or any transfer agent for the Series E 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 E 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 E 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 5(a) of the number of shares of Common
Stock issuable upon conversion of shares of Series E 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 E 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 E 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 E Preferred Stock represented thereby to the
-7-
<PAGE>
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 E 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 E 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:
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
-8-
<PAGE>
(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
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.
-9-
<PAGE>
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.
-10-
<PAGE>
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 E 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 E
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 E 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 E 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 E 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
-11-
<PAGE>
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 E 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
-12-
<PAGE>
of any shares of Series E 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 E Preferred Stock as
herein provided, including any dividends that accrue on the Series E 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 E 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 E 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 E 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 E Preferred Stock shall be made without charge
to the holders thereof for any issuance tax in respect thereof; provided. that
the
-13-
<PAGE>
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 E 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 E Preferred Stock or of any
shares of Common Stock issued or issuable upon the conversion of any shares of
Series E Preferred Stock in any manner which interferes with the timely
conversion of such Series E 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 E
Preferred Stock under this paragraph 5 shall be rounded to the nearest three
decimal points.
6. Redemption. The shares of Series E Preferred Stock shall be subject
to redemption, as follows.
6(a). Redemption Rights. The shares of Series E Preferred Stock shall
be subject to redemption, at any time following the date that is five years
after the Issue Date, either (i) at the option of the Corporation, or (ii) at
the option of any holder, provided that the holder has not previously made a
Conversion Election. The shares of the Series E Preferred Stock may be redeemed,
in whole or in part, at the option of the Corporation, (i) in cash, (ii) by
delivery of such number of fully paid shares of Common Stock, valued at the
average of the last reported sales price of the Common Stock on Nasdaq for ten
trading days before the Redemption Date or (iii) a combination thereof, at a
redemption price equal to the Liquidation Preference.
6(b). Redemption Mechanics. The Corporation shall give a redemption
notice (the "Redemption Notice") not less than thirty (30) and not more than
sixty (60) days prior to the Redemption Date (i) by certified mail, postage
prepaid, (ii) by a nationally known overnight delivery service or (iii)
delivered by hand, addressed to each holder of record of shares of Series E
Preferred Stock, notifying such holder of the redemption and specifying the
Redemption Price applicable to the Series E Preferred Stock, the Redemption Date
and the place where said Redemption Price shall be payable. The Redemption
Notice shall be addressed to each holder at his address as shown by the records
of the Corporation. Except as provided in paragraph 7 below, on or after the
Redemption Date fixed in such Redemption
-14-
<PAGE>
Notice, each holder of shares of Series E Preferred Stock to be so redeemed
shall present and surrender the certificate or certificates for such shares to
the Corporation at the place designated in said notice and thereupon the
Redemption Price of such shares shall be paid to, or to the order of, the Person
whose name appears on such certificate or certificates as the owner thereof.
From and after the close of business on the Redemption Date, unless (i) there
shall have been a default in the payment of the Redemption Price upon surrender
of a certificate or certificates representing shares of Series E Preferred Stock
to be redeemed or (ii) the provisions of paragraph 7 below shall be applicable,
all rights of holders of shares of Series E Preferred Stock subject to
redemption on the Redemption Date (except the right to receive the Redemption
Price upon surrender of a certificate or certificates representing shares of
Series E Preferred Stock to be redeemed, but without interest) shall cease with
respect to such shares, and such shares shall not thereafter be transferred on
the books of the Corporation or be deemed to be outstanding for any purpose
whatsoever.
7. Certain Approvals. The Corporation acknowledges that as a
prerequisite to the conversion of Series E Preferred Stock as contemplated
hereby it may be necessary for a holder of Series E 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 E 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 E 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 E 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 E Preferred Stock
shall remain outstanding and be entitled to all rights and preferences provided
herein.
8. Registration. Each holder of Series E Preferred Stock will be
entitled to the benefit of the Registration Rights Agreement to be entered into
between each holder and the Corporation.
9. Information Rights. Each holder of Series E 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.
-15-
<PAGE>
10. 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.
"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.
"EBITDA" means the earnings before interest, taxes, depreciation and
amortization of the Corporation, determined in accordance with applicable
generally accepted accounting principles, applied in a manner consistent with
the Corporation's publicly filed financial statements.
"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 E Preferred Stock.
"Junior Stock" shall mean any class or series of capital stock
(including Common Stock) of the Corporation (other than Series A Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock) which may be
issued which, at the time of issuance, is not declared to be on a parity with or
senior to the Series E Preferred Stock as to dividends and rights upon
liquidation (or in the case of
-16-
<PAGE>
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 E 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 Series A Preferred Stock and Series C Preferred Stock)
which, at the time of issuance, is declared to be senior to the Series E
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.
"Series A Preferred Stock" shall mean the Series A Participating
Preferred Stock, par value $.001 per share, of the Corporation.
"Series C Preferred Stock" shall mean the 8% Series C Cumulative
Convertible Preferred Stock, par value $.001 per share, of the Corporation.
"Series D Preferred Stock" shall mean the 8% Series D Cumulative
Convertible Preferred Stock, par value $.001 per share, of the Corporation.
"Warrants" shall have the meaning set forth in the Stock Purchase
Agreement dated February 16, 1999.
-17-
<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 February, 1999.
---------------------------------------
Christopher J. Vizas
Chairman of the Board and President
[SEAL]
ATTEST:
- - -----------------------------------
John E. Koonce
Assistant Secretary
-18-
EXHIBIT 4.13
------------
COMPENSATION AGREEMENT
This agreement (the "Agreement") is entered into by and
between Brookshire Securities Corp., a Delaware Corporation ("Brookshire") and
C-Soft Acquisiton Corp., a Delaware Corporation ("C-SOFT") and Executive
TeleCard, Ltd. dba eGlobe, Inc., a Delaware Corporation, ("eGlobe"); each
Brookshire, C-SOFT and eGlobe collectively hereinafter referred to as the
"Parties."
WHEREAS, C-SOFT is engaged in the business of developing and
deploying a proprietary software for internet applications; and
WHEREAS, Brookshire desires to assist C-SOFT in raising
operating capital pursuant to a combination of debt and equity financing; and
WHEREAS, Brookshire, C-SOFT, and eGlobe have agreed to work
together to accomplish this funding objective.
NOW THEREFORE, in consideration of ten dollars ($10.00) and
other good and valuable consideration, the receipt of which is hereby
acknowledged, the Parties intending to be legally bound, hereby agree as
follows:
1. In connection with a debt financing of $250,000 (the
"Note"), either debt or equity, Brookshire shall be entitled to receive from the
escrow agent at closing, a commission of ten percent (10%) and a three percent
(3%) non-accountable expense allowance on the principal amount of the Note.
2. Legal fees of Two Thousand Five Hundred Dollars ($2,500)
payable by C-SOFT to Brookshire's in connection with the transaction.
3. Brookshire shall receive twenty five hundred (2,500)
warrants to purchase shares of the eGlobe's registered common stock at closing
of this transaction, exercisable for a period of five (5) years upon closing of
this Note, exercisable at the closing price of eGlobe's common stock as of this
closing. eGlobe agrees that the underlying shares are registered under the
Securities Act of 1933, as amended.
4. A representative from Brookshire shall be an observer of
the C-SOFT board of directors and shall be entitled to attend all meetings of
the board of directors for a period of three (3) years from closing of the
Private Placement. All reasonable travel expenses including, but not limited to,
airline travel, hotel, and meals associated with attending such meeting shall be
paid by C-SOFT.
5. Brookshire is hereby granted the right to raise additional
capital funding on terms as set forth in other agreements among the parties.
<PAGE>
6. Pursuant to the terms and conditions of an Escrow
Agreement, the Parties agree that in connection with all funds raised for C-SOFT
by Brookshire, legal counsel for both Parties shall be required to provide
written instructions as to the disbursement of proceeds raised by Brookshire.
Agreed and accepted this 2nd day of September, 1998.
BROOKSHIRE SECURITIES CORP.
By:
---------------------------
Name:
Title:
C-SOFT ACQUISITION CORP.
By:
---------------------------
Name:
Title:
EGLOBE, INC.
By:
---------------------------
Name:
Title:
2
EXHIBIT 4.14
------------
AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into this 18th day
of June, 1998, by and between EXECUTIVE TELECARD, LTD., a Delaware corporation
(the "Company"), and SEYMOUR GORDON, resident of the State of New York with an
address at 3 Hawthorne Lane, Lawrence NY 11559 (the "Purchaser").
WHEREAS, the Company and Purchaser entered into an Agreement
whereby the Purchaser loaned the company $1,000,000 pursuant to a Promissory
Note dated as of June 18, 1998; and
WHEREAS, the Company and the Purchaser entered into a Warrant
dated as of June 18, 1998.
Now therefore, in consideration of the promises, the mutual
representations, warranties and covenants set forth herein, the Company and the
Purchaser hereby agree as follows:
1. Replacement and Extension of Warrants. As additional consideration of
the note, and the Warrant for 67,000 shares dated contemporaneously hereto,
Purchaser shall receive in exchange for his present Warrant currently
exercisable on February 28, 1999 at the price of $5.40, a replacement
Warrant for 55,000 shares exercisable on or before February 29, 2001 at an
exercise price of $3.75. All other terms of such Warrant shall remain the
same.
2. Conversion of the Loan. The outstanding principal and interest of the
Loan shall be convertible, at Purchaser's option, into shares of a new
security which borrower intends to issue (the "Convertible Security"). This
provision does not alter the Purchaser's rights to receive interest under
the terms of the Promissory Note.
3. IDT Preference. The Company is using best efforts to obtain IDT
Corporation's agreement that the indebtedness evidenced by Purchaser's
Promissory Note shall be pari passu with indebtedness to IDT. In the event
that IDT's agreement to this cannot be obtained, the loan from Purchaser
will be junior to IDT indebtedness.
4. Representations and Warranties of the Purchaser. The Purchaser
represents and warrants to the Company as follows:
<PAGE>
(a) Investment Intent, etc. The Purchaser is an "accredited
investor" as such term is defined in Rule 501 of Regulation D promulgated under
the Securities Act. The Purchaser has received, examined and reviewed copies of
the Company's most recent reports, as amended, filed under the Exchange Act and
other publicly available documents requested by him and recognizes that the
investment in the Shares involves a high degree of risk. The Purchaser has been
advised that it may not be possible to readily liquidate this investment. The
Purchaser's overall commitment to the Shares (included in the term "Shares" is
common stock in the Company, the Convertible Security or any other security
which is created as a result of this agreement), which are not readily
marketable, is not disproportionate to his net worth, his investment in the
Company will not cause such overall commitment to become excessive, and he can
afford to bear the loss of his entire investment in the Company. The Purchaser
has such knowledge and experience in financial and business matters that he is
capable of evaluating the merits and risks of an investment in the Common Stock
of the Company. The Purchaser confirms that the Company has made available to
him the opportunity to ask questions of, and received answers from, the Company
concerning the Company and the activities of the Company and otherwise to obtain
any additional information, to the extent that the Company possesses such
information or could acquire it without unreasonable effort or expense,
necessary to verify the accuracy of the information conveyed to him. The
Purchaser hereby acknowledges that he has been advised that this offering of
Shares has not been registered with, or reviewed by, the Securities and Exchange
Commission because this offering is intended to be a non-public offering
pursuant to Section 4(2) of the Securities Act. The Purchaser represents that
the Shares are being purchased for this own account, for investment purposes
only and not with a view towards distribution or resale to others. The Purchaser
agrees that he will not attempt to sell, transfer, assign, pledge or otherwise
dispose the Shares unless they are registered under the Securities Act or
unless, in the opinion of counsel satisfactory to the Company, an exemption from
such registration is available. The Purchaser understands that no securities
administrator of any state has made any finding or determination relating to the
fairness of this investment and that no securities administrator of any state
has recommended or endorsed, or will recommend or endorse, the offering of the
Shares. The execution, delivery and performance by the Purchaser of this
Agreement will not constitute or result in a breach or default under, or
conflict with, any order, ruling or regulation of any court or other tribunal or
of any governmental commission or agency, or any agreement or other undertaking,
to which the Purchaser is a party or by which he is bound. The Purchaser has
relied solely upon the advice of its own tax and legal advisors with respect to
the tax and other legal aspects of this investment. The Purchaser is purchasing
the Shares for his account, and not in any agency, fiduciary or similar
capacity. The source of the funds evidencing the Purchase Price are from legally
available funds of the Purchaser.
-2-
<PAGE>
1. Miscellaneous.
(a) Amendment and Modification. This Agreement may be amended,
modified or supplemented only by written agreement of the Purchaser and the
Company.
(b) Waiver. Any breach of any obligation, covenants, agreement
or condition contained herein shall be deemed waived by the non-breaching party,
only by a writing, setting forth with particularity the breach being waived and
the scope of the waiver, but such waiver shall not operate as a waiver of, or
estoppel with respect to, any subsequent or other breach. No waiver shall be
implied from any conduct or action of the non-breaching party. No failure or
delay by any party in exercising any right, power or privilege hereunder or
under the Documents and no course of dealing by any party shall operate as a
waiver and any right, power or privilege hereunder or under any Document nor
shall any single or partial exercise thereof or the exercise of any other right,
power or privilege.
(c) Notices. All notices, requests, demand, and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given when delivered by hand:
If to the Company, to:
Executive TeleCard, Ltd.
1720 S. Bellaire Street, #1000
Denver, Colorado 80222
Attn: Christopher J. Vizas
Chairman and Chief Executive Officer
With a copy to:
Executive TeleCard, Ltd.
1720 S. Bellaire Street, #1000
Denver, Colorado 80222
Attn: W. P. Colin Smith, Jr.
Vice President and General Counsel
If to Purchaser, to:
Seymour Gordon
3 Hawthorne Lane
Lawrence NY 11559
or to such other address as any party shall have specified by notice in writing
to the other in compliance with this paragraph 10(c).
-3-
<PAGE>
(d) Binding Nature Agreement. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns, but neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assigned by
any of the parties hereto without the prior written consent of the other
parties. Any such assignment without the prior written consent of all the
parties shall be invalid.
(e) Acknowledgment by the Purchaser. The Purchaser has been
informed that the Company's Common Stock is publicly-traded on the Nasdaq
National Market and that the Purchase Price for the Shares may bear no relation
to the future market value or book value of the Common Stock. The Purchaser
further acknowledges that he has reviewed such information, as he deems
appropriate to evaluate whether to enter into this Agreement. The Purchaser
further acknowledges that he is not relying on any oral information or
representations from the Company or any other person, including representatives
of the Company in connection with his decision to enter into this Agreement,
including the Company's financial condition, prospects, present or future
results of operations, business plans or the potential for future appreciation
in the Company's Common Stock.
(f) Governing Law. This Agreement and the legal relations
among the parties hereto shall be governed by and construed in accordance with
the laws of the State of New York applicable to contracts made and performed
therein.
(g) Expenses. All costs and expenses incurred in connection
with this Agreement shall be paid by the party incurring such cost or expense.
(h) Counterparts. This Agreement may be signed in counterparts
with the same effect as if both parties had signed one and the same instrument.
(i) Form of Signature. The parties hereto agree to accept a
facsimile transaction copy of their respective signatures as evidence of their
respective actual signatures to this Agreement; PROVIDED, HOWEVER, that each
party who produces a facsimile signature agreement, by the express terms hereof,
to place, immediately after transmission of its signature by fax, a true and
correct original copy of its signature in overnight mail to the address of the
other party.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed the day and year first above written.
EXECUTIVE TELECARD, LTD.
By:
------------------------------------
Christopher J. Vizas
Chairman and Chief Executive Officer
------------------------------------
SEYMOUR GORDON
-5-
EXHIBIT 4.15
------------
PROMISSORY NOTE
$1,000,000.00 June 18, 1998
FOR VALUE RECEIVED, Executive TeleCard, Ltd., a Delaware
corporation (the "Maker"), promises to pay to the order of SEYMOUR GORDON, or
assigns (the "Holder"), at 3 Hawthorne Lane, Lawrence, NY 11559, or at such
other place as the Holder of this Note may from time to time designate, on the
date that is eighteen (18) months after the date hereof (the "Maturity Date"),
the principal amount of One Million Dollars ($1,000,000.00), together with
interest on the unpaid principal amount hereof from the date hereof until paid
in full, said interest to be due and payable on the Maturity Date, at a rate per
annum equal to eight and seven eighths percent (8 7/8%), simple interest. All
payments hereunder shall be made in lawful money of the United States of
America, without offset.
In the event that the Holder has the opportunity to convert
the principal amount of this Promissory Note to convertible shares of the Maker,
then the accrued interest shall be due and payable at the time of the issuance
of such convertible shares, or on the Maturity Date of the Promissory Note,
whichever is earlier. In the event that the Holder has a right of conversion and
elects not to convert, then the interest hereunder shall be payable monthly
until maturity.
The indebtedness evidenced by this Note shall be junior to all
indebtedness incurred by Maker to IDT Corporation.
The unpaid principal amount of this Note may be prepaid in
whole or in part at any time or times without premium or penalty. Each
prepayment shall be applied first to the payment of all interest and other
amounts accrued hereunder on the date of any such prepayment, and the balance of
any such prepayment shall be applied to the principal amount hereof.
The occurrence of any one or more of the following shall
constitute an event of default ("Event of Default") hereunder:
(1) Failure to pay, when due, the principal, any interest, or
any other sum payable hereunder (whether upon maturity hereof, upon
prepayment date, upon acceleration, or otherwise).
(2) Failure to pay, when due, whether upon maturity, upon
acceleration, or otherwise, of indebtedness other than this Note in the
amount of $67,000 or more;
<PAGE>
(3) The failure of the Maker generally to pay its debts as
such debts become due, the admission by the Maker in writing of its
inability to pay its debts as such debts become due, or the making by
Maker of any general assignment for the benefit of creditors;
(4) The commencement by the Maker of any case, proceeding, or
other action seeking reorganization, arrangement, adjustment,
liquidation, dissolution, or composition of its debts under any law
relating to bankruptcy, insolvency, or reorganization, or relief of
debtors, or seeking appointment of a receiver, trustee, custodian, or
other similar official for all or any substantial part of its property;
(5) The commencement of any case, proceeding, or other action
against Maker seeking to have any order for relief entered against the
Maker as debtor, or seeking reorganization, arrangement, adjustment,
liquidation, dissolution, or composition of the Maker or its debts
under any law relating to bankruptcy, insolvency, reorganization, or
relief of debtors, or seeking appointment of a receiver, trustee,
custodian, or other similar official for the Maker or for all or any
substantial part of the property of the Maker, and (i) the Maker shall,
by any act or omission, indicate its consent to, approval of, or
acquiescence in such case, proceeding or action; or (ii) such case,
proceeding, or action results in the entry of an order for relief which
is not fully stayed within seven business days after the entry thereof.
Upon the occurrence of any such Event of Default hereunder,
the entire principal amount hereof, and all accrued and unpaid interest thereof,
shall be accelerated, and shall be immediately due and payable, at the option of
the Holder without demand or notice, and in addition thereto, and not in
substitution therefor, the Holder shall be entitled to exercise any one or more
of the rights and remedies provided by applicable law. Failure to exercise said
option or to pursue such other remedies shall not constitute a waiver of such
option or such other remedies or of the right to exercise any of the same in the
event of any subsequent Event of Default hereunder.
In the event that the principal amount hereof, any interest or
any other sum due hereunder is not paid when due and payable, the whole of the
unpaid principal amount evidenced hereby and all unpaid accrued interest thereon
shall from the date when such payment was due and payable until the date of
payment in full thereof, bear interest at the higher of the rate of interest
hereinbefore provided for or the rate of thirteen percent (13%) per annum, which
rate, if applicable, shall commence, without notice, immediately upon the date
when said payment was due and payable.
-2-
<PAGE>
The Maker promises to pay all costs and expenses (including,
without limitation, attorneys' fees and disbursements) incurred in connection
with the collection thereof.
Any payment on this Note coming due on a Saturday, a Sunday,
or a day which is a legal holiday in the place at which a payment is to be made
hereunder shall be made on the next succeeding day which is a business day in
such place, and any such extension of the time of payment shall be included in
the computation of interest hereunder.
Whenever used herein, the words "Maker" and "Holder" shall be
deemed to include their respective successors and assigns.
This Note shall be governed by and construed under and in
accordance with the laws of the state of New York (but not including the choice
of law rules thereof).
IN WITNESS WHEREOF, the undersigned has duly executed this
Note, or have caused this Note to be duly executed on their behalf, as of the
day and year first hereinabove set forth.
[SEAL] EXECUTIVE TELECARD, LTD.
By:
------------------------------------
Christopher J. Vizas
Chairman and Chief Executive Officer
-3-
EXHIBIT 4.17
------------
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, HYPOTHECATED OR OTHERWISE DISPOSED
OF UNTIL A REGISTRATION STATEMENT WITH RESPECT THERETO IS DECLARED EFFECTIVE
UNDER SUCH ACT OR THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE COMPANY THAT
AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT IS AVAILABLE.
PROMISSORY NOTE
$250,000 SEPTEMBER __, 1998
FOR VALUE RECEIVED, C-SOFT ACQUISITION CORP., A DELAWARE CORPORATION
(HEREINAFTER REFERRED TO AS THE "MAKER") AND EXECUTIVE TELECARD, LTD. DBA
EGLOBE, INC., A DELAWARE CORPORATION (HEREINAFTER REFERRED TO AS THE
"GUARANTOR") PROMISE TO PAY TO THE ORDER OF DR. J. SONI, AN INDIVIDUAL (OR
ANOTHER ENTITY) (HEREINAFTER REFERRED TO AS THE "PAYEE"), THE PRINCIPAL SUM OF
TWO HUNDRED AND FIFTY THOUSAND DOLLARS ($250,000) PAYABLE IN ONE INSTALLMENT OF
THE PRINCIPAL AND INTEREST DUE NINETY (90) DAYS FROM THE DATE OF ISSUANCE OF THE
PROMISSORY NOTE (THE "NOTE").
TERMS
1. THIS NOTE IS ISSUED AS SECURITY FOR A DEBT OWED BY MAKER TO PAYEE AND SHALL
BEAR INTEREST AT AN ANNUAL RATE OF TWELVE PERCENT (12%).
2. THE MAKER ACKNOWLEDGES THAT THIS NOTE SHALL BECOME DUE AND IMMEDIATELY
PAYABLE NINETY (90) DAYS FROM THE DATE OF ISSUANCE OF THE NOTE OR UPON THE MAKER
CLOSING OF FINANCINGS IN AN AGGREGATE AMOUNT OF ONE MILLION DOLLARS
($1,000,000). IN THE EVENT THAT FINANCINGS IS AN AGGREGATE AMOUNT OF ONE MILLION
DOLLARS ($1,000,000) ARE NOT ACHIEVED PRIOR TO THE DUE DATE, THE MAKER WILL HAVE
THE RIGHT TO EXTEND THE NOTE FOR AN ADDITIONAL NINETY (90) DAY TERM.
3. BY ACCEPTANCE HEREOF, THE PAYEE REPRESENTS THAT IT IS AN "ACCREDITED
INVESTOR" AS SUCH TERM IS DEFINED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
4. EGLOBE CORPORATION SHALL, AS ADDITIONAL CONSIDERATION FOR THE NOTE, AUTHORIZE
THE ISSUANCE OF TWENTY FIVE THOUSAND (25,000) WARRANTS TO PURCHASE SHARES OF
EGLOBE CORPORATION'S COMMON STOCK TO PAYEE, EXERCISABLE FOR A PERIOD OF FIVE (5)
YEARS UPON CLOSING OF THIS NOTE,
<PAGE>
EXERCISABLE AT THE CLOSING PRICE OF EGLOBE CORPORATION'S COMMON STOCK AS OF THIS
CLOSING. BY GUARANTEEING THIS NOTE, EGLOBE CORPORATION AGREES THAT THE
UNDERLYING SHARES ARE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
IN WITNESS WHEREOF, THE MAKER AND GUARANTOR HAVE EXECUTED THIS INSTRUMENT,
EFFECTIVE AS OF THIS ___ DAY OF SEPTEMBER, 1998.
SIGNED, SEALED & DELIVERED
IN OUR PRESENCE C-SOFT ACQUISITION CORP.
- - ----------------------------- BY: -----------------------
NAME:
TITLE:
- - ----------------------------- EXECUTIVE TELECARD, LTD.
DBA EGLOBE, INC.
- - ----------------------------- BY: -----------------------
NAME:
TITLE:
- - -----------------------------
STATE OF
-------------------------
COUNTY OF
-------------------------
THE FOREGOING INSTRUMENT WAS ACKNOWLEDGED BEFORE ME THIS ___ DAY OF
______________, 1998, BY __________________, DIRECTOR OF C-SOFT CORPORATION AND
BY ____________________________, CHAIRMAN OF EGLOBE, INC. WHO ARE PERSONALLY
KNOWN TO ME OR WHO HAS PRODUCED THE FOREGOING IDENTIFICATION
_________________________.
--------------------------------
NOTARY PUBLIC
STATE OF
---------------------
-2-
<PAGE>
MY COMMISSION EXPIRES
------------------
-3-
EXHIBIT 4.18
------------
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: April 9, 1999
NO.: W-__
WARRANT TO PURCHASE
SHARES OF
COMMON STOCK
OF
EXECUTIVE TELECARD, LTD.
Executive TeleCard, Ltd. (also d/b/a eGlobe), a Delaware corporation
(the "Company"), hereby issues to EXTL Investors, LLC (the "Holder") this
warrant to purchase from the Company, for a price per share equal to $0.01,
1,500,000 shares of common stock, $.001 par value per share of the Company (the
"Common Stock").
1. Exercise. The rights represented by this warrant may be exercised,
in whole or in part, with respect to one-third (1/3) of the number of shares of
Common Stock which the Holder is entitled to purchase under this warrant, at any
time beginning on the date hereof and ending on the third anniversary of the
date hereof.
Subject to the succeeding sentences of this paragraph, the rights
represented by this warrant may be exercised, in whole or in part, with respect
to the remaining two-thirds (2/3) of the number of shares of Common Stock which
the Holder is entitled to purchase under this warrant (the "Remaining Two
Thirds"), at any time beginning on the earlier of fifteen (15) days after the
Stockholder Vote Date or 120 days after the date hereof, and ending on the third
anniversary of the date hereof (where Stockholder Vote Date has the meaning set
forth in the Loan and Note Purchase Agreement (the "Loan and Note Purchase
Agreement"), dated as of April 9, 1999, among the Holder, the Company and eGlobe
Financing Corporation, a wholly owned subsidiary of the Company).
Notwithstanding the prior sentence, if the Second Closing (as defined in the
Loan and Note Purchase Agreement) occurs, either within 15 days after the
Stockholder Vote Date or subsequently and the Note Warrants (as defined in the
Loan and Note Purchase Agreement) are issued to the
<PAGE>
Holder, the rights represented by this warrant with respect to the Remaining Two
Thirds shall expire and be of no further force and effect ("Remaining Two Thirds
Expiration"). If the rights represented by this warrant to purchase any or all
of the Remaining Two Thirds are exercised, in whole or in part, prior to the
Remaining Two Thirds Expiration, such exercise(s) and any purchase(s) of Common
Stock hereunder resulting therefrom shall be rescinded, the exercise price
therefor shall be returned to the Holder and the shares of Common Stock issued
in such purchases shall be returned to the Company and canceled.
The rights represented by this warrant may be exercised 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 7.2 (or such other address as the Company may designate by
notice in writing to the Holder at its address set forth in section 7.2) 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. 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.
2. Antidilution. In case the Company shall (i) pay a dividend in shares
of Common Stock or make a distribution in shares of Common Stock, (ii) subdivide
its outstanding shares of Common Stock (including, without limitation, by way of
stock splits and the like), (iii) combine its outstanding shares of Common Stock
into a smaller number of shares of Common Stock or (iv) issue by
reclassification of its shares of Common Stock other securities of the Company
(including any such reclassification in connection with a consolidation or
merger in which the Company is the surviving corporation), the number of shares
of Common Stock purchasable upon exercise of this warrant immediately prior
thereto shall be adjusted so that the Holder shall be entitled to receive the
number of shares of Common Stock or the kind and number of other securities of
the Company which it would have owned or have been entitled to receive after the
happening of any of the events described above had this warrant been exercised
immediately prior to the happening of such event or any record date with respect
thereto, and the exercise price per share shall be adjusted appropriately. An
adjustment made pursuant to this Section 2 shall become effective immediately
after the effective date of each such event retroactive to the record date, if
any, for such event, without amendment or modification required to this
document.
-2-
<PAGE>
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. Any
transfer shall be effected by the surrender of this warrant, along with the form
of assignment attached as Exhibit B, properly executed, at the address of the
Company set forth in section 7.2 (or such other address as the Company may
designate by notice in writing to the Holder at its address set forth in section
7.2). 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.
6. Substitution of Preferred Stock. Notwithstanding the references in
this warrant to Common Stock and the purchase of Common Stock upon the exercise
of this warrant, to the extent the Company is not permitted to issue Common
Stock without obtaining Stockholder Approval (as defined below) under the rules
or regulations of the Nasdaq Stock Market, as in effect at the applicable time,
the Company shall substitute, in lieu of Common Stock, a preferred stock of the
Company that (i) shall be equivalent to Common Stock in all economic respects,
including with respect to liquidation, dividends and other economic terms, (ii)
shall be non-voting in the event that the holder (together with all of its
affiliates) is the beneficial owner (as such term is defined under the federal
securities laws and the rules and regulations thereunder) of 19.9% or more of
the Common Stock but otherwise shall vote with the Common Stock as a single
class and be entitled to the same number of votes per share as the number of
shares of Common Stock issuable upon conversion of such preferred stock, and
(iii) shall be convertible into Common Stock, provided that the conversion right
may not be exercised without Stockholder Approval, in the event that the holder
(together with all of its affiliates) is, or following such conversion would be,
the beneficial owner of 19.9% or more of the Common Stock. "Stockholder
Approval" means any approval of stockholders of the Company which may be
required, in the reasonable determination of the Company upon advice of its
counsel, under the rules or regulations of the Nasdaq Stock Market, as in effect
at the applicable time.
-3-
<PAGE>
7. Miscellaneous.
7.1 Securities Act Restrictions. The Holder acknowledges that this
warrant and the Common Stock issuable upon exercise of 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.
7.2 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: 2000 Pennsylvania Avenue, Washington, DC 20006, Fax No. (202) 822-8984,
Attention: Chief Executive Officer, and if to the Holder, to the Holder at the
Holder's 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.
7.3 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.
-4-
<PAGE>
7.4 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.
EXECUTIVE TELECARD, LTD.
By:
--------------------------------
Name: Christopher J. Vizas
Title: Chairman of the Board of
Directors and Chief
Executive Officer
-5-
<PAGE>
EXHIBIT A
PURCHASE FORM
EXTL Investors, LLC, 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 Executive
TeleCard, Ltd., for a price per share equal to $0.01, and herewith makes payment
therefor in the aggregate amount of $___________, all 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.
Dated: EXTL Investors, LLC
------------------------
By
-------------------------------
Title
----------------------------
Address
--------------------------
---------------------------------
<PAGE>
EXHIBIT B
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 Executive TeleCard, Ltd.
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 Executive TeleCard,
Ltd. maintained for the purpose, with full power of substitution in the
premises.
Dated: Print Name:
--------------------------- -----------------------------
Signature:
------------------------------
Witness:
--------------------------------
EXHIBIT 10.10
-------------
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as
of December 2, 1998, between IDX INTERNATIONAL, INC., a Virginia corporation
with principal offices located in Fairfax, Virginia (the "Company") and Hsin Yen
(the "Executive").
WHEREAS, EXECUTIVE TELECARD, LTD., a Delaware corporation with
principal offices located in Denver, Colorado ("EXTEL"), the Company, IDX
International, Inc. ("IDX") and stockholders of IDX, including the Executive
(the "Sellers"), have entered into an Agreement and Plan of Merger (the "Merger
Agreement") providing for the sale by the Sellers to EXTEL of all of the shares
of capital stock of IDX pursuant to a merger of IDX with and into the Company
(the "Merger"); and
WHEREAS, EXTEL and the Company recognize that the Executive's
management and other services have contributed to the goodwill inherent in the
Company's business, which goodwill constitutes a substantial asset of IDX
purchased by EXTEL; and
WHEREAS, EXTEL has required the Executive to enter into this
Employment Agreement as a condition precedent to the Merger under the Merger
Agreement; and
WHEREAS, the parties desire to enter into this Agreement setting
forth the terms and conditions for the employment relationship of the Executive
with the Company.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Executive is employed as the President of the
Company for a period commencing on the date that the Merger is consummated and
becomes effective (the "Effective Date") and ending on the third anniversary of
the Effective Date. As the President of the Company, the Executive shall render
executive, policy, and other management services to the Company of the type
customarily performed by persons serving in such capacities. The Executive shall
report directly to the Chairman (the "Chairman") of the Company's Board of
Directors (the "Board of Directors"), and shall also perform such duties for the
Company and its parent company and affiliated companies as the Board of
Directors may from time to time reasonably direct. The Chairman and the Board of
Directors shall have the right to change the Executive's duties and title, so
long as the change not accompanied by any material decrease in the level of
responsibility.
<PAGE>
2. Location of Services. During the term of this agreement, the
Executive shall perform services at the Company's various offices, particularly
at the Company's principal office in Fairfax, Virginia, with travel to Denver,
Colorado or such other locations as required by the type of services to be
performed by Executive.
3. Salary, Bonus and Benefits. The Company shall pay the
Executive an annual salary equal to $175,000, with such increases as may be
determined by the Board of Directors in its discretion (the "Base Salary"). The
Base Salary of the Executive shall not be decreased at any time during the term
of this Agreement from the amount then in effect, unless the Executive otherwise
agrees in writing. Participation in deferred compensation, discretionary bonus
retirement, and other employee benefit plans and in fringe benefits shall not
reduce the Base Salary. The Base Salary shall be payable to the Executive not
less frequently than monthly. The Executive will be eligible to earn a bonus for
each fiscal year at the sole discretion of the Board of Directors. During the
term of this Agreement, the Executive shall be entitled to such other benefits
as approved by the Board of Directors and generally made available to other
senior managers of the Company in accordance with the Company's policies, at the
discretion of the Board of Directors.
4. Additional Performance Bonus. In the event that the
Company's Revenue for each or one or more of the months of August, September and
October 1999 exceeds, by $500,000 or more, the Projected Revenue for July 1999
and there is a corresponding excess of actual EBITDA over Projected EBITDA for
such period, the Executive (together with the Executive Vice President of the
Company, in such proportions as they mutually agree upon) shall be entitled to a
bonus of 25,000 shares of common stock of EXTEL for each $500,000 by which the
Company's Revenue for each or one or more of the months of August, September and
August 1999 exceeds the Projected Revenue for July 1999 (where "Revenue,"
"Projected Revenue," "EBITDA" and "Projected EBITDA" shall have the meanings set
forth in the side letter, dated as of June 10, by and among the Company, EXTEL
and the Sellers).
5. Standards. The Executive shall perform the Executive's duties
and responsibilities under this Agreement in accordance with such reasonable
standards as may be established from time to time by the Company's Board of
Directors. The reasonableness of such standards shall be measured against
standards for executive performance generally prevailing in the Company's
industry.
6. Voluntary Absences; Vacations. The Executive shall be
entitled to annual paid vacation of at least three weeks (fifteen week days) per
year or such longer period as the Board of Directors may approve. The timing of
paid vacations shall be scheduled in a reasonable manner by the Executive.
-2-
<PAGE>
7. Disability. If the Executive shall become disabled or
incapacitated to the extent that the Executive is unable to perform the
Executive's duties and responsibilities hereunder, the Executive shall be
entitled to receive disability benefits of the type provided for other executive
employees of the Company.
8. Termination of Employment.
(a) The Board of Directors may terminate the Executive's
employment at any time, subject to payment of the compensation described below.
(b) In the case of any termination by the Board of
Directors other than "termination for cause" as defined below, or in the case of
any termination by the Executive after a material breach of this Agreement by
the Company, including without limitation by a demotion of the Executive below
the rank of President, a reduction in Base Salary or a requirement to relocate
("termination with good reason"), the Executive shall continue to receive, for
one year commencing on the date of such termination (the "Severance Period"),
full Base Salary, any bonus that has been earned before termination of
employment, and all other benefits and compensation that the Executive would
have been entitled to under this Agreement in the absence of termination of
employment (collectively, the "Severance Amount"). The Severance Amount shall
not be reduced by any compensation which the Executive may receive for other
employment with another employer after termination of employment with the
Company. If during the term of this Agreement there is a "change in control" of
the Company, and in connection with or within two years after such change of
control the Company terminates the Executive's employment other than termination
for cause or the Executive terminates with good reason, the Company shall be
obligated, concurrently with such termination, to pay the Severance Amount in a
single lump sum cash payment to the Executive. If the Company fails to make
timely payment of any portion of the Severance Amount, the Executive shall be
entitled to reimbursement for all reasonable costs, including attorneys' fees,
incurred by the Executive in taking action to collect such amount or otherwise
enforce this Agreement. In addition, the Executive shall be entitled to interest
on the amounts owed to him under this Agreement at the rate of 5% above the
prime rate (defined as the base rate on corporate loans at large U.S. money
center commercial banks as published by the Wall Street Journal), compounded
monthly, for the period from the date of employment termination until payment is
made to the Executive.
(c) The Executive shall have no right to receive
compensation or other benefits from the Company for any period after termination
for cause by the Company or termination by the Executive other than termination
with good reason, except for any vested retirement benefits to which the
Executive may be entitled under any qualified employee pension plan maintained
by the Company and any deferred compensation to which the Executive may be
entitled.
-3-
<PAGE>
(d) The term "termination for cause" shall mean
termination by the Company because of the Executive's personal dishonesty,
willful misconduct, breach of fiduciary duty involving personal profit,
persistent refusal or failure materially to perform his duties and
responsibilities to the Company which continues after the Executive receives
notice of such refusal or failure, willful violation of any law, rule, or
regulation (other than traffic violations or similar offenses), or material
breach of any provision of this Agreement.
(e) A "change in control," for purposes of this
Agreement, shall be deemed to have taken place if any person other than EXTEL or
one of its Affiliates becomes the beneficial owner of 35% or more of the total
number of voting shares of the Company. For purposes of this paragraph, a
"person" includes an individual, corporation, partnership, trust or group acting
in concert, and a "beneficial owner" shall have the meaning used in Rule 13d-3
under the Securities Exchange Act of 1934, as amended.
9. Confidential Information and Inventions.
(a) Confidential Information. The Executive acknowledges
that the information, observations and data obtained by him concerning the
business and affairs of the Company, EXTEL, their Affiliates and their
predecessors during the course of the Executive's performance of services for,
or employment with, any of the foregoing persons (whether or not compensated for
such services) are the property of the Company, EXTEL and/or the Affiliates,
including information concerning acquisition opportunities in or reasonably
related to the Company's and EXTEL's business or industry of which the Executive
becomes aware during such period. Therefore, the Executive agrees that the
Executive will not at any time (whether during or after the period of time in
which the Executive is employed by the Company and not limited to the period of
time in which the Executive receives Severance Payments) disclose to any
unauthorized person or, directly or indirectly, use for the Executive's own
account, any of such information, observations or data without the Company's
consent, unless and to the extent that the aforementioned matters become
generally known to and available for use by the public other than as a direct or
indirect result of the Executive's acts or omissions to act or the acts or
omissions to act of other senior management employees of the Company. The
Executive agrees to deliver to the Company at the termination of the Executive's
employment, or at any other time the Company or EXTEL may request in writing,
all memoranda, notes, plans, records, reports and other documents, regardless of
the format or media (and copies thereof), relating to the business of the
Company, EXTEL, their Affiliates and their predecessors (including, without
limitation, all acquisition prospects, contract proposals or bidding
information; business plans, lists, contact information, and the identity,
written lists, or descriptions of any customers, referral sources or
organizations; financial statements, cost reports, or other financial
information; training and operations
-4-
<PAGE>
methods and manuals; personnel records; fee structures; and management systems,
policies or procedures, including related forms and manuals) which the Executive
may then possess or have under the Executive's control.
(b) Inventions and Patents. The Executive acknowledges
that all inventions, innovations, improvements, developments, methods, designs,
analyses, drawings, reports and all similar or related information (whether or
not patentable) that relate to the Company's or EXTEL's actual or anticipated
business, research and development or existing or future products or services
and that are conceived, developed, made or reduced to practice by the Executive
while employed by the Company or any of its predecessors ("Work Product") belong
to the Company and the Executive hereby assigns, and agrees to assign, all of
the above to the Company. Any copyrightable work prepared in whole or in part by
the Executive in the course of the Executive's work for any of the foregoing
entities shall be deemed a "work made for hire" under the copyright laws, and
the Company shall own all rights therein. To the extent that any such
copyrightable work is not a "work made for hire," the Executive hereby assigns
and agrees to assign to the Company all right, title and interest, including
without limitation, copyright in and to such copyrightable work. The Executive
shall promptly disclose such Work Product and copyrightable work to the Board of
Directors and at the sole cost of the Company perform all actions reasonably
requested by the Board of Directors (whether during or after the period of time
in which the Executive is employed by the Company and not limited to the period
of time in which the Executive receives Severance Payments) to establish and
confirm the Company's ownership (including, without limitation, assignments,
consents, powers of attorney and other instruments). For purposes of this
Agreement, "Affiliate" means any corporation or business entity that either
controls or is controlled by the Company or EXTEL. For the purposes of this
definition, "control" means the ownership, either directly or through an
unbroken chain of control, of more than fifty percent (50%) of the equity
interest or combined voting or management rights in an entity.
10. Noncompetition and Nonsolicitation.
(a) Noncompetition. The Executive acknowledges that
during the course of the Executive's employment with the Company and IDX, the
Executive has become and will become familiar with, the Company's and EXTEL's
trade secrets and with other information concerning the Company and EXTEL and
that the Executive's services will be of special, unique and extraordinary value
to the Company and that the Company's ability to accomplish its purposes and to
successfully pursue its business plan and compete in the marketplace depend
substantially on the skills and expertise of the Executive. Therefore, and in
further consideration of the compensation being paid to the Executive, the
Executive agrees that, during the period the Executive is employed by the
Company and for a two (2) year period commencing on the date of termination
(collectively, the "Noncompete Period"), the Executive shall not, directly or
indirectly, as principal, agent, trustee or
-5-
<PAGE>
through the agency of any corporation, partnership, association or agent or
agency, (i) own, manage, control, participate in, consult with, render services
for, or in any manner engage in any activity or business competing with the
businesses of the Company, EXTEL or their Affiliates, or any business in which
the Company, EXTEL or their Affiliates has commenced negotiations or has
requested and received confidential information relating to the acquisition of
such business within one (1) year prior to the Effective Date in any state or
country where the Company, EXTEL or their Affiliates conduct business.
(b) Nonsolicitation. In further consideration of the
compensation being paid to the Executive, for a two (2) year period commencing
on the date of termination of employment with the Company, the Executive shall
not directly or indirectly through another person, firm, association,
corporation or other entity with which he or she is now or may hereafter become
associated (i) request, advise, induce or attempt to induce any customer,
supplier, licensee or other business relation of the Company, EXTEL or any of
their Affiliates (each, a "Customer") to withdraw, curtail, cancel or otherwise
cease such Customer's business with the Company, EXTEL and/or such Affiliate or
in any way interfere with the relationship between any such Customer and the
Company, EXTEL and/or such Affiliate, (ii) service, canvass, solicit or accept
any business from any Customer for the purpose of competing with the Company,
EXTEL or such Affiliate, (iii) disclose to any other person, firm, corporation
or other entity, the name or address of any Customer for the purpose of
competing with the Company, EXTEL or such Affiliate, (iv) solicit for employment
or employ any person who is or was employed by the Company, EXTEL or such
Affiliate at any time within the one (1) year period immediately preceding such
solicitation of employment to leave the employ of the Company, EXTEL or such
Affiliate and/or accept employment with the Executive or with such person, firm,
association, corporation or other entity, or in any way willfully interfere with
the relationship between any such person and the Company or EXTEL, or (v)
initiate or engage in any discussions regarding an acquisition of, or the
Executive's employment (whether as an employee, an independent contractor or
otherwise) by, any businesses with which the Company, EXTEL or any of their
Affiliates has entertained discussions or has requested and received
confidential information relating to the acquisition of such business by the
Company, EXTEL or such Affiliate upon or within the one (1) year period prior to
the Effective; provided, however, that ownership of less than five percent (5%)
of the outstanding stock of any publicly traded corporation shall not constitute
a violation of this paragraph.
(c) Enforcement; Remedies. If, at the time of enforcement
of Section 9 or Section 10 of this Agreement, a court holds that the
restrictions stated herein are unreasonable under circumstances then existing,
the parties hereto agree that the maximum duration, scope or geographical area
reasonable under such circumstances shall be substituted for the stated period,
scope or area and that the court shall be allowed to revise the restrictions
contained herein to cover the maximum duration, scope and area permitted by law.
Because the Executive's
-6-
<PAGE>
services are unique and because the Executive has access to confidential
information, the parties hereto agree that money damages would be an inadequate
remedy for any breach of any provision of this Agreement. Therefore, in the
event a breach or threatened breach of Sections 9 or 10 of this Agreement or of
any other provision of this Agreement, the Company may, in addition to other
rights and remedies existing in its favor and without waiver of any right or
remedy which the Company may elect to pursue with respect thereto, apply to any
court of competent jurisdiction (without posting a bond or other security) for
all remedies available at law or in equity, including without limitation
specific performance and/or injunctive or other relief in order to enforce, or
prevent any violations of, the provisions hereof under which it is entitled to
seek enforcement.
11. Conditional Agreement; Acknowledgment. This Agreement and
all of the rights, duties and obligations of the Company and the Executive
contained herein are expressly conditioned upon the closing of the merger
described in the Merger Agreement (the "Closing"). The Executive further
acknowledges that the restrictive covenants set forth in Sections 9 and 10 of
this Agreement are reasonably required for the protection of the legitimate
business interests of the Company and EXTEL, and that such covenants were made
by the Executive (or provision for such covenants was made) in part to induce
EXTEL to enter into the Merger Agreement.
12. Indemnification and Reimbursement of Payment on Behalf of
the Executive. The Company shall be entitled to deduct or withhold or offset
from any amounts owing from the Company or EXTEL to the Executive any federal,
state, local or foreign withholding taxes, excise taxes, or employment taxes
("Taxes") imposed with respect to the Executive's compensation or other payments
from the Company or EXTEL, including but not limited to, wages, bonuses,
dividends, and similar amounts. The Executive shall indemnify the Company for
any amounts paid with respect to any such Taxes, together with any interest,
penalties and related expenses thereto.
13. No Assignments. This Agreement is personal to each of the
parties hereto. No party may assign or delegate any rights or obligations
hereunder without first obtaining the written consent of the other party hereto.
However, in the event of the death of the Executive all rights to receive
payments hereunder shall become rights of the Executive's estate.
14. Other Contracts. The Executive shall not, during the term of
this Agreement, have any other paid employment other than with a subsidiary of
the Company or EXTEL, except with the prior approval of the Board of Directors.
15. Amendments or Additions; Action by Board of Directors. No
amendments or additions to this Agreement shall be binding unless in writing and
signed by all parties hereto. The prior approval by a majority vote of the Board
of Directors shall be required in order for the Company to authorize any
amendments
-7-
<PAGE>
or additions to this Agreement, to give any consents or waivers of provisions of
this Agreement, or to take any other action under this Agreement including any
termination of employment with or without cause.
16. Section Headings. The section headings used in this
Agreement are included solely for convenience and shall not affect, or be used
in connection with, the interpretation of this Agreement.
17. Severability. The provisions of this Agreement shall be
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof.
18. Governing Law. This Agreement shall be governed by the laws
of the State of Virginia (other than the choice of law rules thereof).
IMPORTANT: THIS AGREEMENT CONTAINS VERY IMPORTANT TERMS
GOVERNING YOUR EMPLOYMENT WITH THE COMPANY. SECTIONS 9 AND 10 CONTAIN PROVISIONS
WHICH AFFECT YOUR ABILITY TO TAKE CERTAIN ACTIONS FOLLOWING THE TERMINATION OF
THIS AGREEMENT. YOU SHOULD FEEL FREE TO SEEK ADVICE FROM YOUR ATTORNEY REGARDING
ANY MATTER RELATING TO THIS AGREEMENT.
BY EXECUTING THIS AGREEMENT, YOU ARE AFFIRMING THAT YOU HAVE HAD
THE OPPORTUNITY TO REVIEW THIS AGREEMENT AND TO CONSULT WITH YOUR ATTORNEY IF
YOU SO DESIRED, THAT YOU UNDERSTAND THE MEANING AND SIGNIFICANCE OF ALL OF ITS
PROVISIONS, THAT NO REPRESENTATIONS OR PROMISES HAVE BEEN MADE TO YOU REGARDING
YOUR EMPLOYMENT WHICH ARE NOT SET FORTH IN THIS AGREEMENT, AND THAT YOU ARE
FREELY SIGNING THIS AGREEMENT TO OBTAIN EMPLOYMENT WITH THE COMPANY.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
IDX INTERNATIONAL, INC.
By:
-----------------------------------
-----------------------------------
Hsin Yen
-9-
EXHIBIT 10.14
-------------
AGREEMENT
This AGREEMENT (this "Agreement") is made and entered into, effective
as of the 1st day of December, 1998, by and between Swiftcall Equipment and
Services (USA) Inc., (the "Facility Owner"), a Virginia corporation, with an
office at 11410 Isaac Newton Square, Reston, Virginia 20190, (the "Premises")
and Executive TeleCard, Ltd. d/b/a eGlobe, Inc., a Delaware corporation, with an
office at 1720 South Bellaire Street, Suite 1000, Denver, Colorado 80222 (the
"Lessee").
RECITALS:
A. Lessee desires to make use of Facility Owner's premises,
switch, telecommunications equipment in order to interconnect such
telecommunications equipment with Lessee's Network and equipment as well as
telecommunications equipment provided by Facility Owner or that of other
carriers.
B. Facility Owner and Lessee desire to set forth the terms and
conditions upon which Facility Owner will provide to Lessee, at Facility Owner's
Premises, the use of a portion of Facility Owner's telecommunications equipment.
C. Lessee intends to buy the switch and related equipment from
Facility Owner and Facility Owner intends to sell the switch and related
equipment to Lessee. Facility Owner shall commence due diligence immediately, as
previously requested, upon execution of this Agreement and substantially
complete its due diligence obligations within 14 days of execution of this
Agreement.
AGREEMENTS:
NOW, THEREFORE, in light of the foregoing and in consideration of the
mutual covenants set forth in this Agreement, Facility Owner and Lessee,
intending to be legally bound, agree as follows:
1 LEASE OF FACILITIES
A. Facility Owner hereby grants to Lessee a leasehold interest
to use the Facility Owner's Premises, comprised of a quantity of T-1 and/or E-1
ports and other transmission equipment, for the purpose of permitting Lessee to
pursue its business of calling card services, switching, platform processing, IP
transmission, and to receive and deliver communications traffic to and from
Lessee's telecommunications network, Facility Owner's telecommunications network
or that of other carriers, including the right to connect Lessee's equipment to
the equipment provided by Facility Owner or that of other carriers. This lease
is
<PAGE>
for all of the facilities except such portion that is necessary to process
Facility Owner's existing telecommunications business allowing for reasonable
growth in such business. Facility Owner shall not be liable for any interruption
of Services or for any variation in the quality of the Services which is beyond
its control. It is understood that Lessee may build out in reliance on the
parties stated intention that Lessee shall buy the switch and facilities from
Facility Owner per the pricing terms stated in the attached Agreement and Plan
of Acquisition , and substantially in the form and content.
B. Lessee and Lessor warrant and represent to each other that
each possesses all Leases and permits, and has made all tariff filings necessary
to conduct its business under the laws of each and every jurisdiction having
authority to regulate the business and practices of Lessee. In the event that
any governmental agency having or claiming authority to regulate the business or
practices of Lessee shall issue an order requiring Lessee to cease and desist
any of its business conducted using facilities furnished by Facility Owner, or
through services furnished by Facility Owner, neither the issuance of such order
nor Lessee's compliance therewith shall in any way excuse or diminish Lessee's
obligations under this agreement.
C. Labor and materials required for the mounting, installation
and facility interconnection, which includes but is not limited to cable
running, wire wrapping and punch down to the demarcation point, shall meet
Facility Owner and Lessee approved technical standards and shall be provided by
the Facility Owner.
D. Reception and delivery of such communications traffic
between other Lessees of the Facility Owner is available when both Lessees are
current in their payments to the Facility Owner. All inter Lessee communications
shall be cabled by the Facility Owner.
E. If requested by the Lessee, Facility Owner may provide
additional equipment to Lessee, including, without limitation, Bandwidth
Managers, Frame Relay Access Devices, modems, terminations, and other ancillary
equipment. Lessee is responsible for paying actual charges determined at the
time of installation. Title to all equipment provided by Facility Owner as part
of this agreement resides at all times with the Facility Owner. Additionally,
Lessee may install its own equipment which shall remain the property of the
Lessee.
F. In no event will the facilities and services be less or
substantially different from what has been supplied to IDX heretofore.
G. Facility Owner shall not hypothecate, partition or lease
any portion of the Facilities without the written permission of Lessee which
permission
-2-
<PAGE>
shall not be unreasonably withheld. Otherwise, the facilities shall be used
solely by eGlobe. Facility Owner may use the facilities to process its existing
VIP business.
2 MONTHLY PAYMENTS
Lessee agrees to pay the Facility Owner for each month during
the term of this Agreement the payment (a "Monthly Lease Payment") set forth in
Exhibit A hereto. Facility Owner's invoices for amounts payable hereunder shall
be generated on the first (1st) day of the month. Invoices are due upon receipt
by Lessee, but in no event should full payment be received later than fifteen
(15) days after the date of invoice. If any Monthly Lease Payment remains unpaid
after the fifteen (15) day pay period, such payment shall be subject to a late
payment charge equal to one and one-half percent of the unpaid balance per
month. In addition thereto, in the event of such non-payment of the full Monthly
Lease Payment by sixty (60) days after the date of invoice, Facility Owner may
disconnect or otherwise disable the operation of Lessee's telecommunications
traffic, provided that Facility Owner has given Lessee written notice of
intention to disconnect and allowed five business days for cure. Facility Owner
shall send invoices to Lessee at the address listed herein.
Monthly Lease Payments shall commence upon the date of this
agreement.
The charges payable to Facility Owner are an indivisible
whole, and default by Lessee in the payment of any part thereof may be deemed by
Facility Owner to be a default of the whole and to entitle the Facility Owner to
all of its remedies for default.
3 TAXES
Lessee shall, within the time reasonably stipulated by
Facility Owner, submit Virginia Resale Exemption Certificate or such other
documents and certificates related to taxes as Facility Owner may reasonably
request. In the event that Lessee fails timely to deliver such documentation to
Facility Owner, the Lessee shall be responsible for the prompt payment to
Facility Owner of all federal, state and local taxes (collectively, "Taxes")
upon the use or sale of Services hereunder, the use or resale of property or the
receipts of Facility Owner, if applicable, but Lessee shall not be responsible
for the payment of any Income Tax, Franchise Tax, or other, similar tax which is
measured by the "net " or "taxable" income of Facility Owner. Failure to pay the
amount of such taxes to Facility Owner shall constitute a default by Lessee
hereunder, with the same effect as if Monthly Lease Payments were not made in
full.
-3-
<PAGE>
4 MAINTENANCE, USE AND ALTERATION OF THE PREMISES
-----------------------------------------------
4.1 Alterations. Facility Owner shall maintain the Premises
based on industry standards. Any alteration performed by Lessee, e.g., the
construction of conduits for purposes of building interconnection, shall be done
using reasonable care.
4.2 Lessee and its duly authorized contractors, agents and
employees may have access, twenty four (24) hours a day, seven (7) days a week
to the area of the Site where the Equipment is housed and to all data and
information available to Facility Owner relating to the performance of this
Agreement. Access to the Site shall always be subject to the presence of a duly
authorized employee or agent of Facility Owner.
4.3 Access to the Site by Lessee shall be contingent upon the
observance of Facility Owner's standard safety and security procedures.
5 PROVISION OF ADDITIONAL SERVICES
Lessee may request and Facility Owner, at its option, shall
provide additional services as set forth in the attached Exhibit B.
6 EFFECTIVENESS AND TERMINATION
6.1 Term. This Agreement is effective as of the date hereof
and shall remain in force and effect for twelve (12) months, unless earlier
terminated pursuant to its terms. This Agreement may be extended for an
additional term upon (a) written notice by Lessee to Facility Owner at least
thirty (30) days before the date of the expiration of the initial term, and (b)
such terms and conditions mutually agreeable to the parties. If Facility owner
requires extended time in order to perform its due diligence requirements
relating to the Lessee's purchase of the switch and facility, then the lease
period under this agreement may be extended for an additional six months or
less, at the option of the Lessee.
6.2 Termination. Either party may terminate this Agreement
upon ninety (90) days' written notice to the other party after the failure of
such other party to cure with performance any default in the performance of any
obligation within thirty (30) days of written notice of such default. The cure
period shall be the period ending thirty (30) days after such notice of default
is given.
6.3 Effect of Termination. Upon the expiration or termination
of this Agreement and except as specifically set forth herein, this Agreement
shall no longer have any force or effect and neither party shall have any
further obligation
-4-
<PAGE>
hereunder, except that obligations which have been incurred prior to termination
(including, without limitation, Monthly Lease Payments accruing up until the
time of termination or expiration) shall survive.
7 LIMITS OF LIABILITY
Facility Owner shall maintain the Premises and prove the
Services and will use industry standards in doing so. Notwithstanding the
foregoing, in no event shall Facility Owner be liable for any special,
incidental, indirect, punitive, reliance, or consequential damages, whether
foreseeable or not, including but not limited to, damage or loss of property or
equipment, loss of profits or revenue, cost of capital, cost of replacement
services, or claims for service interruptions or transmission problems,
occasioned by any defect in the Premises or the Services, delay in availability
of the Premises or the Services or any other cause whatsoever with respect to
the Premises or the Services from causes outside its control, including
accidents, cable cuts, fires, floods, emergencies, government regulation, wars,
or acts of God. Facility Owner DISCLAIMS ALL EXPRESS AND IMPLIED WARRANTIES
RELATING TO THE PREMISES OR THE SERVICES, INCLUDING BUT NOT LIMITED TO,
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE.
A. It shall be the obligation of the Lessee to notify Facility Owner of
any interruption in service. Facility Owner shall, using standard
methods in the industry, monitor the system for faults or problems and
effect repairs without any notice from Lessee. Facility Owner shall
immediately notify Lessee of any deficiencies or problems it identifies
through any monitoring or other means.
B. An outage credit will be allowed for interruptions that result from
facilities provided by Facility Owner. Credit shall be applied on a pro
rata basis from the time Facility Owner receives notification from
Lessee until service is restored on interruptions of thirty (30) minute
duration or more.
8 EMERGENCIES AND INTERRUPTIONS
In case of interruption of any services furnished hereunder, Facility
Owner shall use commercially-reasonable efforts under the circumstances to
restore service or, if Facility Owner elects, an equivalent service may be
substituted. Lessee may, at its option, employ "self-help" to cure any
interruption of services.
9 INDEMNIFICATION
9.1 By Lessee or Facility Owner. Either party shall indemnify,
defend, release, and hold harmless the other and all affiliates, agents,
clients,
-5-
<PAGE>
consultants, customers, employees, subcontractors, invitees, or Lessees from and
against any action, claim, court cost, damage, demand, expense, liability, loss,
penalty, proceeding, or suit (collectively, together with related attorneys'
fees, including costs and disbursements, "Claims"), imposed upon the other by
reason of damages to property or injuries, including death, as a result of an
act (whether intentional, negligent, or otherwise) or omission on the part of
the indemnifying part or any of its affiliates, agents, clients, consultants,
customers, employees, subcontractors, invitees, or Lessees in connection with
the Premises.
9.2 Compliance with Law. Each party will indemnify the other
against, and hold it harmless from, all cost, claim, lien, and expense
(including, without limitation, lost revenue under this agreement and reasonable
attorneys' fees and other costs of defense) incurred by the other by reason of
any failure on the part of the indemnifying party to comply with the
requirements of law, or orders of governmental authorities having or claiming
jurisdiction to regulate the business or practices of the indemnifying party.
9.3 Survival. Notwithstanding the termination of this
Agreement for any reason, this Section 9 shall survive such termination.
10 INSURANCE
Throughout the term of this Agreement and any extension
thereof, Lessee and Facility Owner shall maintain and, upon written request,
shall provide to each other proof of comprehensive general liability insurance
with a limit of not less than $1,000,000 per occurrence for bodily injury
liability and property damage liability, including coverage extensions for
blanket contractual liability, personal injury liability and products and
completed operations.
11 ASSIGNMENT
Lessee shall not assign its rights or delegate its duties
under this Agreement, unless to an affiliate or wholly-owned subsidiary, without
Facility Owner's prior written consent which shall not be unreasonably withheld
or delayed.
12 WAIVERS AND CONSENTS
No delay in taking, or failure to take, action with respect to
any breach of this Agreement shall constitute a waiver of any right to take
action with respect to such breach or with respect to any subsequent breach. No
waiver of a party's right to take action with respect to, no consent to, and no
acceptance of, any late payment, late or imperfect performance, or failure to
perform on one (1) occasion shall constitute a waiver of such party's rights to
take action with respect to any delay in making, or failure to make, acceptable
performance upon any other
-6-
<PAGE>
occasion. No waiver or delay in taking or failure to take action with respect
to, any right, power or privilege hereunder on one occasion shall constitute a
waiver thereof on any other occasion. No waiver of a party's rights to take
action with respect to any breach of a provision of this Agreement, or of any
right, power or privilege hereunder, and no consent by a party to any breach of
a provision of this Agreement, shall be effective unless set forth in writing
and signed by such party.
13 GOVERNING LAW
This Agreement shall be construed and enforced in accordance
with, and the validity, and performance hereof, shall be governed by the laws of
the State of Virginia without regard to its principles regarding choice of law.
14 NOTICES
Each notice relating to this Agreement shall be in writing and
shall be: (a) given in person; (b) sent by registered or certified mail (return
receipt requested) or by courier, or (c) transmitted by facsimile machine with a
copy, of such transmission delivered by one of the foregoing methods. Each
properly given notice shall be deemed to have been given as of the earlier of
(a) delivery, (b) four (4) days after the date of mailing, or (c) the date of a
facsimile transmission (receipt of which is orally confirmed or which date is
indicated by the facsimiles machine of any party).
Notices shall be made to the following persons at the following addresses and
facsimile telephone numbers (which may be changed only by properly given
notice):
If to Facility Owner: Swiftcall Equipment and Services (USA) Inc.
11410 Isaac Newton Square North
Suite 101
Reston, VA 20190
Attention: Graham Milne
Telephone No.: 703-385-0347
Facsimile No.: 703-385-9134
If to Lessee: eGlobe Inc.,
4260 E. Evans Ave,
Denver, CO 80222
Contact: Colin Smith
Telephone No.: 303 512 1594
Facsimile No.: 303 782 9628
-7-
<PAGE>
Lessee Billing Address: eGlobe Inc.,
4260 E. Evans Ave,
Denver, CO 80222
Contact: Anne Haas
Telephone No.: 303 512 1564
Facsimile No.: 303 759 2830
Documentation and coordination regarding exchange of technical information
relating to interface circuitry and local interconnects shall be provided as
follows:
Documentation & Coordination: Swiftcall Equipment and Services (USA) Inc.
11410 Isaac Newton Square North
Suite 101
Reston, VA 20190
Attention: David Wells
Telephone No.: 703-385-0347
Facsimile No.: 703-385-9134
Telephone notification of need for assistance for resolution or coordination of
service problems shall be reported to the Facility Owner's Customer Service
Office at 703-708-1515.
15 MISCELLANEOUS
15.1 Neither this Agreement nor any Addendum hereto shall
become effective until accepted by an authorized officer of the Lessee. The
negotiation of any check representing a payment or security deposit under this
Agreement or any Addendum shall not in itself constitute an acceptance thereof.
15.2 The prevailing party shall be entitled to recover its
reasonable attorney's fees and other costs incurred if either party institutes
legal proceedings to enforce any provisions hereof, in addition to any other
relief awarded by the court.
15.3 If any provision of this Agreement shall be determined to
be invalid or unenforceable, the remainder of the Agreement shall continue in
full force and effect.
15.4 All services furnished to customer are subject to the
applicable Federal or State tariffs and regulatory approval. Any conflicts in
the above within the applicable tariff will be resolved in agreement with the
tariff.
15.5 The relationship between Facility Owner and Lessee is
strictly one of Licensor and Lessee, under which Facility Owner provides certain
facilities
-8-
<PAGE>
for the use of Lessee and/or sells certain services to Lessee. Under no
circumstances shall the relationship of landlord and tenant arise or exist
between Facility Owner and Lessee, nor shall Facility Owner and Lessee under any
circumstances be deemed to be carrying on business as partners or joint
venturers.
15.6 During the term of this Agreement and for a period of one
year thereafter, Lessee will not, without the prior written consent of the
Facility Owner (which consent may be withheld for any reason) directly or
indirectly solicit any employee, agent, or independent contractor of the
Facility Owner to become an employee, agent or independent contractor of Lessee,
whether for its own account of that of any other person, firm or corporation.
16 ENTIRE AGREEMENT: AMENDMENTS
This Agreement and all other documents specifically referred
to herein constitute the entire and final agreement and understanding between
the parties with respect to the subject matter hereof and supersedes all prior
agreements relating to the subject matter hereof, which are of no further force
or effect. The Exhibits referred to herein are integral parts hereof and are
hereby made a part of this Agreement. This Agreement may only be modified or
supplemented by an instrument in writing executed by a duly authorized
representative of each party.
17 SUBORDINATION
This Agreement, and the rights of Lessee hereunder, are
subject and subordinate to the terms of that certain lease, dated as of May
13th, 1996, between Facility Owner, as lessee, and APA Properties No6 L.P., as
lessor ("Landlord"). Facility Owner shall provide Lessee with a copy of the
above referenced APA Properties lease.
In witness whereof, Facility Owner and Lessee have caused these presents to be
executed by their duly authorized officers this ___ day of December, 1998.
FACILITY OWNER: LESSEE:
SWIFTCALL USA, INC. EGLOBE, INC.
- - ---------------------------- -------------------------------
By: Graham Milne By:
Its: President Its:
-9-
<PAGE>
EXHIBIT A
SERVICES
Lessee shall pay for the Monthly Lease Payment according to the pricing schedule
shown below.
RESTON - RECURRING CHARGES
$51,000.00
Includes all facilities that are not required to process the existing VIP
business.
-10-
<PAGE>
EXHIBIT B
ADDITIONAL SERVICES
1. The Facility Owner maintains full responsibility for the operation of the
switch, the premises and all entrance facilities provided by the Facility Owner
to the Lessee. All work performed by the Facility Owner's engineers in support
of any of these areas is performed at the expense of the Facility Owner and is
included in the Lessee's base Monthly Lease Payment.
Trouble-shooting and technical support, known as Demand Maintenance Services,
will be performed by "telecommunications engineers" knowledgeable and skilled in
the operations and maintenance of the DMS switch and telecommunications network
and shall include, but not be limited to, the following:
a. Cooperative testing of facilities contracted by the Lessee interconnected
to the Facility Owners switch. This testing may include transmission
testing, call through testing, or other tests required to verify proper
operation of the facility.
b. Changes to the configuration of the Lessee Network including changes to
trunk configurations, routing of specific codes, feature application or
removal, addition of customer identifications in the form of Automatic
Number Identification codes, Authorization codes, or Accounting codes.
c. Testing, card swapping, or configuration activity on any equipment added by
or on the behalf of the Lessee for the purposes of enhancing or providing
services to the Lessee network. These equipment types include, but are not
limited to, echo cancellors, compression equipment, debit card switches,
voice mail systems, call completion equipment, digital cross connect
systems, and channel banks.
d. The collection of information pertaining to the operation of a Lessee
Network that may be available from a machine connected to the network or
the generation of reports from this collected information.
2. Demand Maintenance Service charges are not billed for restoration of troubles
found within that portion of a circuit or Service provided by Facility Owner.
3. Technical support and network trouble-shooting is available for in-service
trouble 7 days a week, 24 hours a day. Demand maintenance work for such
activities as installing new circuits, converting trunk groups to SS7, creating
new translators, cutting in multiplexer equipment, is available from Facility
Owner on a scheduled case basis. "Normal" Demand Maintenance is available
between 8 am to 5 pm, Monday through Friday and can always be requested during
these hours and will be scheduled and provided at a mutually agreed upon time.
-11-
<PAGE>
Facility Owner will make every effort to accommodate requests for
"After Hours" Emergency Demand Maintenance work after normal business hours and
on weekends and holidays. Depending upon the scope of work, Facility Owner shall
make every effort to respond to and provide such emergency work within two hours
of notification.
4.a. Lessee shall be responsible for directing the activities of the Facility
Owner with regards to changes to routing and/or the addition or removal of
carriers to the switch. Facility Owner will make no service affecting activities
without Lessee's direction and approval to do so.
4.b. Requests for maintenance services must be made in writing and Facility
Owner must be advised, in writing, as to the person(s) who are authorized to
request service. It is the Lessee's responsibility to keep Facility Owner
apprised of any changes to its list of representative(s).
4.c. To request technical assistance and help under these terms, a fax must be
sent to the Facility Owner's Operation Center at 703-708-1518. The Lessee should
also call on 703-708-1515, to ensure receipt of the fax. The Facility Owner's
Operation Center personnel will distribute the fax and either perform the work
or call the Lessee to schedule the work.
EXHIBIT 10.16
-------------
LOAN AND NOTE PURCHASE AGREEMENT
THIS LOAN AND NOTE PURCHASE AGREEMENT (this "Agreement") is
entered into as of this 9th day of April, 1999, by and among EGLOBE FINANCING
CORPORATION, a Delaware corporation (the "Company"), EXECUTIVE TELECARD, LTD., a
Delaware corporation (the "Parent"), and EXTL INVESTORS, LLC, a limited
liability company organized under the laws of Nevada (the "Investor").
WHEREAS, the Company desires to borrow, and the Investor
desires to lend, $7,000,000 upon the terms and conditions hereinafter set forth;
WHEREAS, the Company desires to issue, and the Investor
desires to purchase, 5% Secured Notes of the Company, upon the terms and
conditions hereinafter set forth;
WHEREAS, as incentives for the Investor to make such loan and
purchase, the Parent is willing to issue Warrants to purchase the Parent's
Common Stock, upon the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and of the
mutual covenants and agreements hereinafter set forth, the parties hereto hereby
agree as follows:
ARTICLE I.
LOAN; PURCHASE AND SALE OF NOTES
SECTION 1.1. LOAN.
(a) Loan, Loan Note, Loan Warrants. On the basis of the
representations, warranties and agreements contained herein, and subject to the
terms and conditions hereof, the Company shall borrow from the Investor, and
Investor shall lend to the Company, on the First Closing Date (as defined
below), the sum of $7,000,000 in aggregate principal amount, which loan ("Loan")
shall be evidenced by a Promissory Note substantially in the form attached
hereto as Exhibit A (the "Loan Note"). As an incentive for the Investor to make
such Loan, since the Investor would not realize a sufficient return from the
interest payable on the Loan Note to make the Investor willing to make the Loan,
on the First Closing Date the Parent shall issue to the Investor, as additional
consideration to the Investor, Warrants, the terms of which are set forth in
Exhibit B hereto (the "Loan Warrants"), to purchase 1,500,000 shares of Common
Stock, par value $.001 per share, of the Parent for $0.01 per share (the "Parent
Common Stock").
<PAGE>
(b) Repayment of Loan Principal at Maturity. The entire
principal amount of the Loan shall be repaid to the Investor, together with any
accrued but unpaid interest thereon, in cash on the earliest to occur of (i) the
first anniversary of the First Closing Date, (ii) the date of closing of an
offering by the Parent of debt or equity securities, in a single transaction or
series of related transactions, from which the Parent receives net proceeds of
$30 million or more, (iii) the Second Closing Date or (iv) the occurrence of an
Event of Default while the Loan is outstanding (the "Loan Maturity Date").
(c) Loan Interest Rate. The Loan shall bear interest on the
unpaid portion of the principal amount thereof, from the date of issuance until
the unpaid portion of the principal shall have become due and payable (whether
on the Loan Maturity Date, by acceleration or otherwise), at the Loan Interest
Rate (as defined below). Interest shall be due and payable in cash in arrears on
the first day of each month, commencing on the first day of the month following
the date hereof (each, a "Loan Interest Payment Date"), until and including the
Loan Maturity Date. To the extent not prohibited by applicable law, the Loan
shall bear interest on overdue principal, on any overdue amounts arising out of
a required or optional prepayment of principal and on any overdue installment of
interest at the Loan Overdue Rate (as defined below), from after the date on
which such amounts were due and payable, whether by acceleration or otherwise,
until paid.
(d) Prepayment at the Election of the Company. The Loan may be
prepaid without premium or penalty, at the option of the Company exercised by
written notice to the Investor, at any time in whole or from time to time in
part in integral multiples of $100,000. Any prepayment will be applied first to
accrued interest and then to payment of principal. If the Loan is prepaid only
in part, the Loan Note shall be surrendered at the Company's principal office
and the payment shall be recorded directly on the Loan Note or by an amendment
thereto, whereupon the Loan Note will be returned to the Investor promptly.
(e) Capital Contribution Agreement. At or prior to the First
Closing, the Parent shall enter into a Subscription Agreement (the "Loan Capital
Contribution Agreement") substantially in the form attached hereto as Exhibit C.
During the period in which any portion of the Loan is outstanding, the Investor
shall be a third party beneficiary of, and shall be entitled to enforce, the
Loan Capital Contribution Agreement.
SECTION 1.2. SALE AND ISSUANCE OF NOTES; TERMS OF THE NOTES.
(a) Purchase and Sale of Notes. On the basis of the
representations, warranties and agreements contained herein, and subject to the
terms and conditions hereof, including the receipt of Stockholder Approval (as
defined below), if the Company and the Parent so elect by written notice to the
Investor within 15 days after receiving such Stockholder Approval (a "Second
Closing Election"), the Company shall issue and sell to the Investor, and
Investor
-2-
<PAGE>
shall purchase from the Company, on the Second Closing Date (as defined below),
for the purchase price of $20,000,000, $20,000,000 aggregate principal amount of
the Company's 5% Secured Notes, substantially in the form attached hereto as
Exhibit D (the "Notes"). As an incentive for the Investor to make such purchase,
since the Investor would not realize a sufficient return from the interest
payable on the Notes to make the Investor willing to invest in the Notes, on the
Second Closing Date the Parent shall issue to the Investor, as additional
consideration to the Investor, Warrants, the terms of which are set forth in
Exhibit E hereto (the "Note Warrants", and together with the Loan Warrants, the
"Warrants"), to purchase 5,000,000 shares of Parent Common Stock for $1.00 per
share.
(b) Repayment of Principal and Interest. Principal and
interest shall be due and payable in 36 equal monthly installments (based upon a
level payment debt service amortization over a five year period) according to a
schedule attached to the Notes, in arrears on the first day of each month,
commencing on the first day of the month following the date hereof, with the
entire remaining unpaid principal amount (together with accrued interest
thereon) to be due and payable in a single payment on the earlier to occur of
(i) the third anniversary of the Second Closing Date, or (ii) the date of
closing of a Qualified Offering (the "Note Maturity Date").
(c) Interest Rate. The Notes shall bear interest on the unpaid
portion of the principal amount thereof, from the date of issuance until the
unpaid portion of the principal shall have become due and payable (whether on
the Note Maturity Date, by acceleration or otherwise), at the Note Interest Rate
(as defined below). To the extent not prohibited by applicable law, the Notes
shall bear interest on overdue principal, on any overdue amounts arising out of
a required or optional prepayment of principal and on any overdue installment of
interest at the Note Overdue Rate (as defined below), from after the date on
which such amounts were due and payable, whether by acceleration or otherwise,
until paid.
(d) Prepayment at the Election of the Company. The Notes may
be prepaid without premium or penalty, at the option of the Company exercised by
written notice to each holder of Notes, at any time in whole or from time to
time in part in integral multiples of $100,000. Any prepayment will be applied
first to accrued interest and then to payment of principal. If the Notes are
prepaid only in part, the Notes shall be surrendered at the Company's principal
office and the payment shall be recorded directly on the Notes or by an
amendment thereto, whereupon the Notes will be returned to the Investor
promptly.
(e) Manner of Payment of Principal. Interest on the Notes
shall be paid in cash. Principal of the Notes shall be paid in cash except as
provided in this paragraph. In the event that (1) the Closing Price (as defined
below) of the Parent Common Stock on Nasdaq is $8.00 or more for any 15
consecutive trading days during any period in which Notes are outstanding that
is not more than five
-3-
<PAGE>
Business Days preceding the date of a written election made in accordance with
this sentence, (2) the Parent closes a public offering of equity securities of
the Parent at a price of at least $5.00 per share and with gross proceeds to the
Parent of at least $30 million, or (3) the Parent closes a Qualified Offering
(as defined below) (at a price of at least $5.00 per share, in the case of an
offering of equity securities), principal of the Notes equal to up to 50% of the
original principal amount of the Notes may be paid in Parent Common Stock at the
option of the Company if a written election to make such prepayment in Parent
Common Stock is made by the Company (and delivered to the Investor) prior to the
date that is five Business Days after the occurrence of the event specified in
clauses (1), (2) or (3) of this sentence. For purposes of payment in Parent
Common Stock, each share of Parent Common Stock shall be valued as follows: (A)
if the Market Price of Parent Common Stock is less than $6.00 as of the date of
payment, the value of each share of Parent Common Stock shall equal the Market
Price of Parent Common Stock (if the Market Price of Parent Common Stock is less
than $5.00 as of the date of payment, Parent Common Stock may not be used for
such prepayment unless the issuance of the Parent Common Stock would not require
any Stockholder Approval that has not been obtained); or (B) if the Market Price
of Parent Common Stock is greater than or equal to $6.00 as of the date of
payment, the value of each share of Parent Common Stock shall be $6.00.
(f) Security Agreement; Asset Transfer. The Notes shall be
secured by and shall be entitled to the benefits of a Security Agreement (the
"Security Agreement") substantially in the form attached hereto as Exhibit F to
be entered into by the Company and the Investor at the Second Closing. At or
prior to the Second Closing, the Parent shall convey or cause its subsidiaries
to convey to the Company, on the terms and conditions set forth in the transfer
documents reasonably acceptable to the Investor (the "Transfer Documents"), the
assets described in Exhibit G-1. The Parent shall convey or cause its
subsidiaries to convey to the Company, during the period in which the Notes are
outstanding, all assets acquired after the date hereof which are described in
Exhibit G-2. (If such assets cannot be conveyed without violating the terms of
Material Contracts, the Parent or relevant subsidiary shall enter into a
comparable security agreement granting a security interest, to the extent
permitted by applicable Material Contracts.) In the event that any of the
transferred assets are already encumbered by an Encumbrance that is not
prohibited hereunder, it is intended that the Investor would receive a second
priority security interest to the extent permitted by the documents evidencing
the first security interest, and the Company and the Parent agree to use all
reasonable efforts to obtain such consents as may be necessary from the holders
of such first security interests to allow a second security interest to be
placed on such assets for the benefit of the Investor.
(g) Guaranty; Parent Security Agreement. At or prior to the
Second Closing, the Parent (and each of the subsidiaries of the Parent that have
more than $250,000 of accounts receivable individually and such other
subsidiaries of the
-4-
<PAGE>
Parent that may need to be added so that the subsidiaries of the Parent not
parties thereto hold no more than $500,000 of accounts receivable in the
aggregate) shall enter into a Guaranty (the "Guaranty") substantially in the
form attached hereto as Exhibit H and a Security Agreement (the "Parent Security
Agreement") substantially in the form attached hereto as Exhibit I.
SECTION 1.3. CLOSING.
(a) The closing of the transactions contemplated by Section
1.1 (the "First Closing") shall take place at the offices of Hogan & Hartson
L.L.P., 555 Thirteenth Street, N.W., Washington, D.C. 20004 on a date (the
"First Closing Date") that is as soon as practicable following satisfaction or
waiver of any conditions to such closing. At the First Closing the Investor
shall deliver to the Company the amount specified in Section 1.1 in lawful money
of the United States of America in immediately available funds to the Company's
account at a bank which has been designated by the Company. At the First Closing
(i) the Company shall issue and deliver to the Investor the Loan Note in the
principal amount specified in Section 1.1; (ii) the Parent shall issue and
deliver to the Investor the Loan Warrants to purchase the number of shares of
Parent Common Stock specified in Section 1.1, registered in the name of the
Investor; (iii) the Company and the Parent shall execute and deliver (with a
copy to the Investor) the Loan Capital Contribution Agreement; (iv) the Parent
shall execute and deliver to the Investor the Registration Rights Agreement; and
(v) the Company and the Parent shall provide to the Investor a legal opinion of
its counsel in form and substance reasonably satisfactory to the Investor and
the Investor's counsel.
(b) The closing of the transactions contemplated by Section
1.2 (the "Second Closing") shall take place at the offices of Hogan & Hartson
L.L.P., 555 Thirteenth Street, N.W., Washington, D.C. 20004 on a date (the
"Second Closing Date") that is within five Business Days, or as soon as
practicable thereafter, following a Second Closing Election by the Company and
Parent to the Investor (which includes written notice that any required
Stockholder Approval for the Parent to complete the Second Closing has been
obtained). At the Second Closing the Investor shall deliver to the Company the
amount specified in Section 1.2 in lawful money of the United States of America
in immediately available funds to the Company's account at a bank which has been
designated by the Company. At the Second Closing (i) the Company shall issue and
deliver to the Investor the Notes in the principal amount specified in Section
1.2; (ii) the Parent shall issue and deliver to the Investor the Note Warrants
to purchase the number of shares of Parent Common Stock specified in Section
1.2, registered in the name of the Investor; (iii) the Company shall execute and
deliver to the Investor the Security Agreement; (iv) the Parent and its
subsidiaries who are parties thereto shall execute and deliver to the Investor
the Guaranty and the Parent Security Agreement; (v) the Parent shall execute and
deliver to the Investor the Registration Rights Agreement; and
-5-
<PAGE>
(vi) the Company and the Parent shall provide to the Investor a legal opinion of
its counsel in form and substance reasonably satisfactory to the Investor and
the Investor's counsel. Also at the Second Closing the Company shall repay the
Loan to the Investor as provided herein and in the Loan Note.
SECTION 1.4. PARTICIPATION OPTION.
In the event that the Notes are being repaid or prepaid in
connection with a Qualified Offering, the Parent shall extend to the Investor an
option to purchase securities in the Qualified Offering, upon substantially the
same terms and conditions as other investors purchasing in the Qualified
Offering (but subject to such reasonable differences not affecting the economic
factors of such investment as the managing placement agent or underwriter
conducting the Qualified Offering may reasonably request), up to an aggregate
purchase price equal to the principal amount of the Notes being repaid or
prepaid in connection with the Qualified Offering.
SECTION 1.5. STOCKHOLDER APPROVAL AND SECOND CLOSING ELECTION;
STOCK SUBSTITUTION.
(a) Unless the Company and the Parent have elected (by written
notice to the Investor) not to proceed with the Second Closing, the Parent will
use all reasonable efforts to obtain, at its next annual meeting of
stockholders, or at an adjourned or reconvened meeting (the date on which the
stockholder vote occurs being referred to herein as the "Stockholder Vote
Date"), to be held within 120 days after the date hereof, any required
Stockholder Approval for the Second Closing and the transactions to occur at the
Second Closing. The Parent also will use all reasonable efforts to obtain, on
the Stockholder Vote Date (whether or not the Second Closing Election is made),
any required Stockholder Approval for the Investor and its Affiliates, and Mr.
Ronald Jensen, all members of his immediate family and all Affiliates of either,
to be able to convert all preferred stock and exercise all warrants held (or
that will be held following the Second Closing) by them into Parent Common Stock
or transfer Parent Common Stock owned by them to the Investor. If a required
Stockholder Approval for the Second Closing and the transactions to occur at the
Second Closing is sought but not obtained on the Stockholder Vote Date, and the
Parent is therefore not able to issue the Note Warrants at the Second Closing,
the parties shall negotiate in good faith revisions to the transactions
contemplated to occur at the Second Closing that would avoid the need for such
Stockholder Approval and that would provide an economically equivalent result
for each party. If the parties cannot agree upon such revisions (or if the
Company and the Parent do not deliver the Second Closing Election) within 30
days after the Stockholder Vote Date, or if the Company and the Parent have
elected (by written notice to the Investor) not to proceed with the Second
Closing,
-6-
<PAGE>
none of the parties hereto shall be obligated to proceed with the
Second Closing, and all obligations of the parties relating to the Second
Closing shall expire.
(b) All rights of the Company under this Agreement to make
payments in Parent Common Stock shall be subject to receipt by the Parent of any
required Stockholder Approval. Notwithstanding the prior sentence, to the extent
it would avoid the need for Stockholder Approval, the Company shall be entitled
to substitute, in lieu of Parent Common Stock, a preferred stock of Parent that
(i) shall be equivalent to Parent Common Stock in all economic respects,
including with respect to liquidation, dividends and other economic terms, (ii)
shall be non-voting in the event that the holder (together with all of its
Affiliates) is the beneficial owner (as such term is defined under the federal
securities laws and the rules and regulations thereunder) of 19.9% or more of
the Parent Common Stock but otherwise shall vote with the Parent Common Stock as
a single class and be entitled to the same number of votes per share as the
number of shares of Parent Common Stock issuable upon conversion of such
preferred stock, and (iii) shall be convertible into Parent Common Stock,
provided that the conversion right may not be exercised without Stockholder
Approval in the event that the holder (together with all of its Affiliates) is,
or following such conversion would be, the beneficial owner of 19.9% or more of
the Parent Common Stock. For purposes of the provisions relating to use of
Parent Common Stock (or, pursuant to this Section, such preferred stock) to
prepay the Notes, such preferred stock shall be deemed to have the same value as
the value of the Parent Common Stock into which the preferred stock is
convertible (whether or not the conversion right may then be exercised).
SECTION 1.6. ACCOUNTS RECEIVABLE FINANCING.
If so requested by the Company from time to time in written
notices to the Investor, the Investor shall advance to the Company such amounts
as the Company may request, not to exceed, in the aggregate, the lesser of (i)
50% of the amount of the accounts receivable of the Company, the Parent and
those subsidiaries that are parties to the Parent Security Agreement (taken
collectively) which have been outstanding for not more than 90 days ("Eligible
Receivables") and (ii) the aggregate amount of the principal payments received
(and not reborrowed by the Company under this Section 1.6) by the Investor under
the Notes. Such advances shall be evidenced by a Note substantially in the form
attached hereto as Exhibit J (the "A/R Note"), which shall be considered one of
the Notes for all purposes hereunder, and shall be governed by all provisions of
this Agreement relating to the Notes (including without limitation be secured by
and having the benefit of the Security Agreement and having the benefit of the
Guaranty and the Parent Security Agreement).
-7-
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY AND THE PARENT
The Company and the Parent jointly and severally represent and
warrant to the Investor as follows:
SECTION 2.1. ORGANIZATION AND QUALIFICATION.
(a) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. The
Company has the requisite power and authority to own, lease and operate its
assets and properties, to carry on its business as now being conducted and to
execute, deliver and perform this Agreement and the Transaction Documents to
which it is a party. The Company is duly qualified to conduct its business, and
is in good standing, in each jurisdiction where the ownership or leasing of its
properties or the nature of its activities in connection with the conduct of its
business makes such qualification necessary.
(b) The Parent is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. The
Parent has the requisite power and authority to own, lease and operate its
assets and properties, to carry on its business as now being conducted and to
execute, deliver and perform this Agreement and the Transaction Documents to
which it is a party. The Parent is duly qualified to conduct its business, and
is in good standing, in each jurisdiction where the ownership or leasing of its
properties or the nature of its activities in connection with the conduct of its
business makes such qualification necessary.
SECTION 2.2. CERTIFICATE OF INCORPORATION AND BYLAWS.
(a) The Company has heretofore delivered to the Investor a
complete and correct copy of the certificate of incorporation and the bylaws of
the Company, each as amended to date. Such certificate of incorporation and
bylaws are in full force and effect. The Company is not in violation of any of
the provisions of its certificate of incorporation or bylaws or other
organizational or governing document.
(b) The Parent has heretofore delivered to the Investor a
complete and correct copy of the certificate of incorporation and the bylaws of
the Parent, each as amended to date. Such certificate of incorporation and
bylaws are in full force and effect. The Parent is not in violation of any of
the provisions of its
-8-
<PAGE>
certificate of incorporation or bylaws or other organizational or governing
document.
SECTION 2.3. CAPITALIZATION.
(a) The authorized capital stock of the Company consists of
2,000 shares of common stock of which 100 shares are validly issued and
outstanding, fully paid and non-assessable, all of which are held (directly or
indirectly) by Parent free and clear of all Encumbrances, and 1,000 shares of
preferred stock, none of which are issued or outstanding. There are no options,
warrants or other rights, agreements, arrangements or commitments of any
character relating to the issued or unissued capital stock of the Company or
obligating the Company to issue or sell any shares of capital stock of, or other
equity interests in the Company, including any securities directly or indirectly
convertible into or exercisable or exchangeable for any capital stock or other
equity securities of the Company, expect for options or rights held by the
Parent. All shares of common stock of the Company are duly and validly issued,
fully paid and nonassessable.
(b) The authorized capital stock of the Parent consists of:
(i) one hundred million (100,000,000) shares of Parent Common Stock of which
nineteen million three hundred thousand four hundred sixty-six (19,362,966)
shares are issued and outstanding on the date of execution of this Agreement;
and (ii) five million (5,000,000) shares of preferred stock, par value $.001 per
share, of which: (a) one million (1,000,000) shares of Series A Convertible
Preferred Stock are authorized, of which no shares are issued and outstanding;
(b) five hundred thousand (500,000) shares of Series B Convertible Preferred
Stock, all of which are issued and outstanding; (c) two hundred seventy-five
(275) shares of 8% Series C Cumulative Convertible Preferred Stock, of which no
shares are outstanding; (d) one hundred twenty-five (125) shares of 8% Series D
Cumulative Convertible Preferred Stock, of which thirty (30) shares are issued
and outstanding; (e) one hundred twenty-five (125) shares of 8% Series E
Cumulative Convertible Redeemable Preferred Stock, of which fifty (50) shares
are issued and outstanding; and (f) 2,020,000 shares of Series F Convertible
Preferred Stock, of which 1,010,000 shares are issued and outstanding. Except as
set forth in Schedule 2.3 and this Agreement, there are no options, warrants or
other rights, agreements, arrangements or commitments of any character relating
to the issued or unissued capital stock of the Parent or obligating the Parent
to issue or sell any shares of capital stock of, or other equity interests in
the Parent, including any securities directly or indirectly convertible into or
exercisable or exchangeable for any capital stock or other equity securities of
the Parent. Except as set forth in Schedule 2.3 and this Agreement, there are no
outstanding obligations of the Parent to repurchase, redeem or otherwise acquire
any shares of its capital stock or make any investment (in the form of a loan,
capital contribution or otherwise) in any other
-9-
<PAGE>
Person. The Parent shall at all times reserve and keep available out of its
authorized but unissued Parent Common Stock, solely for the purpose of issuance
upon the exercise of the Warrants issued hereunder, such number of shares of
Parent Common Stock as shall then be issuable upon the exercise of the Warrants
issued hereunder. All shares of Parent Common Stock which shall be so issued
shall be duly and validly issued, fully paid and nonassessable and free from all
preemptive rights with respect to the issue thereof.
SECTION 2.4. AUTHORITY.
(a) The execution and delivery of this Agreement by the
Company and the consummation by the Company of the transactions contemplated
hereby have been, and as of the First Closing and the Second Closing the
execution and delivery by the Company of the Transaction Documents to which it
will become a party at such closing and the consummation by the Company of the
transactions contemplated thereby will have been, duly and validly authorized by
all necessary corporate action and no other corporate proceedings on the part of
the Company are necessary to authorize this Agreement or the Transaction
Documents or to consummate the transactions contemplated hereby or thereby. This
Agreement has been, and as of the First Closing and the Second Closing the
execution and delivery by the Company of the Transaction Documents to which it
will become a party at such closing and the consummation by the Company of the
transactions contemplated thereby will have been, duly executed and delivered by
the Company and, assuming the due authorization, execution and delivery by the
Investor, each constitutes or will constitute, respectively, a legal, valid and
binding obligation of the Company, enforceable in accordance with its terms,
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws of general applicability
relating to or affecting creditors' rights generally and by the application of
general principles of equity.
(b) The execution and delivery of this Agreement by the Parent
and the consummation by the Parent of the transactions contemplated hereby have
been, and as of the First Closing and the Second Closing the execution and
delivery by the Parent of the Transaction Documents to which it will become a
party at such closing and the consummation by the Parent of the transactions
contemplated thereby will have been, duly and validly authorized by all
necessary corporate action and no other corporate proceedings on the part of the
Parent are necessary to authorize this Agreement or the Transaction Documents or
to consummate the transactions contemplated hereby or thereby. This Agreement
has been, and as of the First Closing and the Second Closing the execution and
delivery by the Parent of the Transaction Documents to which it will become a
party at such closing and the consummation by the Parent of the transactions
contemplated thereby will have been, duly executed and delivered by the Parent
and, assuming the due authorization, execution and delivery by the Investor,
each constitutes or will
-10-
<PAGE>
constitute, respectively, a legal, valid and binding obligation of the Parent,
enforceable in accordance with its terms, except as such enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium and other similar
laws of general applicability relating to or affecting creditors' rights
generally and by the application of general principles of equity.
SECTION 2.5. NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) Except as set forth in Schedule 2.5, the execution and
delivery of this Agreement by the Company do not, and the performance by the
Company of its obligations under this Agreement will not, (i) conflict with or
violate the certificate of incorporation or bylaws of the Company, (ii) conflict
with or violate any Law (as defined below) (including without limitation any
judgment or injunction) applicable to the Company or its assets and properties,
(iii) result in any breach of or constitute a default under any agreement or
contract to which the Company is a party or (iv) require any consent, approval,
authorization or permit of, or filing with or notification to, any Government
Entity (as defined below), except for the filing and recordation of one or more
of the Transfer Documents or documents relating to the perfection of security
interests granted under the Security Agreement.
(b) Except as set forth in Schedule 2.5, the execution and
delivery of this Agreement by the Parent do not, and the performance by the
Parent of its obligations under this Agreement will not, (i) conflict with or
violate the certificate of incorporation or bylaws of the Parent, (ii) conflict
with or violate any Law (including without limitation any judgment or
injunction) applicable to the Parent or its assets and properties, (iii) result
in any breach of or constitute a default under any Material Contracts (as
defined below) or (iv) require any consent, approval, authorization or permit
of, or filing with or notification to, any Government Entity or party to any
Material Contract, except for the filing and recordation of one or more of the
Transfer Documents or documents relating to the perfection of security interests
granted under the Security Agreement.
SECTION 2.6. FINANCIAL STATEMENTS.
(a) The unaudited balance sheet of the Company as of December
31, 1998 (the "Unaudited Company Balance Sheet"), presents fairly, in all
material respects, the assets and liabilities of the Company as of such date and
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis with the financial statements of the Parent
referred to in Section 2.6(b) (except that the Unaudited Company Balance Sheet
does not contain all required footnotes). Except as reflected in the Unaudited
Company Balance Sheet as of December 31, 1998 (the "Company Balance Sheet
Date"), the Company has no liabilities, contingent or absolute, matured or
unmatured, known or unknown, except for liabilities incurred in the ordinary
course of business since the Company
-11-
<PAGE>
Balance Sheet Date that would not have a Material Adverse Effect (as defined
below).
(b) The consolidated audited balance sheet of the Parent as of
the end of the Parent's fiscal year ending March 31, 1998, and the consolidated
audited statements of income and cash flows for such fiscal year (collectively,
the "Parent Audited Financial Statements"), and the consolidated unaudited
balance sheet of the Parent as of December 31, 1998 and the consolidated
unaudited statements of income and cash flows for the nine month period ended
December 31, 1998 (the "Parent Unaudited Financial Statements"), present fairly,
in all material respects, the financial condition of the Parent as of the
respective dates and the results of operations and cash flows for the respective
periods indicated and have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved (except that such unaudited statements do not contain all required
footnotes and are subject to normal recurring year-end adjustments). Except as
reflected in the unaudited balance sheet of the Parent as of December 31, 1998
(the "Parent Balance Sheet Date"), the Parent has no liabilities, contingent or
absolute, matured or unmatured, known or unknown, except for liabilities
incurred in the ordinary course of business since the Parent Balance Sheet Date
that would not have a Material Adverse Effect.
SECTION 2.7. ABSENCE OF CERTAIN CHANGES OR EVENTS.
(a) Except as set forth in Schedule 2.7, since the Company
Balance Sheet Date, the Company has not incurred any material liability, except
in the ordinary course of its business consistent with its past practices, and
the Company has conducted its business in the ordinary course consistent with
its past practices. Except as set forth in Schedule 2.7, since the Company
Balance Sheet Date, there has not been any change in the business, condition
(financial or otherwise) or results of operations of the Company, including any
transaction, commitment, dispute, damage, destruction or loss, whether or not
covered by insurance, or other event of any character (whether or not in the
ordinary course of business) individually or in the aggregate which has had, or
is reasonably likely to have, a Material Adverse Effect.
(b) Except as set forth in Schedule 2.7, since the Parent
Balance Sheet Date, the Parent has not incurred any material liability, except
in the ordinary course of its business consistent with its past practices, and
the Parent has conducted its business in the ordinary course consistent with its
past practices. Except as set forth in Schedule 2.7, since the Parent Balance
Sheet Date, there has not been any change in the business, condition (financial
or otherwise) or results of operations of the Parent, including any transaction,
commitment, dispute, damage, destruction or loss, whether or not covered by
insurance, or other event of any character (whether or not in the ordinary
course of business) individually or in the aggregate which has had, or is
reasonably likely to have, a Material Adverse Effect.
-12-
<PAGE>
SECTION 2.8. AGREEMENTS.
Except as set forth in Schedule 2.8, all existing agreements
that are or will be required to be filed as an exhibit to reports filed by the
Parent with the Securities and Exchange Commission (the "SEC") (collectively,
the "Material Contracts") are valid and in full force and effect on the date
hereof, and the Parent has not (and has no knowledge that any party thereto has)
violated any provision of, or committed or failed to perform any act which with
or without notice, lapse of time or both would constitute a default under the
provisions of, any Material Contract, except for defaults which would not
reasonably be expected to have a Material Adverse Effect.
SECTION 2.9. LITIGATION.
Except as set forth in Schedule 2.9, there is no action, suit,
investigation, claim, arbitration or litigation pending or, to the knowledge of
the Company or the Parent, threatened against or involving the Company or the
Parent or the business and operations of the Company or the Parent, at law or in
equity, or before or by any court, arbitrator or Government Entity. Neither, the
Company or the Parent is operating under or subject to any judgment, writ,
order, injunction, award or decree of any court, judge, justice or magistrate,
including any bankruptcy court or judge, or any order of or by any Government
Entity.
SECTION 2.10. TAXES AND ASSESSMENTS.
Except as set forth in Schedule 2.10, each of the Company and
the Parent has (i) duly and timely paid all Taxes (as defined below) which have
become due and payable by it; (ii) neither the Company nor the Parent has
received any notice of, nor does it have any knowledge of, any notice of
deficiency or assessment or proposed deficiency or assessment from any taxing
Government Entity; and (iii) to the knowledge of the Company and the Parent,
there are no audits pending and there are no outstanding agreements or waivers
by the Company or the Parent that extend the statutory period of limitations
applicable to any federal, state, local, or foreign tax returns or Taxes.
SECTION 2.11. BROKERS.
No broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of the Company or the Parent, except as set forth on Schedule 2.11,
and the fees and commissions of any brokers, finders or investment bankers
described in Schedule 2.11 shall be borne by the Company or the Parent.
-13-
<PAGE>
SECTION 2.12. SEC FILINGS.
The Parent has filed all forms, reports, statements and other
documents required to be filed with the SEC since January 1, 1998 (all such
forms, reports and other documents are collectively referred to herein as the
"Parent SEC Reports"), except for an amendment on Form 8-K/A with respect to the
IDX International acquisition. As of their respective filing dates, the Parent
SEC Reports (i) complied as to form in all material respects with the
requirements of the Securities Exchange Act of 1934, as amended, the Securities
Act of 1933, as amended (the "Securities Act"), and the SEC's rules and
regulations thereunder, and (ii) did not at the time they were filed contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. A draft of the
Parent's Form 10-K with respect to the fiscal year ended December 31, 1998 has
been provided to the Investor. Such draft does not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
SECTION 2.13. DISCLOSURE.
No representations or warranties by the Company or the Parent
in this Agreement and no statement or information contained in the Schedules
hereto or any certificate furnished or to be furnished by the Company or the
Parent to the Investor pursuant to the provisions of this Agreement (taken
collectively), contains or will contain any untrue statement of a material fact
or omits or will omit to state any material fact necessary, in light of the
circumstances under which it was made, in order to make the statements herein or
therein not misleading.
SECTION 2.14. NASDAQ LISTING.
The Parent has received no notice, either oral or written,
with respect to the continued eligibility of the Parent Common Stock for listing
on the Nasdaq National Market, and except as set forth on Schedule 2.14 the
Parent has maintained all requirements for the continuation of such listing.
SECTION 2.15. GOOD TITLE, ABSENCE OF LIENS.
Following the transfers contemplated by the transfer
documents, the Company will have good and marketable title to all assets and
property owned by it, in each case free and clear of all Encumbrances (as
defined below) (other than Encumbrances not prohibited by Section 4.9).
-14-
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE INVESTOR
The Investor hereby represents and warrants to the Company and the Parent as
follows:
SECTION 3.1. AUTHORITY AND CAPACITY.
The Investor has full legal right, capacity, power and
authority to execute and deliver this Agreement and all other documents,
instruments, certificates and agreements executed or to be executed by the
Investor pursuant hereto, and to consummate the transactions contemplated hereby
and thereby.
SECTION 3.2. ABSENCE OF VIOLATION.
The execution, delivery and performance by the Investor of
this Agreement and all other documents, instruments, certificates and agreements
contemplated hereby to which the Investor is a party, the fulfillment of and the
compliance with the respective terms and provisions hereof and thereof, and the
consummation of the transactions contemplated hereby and thereby, do not and
will not (a) conflict with, or violate any provision of, any Laws having
applicability to the Investor; or (b) conflict with, or result in any breach of,
or constitute a default under, any agreement to which the Investor is a party.
SECTION 3.3. RESTRICTIONS AND CONSENTS.
There are no agreements, Laws or other restrictions of any
kind to which the Investor is party or subject that would prevent or restrict
the execution, delivery or performance of this Agreement by the Investor.
SECTION 3.4. BINDING OBLIGATION.
This Agreement constitutes, and each document, instrument,
certificate and agreement to be executed by the Investor pursuant hereto, when
executed and delivered in accordance with the provisions hereof, assuming the
due authorization, execution and delivery by the Company and the Parent, shall
constitute, a valid and binding obligation of the Investor, enforceable in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium and other similar laws of
general applicability relating to or affecting creditors' rights generally and
by the application of general principles of equity.
SECTION 3.5. NO REGISTRATION UNDER THE SECURITIES ACT.
The Investor understands that the Notes and the Warrants to be
issued to the Investor under this Agreement (and the Loan, to the extent it is
-15-
<PAGE>
deemed to be a security) have not been and will not be registered under the
Securities Act in reliance upon exemptions contained in the Securities Act or
interpretations thereof, and neither such Notes or the Warrants, nor the Parent
Common Stock issuable in repayment or upon exercise thereof (nor the Loan, to
the extent it is deemed to be a security), can be offered for sale, sold or
otherwise transferred unless such shares or Warrants are so registered or
qualify for exemption from registration under the Securities Act.
SECTION 3.6. ACQUISITION FOR INVESTMENT.
The Notes and Warrants to be issued to the Investor under this
Agreement, and the Parent Common Stock issuable in repayment or upon exercise
thereof (and the Loan, to the extent it is deemed to be a security), are being
acquired by the Investor in good faith solely for its own account, for
investment and not with a view toward resale or other distribution within the
meaning of the Securities Act. Such securities will not be offered for sale,
sold or otherwise transferred by the Investor without either registration or
exemption from registration under the Securities Act.
SECTION 3.7. EVALUATION OF MERITS AND RISKS OF INVESTMENT.
The Investor has such knowledge and experience in financial
and business matters that the Investor is capable of evaluating the merits and
risks of the Investor's investment in the Notes and the Warrants to be acquired
hereunder and the Parent Common Stock in repayment or upon exercise thereof (and
the Loan, to the extent it is deemed to be a security). The Investor understands
and is able to bear any economic risks associated with such investment
(including, without limitation, the necessity of holding such securities for an
indefinite period of time (until the Note Maturity Date or earlier due dates
under the amortization schedule, in the case of the Notes), inasmuch as the
securities have not been registered under the Securities Act). The Investor is
an "accredited investor", as that term is defined in Regulation D promulgated
under the Securities Act. The Investor confirms that the Company and the Parent
have made available to the Investor and its representatives and agents the
opportunity to ask questions of the officers and management employees of the
Company and the Parent about the business and financial condition of the Company
and the Parent as the Investor or its representatives have requested.
-16-
<PAGE>
ARTICLE IV
COVENANTS
SECTION 4.1. CONSENTS AND APPROVALS; FILINGS AND NOTICES.
The Company and the Parent shall use reasonable efforts to as
promptly as possible make all filings with, provide all notices to and obtain
all consents and approvals from third parties required to be obtained by the
Company or the Parent in connection with the transactions contemplated
hereunder, including, without limitation, all filings with, notices to and
consents and approvals from Government Entities and other Persons.
SECTION 4.2. FURTHER ACTION; REASONABLE BEST EFFORTS.
Each of the parties shall use reasonable best efforts to take,
or cause to be taken, all appropriate action, and do, or cause to be done, all
things necessary, proper or advisable under applicable Laws or otherwise to
consummate and make effective the transactions contemplated by this Agreement as
promptly as practicable, including, without limitation, using its reasonable
best efforts to obtain all licenses, permits, consents, approvals,
authorizations, qualifications and orders of Government Entities and parties to
contracts with the Company or the Parent as are necessary for the transactions
contemplated herein.
SECTION 4.3. PAYMENTS.
The Company shall duly and punctually pay the principal,
interest and any other amounts payable in respect of the Loan Note and the Notes
in accordance with their terms and the terms hereof.
SECTION 4.4. PERFORMANCE.
The Company and the Parent shall duly and punctually perform
the Transaction Documents to which each is a party in accordance with their
terms and the terms hereof.
SECTION 4.5. MAINTENANCE OF THE COMPANY AND PARENT.
The Company and the Parent shall do or cause to be done, all
things necessary to preserve and keep in full force and effect the Company's and
the Parent's corporate existences. The Company and the Parent shall obtain, make
and keep in full force and effect all authorizations from and registrations with
Government Entities that may be required for the validity or enforceability
against it of this Agreement and the Transaction Documents and for the operation
of its
-17-
<PAGE>
business and the ownership of its properties, except where the failure to do so
would not have a Material Adverse Effect. Each of the Company and the Parent
shall timely file all tax returns or extensions and all information or similar
reports required by law to be filed by it, and will pay all applicable taxes and
other governmental charges required to be paid. Each of the Company and the
Parent shall comply with all applicable Laws in respect of the operation of all
properties (including, without limitation, leased or owned facilities) by the
Company and the Parent and the conduct of its business other than where
non-compliance would not have a Material Adverse Effect. The Company and the
Parent shall carry and maintain in full force and effect, at all times with
financially sound and reputable institutions, insurance in such forms and
amounts and against such risks as may be reasonable and prudent in the
circumstances for a company holding the assets it holds or will hold as of the
Second Closing Date and as may be required by applicable Laws.
SECTION 4.6. NO CONSOLIDATION, MERGER OR SALE OF ASSETS OR STOCK
OF THE COMPANY.
(a) The Company shall not consolidate with or merge into
another Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, unless:
(i) the Person formed by such consolidation or
into which the Company is merged or the Person which acquires by conveyance or
transfer, or which leases, the properties and assets of the Company
substantially as an entirety shall be a corporation, partnership or trust
wholly-owned (directly or indirectly) by the Parent, shall be organized and
validly existing under the laws of the United States of America, any State
thereof or the District of Columbia and shall expressly assume the due and
punctual payment of the principal, interest and any other amounts payable in
respect of the Loan Note and the Notes and the performance of every other
covenant of the Company under the this Agreement and the Transaction Documents;
(ii) immediately after giving effect to such
transaction, no Event of Default (as defined below), and no event which, after
notice or lapse of time or both, would become an Event of Default, shall have
occurred and be continuing; and
(iii) immediately after giving effect to such
transaction, the corporation formed by such consolidation or into which the
Company is merged or the Person which acquires its assets would have a net worth
no less than the net worth of the Company prior to giving effect to such
transaction, without giving effect to such transaction (other than transaction
costs paid or committed to be paid by the Parent).
-18-
<PAGE>
(b) The Company shall not dispose of all or any part of its
interest in any material asset, unless such sale or disposition is on an arm's
length basis and in the ordinary course of business.
(c) The Parent shall not dispose of all or any part of its
100% ownership (direct or indirect) of the capital stock of the Company.
SECTION 4.7. LIMITATION ON INDEBTEDNESS.
Without the prior written consent of the Investor, the Company
shall not incur or have outstanding any Indebtedness (as defined below) other
than (i) the Loan, the Loan Notes and the Notes, (ii) Indebtedness (in the form
of a building mortgage and capitalized leases) outstanding on the date hereof
and disclosed on Exhibit G-1 or refinancing of such Indebtedness, or (iii)
Indebtedness incurred for the financing (from the asset vendor or other
equipment or asset financier, not to exceed 100% of the acquisition cost of the
assets being acquired) of assets acquired after the date hereof and used in the
businesses of the Company, the Parent or the Parent's other subsidiaries.
Without the prior written consent of the Investor, the Parent shall not incur
any additional Indebtedness other than (a) Indebtedness to refinance, or
extensions of, Indebtedness outstanding as of the date hereof or other
Indebtedness not prohibited by the terms of this Agreement (to the extent such
refinancing or extension would be deemed to constitute additional Indebtedness),
provided that such refinancing or extension does not increase the amount of such
Indebtedness, (b) Indebtedness incurred to repay or prepay the Loan, the Loan
Notes and the Notes, (c) the accounts receivable facility referred to in Section
1.6, or (d) Indebtedness incurred for the financing (from the asset vendor or
other equipment or asset financier, not to exceed 100% of the acquisition cost
of the assets being acquired) of assets acquired after the date hereof and used
in the businesses of the Company, the Parent or the Parent's other subsidiaries.
SECTION 4.8. LIMITATION ON DIVIDENDS AND OTHER RESTRICTED PAYMENTS.
Without the prior written consent of the Investor, neither the
Company nor the Parent shall make any Restricted Payment (as defined below).
SECTION 4.9. GOOD TITLE, LIMITATION ON LIENS.
The Company shall maintain good and marketable title to all
assets and property owned by it, in each case (except with the prior written
consent of the Investor), free and clear of all Encumbrances (other than
Encumbrances for the benefit of the Investor), except for Permitted Liens (as
defined below), Encumbrances granted in connection with the purchase (from the
asset vendor or
-19-
<PAGE>
other equipment or asset financier, not to exceed 100% of the acquisition cost
of the assets being acquired) of assets acquired after the date hereof and used
in the businesses of the Company, the Parent or the Parent's other subsidiaries,
and such individual Encumbrances as do not secure Indebtedness in excess of
$100,000 and where the fair market value of the assets so encumbered does not
exceed $250,000.
The Parent shall maintain good and marketable title to all
assets and property to be transferred to the Company pursuant to the Transfer
Documents and as provided in this Agreement until such assets are transferred to
the Company, in each case (except with the prior written consent of the
Investor), free and clear of all Encumbrances (other than Encumbrances for the
benefit of the Investor or created under the Transaction Documents), except for
(i) Encumbrances outstanding as of the date hereof (or replacement Encumbrances
to the extent such replacement Encumbrances would not be deemed to constitute
additional Encumbrances), (ii) Permitted Liens (as defined below), (iii)
Encumbrances created in connection with the purchase (from the asset vendor or
other equipment or asset financier, not to exceed 100% of the acquisition cost
of the assets being acquired) of assets acquired after the date hereof and used
in the businesses of the Company, the Parent or the Parent's other subsidiaries,
and (iv) such individual Encumbrances as do not secure Indebtedness in excess of
$100,000 and where the fair market value of the assets so encumbered does not
exceed $250,000. In addition, all accounts receivable of the Parent and its
subsidiaries who are parties to the Parent Security Agreement shall be free and
clear of all Encumbrances (other than Encumbrances for the benefit of the
Investor or created under the Transaction Documents), except for items described
in clauses (ii), (iii) or (iv) of the definition of Permitted Liens.
Without the prior written consent of the Investor, from and
after the First Closing, the Parent shall not create any Encumbrances, or permit
any Encumbrances to exist) on the Parent's accounts receivable, other than
Encumbrances for the benefit of the Investor or created under the Transaction
Documents, or other than Encumbrances permitted by the immediately preceding
paragraph.
SECTION 4.10. NOTICE TO INVESTOR.
Upon the Company obtaining knowledge of (a) an Event of
Default or (b) the existence of any pending or threatened actions, suits,
investigations, litigations, or other judicial or administrative proceedings
which, if adversely determined, could reasonably be expected to have a Material
Adverse Effect, the Company shall deliver promptly (and in any event within five
Business Days after the obtaining of such knowledge) to the Investor a
certificate of an executive officer of the Company specifying the nature and
period of existence thereof and what action the Company proposes to take with
respect thereto.
-20-
<PAGE>
SECTION 4.11. COMPLIANCE WITH TRANSACTION DOCUMENTS.
The Company and the Parent shall comply with all of the
provisions of, and perform each of its obligations under, each of the
Transaction Documents to which it is a party.
SECTION 4.12. MAINTENANCE OF PROPERTIES.
The Company shall, in all material respects, maintain,
preserve and keep its properties which are used or useful in the conduct of its
business (whether owned in fee or a leasehold interest) in good repair and
working order and from time to time shall make all necessary repairs,
replacements, renewals and additions so that at all times the economic
efficiency thereof shall be maintained. The Company shall maintain, preserve and
keep its rights under or in all material patents, trademarks, trademark
registrations, service marks, service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets and rights which are owned by
the Company and or which are reasonably necessary for the conduct of its
business, and the Company shall protect and defend such rights against any
infringing uses that would have a Material Adverse Effect.
SECTION 4.13. TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS.
Except for the transactions specifically contemplated by the
Transaction Documents, and transactions solely between or among the Company, the
Parent and the Parent's subsidiaries, the Company shall not enter into or be a
party to any transaction or arrangement with any Affiliate of the Company,
Related Person of the Company or Related Person of any Affiliate of the Company
involving the transfer of assets by the Company to such Affiliate or Related
Person, except in the ordinary course of and pursuant to the reasonable
requirements of the Company's business or upon fair and reasonable terms no less
favorable to the Company than could be obtained in a comparable arm's-length
transaction between unrelated parties.
SECTION 4.14. USE OF PROCEEDS.
(a) The proceeds from the Loan and the Loan Note shall be used
to purchase assets under the Transfer Documents or pay dividends or make other
payments to the Parent, with the end result that all of the net proceeds of the
Loan and the Loan Note shall be made available to the Parent. Such funds shall
be used by the Parent and its subsidiaries to fund capital expenditures relating
to the Parent's network of IP trunks and intelligent platforms for calling card
and unified messaging services, and for working capital and general corporation
purposes.
(b) The proceeds from the sale of the Notes by the Company
shall be used to purchase assets under the Transfer Documents or pay dividends
or make other payments to the Parent, with the end result that all of the net
proceeds of the Notes shall be made available to the Parent. Such funds shall be
used by the
-21-
<PAGE>
Parent and its subsidiaries to fund capital expenditures relating to the
Parent's network of IP trunks and intelligent platforms for calling card and
unified messaging services, to repay debt (including the Loan and the Parent's
outstanding Indebtedness to IDT Corporation, which shall be repaid by the Parent
with such proceeds at the Second Closing) and for working capital and general
corporation purposes.
(c) None of the proceeds of the sale of the Notes shall be
used, directly or indirectly, for the purpose of purchasing or carrying any
"margin stock" as defined in Regulation G (12 CFR Part 207) of the Board of
Governors of the Federal Reserve System. Neither the Company nor any agent
acting on its behalf shall take any action which might cause this Agreement or
the Notes to violate Regulation G, Regulation T, Regulation U or Regulation X of
the Board of Governors of the Federal Reserve System.
SECTION 4.15. CONTINUANCE OF BUSINESS.
The Company shall limit itself to, and continue to conduct,
the business in which the Company is currently engaged during the period in
which the Loan, the Loan Note or the Notes are outstanding.
SECTION 4.16. FURTHER ASSURANCES.
The Company and the Parent shall promptly execute and deliver
all further instruments and documents, and take all further action that may be
necessary or that the Investor may reasonably request in order more fully to
give effect to the provisions of this Agreement.
SECTION 4.17. NASDAQ LISTING.
The Parent shall use all reasonable efforts, at the Parent's
expense, to cause the shares of Parent Common Stock issuable in repayment of the
Notes or upon exercise of the Warrants, respectively, to be approved for listing
on the Nasdaq National Market, as promptly as practicable after such stock has
been registered for resale pursuant to the Registration Rights Agreement (as
defined below).
SECTION 4.18. BLUE SKY.
The Parent shall use reasonable efforts, at the Parent's
expense, to obtain any necessary blue sky permits and approvals required to
permit the distribution of the shares of the Parent Common Stock issuable in
repayment of the Notes or upon exercise of the Warrants, respectively, to be
issued in accordance with the provisions of this Agreement.
-22-
<PAGE>
SECTION 4.19. REGISTRATION RIGHTS AGREEMENT.
At each of the First Closing and the Second Closing, the
Parent and the Investor will enter into a Registration Rights Agreement in the
form attached as Exhibit K (the "Registration Rights Agreement").
SECTION 4.20. ACCESS TO INFORMATION.
The Investor will be entitled to copies of all material
provided by the Parent to holders of Parent Common Stock, and upon request by
such holder copies of all filings made with the SEC pursuant to rules and
regulations thereof. In addition, the Investor will be given the opportunity
from time to time to meet with members of management and receive copies of such
information (other than material non-public information) regarding the Company
and the Parent and their businesses as the Investor may reasonably request. The
Parent will not provide the Investor with any material non-public information
other than pursuant to a confidentiality agreement reasonably acceptable to the
Parent.
ARTICLE V
SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION; REMEDIES
SECTION 5.1. SURVIVAL OF REPRESENTATIONS.
All representations, warranties, covenants, indemnities and
other agreements made by any party to this Agreement herein or pursuant hereto,
shall be deemed made on and as of the Closing Date as though such
representations, warranties, covenants, indemnities and other agreements were
made on and as of such date, and all such representations, warranties,
covenants, indemnities and other agreements shall survive the Closing Date and
any investigation, audit or inspection at any time made by or on behalf of any
party hereto, as follows: (a) unless otherwise specified below, representations
and warranties shall survive for a period of two (2) years after the Closing
Date; and (b) the covenants and agreements in this Article V and the covenants
and agreements which by their terms survive the Closing Date shall continue in
full force and effect until fully discharged. Notwithstanding anything herein to
the contrary, any representation, warranty, covenant or agreement which is the
subject of a claim which is asserted in writing prior to the expiration of the
applicable period set forth above shall survive with respect to such claim or
dispute until the final resolution thereof.
-23-
<PAGE>
SECTION 5.2. AGREEMENT OF THE COMPANY AND THE PARENT TO INDEMNIFY.
Subject to the conditions and provisions of this Article V,
the Company and the Parent hereby agree to indemnify, defend and hold harmless
the Investor from and against and in respect of all Losses (as defined below)
resulting from, imposed upon or incurred by the Investor, directly or
indirectly, by reason of or resulting from any misrepresentation or breach of
any representation or warranty, or noncompliance with any conditions or other
agreements, given or made by the Company and the Parent in this Agreement or in
any document, certificate or agreement furnished by or on behalf of the Company
and the Parent pursuant to this Agreement. It shall be a condition to the rights
of the Investor to indemnification pursuant to this Section that the Investor
shall assert a claim for such indemnification within the applicable survival
period set forth in Section 5.1 hereof.
SECTION 5.3. CONDITIONS OF INDEMNIFICATION.
The obligations and liabilities of the Company and the Parent
hereunder with respect to their indemnities pursuant to this Article V,
resulting from any Third Party Claim (as defined below) shall be subject to the
following terms and conditions:
(a) To seek indemnification, the Investor must give the
Company and the Parent notice of any Third Party Claim which is asserted
against, imposed upon or incurred by the Investor and which may give rise to
liability of the Company and the Parent pursuant to this Article V, stating (to
the extent known or reasonably anticipated) the nature and basis of such Third
Party Claim and the amount thereof; provided that the failure to give such
notice shall not affect the rights of the Investor hereunder except to the
extent that the Company and the Parent shall have suffered actual material
damage by reason of such failure.
(b) Subject to Section 5.3(c) below, the Company and the
Parent shall have the right to undertake, by counsel or other representatives of
their own choosing, the defense of such Third Party Claim at the Company and the
Parent's risk and expense.
(c) In the event that (i) the Company and the Parent shall
elect not to undertake such defense, (ii) within a reasonable time after notice
from the Investor of any such Third Party Claim, the Company and the Parent
shall fail to undertake to defend such Third Party Claim, or (iii) there is a
reasonable probability that such Third Party Claim may materially and adversely
affect the Investor other than as a result of money damages or other money
payments, then the Investor (upon further written notice to the Company and the
Parent) shall
-24-
<PAGE>
have the right to undertake the defense, compromise or settlement of such Third
Party Claim, by counsel or other representatives of its own choosing, on behalf
of and for the account and risk of the Company and the Parent. In the event that
the Investor undertakes the defense of a Third Party Claim under this Section
5.3(c), the Company and the Parent shall pay to the Investor, in addition to the
other sums required to be paid hereunder, the reasonable costs and expenses
incurred by the Investor in connection with such defense, compromise or
settlement as and when such costs and expenses are so incurred.
(d) Anything in this Section 5.3 to the contrary
notwithstanding, (i) the Company and the Parent shall not, without the
Investor's written consent, settle or compromise such Third Party Claim or
consent to entry of any judgment which does not include as an unconditional term
thereof the giving by the claimant or the plaintiff to the Investor of a release
from all liability in respect of such Third Party Claim in form and substance
satisfactory to the Investor; (ii) in the event that the Company and the Parent
undertakes the defense of such Third Party Claim, the Investor, by counsel or
other representative of their own choosing and at its sole cost and expense,
shall have the right to participate in the defense, compromise or settlement
thereof and each party and its counsel and other representatives shall cooperate
with the other party and its counsel and representatives in connection
therewith; and (iii) in the event that the Company and the Parent undertake the
defense of such Third Party Claim, the Company and the Parent shall have an
obligation to keep the Investor informed of the status of the defense of such
Third Party Claim and furnish the Investor with all documents, instruments and
information that the Investor shall reasonably request in connection therewith.
SECTION 5.4. REMEDIES CUMULATIVE.
The remedies provided herein shall be cumulative and shall not
preclude the assertion by the parties hereto of any other rights or the seeking
of any other remedies against the other, or their respective successors or
assigns.
SECTION 5.5. REIMBURSEMENT BY THE COMPANY
If (i) the Investor, other than by reason of its gross
negligence, willful misconduct, misrepresentation or violation of law, rule or
regulation (an "Investor Factor"), becomes involved in any capacity in any
action, proceeding or investigation brought by any stockholder of the Company,
in connection with or as a result of the consummation of the transactions
contemplated by this Agreement, or if the Investor is impleaded in any such
action, proceeding or investigation by any Person, or (ii) the Investor, other
than by reason of any Investor Factor, or by reason of its trading of the Parent
Common Stock in a manner that is illegal under the federal securities laws,
becomes involved in any capacity in any action, proceeding or investigation
brought by the Securities and Exchange Commission
-25-
<PAGE>
against or involving the Company or in connection with or as a result of the
consummation of the transactions contemplated by this Agreement, or if the
Investor is impleaded in any such action, proceeding or investigation by any
Person, then in any such case, the Company will reimburse the Investor for its
reasonable legal and other expenses (including the cost of any investigation and
preparation) incurred in connection therewith, as such expenses are incurred. In
addition, other than with respect to any matter in which the Investor is a named
party, the Company will reimburse the Investor for reasonable internal and
overhead costs for the time of any officers or employees of the Investor devoted
to appearing and preparing to appear as witnesses, assisting in preparation for
hearings, trials or pretrial matters, or otherwise with respect to inquiries,
hearing, trials, and other proceedings relating to the subject matter of this
Agreement. The reimbursement obligations of the Company under this paragraph
shall be in addition to any liability which the Company may otherwise have
(other than matters specifically addressed in the Registration Rights Agreement,
which shall be governed solely by that agreement), shall extend upon the same
terms and conditions to any Affiliates of the Investor who are actually named in
such action, proceeding or investigation, and partners, directors, agents,
employees and controlling Persons (if any), as the case may be, of the Investor
and any such Affiliate, and shall be binding upon and inure to the benefit of
any successors, assigns, heirs and Personal representatives of the Company, the
Investor, any such Affiliate and any such Person. The Company also agrees that
neither the Investor nor any such Affiliate, partner, director, agent, employee
or controlling Person shall have any liability to the Company or any Person
asserting claims on behalf of or in right of the Company in connection with or
as a result of the consummation of this Agreement, except to the extent that any
losses, claims, damages, liabilities or expenses incurred by the Company result
from any Investor Factor, and except as provided in or contemplated by this
Agreement.
ARTICLE VI
EVENTS OF DEFAULT AND REMEDIES THEREFOR
SECTION 6.1. EVENTS OF DEFAULT.
Any one or more of the following shall constitute an "Event of
Default" as the term is used herein:
(a) default shall occur in the payment of principal or
interest on the Loan, the Loan Note or the Notes, or under the Guaranty or Loan
Capital Contribution Agreement, on any date on which any of such amounts are due
and payable and such default shall continue for a period of five Business Days
after written notice to the Company by the Investor; or
(b) default shall occur in the observance or performance of
any covenant set forth in Sections 4.5, 4.6, 4.7, 4.8 or 4.9 (other than an
immaterial default); or
-26-
<PAGE>
(c) default shall occur in the observance or performance of
any other obligation, covenant, undertaking, condition or provision in respect
of the Loan, the Loan Note or the Notes or contained in this Agreement or the
Transaction Documents (other than an immaterial default) which is not remedied
within 30 days after the earlier of: (i) receipt by the Company of written
notice from the Investor requiring the same to be remedied and (ii) the date on
which the Company shall have obtained knowledge of the occurrence of any such
default; or
(d) the Company or the Parent defaults, in an amount equal to
or greater than $250,000, (beyond any applicable grace period) on any payment of
principal or of interest on any Indebtedness; or
(e) there shall be entered in any court of competent
jurisdiction, any final judgment ordering the Company or the Parent to pay money
in excess of $250,000 or the equivalent thereof in another currency, and such
judgment shall remain undismissed, undischarged, or unstayed pending appeal and
in effect for a period of 30 days from the entry thereof; or
(f) any representation or warranty made by the Company or the
Parent herein in connection with the consummation of the Loan or the issuance
and delivery of the Loan Note or the Notes shall prove to have been false or
incorrect in any material respect as of the date of the making thereof; or
(g) the Company or the Parent shall become insolvent or unable
to pay its debts as they come due, or shall stop, suspend or threaten to stop or
suspend payment of all or a material part of its debts or shall propose or make
a general assignment or an arrangement or composition with or for the benefit of
its creditors, or a moratorium shall be agreed or declared in respect of or
affecting all or a material part of the Indebtedness of the Company or the
Parent; or
(h) there shall be entered an order by any competent court, or
a resolution passed, for the winding up or dissolution of the Company or the
Parent, save for the purposes of reconstruction, amalgamation or reorganization
on terms approved by the Investor; or
(i) the Company or the Parent shall initiate or consent to
judicial proceedings relating to itself under any applicable liquidation,
bankruptcy, insolvency, composition, reorganization or other similar Laws
(including a proceeding to appoint a receiver, trustee, custodian or other
similar official for it or for all or any material part of its assets), or there
shall be commenced against the Company or the Parent any such proceeding that
results in the entry of an order for relief or remains undismissed, unbonded or
unstayed pending appeal and in effect for a period of 30 days from the date of
entry thereof; or the Company or the Parent shall make a conveyance or
assignment for the benefit of, or shall enter into any composition or other
arrangement with, its creditors generally, save for the purposes of
reconstruction, amalgamation or reorganization on terms approved by the
Investor.
-27-
<PAGE>
SECTION 6.2. ACCELERATION OF MATURITIES.
Upon the occurrence and during the continuation of any Event
of Default, the Investor may declare the Loan and the Loan Note, or the Notes,
as the case may be, to be immediately due and payable on the terms then due upon
optional prepayment by the Company pursuant to Section 1.1 or 1.2, as
applicable.
SECTION 6.3. ADDITIONAL REMEDIES; REMEDIES CUMULATIVE.
In addition to the remedies available under Section 6.2, upon
the occurrence and during the continuation of any Event of Default, the Investor
may exercise any other remedy it has under any Transaction Document, including
without limitation the Security Agreement, the Guaranty and the Parent Security
Agreement, and shall have the right to enforce the Loan Capital Contribution
Agreement (in the case of an Event of Default while the Loan is outstanding).
The Investor also shall have any other remedy available by law. No remedy herein
conferred upon the Investor is intended to be exclusive of any other remedy, and
to the extent permitted by law each and every such remedy shall be cumulative
and shall be in addition to every other remedy given hereunder or now or
hereafter existing at law or in equity or by statute or otherwise.
SECTION 6.4. REMEDIES NOT WAIVED.
Except for such waivers as may have been agreed to in writing
by the Investor, no course of dealing between the Company and the Investor and
no delay or failure in exercising any rights hereunder or under the Loan Note or
the Notes in respect thereof shall operate as a waiver of any of the rights of
the Investor.
SECTION 6.5. RESCISSION OF ACCELERATION.
The provisions of Section 6.2 are subject to the condition
that if the principal of and accrued but unpaid interest on the Loan and the
Loan Note, or the Notes, as the case may be, have been declared or have become
immediately due and payable by reason of the occurrence of any Event of Default
described in Section 6.1, the Investor may, by written instrument filed with the
Company, rescind and annul such declaration and the consequences thereof;
provided, that at the time such declaration is annulled and rescinded, (a) no
judgment or decree has been entered for the payment of any monies due pursuant
to the Loan and the Loan Note, or the Notes, as the case may be, or this
Agreement, (b) all arrears of interest upon all the applicable Notes and all
other sums payable under the Loan and the Loan Note, or the Notes, as the case
may be, and under this Agreement (except any principal or interest on the Notes
which has become due and payable solely by reason of such declaration under
Section 6.2) shall have been duly paid; and (c) each and every other Event of
Default shall have been cured or waived.
-28-
<PAGE>
ARTICLE VII
GENERAL PROVISIONS
SECTION 7.1. NOTICES.
All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
as of the date delivered, mailed or transmitted, and shall be effective upon
receipt, if delivered personally, mailed by registered or certified mail
(postage prepaid, return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
changes of address) or sent by electronic transmission to the telecopier number
specified below:
(a) If to the Company:
eGlobe Financing Corporation
2000 Pennsylvania Avenue, NW
Suite 4800
Washington, DC 20006
Telecopier No.: 202-822-8984
Attention: Chairman
(b) If to the Parent:
Executive TeleCard, Ltd.
2000 Pennsylvania Avenue, NW
Suite 4800
Washington, DC 20006
Telecopier No.: 202-822-8984
Attention: Chairman
(c) If to the Investor:
EXTL Investors, LLC
850 Cannon, Suite 200
Hurst, TX 76054
Telecopier No.: 817-428-3899
Attention: Ronald Jensen
-29-
<PAGE>
SECTION 7.2. CERTAIN DEFINITIONS.
For purposes of this Agreement, the term:
"Affiliate" means a Person that directly or indirectly, through
one or more intermediaries, controls, is controlled by, or is under common
control with, the first mentioned Person.
"Business Day" means any day other than a Saturday, Sunday or
other day on which banks in New York are required by law to close or are
customarily closed.
"Closing Price" of each share of Parent Common Stock or other
security means the composite closing price of the sales of the Parent Common
Stock or such other security on all securities exchanges on which such security
may at the time be listed (as reported in The Wall Street Journal), or, if there
has been no sale on any such exchange on any day, the average of the highest bid
and lowest asked prices of the Parent Common Stock or such other security on all
such exchanges at the end of such day, or, if such security is not so listed,
the closing price (or last price, if applicable) of sales of the Parent Common
Stock or such other security in the Nasdaq National Market (as reported in The
Wall Street Journal) on such day, or if such security is not quoted in the
Nasdaq National Market but is traded over-the-counter, the average of the
highest bid and lowest asked prices on such day in the over-the-counter market
as reported by the National Quotation Bureau Incorporated, or any similar
successor organization.
"control" (including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly or as trustee or
executor, of the power to direct or cause the direction of the management or
policies of a Person, whether through the ownership of stock or as trustee or
executor, by contract or credit arrangement or otherwise.
"Encumbrance" means any mortgage, charge, lien, pledge,
hypothecation, assignment, deposit arrangement (excluding normal banking
transactions), security interest or other encumbrance of a similar nature
whatsoever.
"Government Entity" means any United States or other national,
state, municipal or local government, domestic or foreign, any subdivision,
agency, entity, commission or authority thereof, or any quasi-governmental or
private body exercising any regulatory, taxing, importing or other governmental
or quasi-governmental authority.
"Indebtedness" means, with respect to any Person and without
duplication, (a) all obligations of such Person for borrowed money and all
obligations of such Person evidenced by bonds, debentures, notes or other
similar
-30-
<PAGE>
instruments; (b) all obligations, contingent or otherwise, relative to the face
amount of all letters of credit, whether or not drawn, and banker's acceptances
issued for the account of such Person; (c) all obligations of such Person as
lessee under leases that have been or should be, in accordance with generally
accepted accounting principles, recorded as capitalized lease obligations; (d)
indebtedness (excluding prepaid interest thereon) secured by an Encumbrance on
property owned or being purchased by such Person (including indebtedness arising
under conditional sales or other title retention agreements), whether or not
such indebtedness shall have been assumed by such Person or is limited in
recourse; (e) all guarantees of such Person in respect of any of the foregoing;
and (f) amendments, renewals, extensions, modifications and refundings of any of
(a) through (e).
"Laws" means all foreign, federal, state and local statutes, laws,
ordinances, regulations, rules, resolutions, orders, determinations, writs,
injunctions, awards (including, without limitation, awards of any arbitrator),
judgments and decrees applicable to the specified Persons or entities.
"Loan Interest Rate" means 8.0% per annum, simple interest,
computed on the basis of actual days elapsed and a year of 365 days; provided,
however, that in the event that any amount payable hereunder is determined to be
interest in excess of the maximum interest rate permitted by applicable law,
"Loan Interest Rate" shall mean such permitted maximum.
"Loan Maturity Date" means the earliest to occur of (i) the first
anniversary of the First Closing Date, (ii) the date of closing of an offering
by the Parent of debt or equity securities, in a single transaction or series of
related transactions, from which the Parent receives net proceeds of $30 million
or more, or (iii) the Second Closing Date or (iv) the occurrence of an Event of
Default while the Loan is outstanding.
"Loan Overdue Rate" means a rate per annum equal to the maximum
interest rate permitted by applicable law.
"Losses" means all demands, losses, claims, actions or causes of
action, assessments, damages, liabilities, costs and expenses, including,
without limitation, interest, penalties and reasonable attorneys' fees and
disbursements.
"Market Price" means (i) if the Parent Common Stock is listed on
any securities exchange, quoted in the Nasdaq National Market, or quoted in the
over-the-counter market, the Closing Price of the Parent Common Stock on the
date that is two days prior to the day as of which the Market Price is being
determined, or (ii) if the Parent Common Stock is not listed on any securities
exchange, quoted in the Nasdaq National Market, or quoted in the
over-the-counter market throughout the Pricing Period, the fair value of the
Parent Common Stock determined by agreement between the Parent and the Investor
or, if they are unable to reach
-31-
<PAGE>
agreement within a reasonable period of time, the fair value of the Parent
Common Stock as determined by an independent appraiser selected by the Parent
(which appraiser may be the Parent's investment banker, and the fees and
expenses of such appraiser shall be borne by the Parent).
"Material Adverse Effect" means any material adverse effect on the
assets, business, financial condition or results of operations of the Parent and
its subsidiaries, taken as a whole, or upon the ability of the Company to
perform its obligations under this Agreement and the Transaction Documents.
"Note Interest Rate" means 5.0% per annum, simple interest,
computed on the basis of actual days elapsed and a year of 365 days; provided,
however, that in the event that any amount payable hereunder is determined to be
interest in excess of the maximum interest rate permitted by applicable law,
"Note Interest Rate" shall mean such permitted maximum.
"Note Maturity Date" means the earlier to occur of (i) the third
anniversary of the Second Closing Date, or (ii) the date of closing of a
Qualified Offering.
"Note Overdue Rate" means a rate per annum equal to the maximum
interest rate permitted by applicable law.
"Permitted Lien" means (i) Liens created in the ordinary course of
business securing Indebtedness incurred in customary amounts for the financing
(from the asset vendor or other equipment or asset financier, not to exceed 100%
of the acquisition cost of the assets being acquired) of assets (other than
accounts receivable) acquired after the date hereof and used in the businesses
of the Company, the Parent or the Parent's other subsidiaries; (ii) Liens
arising by reason of (A) taxes that are being contested in good faith by
appropriate proceedings properly instituted and diligently conducted and in
respect of which appropriate reserves are being maintained, (B) security for
payment of workmen's compensation or insurance, unemployment insurance and other
types of social security, (C) deposits in connection with tenders, contracts
(other than contracts for the payment of money) or leases entered into in the
ordinary course of business or (D) deposits to secure public or statutory
obligations, or in lieu of surety or appeal bonds; (iii) statutory inchoate
liens of mechanics, materialmen, laborers, employees or suppliers arising by
operation of law incurred in the ordinary course of business for sums which are
not overdue for a period of 45 or more days or that are being diligently
contested in good faith by negotiations or by appropriate proceedings that
suspend the collection thereof; and (iv) Liens arising out of judgments or
orders that have been adequately bonded or which do not constitute an Event of
Default.
"Person" means an individual, corporation, partnership,
association, trust, unincorporated organization, other entity or group.
-32-
<PAGE>
"Qualified Offering" means an offering by the Parent of debt or
equity securities, in a single transaction or series of related transactions,
from which the Parent receives net proceeds of $100 million or more.
"Related Person" of any Person means a director, nominee for
election as a director, or executive officer of such Person.
"Restricted Payment" means (a) the payment by the Parent of any
dividend or distribution on any class of share capital, other than dividends on
outstanding preferred stock or additional preferred stock issued after the date
hereof which has a required dividend that is within the range of reasonable and
customary preferred stock dividends, (b) the repurchase or redemption by the
Parent of shares of any class of share capital or any warrants, rights or
options to purchase or acquire any shares of any class of share capital, other
than from the proceeds of a substantially contemporaneous issuance of equity
securities, (c) the prepayment, purchase or redemption of any indebtedness pari
passu or subordinated to the Notes or (d) the setting aside of funds for any of
the foregoing purposes; provided, however, that the repurchase of shares of
Parent Common Stock from departing employees of the Parent shall not be deemed
to be a Restricted Payment so long as there is no existing Event of Default and
the sum of the amount of such repurchases from the First Closing Date to and
including such date of repurchase does not exceed $250,000.
"Senior Indebtedness" means the principal of and interest on (i)
all Indebtedness of the Parent (including Indebtedness of others guaranteed by
the Parent) to IDT Corporation outstanding on the date hereof, (ii) Indebtedness
(in the form of a building mortgage and capitalized leases) outstanding on the
date hereof and disclosed on Exhibit G-1 or refinancing of such Indebtedness, or
(iii) Indebtedness incurred for the financing (from the asset vendor or other
equipment or asset financier, not to exceed 100% of the acquisition cost of the
assets being acquired) of assets acquired after the date hereof and used in the
businesses of the Company, the Parent or the Parent's other subsidiaries, which
Indebtedness is secured or by its terms is senior or superior in right of
payment or otherwise to other Indebtedness of the Parent.
"Stockholder Approval" means any approval of stockholders of the
Parent which may be required, in the reasonable determination of the Parent upon
advice of its counsel, under the rules or regulations of the Nasdaq Stock
Market, as in effect at the applicable time.
"subsidiary" means a corporation, partnership, joint venture or
other entity of which the Company owns, directly or indirectly, at least 50% of
the outstanding securities or other interests the holders of which are generally
entitled
-33-
<PAGE>
to vote for the election of the board of directors or other governing body or
otherwise exercise control of such entity.
"Taxes" means all federal, state, local and foreign taxes
(including, without limitation, income, profit, franchise, sales, use, VAT, real
property, personal property, ad valorem, excise, employment, social security and
wage withholding taxes) and installments of estimated taxes, assessments,
deficiencies, levies, imports, duties, license fees, registration fees,
withholdings or other similar charges of every kind, character or description
imposed by any governmental authorities, and any interest, penalties or
additions to tax imposed thereon or in connection therewith.
"Third Party Claim" means any claim or other assertion of
liability by a third party.
"Transaction Documents" means the Loan Note, Notes, Security
Agreement, Transfer Documents, Warrants, Loan Capital Contribution Agreement,
Guaranty and Parent Security Agreement.
SECTION 7.3. HEADINGS.
The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
SECTION 7.4. SEVERABILITY.
If any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced by any rule of law or public policy, all
other conditions and provisions of this Agreement shall nevertheless remain in
full force and effect so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that transactions contemplated hereby are fulfilled to the extent possible.
SECTION 7.5. ENTIRE AGREEMENT.
This Agreement (together with the Exhibits, the Schedules and
the other documents delivered pursuant hereto) constitutes the entire agreement
of the parties and supersedes all prior agreements and undertakings, both
written and oral, between the parties, or any of them, with respect to the
subject matter hereof,
-34-
<PAGE>
except as otherwise expressly provided herein, are not intended to confer upon
any other Person any rights or remedies hereunder.
SECTION 7.6. SPECIFIC PERFORMANCE.
The transactions contemplated by this Agreement are unique.
Accordingly, each of the parties acknowledges and agrees that, in addition to
all other remedies to which the Investor may be entitled, the Investor is
entitled to a decree of specific performance, provided the Investor is not in
material default hereunder.
SECTION 7.7. ASSIGNMENT.
Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
party. Subject to the preceding sentence, this Agreement shall be binding upon,
inure to the benefit of and be enforceable by the parties and their respective
successors and assigns.
SECTION 7.8. THIRD PARTY BENEFICIARIES.
This Agreement shall be binding upon and inure solely to the
benefit of each party hereto, and nothing in this Agreement, express or implied,
is intended to or shall confer upon any other Person any right, benefit or
remedy of any nature whatsoever under or by reason of this Agreement.
SECTION 7.9. FEES AND EXPENSES.
Except as otherwise provided for in this Agreement, each party
hereto shall pay its own fees, costs and expenses incurred in connection with
this Agreement and in the preparation for and consummation of the transactions
provided for herein; provided, however, that the Company and the Parent shall
reimburse the Investor for reasonable legal expenses incurred by the Investor in
connection with transactions contemplated hereby, up to a maximum of $20,000.
SECTION 7.10. AMENDMENT.
This Agreement may not be amended except by an instrument in
writing signed by the parties hereto.
-35-
<PAGE>
SECTION 7.11. SUBORDINATION.
The Investor covenants and agrees, and each subsequent holder
of the Loan Note, by its acceptance thereof, likewise covenants and agrees, that
to the extent the indebtedness represented by the Loan Note, either alone or
together with the rights of the holders of the Loan Note under the Transaction
Documents, could be deemed to constitute indebtedness of the Parent, the payment
of the principal, interest and any other amounts payable in respect of the Loan
and the Loan Note are hereby expressly made subordinate, and subject in right of
payment, to the prior payment in full of all amounts owing to holders of Senior
Indebtedness.
SECTION 7.12. LOSS, THEFT, ETC. OF NOTES.
Upon receipt of evidence satisfactory to the Company of the
loss, theft, mutilation or destruction of the Loan Note or any Note, and in the
case of any such loss, theft or destruction upon delivery of a bond of indemnity
in such form and amount as shall be reasonably satisfactory to the Company, or
in the event of such mutilation upon surrender and cancellation of the Loan, the
Loan Note or any Note, the Company shall make and deliver without expense to the
holder thereof, a new note, of like tenor, in lieu of such lost, stolen,
destroyed or mutilated note. If the Investor or any institutional holder is the
owner of any such lost, stolen or destroyed note, then the affidavit of the
Investor or an authorized officer of such owner, setting forth the fact of loss,
theft or destruction and of its ownership of the note at the time of such loss,
theft or destruction shall be accepted as satisfactory evidence thereof and an
unsecured agreement of indemnity submitted to the Company by the Investor or any
institutional holder shall satisfy the requirement of a bond of indemnity.
SECTION 7.13. CONSENT REQUIRED.
Any term, covenant, agreement or condition of this Agreement
may, with the consent of the Company and the Parent, be amended or compliance
therewith may be waived (either generally or in particular instance and either
retroactively or prospectively), if the Company and the Parent shall have
obtained the consent in writing of the Investor.
SECTION 7.14. GOVERNING LAW.
All corporate law matters arising under this Agreement shall
be governed by and construed in accordance with the laws of the State of
Delaware, and all other matters arising under this Agreement shall be governed
by and construed in accordance with the laws of the State of Texas, in each case
regardless of the laws that might otherwise govern under applicable principles
of conflicts of law. Each of the parties consents to the jurisdiction of the
federal courts whose districts encompass any part of the State of Texas or the
state courts of the State of Texas in connection with any dispute arising under
this Agreement and hereby
-36-
<PAGE>
waives, to the maximum extent permitted by law, any objection, including any
objection based on forum non conveniens, to the bringing of any such proceeding
in such jurisdictions.
SECTION 7.15. COUNTERPARTS.
This Agreement may be executed and delivered in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed and delivered shall be deemed to be an original but all
of which taken together shall constitute one and the same agreement.
[Remainder of Page Intentionally Left Blank]
-37-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this LOAN
AND NOTE PURCHASE AGREEMENT to be executed and delivered as of the date first
written above.
EXECUTIVE TELECARD, LTD.
By:
--------------------------------
Name: Christopher J. Vizas
Title: Chairman of the Board of
Directors and Chief
Executive Officer
EGLOBE FINANCING CORPORATION
By:
--------------------------------
Name:
Title:
EXTL INVESTORS, LLC
By:
--------------------------------
Name:
Title:
38
EXHIBIT 10.17
-------------
PROMISSORY NOTE
$7,000,000 April 9, 1999
FOR VALUE RECEIVED, EGLOBE FINANCING CORPORATION, a Delaware
corporation (the "Maker"), promises to pay to the order of EXTL INVESTORS, LLC,
a limited liability company organized under the laws of Nevada (the "Holder"),
at 850 Cannon, Suite 200, Hurst, TX 76054, or at such other place as the Holder
of this Note may from time to time designate, the principal amount of Seven
Million United States Dollars ($7,000,000), together with any accrued but unpaid
interest thereon, on the terms and conditions set forth below.
This Note is the "Loan Note" referred to in the Loan and Note
Purchase Agreement dated as of April 9, 1999, by and among the Maker, Executive
TeleCard, Ltd., a Delaware corporation (the "Parent"), and the Holder (the "Loan
and Note Purchase Agreement"). Capitalized terms used but not defined herein
shall have the meanings set forth in the Loan and Note Purchase Agreement.
The entire principal amount of this Note shall be repaid to
the Holder, together with any accrued but unpaid interest thereon, on the
earliest to occur of (i) the first anniversary of the First Closing Date, (ii)
the date of closing of an offering by the Parent of debt or equity securities,
in a single transaction or series of related transactions, from which the Parent
receives net proceeds of $30 million or more, or (iii) the Second Closing Date
(the "Loan Maturity Date").
This Note shall bear interest on the unpaid portion of the
principal amount thereof, from the date of issuance until the unpaid portion of
the principal shall have become due and payable (whether on the Loan Maturity
Date, by acceleration or otherwise), at the Loan Interest Rate. Interest shall
be due and payable to the Holder in arrears on the first day of each month,
commencing on the first day of the month following the date hereof (each, an
"Interest Payment Date"), until and including the Loan Maturity Date. To the
extent not prohibited by applicable law, this Note shall bear interest on
overdue principal, on any overdue amounts arising out of a required or optional
prepayment of principal and on any overdue installment of interest at the Loan
Overdue Rate, from after the date on which such amounts were due and payable,
whether by acceleration or otherwise, until paid.
Payments of principal and interest on this Note shall be paid
in cash in lawful money of the United States of America.
Whenever any payment to be made under or with respect to this
Note shall be stated to be due on any day other than a Business Day, such
payment may
<PAGE>
be made on the next succeeding Business Day, and such extension of time shall in
such case be included in the computation of interest due on such date.
This Note may be prepaid without premium or penalty, at the
option of the Maker exercised by written notice to the Holder, at any time in
whole or from time to time in part in integral multiples of $100,000. Any
prepayment will be applied first to accrued interest and then to payment of
principal. If this Note is prepaid only in part, this Note shall be surrendered
at the Company's principal office and the payment shall be recorded directly on
this Note or by an amendment thereto, whereupon the Loan Note will be returned
to the Investor promptly.
During the period in which any portion of this Note is
outstanding, the Holder shall be a third party beneficiary of, and shall be
entitled to enforce, the Loan Capital Contribution Agreement.
The Holder covenants and agrees, and each subsequent holder of
this Note, by its acceptance thereof, likewise covenants and agrees, that to the
extent the indebtedness represented by this Note, either alone or together with
the rights of the Holder under the Transaction Documents, could be deemed to
constitute indebtedness of the Parent, the payment of the principal, interest
and any other amounts payable in respect of this Note are hereby expressly made
subordinate, and subject in right of payment, to the prior payment in full of
all amounts owing to holders of Senior Indebtedness.
The occurrence of any Event of Default under and as defined in
the Loan and Note Purchase Agreement shall constitute an "Event of Default"
hereunder.
If an Event of Default exists hereunder, the Holder may
exercise any right, power or remedy which the Holder may have under the Loan and
Note Purchase Agreement if the corresponding Event of Default exists under and
as defined in the Loan and Note Purchase Agreement.
In the event the interest provisions hereof or any exactions
provided for herein or in the Loan and Note Purchase Agreement shall result in
an effective rate of interest which, for any period of time, exceeds the limit
of any usury or other law applicable to the transactions evidenced hereby, all
sums in excess of those lawfully collectible as interest for the period in
question shall, without further agreement or notice between or by any party
hereto, be applied toward repayment of outstanding principal immediately upon
receipt of such moneys by the Holder with the same force and effect as if the
Maker had specifically designated such extra sums to be so applied to principal
and the Holder had agreed to accept such extra payments in repayment of the
principal balance hereof. Notwithstanding the foregoing, however, the Holder may
at any time and from time to time elect, by notice in writing to the Maker, to
reduce or limit the collection of any interest to such sums which shall not
result in any payment of interest in excess of that lawfully collectable. The
Maker agrees that
2
<PAGE>
in determining whether or not any interest payable under this Note exceeds the
highest rate permitted by law, any non-principal payment shall be deemed to the
extent permitted by law to be an expense, fee, premium or penalty, rather than
interest.
The Maker expressly waives presentment for payment, demand,
notice of dishonor, protest, notice of protest, diligence of collection, notice
of intention to accelerate, notice of acceleration, and (except as otherwise
expressly provided herein or in the Loan and Note Purchase Agreement to the
contrary) any similar notice of any kind, and hereby consents to any number of
renewals and extensions of time of payment hereof, which renewals and extensions
shall not affect the liability of the Maker.
The Maker promises to pay all costs and expenses (including,
without limitation, attorneys' fees and disbursements) incurred in connection
with the collection thereof.
Without the prior written consent of the Maker, this Note may
not be transferred except to an Affiliate of the Holder, to Mr. Ronald Jensen,
to a member of Mr. Jensen's immediate family or an Affiliate of either.
Neither this Note nor any of the rights, interests or
obligations of the Maker hereunder shall be assigned in any respect without the
prior written consent of the Holder. Whenever used herein, the words "the Maker"
and "the Holder" shall be deemed to include their respective successors and
permitted assigns.
All communications required or permitted by this Note shall be
in accordance with Section 7.1 of the Loan and Note Purchase Agreement.
If any term, condition or other provision of this Note is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other terms, conditions and provisions of this Note shall
nevertheless remain in full force and effect. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Note so as to effect
the original intent of the parties as closely as possible in an acceptable
manner to the end that transactions contemplated hereby are fulfilled to the
extent possible.
This Note may not be amended except by an instrument in
writing signed by the Maker and the Holder.
This Note shall be governed by and construed in accordance
with the laws of the State of Texas, regardless of the laws that might otherwise
govern under applicable principles of conflicts of law. The Maker consents to
the jurisdiction of
3
<PAGE>
the federal courts whose districts encompass any part of the State of Texas or
the state courts of the State of Texas in connection with any dispute arising
under this Note and hereby waives, to the maximum extent permitted by law, any
objection, including any objection based on forum non conveniens, to the
bringing of any such proceeding in such jurisdictions.
IN WITNESS WHEREOF, the undersigned has caused this Note to be
duly executed and delivered as of the day and year first written above.
EGLOBE FINANCING CORPORATION
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
4
EXHIBIT 10.18
-------------
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT (this "Agreement") is entered into
as of this 9th day of April, 1999, by and among EGLOBE FINANCING CORPORATION, a
Delaware corporation (the "Company"), and EXECUTIVE TELECARD, LTD., a Delaware
corporation (the "Parent").
WHEREAS, the Parent is the sole stockholder of the Company;
and
WHEREAS, EXTL Investors, LLC, a limited liability company
organized under the laws of Nevada (the "Investor"), is making a loan (the
"Loan") to the Company, upon the terms and conditions set forth in a Loan and
Note Purchase Agreement dated as of April 9, 1999 (the "Loan and Note Purchase
Agreement");
WHEREAS, as an incentive for the Investor to make the Loan,
the Parent has agreed under the Loan and Note Purchase Agreement to enter into
this Agreement to provide the Company with the funds necessary to fund the
obligations under the Loan and under the Loan Note (as defined in the Loan and
Note Purchase Agreement) and to pay expenses of the Company.
NOW, THEREFORE, in consideration of the foregoing and of the
mutual covenants and agreements contained herein, the parties hereto agree as
follows:
1. SUBSCRIPTION FOR SHARES. The Parent hereby irrevocably and
unconditionally agrees to subscribe for up to 378 shares of common stock of the
Company, upon demand by the Company from time to time, at a price of $20,000 per
share, payable in cash, for an aggregate subscription price for such shares
equal to $7,560,000. In the event the Company desires to cause the Parent to
purchase any shares under this Agreement, the Company shall deliver a notice to
the Parent specifying (a) the cash amount then due and owing under the Loan and
Note Purchase Agreement and the Loan Note or the cash amount required to pay
expenses of the Company, (b) the number of shares to be purchased by the Parent
(for an aggregate purchase price sufficient to cover the amount then due and
owing under the Loan and Note Purchase Agreement and the Loan Note or required
to pay expenses of the Company), and (c) the time and place for payment of the
purchase price for such shares, which shall not be earlier than 10 days after
the date of such notice. On or before the purchase date specified in such
notice, the Parent shall deliver to the Company (or if the Company owes funds to
the Investor, the Parent shall deliver to the Investor, which delivery shall be
deemed to have been sent to the Company and by the Company to the Investor) cash
(which shall be applied immediately to payment of the Loan Note) in an amount
equal to the purchase price for the shares to be purchased pursuant to such
notice and the
<PAGE>
Company shall issue to the Parent the shares of the Company upon receipt of
payment therefor, effective as of the purchase date specified in such notice
and, as soon as is practicable after payment is made therefor, issue the
appropriate certificates in the name of the Parent.
2. BINDING AGREEMENT. This Agreement shall be binding upon the
Parent, its successors and assigns.
3. THIRD PARTY BENEFICIARIES. This Agreement shall be binding
upon and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person any right, benefit or remedy of any nature whatsoever under or by reason
of this Agreement, except that as set forth in the next sentence. During the
period in which the Loan Note is outstanding, the Investor shall be a third
party beneficiary of, and shall be entitled to enforce, directly against the
Parent, the Parent's obligations to fund under this Agreement. In such event it
shall not be a defense to the Parent's obligation to fund that shares of the
Company's stock have not been issued therefor, and such shares shall be deemed
to have been issued hereunder concurrently with such funding (and the Parent
shall be obligated to cause the Company to issue the certificates evidencing
such shares). This Agreement may not be amended, nor may any provision of this
Agreement be waived, except by an instrument in writing signed by the parties
hereto and consented to in writing by the Investor.
4. MISCELLANEOUS.
(a) The obligations of the Parent hereunder are not intended
to constitute indebtedness of the Parent. To the extent the obligations of the
Parent hereunder could be deemed to constitute indebtedness of the Parent, such
obligations are subordinate (and are hereby expressly made subordinate) and
subject in right of payment to the prior payment in full of all amounts owing to
holders of Senior Indebtedness. For purposes of this Agreement, "Senior
Indebtedness" means the principal of and interest on all indebtedness of the
Parent (including indebtedness of others guaranteed by the Parent) other than
the Loan Note, which indebtedness is outstanding on the date hereof and which by
its terms is senior or superior in right of payment of other indebtedness of the
Parent.
(b) All corporate law matters arising under this Agreement
shall be governed by and construed in accordance with the laws of the State of
Delaware, and all other matters arising under this Agreement shall be governed
by and construed in accordance with the laws of the State of Texas, in each case
regardless of the laws that might otherwise govern under applicable principles
of conflicts of law. Each of the parties consents to the jurisdiction of the
federal courts whose districts encompass any part of the State of Texas or the
state courts of the State of Texas in connection with any dispute arising under
this Agreement and hereby
-2-
<PAGE>
waives, to the maximum extent permitted by law, any objection, including any
objection based on forum non conveniens, to the bringing of any such proceeding
in such jurisdictions.
(c) This Agreement may be executed and delivered in one or
more counterparts, and by the different parties hereto in separate counterparts,
each of which when executed and delivered shall be deemed to be an original but
all of which taken together shall constitute one and the same agreement.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed and delivered as of the date first written above.
EXECUTIVE TELECARD, LTD.
By:
---------------------------------
Name: Christopher J. Vizas
Title: Chairman of the Board of
Directors and Chief
Executive Officer
EGLOBE FINANCING CORPORATION
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
4
EXHIBIT 21
----------
EXECUTIVE TELECARD, LTD.'S SUBSIDIARIES:
DOMESTIC CORPORATIONS: JURISDICTION OF ORGANIZATION
- - --------------------------------------------------------------------------------
Executive TeleCard, Inc. Colorado
eGlobe Financing Corp. Delaware
Telekey, Inc. Georgia
IDX International, Inc. Virginia
FOREIGN CORPORATIONS:
Executive TeleCard SA (T&C) T&C -BWI
Trans World Telecommunications A/S Denmark
UCI Tele Networks, Ltd. Cyprus
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Executive Telecard, Ltd.
d/b/a eGlobe, Inc.
Denver, Colorado
We hereby consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-63043) of our report dated March 19, 1999, except
for Note 18 which is as of April 10, 1999, relating to the consolidated
financial statements and schedule of eGlobe, Inc. appearing in the Company's
Annual Report on Form 10-K for the nine months ended December 31, 1998.
/S/ BDO Seidman, LLP
Denver, Colorado
April 14, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from and is
qualified in its entirety by reference to such financial
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 1407131
<SECURITIES> 0
<RECEIVABLES> 7837369
<ALLOWANCES> 986497
<INVENTORY> 0
<CURRENT-ASSETS> 8852627
<PP&E> 26801077
<DEPRECIATION> 13152410
<TOTAL-ASSETS> 36388161
<CURRENT-LIABILITIES> 29808099
<BONDS> 0
0
501
<COMMON> 16362
<OTHER-SE> 5325855
<TOTAL-LIABILITY-AND-EQUITY> 36388161
<SALES> 0
<TOTAL-REVENUES> 22490642
<CGS> 0
<TOTAL-COSTS> 12619245
<OTHER-EXPENSES> 15811030
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1018049
<INCOME-PRETAX> (7090192)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7090192)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7090192)
<EPS-PRIMARY> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
EXHIBIT 99.2
------------
PUBLIC NOTICE
FEDERAL COMMUNICATIONS COMMISSION
1919 M STREET, N.W.
WASHINGTON D.C. 20554
- - --------------------------------------------------------------------------------
News media information 202-418-0500. Recorded listing of releases and texts
202-418-2222
Report No. I-8330 Thursday, August 20, 1998
DA-98-1657
OVERSEAS COMMON CARRIER SECTION 214 APPLICATIONS
ACTIONS TAKEN
The following applications for international section 214 certification have been
granted pursuant to the Commission's streamlined processing procedures set forth
in Section 63.12 of the Commission's Rules, 47 C.F.R. ss. 63.12. Unless
otherwise noted, these authorizations grant the referenced applicants (1) global
or limited global facilities-based authority; and/or (2) global or limited
global resale authority. The general terms and conditions of such global
authority are set forth in Section 63.18(e)(1) & (2) of the Commission's rules,
47 C.F.R. ss. 63.18(e)(1) & (2). These authorizations also are subject to all
other applicable Commission rules and policies. This Public Notice serves as
each referenced carrier's Section 214 authorization. It contains general and
specific conditions which are set forth below.
ITC-98-497 LIMITED GLOBAL FACILITIES-BASED SERVICES
CABLE & WIRELESS GLOBAL NET ORGANISATION LIMITED (IRELAND) effective: 8/19/98
Application for authority, pursuant to Section 63.18(e)(6) of the Commission's
Rules, to operate as a facilities-based carrier on the U.S. - U.K. route.
ITC-98-496-AL ASSIGNMENT OF LICENSE
EXECUTIVE TELECARD, LTD. AND IDX INTERNATIONAL, INC. effective: 8/19/98
Application for authority for assignment of Section 214 authorization of IDX
International, Inc. to Extel Merger Sub No. 1, a wholly-owned subsidiary of
Executive TeleCard, Ltd.
ITC-98-495 GLOBAL RESALE SERVICES
WIRE RESOURCES (USA), INC. effective: 8/19/98
Application for authority to provide service in accordance with the provisions
of Section 63.18(e)(2) of the rules.
ITC-98-494 GLOBAL RESALE SERVICES
MAIL-LENNIUM TELECOM, INT., INC. effective: 8/19/98
Application for authority to provide service in accordance with the provisions
of Section 63.18(e)(2) of the rules.
ITC-98-493 GLOBAL FACILITIES-BASED/GLOBAL RESALE SERVICES
CELLULAR XL ASSOCIATES, L.P. effective: 8/19/98
<PAGE>
Application for authority to operate as a facilities-based and resale carrier in
accordance with the provisions of Section 63.18(e)(1) and (e)(2) of the rules.
ITC-98-492 GLOBAL FACILITIES-BASED/GLOBAL RESALE SERVICES
NORTH AMERICAN DIGICOM CORPORATION effective: 8/19/98
Application for authority to operate as a facilities-based and resale carrier in
accordance with the provisions of Section 63.18(e)(1) and (e)(2) of the rules.
ITC-98-490 GLOBAL FACILITIES-BASED/GLOBAL RESALE SERVICES
GLOBAL INTEGRATION SERVICES, INC. effective: 8/19/98
Application for authority to operate as a facilities-based and resale carrier in
accordance with the provisions of Section 63.18(e)(1) and (e)(2) of the rules.
ITC-98-489-TC TRANSFER OF CONTROL
STAR TELECOMMUNICATIONS, INC. effective: 8/19/98
Application for authority to transfer control of PT-1 Communications, Inc. to
Star Telecommunications, Inc.
ITC-98-488 GLOBAL FACILITIES-BASED/GLOBAL RESALE SERVICES
PENSAT INTERNATIONAL COMMUNICATIONS, INC. effective: 8/19/98
Application for authority to operate as a facilities-based and resale carrier in
accordance with the provisions of Section 63.18(e)(1) and (e)(2) of the rules.
ITC-98-407 GLOBAL RESALE SERVICES
SPECIAL ACCOUNTS BILLING GROUP, INC. effective: 8/19/98
Application for authority to provide service in accordance with the provisions
of Section 63.18(e)(2) of the rules. Applicant's name has been change from
Unisource Communications, Inc. to Special Accounts Billing Group, Inc. (Letter
dated August 17, 1998).
Carriers should review carefully the general terms and conditions of their
authorizations. These are set forth in detail below and in Section 63.18(e)(1) &
(2) of the rules. Failure to comply with general or specific terms and
conditions of the referenced authorizations or, with other relevant Commission
rules and policies, could result in fines and forfeitures.
The Commission recently amended its Part 43 and Part 63 rules that apply to U.S.
international carriers in IB Docket No. 97-142, Rules and Policies on Foreign
Participation in the U.S. Telecommunications Market, FCC 97-398, rel. Nov. 26,
1997, 62 Fed. Reg. 64,741 (Dec. 9, 1997); 63 Fed. Reg. 5743 (Feb. 4, 1998)
(Foreign Participation Order. Carriers are advised to review the new rules,
which became effective February 9, 1998. These rules are contained in Appendix C
to the Foreign Participation Order and are published in the Federal Register.
The Foreign Participation Order is also available as a text file at http://www.
fcc.gov/Bureaus/International/Orders/fcc97398.txt. It is available as a
WordPerfect document at http://www.fcc.gov/Bureaus/International/Orders/
fcc97398.zip.
GENERAL CONDITIONS OF AUTHORIZATION
(1) These authorizations are subject to the International Bureau's Exclusion
List that identifies restrictions on providing service to particular countries
or using particular facilities. The most recent Exclusion List is attached to
this Public Notice. The list applies to all U.S. international carriers,
including those that have previously received global or limited global Section
214 authority, whether by streamlined grant or specific written order. Carriers
are advised that the attached
<PAGE>
Exclusion List is subject to amendment at any time pursuant to the procedures
set forth in Streamlining the International Section 214 Authorization Process
and Tariff Requirements IB Docket No. 95-118, 11 FCC Rcd 12884 (1996), para. 18.
A copy of the most current Exclusion List will be maintained in the
International Bureau's Reference Center and will be available at
http://www.fcc.gov/ib/td/pf/exclusionlist.html. It also will be attached to each
Public Notice that grants international Section 214 authority.
(2) The export of telecommunications services and related payments to countries
that are subject to economic sanctions may be restricted. For information
concerning current restrictions, call the Office of Foreign Assets Control, U.S.
Department of the Treasury, (202) 622-2520.
(3) Carriers shall comply with the requirements of Section 63.11 of the
Commission's rules, which requires notification by, and in certain circumstances
prior approval for, U.S. carriers acquiring an affiliation with foreign
carriers. A carrier that acquires an affiliation with a foreign carrier will be
subject to possible reclassification as a dominant carrier on an affiliated
route pursuant to the provisions of Section 63.10 of the rules.
(4) Carriers shall file with the Commission a copy of all operating agreements
entered into with their foreign correspondents and all amendments within thirty
(30) days of their execution, and shall otherwise comply with the filing
requirements contained in Sections 43.51, 64.1001 and 64.1002 of the
Commission's Rules, 47 C.F.R. ss.ss. 43.51, 64.1001, 64,1002. In addition, any
carrier interconnecting private lines to the U.S. public switched network at its
switch, including any switch in which the carrier obtains capacity either
through lease or otherwise, shall file annually with the Chief, International
Bureau, a certified statement containing, on a country-specific basis, the
number and type (e.g., 64 kbps circuits) of private lines interconnected in such
manner. The Commission will treat the country of origin information as
confidential. Carriers need not file their contracts for interconnection unless
the Commission specifically requests. Carriers shall file their annual report on
February 1 (covering international private lines interconnected during the
preceding January 1 to December 31 period) of each year. International private
lines to countries for which the Commission has authorized the provision of
switched basic services over private lines at any time during a particular
reporting period are exempt from this requirement. See 47 C.F.R. ss. 43.51(d).
(5) Carriers authorized to provide private line service either on a facilities
or resale basis are limited to the provision of such private line service only
between the United States and those foreign points covered by their referenced
applications for Section 214 authority. In addition, the carriers may not -- and
their tariffs must state that their customers may not -- connect their private
lines to the public switched network at either the U.S. or foreign end, or both,
for the provision of international switched basic services, unless the
Commission has authorized the provision of switched services over private lines
to the particular country at the foreign end of the private lines to the
particular country at the foreign end of the private line. See 47 C.F.R. ss.
63.18(e)(2)(ii)(C), (e)(3)-(4); ss. 63.21(a). This restriction is subject to an
exception for facilities-based private lines as set forth in 47 C.F.R. ss.
63.18(e)(4)(ii)(B). See generally International Settlement Rates, IB Docket No.
96-261, Report and Order, FCC 97-280 (rel. Aug. 18, 1997), paragraphs 242-259.
(6) The Commission has authorized the provision of switched basic services via
facilities-based or resold private lines between the United States and the
following countries: Sweden, Canada, New Zealand, the United Kingdom, Australia,
The Netherlands, Luxembourg, Norway, Denmark, France, Germany, Belgium, Austria,
Switzerland and Japan.
(7) Carriers may engage in "switched hubbing" to countries for which the
Commission has not authorized the provision of switched basic services over
private lines consistent with Section 63.17(b) of the rules.
<PAGE>
(8) Carriers may provide U.S. inbound or outbound switched basic service via
their authorized private lines extending between or among the United States,
Sweden, New Zealand, the United Kingdom, Australia, The Netherlands, Luxembourg,
Norway, Denmark, France, Germany, Belgium, Austria, Switzerland, and Japan.
(9) Carriers shall comply with the "No Special Concessions" rule, Section 63.14,
47 C.F.R.ss. 63.14.
(10) Carriers shall file a tariff pursuant to Section 203 of the Communications
Act of 1934, as amended, 47 U.S.C. Section 203, and Part 61 of the Commission's
Rules, 47 C.F.R. Part 61, for their authorized services.
(11) Carriers shall file the annual reports of overseas telecommunications
traffic required by Section 43.61(a). Carriers shall also file the quarterly
reports required by Section 43.61 in the circumstances specified in paragraphs
(b) and (c) of that Section.
(12) Carriers shall file annual reports of circuit status and/or circuit
additions in accordance with the requirements set forth in Rules for Filing of
International Circuit Status Reports. CC docket No. 93-157, Report and Order, 10
FCC Rcd 8605 (1995). See 47 C.F.R. ss.ss. 43.82 & 63.15(b). These requirements
apply to facilities-based carriers and private line resellers, respectively.
(13) Carriers should consult Sec. 63.19 of the rules when contemplating a
discontinuance, reduction or impairment of service. Further, the grant of these
applications shall not be construed to include authorization for the
transmission of money in connection with the services the applicants have been
given authority to provide. The transmission of money is not considered to be a
common carrier service.
(14) If any carrier is reselling service obtained pursuant to a contract with
another carrier, that contract or a contract summary shall be filed publicly by
the underlying carrier in accordance with Section 203 of the Communications Act,
47 U.S.C. ss. 203, and Competition in the Interstate Interexchange Marketplace 6
FCC Rcd 5880, 5902 (1991). In addition, the services obtained by contract shall
be made generally available by the underlying carrier to similarly situated
customers at the same terms, conditions and rates.
(15) To the extent that any of the above-listed applicants intends to provide
international call-back services through the use of uncompleted call signaling,
its authorization to resell international switched voice and/or data services to
provide these services is expressly subject to the conditions listed in VIA USA
Ltd., et. al., 9 FCC Rcd 2288 (1994), on recon., 10 FCC Rcd 9540 (1995).
(16) To the extent the applicant is, or is affiliated with, an incumbent
independent local exchange carrier, as those terms are defined in Section
64.1902 of the rules, it shall provide the authorized services in compliance
with the requirements of Section 64.1903. See Regulatory Treatment of LEC
Provision of Interexchange Services Originating in the LEC's Local Exchange Area
and Policy and Rules Concerning the Interstate, Interexchange Marketplace Second
Report and Order in CC Docket No. 96-149 and Third Report and Order in CC Docket
No. 96-61. FCC 97-142 (released April 18, 1997), recon., 12 FCC Rcd 8730.
(17) Any carrier authorized here to provide facilities-based service between the
United States and markets served by a foreign carrier with which it has an
affiliation may provide U.S. facilities-based service between the United States
and such market only if the affiliated foreign carrier has negotiated a
settlement rate for its settled traffic with U.S. international carriers that is
in effect and is at or below the relevant benchmark settlement rate adopted in
International Settlement Rates IB Docket No. 96-261, Report and Order, FCC
97-280 (rel. Aug. 18, 1997) (Benchmarks Order). See also
<PAGE>
Benchmarks Order at paragraphs 224-227. For the purposed of this condition,
"affiliation" and "foreign carrier" are defined in Section 63.18(h)(1)(i) and
(ii), respectively.
Petitions for reconsideration under Section 1.106 or applications for review
under Section 1.115 of the Commission's Rules in regard to the grant of any of
these applications may be filed within thirty (30) days of this public notice
(see Section 1.4(b)(2)).
For additional information concerning this matter, please contact the
International Bureau Public Reference Center at (202) 418-1492 or (202)
418-1493.
EXCLUSION LIST FOR INTERNATIONAL SECTION 214 AUTHORIZATIONS
- - -- Last Amended May 11, 1998 --
The following is a list of countries and facilities not covered by grant of
global Section 214 authority under Section 63.18(e)(1) of the Commission's
Rules, 47 C.F.R. ss. 63.18(e)(1). In addition, the facilities listed shall not
be used by U.S. carriers authorized under Section 63.01 of the Commission's
Rules unless the carrier's Section 214 authorization specifically lists the
facility. Carriers desiring to serve countries or use facilities listed as
excluded hereon shall file a separate Section 214 application pursuant to
Section 63.18(e)(6) of the Commission's rules.
Countries
Cuba (applications for service to this country shall comply with the separate
filing requirements of the Commission's Public Notice Report No. I-6831, dated
July 27, 1993, "FCC to Accept Applications for Service to Cuba.")
Facilities
All non-U.S.-licensed cable and satellite systems except the following cable
systems:
Aden-Djibouti
APC
APCN
APHRODITE 2
ARIANNE 2
ASEAN
B-M-P
Brunei-Singapore
CADMOS
CANTAT-3
CARAC
CELTIC
China-Japan
CIOS
Denmark-Russia 1
ECFS
EMOS-1
EURAFRICA
FLAG
Germany-Denmark 1
Germany-Sweden No. 4
Germany-Sweden No. 5
H-J-K
<PAGE>
HERMES
HONTAI-2
ITUR
KATTEGAT-1
Kuantan-Kota Kinabalu
LATVIA-SWEDEN
Malaysia-Thailand
Marseille/Palermo Link
MAT-2
ODIN
PENCAN-5
R-J-K
RIOJA
SAT-2
SEA-ME-WE 2
SEA-ME-WE 3
Sweden-Finland
T-V-H
TAGIDE 2
TASMAN 2
UGARIT
UK-BEL 6
UK-Denmark 4
UK-Germany 5
UK-Germany 6
UK-Netherlands 12
UK-Netherlands 14
UK-Spain 4
Ulysses
UNISUR
This list is subject to change by the Commission when the public interest
requires. Before amending the list, the Commission will first issue a public
notice giving affected parties the opportunity for comment and hearing on the
proposed changes. The Commission will then release an order amending the
exclusion list. This list also is subject to change upon issuance of an
Executive Order. See Streamlining the Section 214 Authorization Process and
Tariff Requirements, IB Docket, No. 95-118, FCC 96-79, released March 13, 1996.
This list was last amended May 11, 1998. See PLD Telekom, Inc. and Streamlining
the International Section 214 Authorization Process and Tariff Requirements --
Exclusion List, IB Docket No. 95-118, DA 98-888, released May 11, 1998.
For additional information, contact the International Bureau's
Telecommunications Division, Policy & Facilities Branch, (202) 418-1460.
<PAGE>
ADDITIONS
PRO FORMA TRANSFER OF CONTROL/ASSIGNMENT OF LICENSE
---------------------------------------------------
ITC-98-60_-TC Startec Global Communications Corporation
Granted 8/18/98 Startec Global Licensing Corporation
SURRENDER OF SECTION 214 AUTHORIZATION
--------------------------------------
ITC-86-106 Keystone Communications, L.P.
ITC-88-206 (Letter on 8/12/98)
ITC-93-181
RPOA-89-001
ITC-97-363 Blackstone Calling Card, Inc.
(Letter on 8/12/98)
