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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number
September 30, 2000 1-10210
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eGLOBE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3486421
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
1250 24TH STREET, NW, SUITE 725, WASHINGTON, DC 20037
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(Address of principal executive offices)
Registrant's telephone number, including area code: (202) 822-8981
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
On October 25, 2000, the Company's stockholders approved a reverse stock
split of 1-for-2.7, 1-for-3.7, and 1-for-4.7 with the precise ratio to be
determined by the Company's Board of Directors, and on October 31, 2000, the
Company's Board of Directors declared a 1-for-4.7 reverse stock split. The
reverse stock split became effective on November 13, 2000, and each 4.7 shares
of the Company's common stock that was issued and outstanding immediately prior
to the effective time was changed into one validly issued, fully paid and
non-assessable share of the Company's common stock without any further action
by the holders of shares of the Company's common stock. The financial
statements and all references to common stock contained in this Form 10-Q give
retroactive effect to the reverse stock split.
The number of shares outstanding of each of the registrant's classes of
common stock, as of November 15, 2000 is 20,924,888 shares, all of one class of
$.001 par value common stock.
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<PAGE>
EGLOBE, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
PART I
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 ... 2-3
Consolidated Statements of Operations for the three months ended September 30,
2000 and 1999 ................................................................ 4
Consolidated Statements of Operations for the nine months ended September 30,
2000 and 1999 ................................................................ 5
Consolidated Statements of Comprehensive Loss for the three months ended
September 30, 2000 and 1999 .................................................. 6
Consolidated Statements of Comprehensive Loss for the nine months ended
September 30, 2000 and 1999 .................................................. 7
Consolidated Statements of Cash Flows for the nine months ended September 30,
2000 and 1999 ................................................................ 8-9
Notes to Consolidated Financial Statements ................................... 10-33
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................... 34
Item 7A Quantitative and Qualitative Disclosure About Market Risk .................... 42
PART II
Item 1 Legal Proceedings ............................................................ 42-43
Item 2 Changes in Securities ........................................................ 43-44
Item 3 Defaults Upon Senior Securities .............................................. 44
Item 4 Submission of Matters to a Vote of Security Holders .......................... 44
Item 5 Other Information ............................................................ 44
Item 6 Exhibits and Reports on Form 8-K ............................................. 44
Signatures ......................................................................... 45
</TABLE>
1
<PAGE>
EGLOBE, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
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<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31,
(UNAUDITED) 1999
<S> <C> <C>
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ASSETS
CURRENT:
Cash and cash equivalents ....................................................... $ 925,000 $ 2,659,000
Restricted cash ................................................................. -- 158,000
Restricted short-term investments ............................................... 2,942,000 1,492,000
Accounts receivable, less allowance of $5,774,000 and $3,206,000 for
doubtful accounts ............................................................. 16,108,000 15,142,000
Other receivables ............................................................... 1,278,000 1,406,000
Prepaid expenses ................................................................ 647,000 1,584,000
Other current assets ............................................................ 263,000 639,000
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TOTAL CURRENT ASSETS ............................................................. 22,163,000 23,080,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization of $33,137,000 and $24,352,000 ..................................... 32,945,000 42,078,000
GOODWILL, net of accumulated amortization of $4,396,000 and $1,572,000
(Note 4) ........................................................................ 23,209,000 24,904,000
OTHER INTANGIBLE ASSETS, net of accumulated amortization of $11,605,000
and $6,466,000 (Note 4) ......................................................... 16,924,000 21,674,000
ASSETS HELD FOR SALE (NOTE 13) ................................................... 312,000 --
OTHER:
Deposits ........................................................................ 1,984,000 1,659,000
Investments (Note 5) ............................................................ 1,711,000 --
Other assets .................................................................... 227,000 400,000
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TOTAL OTHER ASSETS ............................................................... 3,922,000 2,059,000
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TOTAL ASSETS ..................................................................... $99,475,000 $ 113,795,000
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</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
2
<PAGE>
EGLOBE, INC.
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
AS OF SEPTEMBER 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
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<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31,
(UNAUDITED) 1999
<S> <C> <C>
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LIABILITIES, MINORITY INTEREST, REDEEMABLE STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT:
Accounts payable (Note 6) ..................................................... $ 44,560,000 $ 41,558,000
Accrued expenses .............................................................. 21,763,000 10,992,000
Income taxes payable .......................................................... 665,000 560,000
Notes payable and current maturities of long-term debt (Note 7) ............... 7,424,000 7,868,000
Notes payable and current maturities of long-term debt-related
parties (Note 8) ............................................................ -- 4,676,000
Deferred revenue .............................................................. 315,000 1,331,000
Other liabilities ............................................................. 1,303,000 797,000
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TOTAL CURRENT LIABILITIES ...................................................... 76,030,000 67,782,000
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ACCOUNTS PAYABLE -- LONG-TERM .................................................. -- 1,000,000
LONG-TERM DEBT, NET OF CURRENT MATURITIES (NOTE 7) ............................. 1,853,000 5,194,000
LONG-TERM DEBT -- RELATED PARTIES, NET OF CURRENT MATURITIES (NOTE 8)........... 11,834,000 8,301,000
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TOTAL LIABILITIES .............................................................. 89,717,000 82,277,000
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MINORITY INTEREST (Note 4) ..................................................... -- 2,800,000
REDEEMABLE STOCK (Notes 9 and 11) .............................................. 23,540,000 700,000
STOCKHOLDERS EQUITY (DEFICIT):
Preferred stock, all series, $.001 par value, 10,000,000 and 5,000,000
shares authorized, 0 and 1,927,791 shares outstanding ....................... -- 2,000
Common stock, $.001 par value, 200,000,000 shares authorized,
20,924,888 and 14,804,383 shares outstanding Note 13 ........................ 21,000 15,000
Stock to be issued ............................................................ -- 2,624,000
Notes receivable (Note 9) ..................................................... (1,369,000) (1,210,000)
Additional paid-in capital .................................................... 137,347,000 106,773,000
Accumulated deficit ........................................................... (149,250,000) (80,682,000)
Accumulated other comprehensive income (loss) ................................. (531,000) 496,000
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TOTAL STOCKHOLDERS' EQUITY (DEFICIT) ........................................... (13,782,000) 28,018,000
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TOTAL LIABILITIES, MINORITY INTEREST, REDEEMABLE STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT) .............................................................. $ 99,475,000 $ 113,795,000
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</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
3
<PAGE>
EGLOBE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
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<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30,
2000 1999
<S> <C> <C>
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REVENUE (NOTES 2 AND 12) ....................................................... $ 23,925,000 $ 31,977,000
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COST OF REVENUE ................................................................ 20,329,000 30,585,000
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GROSS PROFIT ................................................................... 3,596,000 1,392,000
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COSTS AND EXPENSES:
Selling, general and administrative, exclusive of $2.0 million reported
below of compensation related to stock options and acquisitions ............. 10,242,000 8,716,000
Compensation related to stock options (Note 9) ................................ 2,006,000 --
Deferred compensation related to acquisitions (Note 4) ........................ -- 149,000
Depreciation and amortization ................................................. 2,992,000 1,857,000
Amortization of goodwill and other intangible assets .......................... 2,324,000 3,284,000
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TOTAL COSTS AND EXPENSES ....................................................... 17,564,000 14,006,000
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LOSS FROM OPERATIONS ........................................................... (13,968,000) (12,614,000)
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OTHER INCOME (EXPENSE):
Interest expense .............................................................. (1,334,000) (1,861,000)
Interest income ............................................................... 95,000 120,000
Other income .................................................................. 18,000 2,000
Other expense ................................................................. (23,000) (115,000)
Loss on i1.com investment (Note 5) ............................................ (451,000) --
Loss on Unitel investment (Note 5) ............................................ (75,000) --
Loss on sale of assets ........................................................ (620,000) --
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TOTAL OTHER EXPENSE ............................................................ (2,390,000) (1,854,000)
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LOSS BEFORE TAX BENEFIT AND EXTRAORDINARY ITEM ................................. (16,358,000) (14,468,000)
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TAX BENEFIT .................................................................... -- 400,000
LOSS ON EXTINGUISHMENT OF DEBT (NOTE 13) ....................................... (2,566,000) --
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NET LOSS ....................................................................... (18,924,000) (14,068,000)
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PREFERRED STOCK DIVIDENDS (NOTES 9, 10 AND 11) ................................. (294,000) (6,454,000)
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NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS ................................... $ (19,218,000) $ (20,522,000)
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NET LOSS PER SHARE BEFORE EXTRAORDINARY ITEM (BASIC AND DILUTED) ............... $ (0.84) $ (1.61)
NET LOSS PER SHARE ON EXTRAORDINARY ITEM (BASIC AND DILUTED) ................... $ (0.13) --
NET LOSS PER SHARE (BASIC AND DILUTED) (NOTE 10) ............................... $ (0.97) $ (1.61)
SHARES USED IN COMPUTING BASIC AND DILUTED LOSS PER SHARE ...................... 19,891,057 12,747,542
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</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
4
<PAGE>
EGLOBE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
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<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
<S> <C> <C>
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REVENUE (NOTES 2 AND 12) ........................................................ $ 88,966,000 $ 112,092,000
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COST OF REVENUE ................................................................. 79,701,000 107,641,000
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GROSS PROFIT .................................................................... 9,265,000 4,451,000
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COSTS AND EXPENSES:
Selling, general and administrative, exclusive of $10.5 million,
$1.4 million and $1.1 million reported below of compensation
related to stock options and acquisitions .................................... 39,499,000 22,436,000
Compensation related to stock options (Note 9) ................................. 10,445,000 --
Deferred compensation related to acquisitions (Note 4) ......................... 1,438,000 1,111,000
Depreciation and amortization .................................................. 9,133,000 4,689,000
Amortization of goodwill and other intangible assets ........................... 8,064,000 4,883,000
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TOTAL COSTS AND EXPENSES ........................................................ 68,579,000 33,119,000
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LOSS FROM OPERATIONS ............................................................ (59,314,000) (28,668,000)
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OTHER INCOME (EXPENSE):
Interest expense ............................................................... (5,065,000) (5,944,000)
Interest income ................................................................ 274,000 651,000
Other income ................................................................... 66,000 2,000
Other expense .................................................................. (54,000) (156,000)
Loss on i1.com investment (Note 5) ............................................. (1,031,000) --
Loss on Unitel investment (Note 5) ............................................. (258,000) --
Loss on sale of assets ......................................................... (620,000) --
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TOTAL OTHER EXPENSE ............................................................. (6,688,000) (5,447,000)
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LOSS BEFORE TAX BENEFIT AND EXTRAORDINARY ITEM .................................. (66,002,000) (34,115,000)
--------------------------------------------------------------------------------
TAX BENEFIT ..................................................................... -- 400,000
LOSS ON EXTINGUISHMENT OF DEBT (NOTE 13) ........................................ (2,566,000) --
--------------------------------------------------------------------------------
NET LOSS ........................................................................ (68,568,000) (33,715,000)
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PREFERRED STOCK DIVIDENDS (NOTES 9, 10 AND 11) .................................. (16,997,000) (10,783,000)
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NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS .................................... $ (85,565,000) $ (44,498,000)
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NET LOSS PER SHARE BEFORE EXTRAORDINARY ITEM (BASIC AND DILUTED) ................ $ (4.45) $ (3.52)
NET LOSS PER SHARE ON EXTRAORDINARY ITEM (BASIC AND DILUTED) .................... $ (0.14) $ --
NET LOSS PER SHARE (BASIC AND DILUTED) (NOTE 10) ................................ $ (4.59) $ (3.52)
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SHARES USED IN COMPUTING BASIC AND DILUTED LOSS PER SHARE ....................... 18,634,512 12,632,966
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</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
5
<PAGE>
EGLOBE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
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<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
<S> <C> <C>
--------------------------------------------------------------------------------
NET LOSS ......................................................................... $ (18,924,000) $ (14,068,000)
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FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ......................................... (1,372,000) 30,000
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COMPREHENSIVE NET LOSS ........................................................... $ (20,296,000) $ (14,038,000)
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</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
6
<PAGE>
EGLOBE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
<S> <C> <C>
--------------------------------------------------------------------------------
NET LOSS ......................................................................... $ (68,568,000) $ (33,715,000)
--------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ......................................... (1,027,000) 292,000
--------------------------------------------------------------------------------
COMPREHENSIVE NET LOSS ........................................................... $ (69,595,000) $ (33,423,000)
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</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
7
<PAGE>
EGLOBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
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<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
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<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net loss .............................................................. $ (68,568,000) $ (33,715,000)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization ....................................... 17,197,000 9,572,000
Provision for bad debts ............................................. 3,686,000 961,000
Non-cash interest expense ........................................... -- 408,000
Minority interests in loss .......................................... (64,000) --
Loss on Investments ................................................. 1,289,000 --
Issuance of options and warrants for services ....................... 1,594,000 19,000
Issuance of common stock for services ............................... 34,000 --
Deferred compensation costs related to acquisitions ................. 1,438,000 1,111,000
Compensation costs related to stock options ......................... 10,445,000 --
Amortization of warrant value for services .......................... 945,000 --
Value of penalty warrants to be issued (Note 4) ..................... 950,000 --
Amortization of debt discounts ...................................... 2,280,000 4,602,000
Loss on sale of assets .............................................. 620,000 --
Loss on extinguishment of debt ...................................... 2,566,000 --
Changes in operating assets and liabilities (net of changes from
acquisitions):
Accounts receivable ................................................. (4,861,000) (8,874,000)
Other receivables ................................................... 578,000 --
Prepaid expenses .................................................... 35,000 689,000
Other current assets ................................................ 376,000 (306,000)
Other assets ........................................................ 208,000 (25,000)
Accounts payable .................................................... 2,002,000 8,575,000
Income taxes payable ................................................ 105,000 (621,000)
Accrued expenses .................................................... 10,374,000 (416,000)
Deferred revenue .................................................... (1,016,000) 222,000
Other liabilities ................................................... 506,000 67,000
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CASH USED IN OPERATING ACTIVITIES ...................................... (17,281,000) (17,731,000)
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INVESTING ACTIVITIES:
Purchases of property and equipment ................................... (1,196,000) (11,000,000)
Purchase of intangibles ............................................... (137,000) --
Net sales (purchases) of short-term investments ....................... (1,450,000) 6,000,000
Acquisition of companies, net of cash acquired (Note 4) ............... -- (2,085,000)
(Increase) decrease in restricted cash ................................ 158,000 (258,000)
Other assets .......................................................... (325,000) (323,000)
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CASH USED IN INVESTING ACTIVITIES ...................................... (2,950,000) (7,666,000)
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</TABLE>
8
<PAGE>
EGLOBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
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<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
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<S> <C> <C>
FINANCING ACTIVITIES:
Proceeds from notes payable (Note 7) .......................................... -- $ 2,705,000
Proceeds from notes payable-related parties (Note 8) .......................... $ 692,000 27,768,000
Proceeds from issuance of preferred stock ..................................... 19,525,000 10,000,000
Stock issuance costs .......................................................... (1,114,000) (1,151,000)
Proceeds from exercise of warrants (Note 9) ................................... 755,000 --
Proceeds from capital leases .................................................. -- 3,239,000
Proceeds from exercise of options (Note 9) .................................... 1,914,000 716,000
Proceeds from issuance of common stock ........................................ 1,501,000 --
Deferred financing and acquisition costs ...................................... -- (403,000)
Proceeds from sale of assets.................................................. 250,000 --
Payments on capital leases .................................................... (1,193,000) 94,000
Payments on notes payable (Note 7) ............................................ (3,149,000) (7,680,000)
Payments on notes payable -- related parties (Note 8) ......................... (684,000) (9,317,000)
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CASH PROVIDED BY FINANCING ACTIVITIES .......................................... 18,497,000 25,971,000
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................... (1,734,000) 574,000
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CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................. 2,659,000 4,031,000
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CASH AND CASH EQUIVALENTS, END OF PERIOD ....................................... $ 925,000 $ 4,605,000
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</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
9
<PAGE>
EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
NOTE 1 -- BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
eGlobe, Inc. and its wholly owned subsidiaries ("the Company") and have been
prepared in accordance with United States generally accepted accounting
principles for interim financial information. Pursuant to Rule 10-01 of
Regulation S-X, these consolidated financial statements do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included
consisting only of normal recurring accruals. Operating results for the three
and nine months ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000.
The consolidated financial statements of the Company for the three and
nine months ended September 30, 2000 and September 30, 1999 have been restated
to give retroactive effect to the merger with Trans Global Communications, Inc.
("Trans Global") effective March 23, 2000, which has been accounted for using
the pooling of interests method of accounting. As a result, the financial
position, results of operations, and cash flows are presented as if the
combining companies had been consolidated for all periods presented. Trans
Global is a leading provider of international voice and data services to
carriers in several markets around the world.
It is suggested that these consolidated financial statements be read in
conjunction with the supplemental consolidated financial statements and notes
thereto included in the Company's Current Report on Form 8-K/A filed with the
Securities & Exchange Commission on September 14, 2000. See Note 2 for further
information.
The Company completed the following acquisitions in 1999 that were
accounted for under the purchase method of accounting. In February 1999, the
Company completed the acquisition of Telekey, Inc. ("Telekey"), a provider of
card-based telecommunications services. In June 1999, the Company, through its
newly formed subsidiary, Vogo Networks, LLC ("Vogo"), purchased substantially
all of the assets and assumed certain liabilities of Connectsoft Communications
Corporation and Connectsoft Holdings, Corp. (collectively "Connectsoft"), which
developed and continues to enhance a server based communication system that
integrates various forms of messaging, Internet and web content, personal
services, and provides telephone access to Internet content (including email
and e-commerce functions). In July 1999, the Company completed the acquisition
of Swiftcall Equipment and Services (USA) Inc., ("Swiftcall"), a
telecommunications company, and certain network operating equipment held by an
affiliate of Swiftcall. Effective August 1, 1999, the Company assumed
operational control of Highpoint International Telecom, Inc. and certain assets
and operations of Highpoint Carrier Services, Inc. and Vitacom, Inc.
(collectively "Highpoint"). The three entities were majority owned subsidiaries
of Highpoint Telecommunications Inc. ("HGP"), a publicly traded company on the
Canadian Venture Exchange. On October 14, 1999, substantially all of the
operating assets of Highpoint were transferred to iGlobe, Inc. ("iGlobe"), a
newly formed subsidiary of HGP, and the Company concurrently acquired all of
the issued and outstanding common stock of iGlobe. iGlobe possesses an
infrastructure supplying Internet Protocol ("IP") services, particularly voice
over IP, throughout Latin America. In September 1999, the Company, acting
through a newly formed subsidiary, acquired control of Oasis Reservations
Services, Inc. ("ORS"), a Miami based transaction support services and call
center to the travel industry, from its sole stockholder, Outsourced Automated
Services and Integrated Solutions, Inc. ("Oasis"). The Company and Oasis formed
eGlobe/Oasis Reservations LLC ("LLC") which is responsible for conducting ORS'
operations. The Company managed and controlled the operations of the LLC and
accordingly included the LLC in its consolidated financial statements.
Effective May 12, 2000, the Company became the sole member of the LLC. In
December 1999, the Company completed the
10
<PAGE>
EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- BASIS OF PRESENTATION -- (CONTINUED)
acquisition of Coast International, Inc. ("Coast"), a provider of interactive
voice and Internet services, as well as long distance services. On August 23,
2000, the Company entered into an agreement to sell the remaining Coast assets,
the Internet and help desk business, to Information Management Solutions
Consulting, L.L.C., ("IMS"). The Company is currently finalizing the sale of
the Coast domestic long distance customer base. See Notes 4, 7, 8 and 9 for
further discussion.
In December 1998, the Company acquired IDX International, Inc. ("IDX"), a
supplier of IP transmission services, principally to telecommunications
carriers, in 14 countries. Also, in December 1998, the Company acquired UCI
Tele Network, Ltd. ("UCI"), a development stage calling card business, with
contracts to provide calling card services in Cyprus and Greece. These
acquisitions were also accounted for under the purchase accounting method.
The Company invested in i1, Inc ("i1") an e-Business solutions company
focused on the Asia Pacific Market. i1 was founded by a former executive of the
Company with the technological assistance and support of the Company, which was
a co-founder of i1. The Company's holding in i1 is accounted for as an equity
investment in the consolidated financial statements of the Company since the
Company does not have a "controlling financial interest" in i1.com. See Note 5
for further discussion.
The Company has an investment in Unitel, a Guatemalan company holding a
full telecommunications license in Guatemala and functioning as a
communications carrier of PSTN traffic including voice, data and Internet. It
is accounted for as an equity investment in the consolidated financial
statements of the Company since the Company does not have a "controlling
financial interest" in Unitel. See Note 5 for further discussion.
In December 1999, the U.S Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin No. 101, " Revenue Recognition in Financial
Statements" ("SAB" 101), which clarifies the SEC's views on revenue
recognition. The Company believes its existing revenue recognition policies and
procedures are in compliance with SAB 101 and therefore, SAB 101's adoption
will not have a material impact on the Company's financial condition, results
of operations or cash flows.
In March 2000, the FASB issued Emerging Issues Task Force Issue No 00-2,
"Accounting for Web Site Development Costs" ("EITF 00-2"), which is effective
for all such costs incurred for fiscal quarters beginning after June 30, 2000.
This Issue establishes accounting and reporting standards for costs incurred to
develop a web site based on the nature of each cost. Currently, as the Company
has no web site development costs, the adoption of EITF 00-2 would have no
impact on the Company's financial condition or results of operations. To the
extent the Company begins to enter into such transactions in the future, the
Company will adopt the Issue's disclosure requirements in the quarterly and
annual financial statements for the year ending December 31, 2000.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN 44"), which is
effective July 1, 2000, except that certain conclusions in this Interpretation
which cover specific events that occur after either December 15, 1998, or
January 12, 2000 are recognized on a prospective basis from July 1, 2000. This
Interpretation clarifies the application of APB Opinion 25 for certain issues
related to stock issued to employees. The Company believes its existing stock
based compensation policies and procedures are in compliance with FIN 44 and
therefore, the adoption of FIN 44 will have no material impact on the Company's
financial condition, results of operations or cash flows.
11
<PAGE>
EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- BASIS OF PRESENTATION -- (CONTINUED)
In September 2000, the FASB issued Emerging Issues Task Force Issue No
99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent" ("EITF
99-19"), which was effective for all such costs incurred for fiscal quarters
beginning after June 30, 2000. This issue establishes accounting and reporting
standards for when a company should recognize revenue in the amount of the
gross amount billed to the customer and when the company should recognize
revenue based on the new amount retained because, in substance, it has earned a
commission from the vendor-manufacturer of the goods or services on the sale.
The Company adopted EITF 99-19 effective June 30, 2000, and believes the
adoption of EITF 99-19 had no material impact on the Company's financial
condition, results of operations or cash flows.
NOTE 2 -- MERGER WITH TRANS GLOBAL
Pursuant to an Agreement and Plan of Merger entered into on December 16,
1999, and effective March 23, 2000, a wholly-owned subsidiary of eGlobe merged
with and into Trans Global, with Trans Global continuing as the surviving
corporation and becoming a wholly-owned subsidiary of eGlobe (the "Merger").
The Merger provided for the issuance of 40,000,000 shares of the eGlobe common
stock in exchange for all of the outstanding common stock of Trans Global. The
Merger has been accounted for as a pooling of interests. In addition, eGlobe
issued 2,000,000 shares of its common stock into escrow to cover its potential
indemnification obligations under the merger agreement.
Revenue, net loss, net loss attributable to common stockholders, and net
loss per share of eGlobe and Trans Global as consolidated for the periods
presented are as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
1999
2000 RESTATED
---------------- ------------------
<S> <C> <C>
REVENUE:
eGlobe ...................................... $ 12,655,000 $ 10,635,000
Trans Global ................................ 15,126,000 21,342,000
Elimination of intercompany revenue ......... (3,856,000) --
------------- --------------
eGlobe, consolidated ........................ $ 23,925,000 $ 31,977,000
------------- --------------
NET LOSS:
eGlobe ...................................... (17,889,000) $ (12,608,000)
Trans Global ................................ (1,035,000) (1,460,000)
------------- --------------
eGlobe, consolidated ........................ $ (18,924,000) $ (14,068,000)
------------- --------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS:
eGlobe ...................................... (16,012,000) $ (19,062,000)
Trans Global ................................ (3,206,000) (1,460,000)
------------- --------------
eGlobe, consolidated ........................ $ (19,218,000) $ (20,522,000)
------------- --------------
NET LOSS PER SHARE (BASIC AND DILUTED)
As previously reported ...................... $ -- $ (0.94)
eGlobe, consolidated ........................ $ (0.97) $ (1.61)
------------- --------------
</TABLE>
12
<PAGE>
EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- MERGER WITH TRANS GLOBAL -- (CONTINUED)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
1999
2000 RESTATED
------------------ ------------------
<S> <C> <C>
REVENUE:
eGlobe ...................................... $ 34,639,000 $ 28,136,000
Trans Global ................................ 58,183,000 83,956,000
Elimination of intercompany revenue ......... (3,856,000) --
-------------- --------------
eGlobe, consolidated ........................ $ 88,966,000 $ 112,092,000
-------------- --------------
NET LOSS:
eGlobe ...................................... $ (64,328,000) $ (31,360,000)
Trans Global ................................ (4,240,000) (2,355,000)
-------------- --------------
eGlobe, consolidated ........................ $ (68,568,000) $ (33,715,000)
-------------- --------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS:
eGlobe ...................................... $ (82,359,000) $ (42,143,000)
Trans Global ................................ (3,206,000) (2,355,000)
-------------- --------------
eGlobe, consolidated ........................ $ (85,565,000) $ (44,498,000)
-------------- --------------
NET LOSS PER SHARE (BASIC AND DILUTED)
As previously reported ...................... $ -- $ (2.18)
eGlobe, consolidated ........................ $ (4.59) $ (3.52)
-------------- --------------
</TABLE>
NOTE 3 -- MANAGEMENT'S PLAN
In seeking financing to fund its growth plan, the Company has encountered
investor interest in one or the other of the principal business areas of the
Company (its Voice over IP (VoIP) focused Network Services and its Enhanced
Services) but not in both; indeed, some prospective investors have advised the
Company that they will not invest in the business which interests them as long
as it is tied to the other line of business. In addition, the changing
character of the capital markets over the last six months has made some avenues
of funding unavailable to the Company. Therefore, the Company does not believe
that it can reasonably meet the capital needs of the development plan that it
has been pursuing.
Management and the Board of Directors of the Company have determined that
it is in the best interests of the Company to split off the infant,
money-losing, enhanced service operations of the company and augment the value
of the VoIP business of the company. Selling a substantial majority or all of
the Enhanced Services business and its underlying technology will remove the
negative cash flow that the Company is currently experiencing and provide funds
for existing liabilities and note payment obligations; the sale will also
permit the proper capitalization of the Enhanced Service businesses going
forward. Perhaps most important, the Company believes that the split should
permit the VoIP focused Network Services business of the Company to return to
rapid growth with much more modest capital requirements (less than $15 million)
over the next 12 months than would be required by seeking to continue
development of both lines of business. The Company has had initial discussions
with parties interested in participating in the separated Enhanced Services
business and current indications are that an agreement is possible by the end
of the fourth quarter. While the Company will be, at best, a minority
participant in the separated Enhanced Services business, it anticipates that it
will continue to employ and sell the services provided by the Enhanced Services
business to its customers.
There is no assurance, however, that the Company will not encounter delays
in splitting off the Enhanced Services business, or that it will complete such
a separation. In that event, it will be forced to
13
<PAGE>
EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- MANAGEMENT'S PLAN -- (CONTINUED)
put all development activities in this area on hold and sharply curtail any
operational development in the Company, except in its VoIP based Network
Services. Under these circumstances, all additional capital (including the
further proceeds of $6 million from Series Q Preferred Stock) will be focused
on VoIP.
Under this plan, the Company anticipates receiving financing from the sale
of the Enhanced Services business segment (in one or more transactions) as well
as $6.0 million from the previously agreed sale of Series Q Convertible
Preferred Stock which was contingent, in pertinent part, on the registration of
the underlying common shares and on the approval by shareholders of the
conversion of a substantial portion of the preferred stock into common stock.
Both the registration and the approval have been completed.
Should the Company be unable to complete the split-off of its Enhanced
Services business for a sufficient price, or obtain sufficient additional
capital or financing to enable the Company to meet future capital expenditure
and working capital requirements, or successfully complete the other actions
described above, management would be required to significantly modify its
current business plan for the remainder of the current year and fiscal year
2001. Such modifications would likely result in a significant reduction in
planned capital expenditures. Despite the efforts currently underway, there can
be no assurance that the Company will be able to split-off such business, have
access to sufficient additional capital or financing on satisfactory terms to
enable it to meet future capital expenditure and working capital requirements
or that it will be able to successfully implement such modifications. In the
event the Company is unable to sell such business, obtain such capital or
financing or implement such modifications, it could be unable to satisfy its
obligations to third parties, which could result in defaults under the existing
debt and other financing agreements and, after the passage of any applicable
time and notice provisions, would enable creditors in respect to those
obligations to accelerate the indebtedness and assert other remedies against
the Company. Such events would have a material adverse effect upon the Company
and would threaten its ability to continue as a going concern.
As of September 30, 2000, the Company had a net working capital deficiency
of $53.9 million. This net working capital deficiency resulted principally from
a loss from operations of $68.6 million (including deferred compensation,
depreciation, amortization and other non-cash charges which totaled $46.6
million for the nine months ended September 30, 2000). Also contributing to the
working capital deficiency were $7.4 million in notes payable and current
maturities of long-term debt, and $67.3 million in accounts payable, accrued
expenses, other liabilities and deferred revenue. Accounts payable includes
approximately $10.5 million of payables which are being renegotiated with a
single vendor with whom the Company no longer does business. The current
maturities of $7.4 million consists of $3.0 million primarily related to
acquisition/merger debt and $4.4 million related to capital lease payments due
over the one year period ending September 30, 2001. As disclosed in Notes 6, 7
and 8 certain of these payments are in arrears on September 30, 2000.
14
<PAGE>
EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- MANAGEMENT'S PLAN -- (CONTINUED)
Thus far in 2000, the Company has met its cash requirements from (1)
proceeds from the exercise of options and warrants of $0.8 million, primarily
as a result of the improvement in the Company's stock price during the month of
January 2000 and as sustained through the end of the first quarter, (2)
proceeds of $0.5 million from the sale of Series N Convertible Preferred Stock
("Series N Preferred"), (3) proceeds of $15.0 million from the sale of Series P
Redeemable Convertible Preferred Stock ("Series P Preferred") and (4) proceeds
of $4.0 million from the sale of Series Q Redeemable Convertible Preferred
Stock ("Series Q Preferred). These capital transactions are discussed in Notes
7 and 9.
If the Company meets its projections for reaching breakeven on an
operating cash basis during the fourth quarter of 2000, the Company will still
have additional capital requirements through September 2001 of up to $43.1
million. The Company will need to fund pre-existing liabilities and note
payable obligations and the purchase of capital equipment.
The Company expects to receive $6.0 million in proceeds from the sale of
additional shares of Series Q Preferred Stock immediately upon the
effectiveness of the registration of the common stock underlying this preferred
stock. The Company anticipates that the additional capital needed will come
from a combination of financings that could consist of debt, private equity, a
public follow-on offering, or a line of credit facility during the twelve-month
period from October 2000 through September 2001. There is the possibility that
the amount of financing required could be diminished by secured equipment-based
financings.
The Company anticipates that increased sales in the international market
with higher margins will reduce its net working capital deficiency and
contribute to its funding requirements through the third quarter of 2001.
On December 14, 1999, Trans Global entered into a letter agreement with a
vendor which had been Trans Global's largest supplier at periods in the past,
regarding the payment of various past due switch and circuit costs for 1998 and
1999. Pursuant to that agreement, Trans Global agreed to pay approximately
$13.8 million in consecutive monthly installments at 9% interest through
January 1, 2001. The payable is secured by certain assets of Trans Global. As
of September 30, 2000, the remaining balance due was was $10.5 million. Trans
Global, as of November 1, 2000, has not paid $8.4 million of scheduled payments
that were due since May 2000. Trans Global is currently in discussions
regarding alternative arrangements for settlement of the outstanding
obligations, and believes that conclusion of an arrangement that is not
materially adverse to the immediate or long-term future operations of the
Company is possible. There can be no assurance that Trans Global will be able
to satisfactorily resolve this matter. Should this not be resolved and should
this vendor take action to take possession of the assets held as security,
Trans Global believes that business will not be adversely impacted. There is no
guarantee that Trans Global and therefore the Company will not have its
operations affected adversely should a satisfactory resolution between the
parties not be reached.
The Company is obligated under certain conditions to redeem the shares of
Series P Preferred Stock and Series Q Preferred Stock. See Note 11 for further
discussion.
NOTE 4 -- ACQUISITIONS
As discussed previously, the Company acquired IDX and UCI in December 1998
and Telekey, Connectsoft, Swiftcall, iGlobe, ORS and Coast in 1999. The results
of operations of the acquired businesses are included in the consolidated
financial statements from the date of acquisition. These acquisitions were
accounted for using the purchase method of accounting. There are certain
contingent purchase elements in some of these acquisitions as discussed below.
IDX and UCI
The Company may issue additional purchase consideration if IDX and UCI
meet certain defined performance objectives. The Company is currently
renegotiating UCI's original agreement and timing of the performance
measurement. The Company will determine the final goodwill amounts when the
contingent purchase elements are resolved and the contingent purchase
consideration is issued. Goodwill may materially increase when these
contingencies are resolved.
15
<PAGE>
EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- ACQUISITIONS -- (CONTINUED)
At the acquisition date, the stockholders of IDX originally received
preferred stock and warrants which were ultimately convertible into common
stock subject to IDX meeting certain performance objectives. These stockholders
in turn granted preferred stock and warrants, each of which were convertible
into a maximum of 240,000 shares of the Company's common stock, to certain
employees. The stock grants were performance based and were adjusted each
reporting period (but not less than zero) for the changes in the stock price
until the shares and/or warrants (if and when) issued were converted into
common stock. In December 1999, the IDX stockholders agreed not to issue
preferred stock and warrants to the employees or other parties. In exchange,
the Company agreed to issue eGlobe options to these employees and others
related to IDX. The options have an exercise price of $1.20 and a three-year
term. The options vested 75% at March 31, 2000 and the other 25% will vest on
an accelerated basis if IDX meets its earn out or in three years if it does
not. These options were granted in the first quarter of 2000. The increase in
market price of the underlying common stock granted by the IDX stockholders to
certain employees resulted in a charge to income of $0.1 million for the three
months ended September 30, 1999 and $0.5 million and $0.6 million for the nine
months ended September 30, 2000 and 1999, respectively. See Note 9 for further
discussion.
Telekey
As part of the purchase consideration, stockholders of Telekey received
1,010,000 shares of Series F Preferred Stock which were converted into common
stock on January 3, 2000. In addition, under the original purchase agreement,
the stockholders were to receive at least 505,000 and up to an additional
1,010,000 shares of Series F Preferred Stock two years from the date of closing
subject to Telekey meeting certain revenue and EBITDA objectives. The value of
$979,000 for the minimum 505,000 shares of Series F Preferred Stock to be
issued was included in the purchase consideration. These stockholders in turn
agreed to grant upon conversion of the Series F Preferred Stock a total of
240,000 shares of the Company's common stock to certain Telekey employees. Of
this total, 60,000 shares were to be issued only if Telekey met certain
performance objectives. As of September 30, 2000 and 1999, the value of the
underlying non-contingent 180,000 shares of common stock granted by the Telekey
stockholders to certain employees resulted in a charge to income of $0.1
million and $0.5 million, respectively. The stock grants were performance based
and were to be adjusted each reporting period (but not less than zero) for the
changes in the stock price until the shares were issued to the employees. As
the Telekey stockholders converted their shares of Series F Preferred Stock on
January 3, 2000, no additional compensation expense will be recorded for the
120,000 shares Issued by the Telekey stockholders at this date.
The remaining 60,000 non-contingent shares plus an additional 30,000
contingent shares were issued to employees in May 2000 pursuant to the
restructuring agreement discussed below. A charge to income for the three and
nine months ended September 30, 2000 for the incremental value of the
underlying 90,000 shares of common stock was insignificant.
In May 2000, the Company reached a final agreement with the former
stockholders of Telekey which restructured certain terms of the original
purchase agreement. This new agreement allowed the Company to integrate the
Telekey operations, (prior to this time, Telekey's operations had to be kept
separate in order to determine whether the earn-out criteria would be met) to
improve the synergies and technological advancements realized from the merger
and to allow for a change to the general management team of Telekey. The
Company issued 757,500 shares of common stock, of which the value of 505,000
shares was included in the initial purchase consideration, in return for an
acceleration of the original earn-out provisions as well as the termination
dates of certain employment agreements. The issuance of these shares
represented consideration for the earnings contingency under the original
purchase agreement as such, goodwill was increased by approximately $1.0
million for the additional 252,500 shares of common stock.
16
<PAGE>
EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- ACQUISITIONS -- (CONTINUED)
iGlobe
The initial preliminary purchase price allocation reflected in the
consolidated financial statements as of December 31, 1999 included goodwill of
$1.8 million and acquired intangibles of $2.4 million related to a customer
base, licenses and operating agreements, a sales agreement and an assembled
workforce. During the nine months ended September 30, 2000, based on further
management review, $0.7 million and $0.3 million were reclassified from
goodwill to intangibles and fixed assets, respectively and $1.0 million was
reclassified from fixed assets to investments (see Note 5 for further
discussion of Investment in Unitel). The consolidated financial statements of
the company as of September 30, 2000 reflect the final allocation of the
purchase price based on the completion of the management review. On April 17,
2000, the Company renegotiated certain elements of the iGlobe purchase
agreement as discussed in Note 9.
ORS
The LLC was initially funded by contributions effected by the members
under a contribution agreement. Oasis contributed all the outstanding shares of
ORS valued at approximately $2.3 million and the Company contributed 1.5
million shares of its common stock valued at $3.0 million on the date of
issuance and warrants to purchase additional shares of its common stock to the
LLC.
The warrants are exercisable at a price of $.001 per share for the shares
of common stock as discussed below:
(a) Shares equal to the difference between $3.0 million and the value of
the Company's 1.5 million share contribution on the date that the shares
of common stock (including the shares underlying the warrants) contributed
to the LLC are registered with the SEC if the value of the 1.5 million
shares on that date is less than $3.0 million;
(b) Shares equal to $100,000 of the Company's common stock for each
30-day period beyond 90 days following the date of contribution that the
shares of the Company's common stock (including the shares underlying the
warrants) contributed to the LLC remain unregistered (as of November 1,
2000, shares equal to $800,000 are issuable upon registration under the
warrant);
(c) 204,909 shares valued at $ 2.0 million became exercisable January
31,2000 based on ORS meeting certain defined performance objectives;
(d) Shares based upon (1) ORS achieving certain revenue and EBITDA
targets, and (2) the Company's share price at the date of registration of
the shares for this transaction. Under certain circumstances, these shares
may be equal to the greater of (A) 50% of the incremental revenue for the
Second Measurement Period (as defined in the agreements) over $9.0 million
or (B) four times the incremental Adjusted EBITDA (as defined in the
agreements) for the Second Measurement Period over $1.0 million provided,
however, that such number of shares shall not exceed the greater of; (i)
1,000,000 shares of the Company's common stock or (ii) that the number of
shares of the Company's common stock determined by dividing $8.0 million
by the Second Measurement Period Date Market Value (as defined in the
agreements); and provided further, that if the basis for issuance of such
shares is incremental revenue over $9.0 million then EBITDA for the Second
Measurement Period must be at least $1.0 million for the revenue between
$9.0 million and $12.0 million or at least $1.5 million for revenue above
$12.0 million. In addition, the warrant holder may receive 0.5 million
shares of the Company's common stock if the revenue for the Second
Measurement Period is equal to or greater than $37.0 million and the
Adjusted EBITDA for the Second Measurement Period is equal to or greater
than $5.0 million.
On May 12, 2000, Oasis exercised its option to exchange its interest in
the LLC for the Company's common stock and warrants held by the LLC. The LLC
recorded the excess of the carrying value of the Company's securities of $5.1
million over the current fair value of the ORS stock as additional goodwill of
$2.4 million. As a result of this exchange, the Company now owns 100% of the
LLC.
17
<PAGE>
EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- ACQUISITIONS -- (CONTINUED)
The remaining contingent consideration is based on ORS meeting defined
levels of performance objectives as discussed earlier and is issuable at a
future measurement date. As the contingent consideration is based on an
earnings contingency, it will be recorded as a purchase price adjustment at the
time that the contingency is resolved.
Coast
The consolidated financial statements of the Company as of September 30,
2000 reflect the final allocation of the purchase price based on management's
review and final third party appraisals. The purchase price allocation resulted
in goodwill of $14.3 million and intangibles of $3.2 million related to the
value of certain distribution networks, certain long distance infrastructure,
internally developed software and assembled and trained workforce.
On August 23, 2000, the Company entered into an agreement to sell the
remaining Coast assets, the Internet and help desk business, to Information
Management Solutions Consulting, L.L.C., ("IMS"). IMS is owned by relatives of
Bijan Moaveni, the Chief Operating Officer of the Company. The purchase price
of $700,000 is payable to the Company, $250,000 in cash and a promissory note
of $450,000 secured by the Company's common stock owned by Bijan Moaveni valued
at $13.31 per share or a price equal to the average market price of the last
fifteen trading days prior to the execution of the agreement, whichever is
greater. This purchase includes all related fixed assets as of July 31, 2000,
including prepaid insurance and software, security deposits and other related
assets. IMS is also responsible for payment of all expenses incurred in the
ordinary course of business beginning August 1, 2000 and will assume the lease
on the facility in Kansas and bandwidth contracts from two customers. The
Company recorded a $620,000 loss on sale of assets.
NOTE 5 -- INVESTMENTS
Investment in i1, Inc.
The Company's investment in i1, Inc. is accounted for under the equity
method. i1, Inc. ("i1") was founded by a former fully diluted executive with
the technological assistance and support of the Company, which was a
co-founder, is an e-Business solutions provider that supplies software and
services that allow small and medium-sized businesses to transact business over
the Internet. Initially the Company received a fully diluted 75% ownership
interest of approximately 50% in i1 in exchange for providing i1 with a license
to use the Company's technology related to its Vogo voice access and universal
messaging services (the other 50% of fully diluted equity was primarily in
performance based incentive stock options for i1 executives). As of September
30, 2000, the Company retained a 35% ownership interest with a carrying value
of $969,000. See Note 8 for further discussion.
Investment in Unitel
The Company has an investment in Unitel, a Guatemalan company which holds a
full telecommunications operating license in Guatemala and functions as a
communications carrier of PSTN traffic including voice, data, and Internet. The
investment is accounted for under the equity method. As of September 30, 2000,
the carrying value of the investment is $742,000. See Note 4 for further
discussion.
NOTE 6 -- COLLATERALIZED ACCOUNTS PAYABLE
As of September 30, 2000, Trans Global has secured accounts payable with
AT&T Corp. ("AT&T") for approximately $10.5 million. The agreement is
collateralized by certain fixed assets of Trans Global with a net book value of
$8.5 million at September 30, 2000. Since May 2 2000, Trans Global has been in
arrears on its scheduled payments to AT&T and is currently in negotiations with
AT&T to restructure this payable. See Note 3 for further discussions.
18
<PAGE>
EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- NOTES PAYABLE AND LONG-TERM DEBT
At September 30, 2000 and December 31, 1999, notes payable and long-term
debt consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31,
(UNAUDITED) 1999
-------------------- -------------
<S> <C> <C>
8% unsecured promissory note for acquisition of UCI (1) .............. $ 500,000 $ 500,000
8% mortgage note, payable monthly, including interest through March
2010, with an April 2010 balloon payment; secured by deed of trust on
the related land and building ....................................... 293,000 299,000
Promissory note of Telekey payable to a telecommunications
company (2) ......................................................... -- 454,000
Promissory note due to seller of iGlobe (3) .......................... 1,129,000 1,831,000
Promissory note due to seller of ORS (4) ............................. 304,000 451,000
Promissory note secured by certain equipment (5) ..................... 1,934,000 2,720,000
Certain promissory notes to an investor and for certain acquisitions,
repaid in January and February 2000 ................................. -- 1,057,000
Capitalized lease obligations (6) .................................... 5,117,000 5,750,000
---------- -----------
Total ................................................................ 9,277,000 13,062,000
Less current maturities .............................................. 7,424,000 7,868,000
---------- -----------
Total notes payable and long-term debt ............................... $1,853,000 $ 5,194,000
---------- -----------
</TABLE>
----------
(1) In connection with the UCI acquisition, the Company issued a $0.5 million
unsecured promissory note with 8% interest payable monthly due no later
than September 30, 2000.
(2) Telekey had an outstanding promissory note issued in the original amount of
$454,000 bearing interest, payable quarterly at 10% with principal due on
December 31, 2000. The note was secured by certain assets of the previous
stockholders of Telekey. This note was paid in full in September 2000.
(3) In connection with the acquisition of iGlobe, HGP financed working capital
for iGlobe through the closing date for which the Company issued an
unsecured note payable for approximately $1.8 million which was subject to
adjustment. The outstanding past due balance bears interest at 15% per
annum. As of September 30, 2000, the Company has repaid $702,000 of the
note. The remaining balance of the note was due on June 1, 2000, and the
parties are currently negotiating payment terms on the remaining balance.
(4) The note payable to Oasis bears interest at 7% and principal and interest
are due in six equal quarterly installments beginning November 30, 1999.
The Company guaranteed ORS' obligations under this loan and granted the
seller a security interest in its ownership interest in the LLC. As of
September 30, 2000, $150,000 in debt payments was in arrears.
(5) Effective June 11, 1999, Trans Global entered into a financing agreement
for a total of $3.3 million secured by certain switch hardware and
software. The note is payable in 36 consecutive monthly installments of
approximately $105,000 (principal and interest) at a fixed interest rate
of 8.88%.
(6) The Company is committed under various capital leases for certain property
and equipment. These leases are for terms of 18 months to 36 months and
bear interest ranging from 8.5% to 28.0%. Accumulated depreciation on
equipment held under capital leases was $2,805,000 and $1,395,000 at
September 30, 2000 and December 31, 1999, respectively. As of September
30, 2000, $600,000 in debt payments was in arrears.
19
<PAGE>
EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- NOTES PAYABLE AND LONG-TERM DEBT -- RELATED PARTIES
As of September 30, 2000 and December 31, 1999, notes payable and
long-term debt with related parties consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
-------------------- -------------------
(UNAUDITED)
<S> <C> <C>
Accounts receivable revolving credit note (1) .................. $ -- $ 1,058,000
Secured notes, net of unamortized discount of $5,702,000 and
$7,128,000 (1) ............................................... -- 7,806,000
Promissory note of Coast (2) ................................... -- 3,000,000
Promissory note of Coast (2) ................................... -- 250,000
Promissory note to i1.com (3) .................................. 2,000,000 --
Promissory note payable to a stockholder, net of unamortized
discount of $0 and $137,000 (4) .............................. -- 863,000
Promissory note payable to EXTL/Special Investment Risks
net of unamortized discount $5,166,000 (1).................... 9,834,000 --
----------- -----------
Total, net of unamortized discount of $5,166,000 and
$7,265,000 ................................................... 11,834,000 12,977,000
Less current maturities, net of unamortized discount of $0 and
$2,988,000 ................................................... -- 4,676,000
----------- -----------
Total long-term debt, net of unamortized discount of
$5,166,000 and $4,277,000 .................................... $11,834,000 $ 8,301,000
</TABLE>
(1) In April 1999, the Company entered into a loan and note purchase agreement
with EXTL Investors ("EXTL"), which together with its affiliates was the
Company's largest stockholder at the time. Under the terms of this Loan
and Note Purchase Agreement ("Agreement"), in April 1999, the Company
initially received an unsecured loan of $7.0 million bearing interest at
8%. As additional consideration, EXTL received 500,000 warrants valued at
approximately $2.9 million.
Under the Agreement, in July 1999, EXTL purchased $20.0 million of 5%
Secured Notes ("Notes") following approval by the Company's stockholders.
The initial $7.0 million note was repaid from the proceeds of the Notes
along with accrued interest. As additional consideration for the Notes,
EXTL was granted warrants vesting over two years expiring in three years,
to purchase 5,000,000 shares of the Company's common stock at an exercise
price of $1.00 per share. The value assigned such warrants of
approximately $10.7 million was recorded as a discount to the Notes and is
being amortized over the term of the Notes as additional interest expense.
Also, under the Agreement, EXTL agreed to make advances to the Company
under a 5% Accounts Receivable Revolving Credit Note ("Revolver") for an
amount up to the lesser of (1) 50% of eligible receivables (as defined) or
(2) the aggregate amount of principal that has been repaid to date
($1,750,000 as of September 30, 2000). Interest payments are due monthly
with the unpaid principal and interest on the Revolver due on the earliest
to occur of (i) June 30, 2002, or (ii) the date of closing of a Qualified
Offering as defined above.
In August 1999, the Company and EXTL agreed to exchange $4.0 million of the
Notes for 40 shares of Series J Cumulative Convertible Preferred Stock
("Series J Preferred"). The excess of the fair value of the Series J
Preferred Stock of $4.0 million over the carrying value of the Notes (net
of the unamortized discount of approximately $1.9 million) of $2.1 million
was recorded as an extraordinary loss of $2.1 million on early retirement
of debt. As a result of this agreement, the $4.0 million is not subject to
redraw under the Revolver.
In April 2000, the Agreement was amended and EXTL consented to the
Company's (1) assumption of the Coast notes payable, (2) guarantee of
these Coast notes and (3) the granting of a security interest in the
assets currently securing the Notes as well as the Coast assets to the
Coast note holder.
On September 12, 2000 the Company entered into an agreement to amend and
restate the loan and note purchase agreement and the 5% secured notes prior
to the amendment, which included the two Coast promissory notes, the total
outstanding principal balance under the 5% secured notes to EXTL Investors,
which was recently renamed in connection with a merger EXTL--Special
Investment Risks, LLC, was $19,577,989, which includes interest and
penalties of $1,000,000. As amended, the 5% secured notes will be paid in
monthly principal payments of $50,000 beginning on October 15, 2000 with the
residual unpaid
20
<PAGE>
EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- NOTES PAYABLE AND LONG-TERM DEBT -- RELATED PARTIES -- (CONTINUED)
principal becoming due and payable on its July 1, 2002 maturity date. As
amended, the 5% secured notes will bear interest at the prime rate plus 2%
and will accrue monthly on the unpaid principal and unpaid interest and will
be due at maturity. EXTL--Special Investments Risks waived all past defaults
and all violations of existing loan instruments were deemed cured.
EXTL--Special Investments Risks, LLC exercised its warrant to purchase
5,000,000 shares of the Company's common stock in connection with the
amendment of the loan and note purchase agreement by reducing the
outstanding principal balance under the 5% secured notes by $3,577,989,
resulting in a remaining note indebtedness of $15,000,000 plus interest of
$1,000,000.
In connection with the amendment, the Company also has issued warrants to
EXTL--Special Investment Risks, LLC to purchase 1,000,000 shares of the
Company's common stock at $1.94 per share expiring July 1, 2004.
As a result of this transaction the Company recorded $2.6 million as loss on
extinguishment of debt.
(2) Coast had two outstanding unsecured promissory notes with an affiliate of
EXTL for $3.0 million and $250,000, bearing interest at an 11% rate.
Interest on both notes was payable monthly with the principal due July 1,
2000 and November 29, 2000, respectively. As noted in (1) above, on
September 12, 2000 the Company entered into an agreement to amend the EXTL
note agreement, which included these Coast promissory notes. As a result,
these notes were eliminated.
(3) The Company has an outstanding 6% unsecured note with affiliate i1.com for
$2.0 million, which matures on February 1, 2001. The note was used to
purchase 800,000 shares of i1.com's Class B stock. See Note 5 for further
discussion of this investment.
(4) The Company had an outstanding 14% unsecured $1.0 million note with an
existing stockholder. The lender had the option to exchange the principal
of the note (up to a maximum amount of $750,000) for: (1) shares of common
stock of the Company at a price per share of $1.56 and (2) warrants to
purchase shares of common stock of the Company at a price of $1.00 (60,000
shares per $250,000 of debt exchanged). On April 17, 2000, this note was
exchanged for 543,270 shares of common stock and warrants to purchase
180,000 shares of common stock, with an exercise price of $1.00 per share.
The additional $250,000 of loan principal converted at a rate of $4.00 per
share, the closing price of the Company's common stock on the date of the
transaction. On July 19, 2000, the Company issued an additional 37,500
shares of common stock to reflect an agreed adjustment to the original
conversion price for the $250,000 of the additional loan principal
converted to stock. The value of these shares of 37,500 was recorded as
additional interest expense in 2000.
NOTE 9 -- STOCKHOLDERS' EQUITY
Preferred Stock
The following is a summary of the Company's series of Preferred Stock and
the amounts authorized and outstanding as of September 30, 2000 and December
31, 1999. See Note 11 for further discussion of redeemable preferred stock.
8% Series D Cumulative Convertible Preferred Stock, 0 and 125 shares
authorized, 0 and 35 shares, respectively, issued and outstanding ($3.5 million
aggregate liquidation preference) (converted in January 2000 into 2,537,500
shares of common stock, including payment of dividends) (Series eliminated in
February 2000).
8% Series E Cumulative Convertible Redeemable Preferred Stock, 125 shares
authorized, 0 and 50 shares, respectively, issued and outstanding (converted on
January 31, 2000 into 2,352,941 shares of common stock).
Series F Convertible Preferred Stock, 2,020,000 shares authorized, 0 and
1,010,000 shares, respectively, issued and outstanding (converted on January 3,
2000 into 1,209,584 shares of common stock) (Series eliminated in July 2000)
(See Note 4).
Series H Convertible Preferred Stock, 0 and 500,000 shares authorized, 0
and 500,000 shares, respectively, issued and outstanding (converted on January
31, 2000 into 3,262,500 shares of common stock) (Series eliminated in February
2000).
Series I Convertible Optional Redemption Preferred Stock, 400,000 shares
authorized, 0 and 400,000 shares, respectively, issued and outstanding (150,000
shares plus the 8% premium converted on February 14, 2000 into 166,304 shares
of common stock, 250,000 shares plus the 8% premium converted on July 17, 2000
into 938,210 shares of common stock) (Series eliminated in July 2000).
21
<PAGE>
EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- STOCKHOLDERS' EQUITY -- (CONTINUED)
5% Series J Cumulative Convertible Preferred Stock, 40 shares authorized,
0 and 40 shares, respectively, issued and outstanding ($4.0 million aggregate
liquidation preference) (converted on January 31, 2000 into 2,564,102 shares of
common stock).
5% Series K Cumulative Convertible Preferred Stock, 0 and 30 shares
authorized, 0 and 30 shares, respectively, issued and outstanding ($3.0 million
aggregate liquidation preference) (converted on January 31, 2000 into 1,923,077
shares of common stock) (Series eliminated in February 2000).
20% Series M Convertible Preferred Stock, 1 share authorized, 0 and 1
share, respectively, issued and outstanding ($9.0 million aggregate liquidation
preference) (converted on April 17, 2000 into 3,773,584 shares of common stock)
(Series eliminated in July 2000).
8% Series N Cumulative Convertible Preferred Stock, 0 and 20,000 shares
authorized, 0 and 1,535 shares, respectively, issued and outstanding ($1.5
million liquidation preference) (converted during January 2000 into 530,656
shares of common stock) (Series eliminated in February 2000).
Series O Convertible Preferred Stock, 16,100 shares authorized, 0 and
16,100 shares, respectively, issued and outstanding ($16.0 million aggregate
liquidation preference) (converted on April 30, 2000 into 3,220,000 shares of
common stock).
The following is a detailed discussion of certain series of preferred
stock outstanding during the nine months ended September 30, 2000.
Series I Convertible Preferred Stock
On February 14, 2000, 150,000 shares of the Series I Preferred Stock plus
the 8% accrued premium automatically converted into 166,304 shares of common
stock pursuant to the terms of the certificate of designations.
On July 17, 2000, the remaining 250,000 shares of Series I Preferred Stock
plus the 8% accrued premium automatically converted into 938,210 shares of
common stock.
Series M Convertible Preferred Stock
The share of Series M Preferred Stock carried an annual cumulative
dividend of 20% which would accrue and be payable annually or at conversion in
cash or shares of common stock, at the option of the Company. The above market
dividend resulted in a premium of $643,000 which was being amortized as a
deemed preferred stock dividend over the one-year period from the issuance
date. The Series M Preferred Stock was convertible, at the option of the
holder, one year after the issue date at a conversion price of $2.385. The
Company recorded a dividend on the Series M Preferred Stock of approximately
$1.4 million for the beneficial conversion feature based on the excess of the
common stock closing price on the effective date of the acquisition over the
conversion price. The dividend was being amortized as a deemed preferred
dividend over the one-year period from the date of issuance.
On April 17, 2000, the Company and HGP entered into a renegotiation
agreement which is summarized as follows:
(1) The one share of Series M Preferred Stock was exchanged into 3,773,584
shares of common stock and HGP waived all rights to accrued Series M
Preferred Stock dividends. The $5.5 million difference between the fair
value of the common stock issued and the carrying value of the Series M
Preferred Stock (net of any unamortized premium or discount and the
accrued Series M dividends that were waived) was recorded as a dividend in
April 2000. The dividend amount is being reflected in the Company's
statement of operations for the nine months ended September 30, 2000 as an
increase in the net loss attributable to common stockholders.
22
<PAGE>
EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- STOCKHOLDERS' EQUITY -- (CONTINUED)
HGP has agreed in the event it wishes to sell all or part of the Company's
common stock, it will notify the Company ("Revelant Date") at least 30
days prior to the sale. The Company shall have the right, by notice to the
HGP, to repurchase or place with a third party the stock proposed to be
sold at a price equal to (i) 20% less than the average closing price of
the Company's common stock over the ten trading days prior to the Relevant
Date, if such average is $8 or less; (ii) 15% less than the average
closing price of the Company's common stock over the ten trading days
prior to the Relevant Date, if such price is $8.00 or more but less than
$14.00; and (iii) 10% less than the average closing price of the Company's
common stock over the ten trading days prior to the Relevant Date, if such
average price is $14.00 or more. If the Company does not exercise its
repurchase rights, HGP is free to sell the stock, provided it agrees to
use reasonable efforts to avoid events significantly and adversely
affecting the market price of the Company's common stock. This repurchase
agreement expired October 31, 2000;
(2) The Company agreed to file a registration statement to register the
3,773,584 shares of common stock prior to May 31, 2000. If the
registration statement is not filed by May 31, 2000, the Company agreed to
pay a penalty of $40,000 for each 30-day period that such registration
statement has not been filed.
(3) The Company agreed to pay the amounts in arrears under the note owed in
connection with the acquisition prior to June 1, 2000. (See Note 7 for
discussion of note)
Series N Cumulative Convertible Preferred Stock
During January 2000, the shares of Series N Preferred Stock outstanding at
December 31, 1999 were converted into 375,262 shares of common stock.
In January 2000, the Company sold an additional 525 shares of Series N
Preferred Stock and warrants to purchase 42,457 shares of common stock for
proceeds of $0.5 million. These shares of Series N Preferred Stock were
converted, at the holders' option, into 155,394 shares of the Company's common
stock at conversion prices between $3.37 and $3.51. The warrants are
exercisable one year from issuance and expire three years from issuance with an
exercise price of $7.50 per share. In addition, the holders may elect to make a
cash-less exercise. The values of the warrants totaling $157,000 were recorded
as dividends at the issuance dates because the Series N Preferred Stock was
immediately convertible.
In February 2000, the Company issued warrants to a certain Series N
Preferred stockholder to purchase 200,000 shares of the Company's common stock
at a price per share equal to $7.50. The warrants are exercisable in whole or
in part at any time beginning on the date that is one year after the date of
issuance until the third anniversary of the date of issuance. These warrants
were issued due to a delay in registering shares of the Company's common stock,
accordingly, the value of these warrants of $1.6 million was included in
selling, general and administrative expense for the nine months ended September
30, 2000.
Series O Convertible Preferred Stock
In December 1999, the Company issued 16,100 shares of Series O Preferred
Stock in connection with the acquisition of Coast. See Note 4 for further
discussion. The estimated value of the Series O Preferred Stock of $13.4
million was based upon a third party appraisal. The Series O Preferred Stock
carried an annual dividend of 10% and all dividends that would accrue through
November 30, 2001 on each share of Series O Preferred Stock were payable in
full upon conversion of such shares. The final appraisal included a present
value of $2.5 million for dividends through November 30, 2001. The difference
between the undiscounted value of the dividends and $2.5 million was being
accrued as a dividend over the period from the issuance date to the date that
the Series O Preferred Stock could first be converted by the holder.
23
<PAGE>
EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- STOCKHOLDERS' EQUITY -- (CONTINUED)
The shares of Series O Preferred Stock had a liquidation value of $16.1
million and were convertible, at the holder's option, into a maximum 3,220,000
shares of common stock at any time after the later of (a) one year after the
date of issuance and (b) the date the Company had received stockholder approval
for such conversion (received March 23, 2000) and the applicable
Hart-Scott-Rodino waiting period has expired or terminated (the "Clearance
Date"), at a conversion price equal to $5.00. The shares of Series O Preferred
Stock automatically convert into shares of common stock, on the occurrence of
certain events including the first date as of which the last reported sales
price of the Company's common stock on Nasdaq is $6.00 or more for any 15
consecutive trading days during any period in which Series O Preferred Stock
was outstanding.
On January 26, 2000, the closing sales price of the Company's common stock
was $6.00 or more for 15 consecutive trading days and accordingly, on the
Clearance Date, April 30, 2000, the outstanding Series O Preferred Stock
converted into 3,220,000 shares of common stock. On this date the remaining
unamortized dividend of $0.4 million was recorded.
Common Stock
During the nine months ended September 30, 2000, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock, Series H Preferred Stock,
400,000 shares plus the 8% value Series I Preferred Stock, Series J Preferred
Stock, Series K Preferred Stock, Series N Preferred Stock and Series O
Preferred Stock converted into shares of common stock. See above discussion.
Upon the execution of the Coast merger agreement, one of the Coast
stockholders signed an employment agreement with the Company. Under a side
letter to the employment agreement, the Company was obligated to repurchase the
247,213 shares of common stock issued to this employee in the Coast acquisition
for $700,000 under certain conditions. Accordingly, the redemption value of
$700,000 for these shares was reflected as Redeemable Common Stock at December
31, 1999. In January 2000, this employee waived the redemption feature and this
amount was reclassified to Stockholders' Equity.
In December 1999, the Company entered into a promissory note with a bank,
as amended on February 1, 2000, for a principal amount of $14.0 million. In
connection with the note agreement, a security and pledge agreement was signed
whereby the Company assigned all of its rights to 4,961,000 shares of common
stock to the lender. However, the lender failed to fund the note on a timely
basis and in March 2000, the Company advised the lender that they were
terminating the agreement and demanded the lender return the stock
certificates. The lender returned the certificates on April 17, 2000.
On April 17, 2000, an existing stockholder exchanged his loan of
$1,000,000 for 115,589 shares of the Company's common stock and warrants to
purchase 38,298 shares of common stock. See Note 8 for further discussion.
Also on April 17, 2000, the one share of Series M Preferred Stock was
converted into 802,890 shares of common stock and the holder waived all rights
to Series M dividends. The $5.5 million difference between the fair value of
common stock issued and the carrying value of the Series M Preferred Stock (net
of any unamortized premium or discount and the accrued dividends that were
waived) was recorded as a dividend in April 2000. See Series M Preferred Stock
above.
On May 12, 2000 Oasis exchanged its interest in the LLC for 319,149 shares
of the Company's common stock and warrants to purchase 43,598 shares of common
stock held by the LLC. See Note 4 for further discussion.
In May 2000, the Company issued 161,170 shares of the Company's common
stock as a result of the Company's final agreement with the former stockholders
of Telekey to restructure certain elements of the original purchase agreement.
See Note 4 for further discussion.
24
<PAGE>
EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- STOCKHOLDERS' EQUITY -- (CONTINUED)
On July 12, 2000 as payment of the second installment of the purchase
price of Swiftcall, the Company issued 79,080 shares of common stock and issued
into escrow 15,720 shares of our common stock per the original agreement. See
Note 4 for further discussion.
On July 17, 2000, the remaining 250,000 shares of Series I Preferred Stock
plus the 8% accrued premium automatically converted into 199,619 shares of
common stock. See Series I Preferred Stock above.
On July 19, 2000 the Company issued an additional 7,980 shares of common
stock to reflect an agreed adjustment to the original conversion price for the
$250,000 of the additional loan principal converted to stock. The value of the
7,980 shares was recorded as additional interest expense. See Note 8 for
further discussion.
On August 25, 2000, the Company issued Tower Hill Investments Limited
227,964 shares of its common stock and warrants to purchase 34,194 shares of
its common stock in a private placement for an aggregate purchase of $1.5
million. The warrants have an exercise price of $1.40 per share and are
exercisable immediately and expire on August 24, 2005.
On September 12, 2000, EXTL -- Special Investment Risks, LLC exercised its
warrant to purchase 5,000,000 shares of the Company's common stock in
connection with the amendment of the loan and note purchase agreement. In
connection with this amendment, the Company also issued warrants to EXTL --
Special Investment Risks, LLC to purchase 1,000,000 shares of the Company's
common stock at $1.94 per share expiring July 1, 2004. See Note 8 for further
discussion.
During the nine months ended September 30, 2000, the Company received
proceeds of approximately $1.9 million from the exercise of options to acquire
162,344 shares of common stock.
During the nine months ended September 30, 2000, the Company received
proceeds of approximately $0.8 million from the exercise of warrants to acquire
149,981 shares of common stock. In addition, there was a cash-less exercise of
warrants to purchase 65,248 shares of common stock for which 39,195 shares were
issued.
The Company loaned certain of its executive officers money in connection
with their purchase of the Company's common stock, in December 1999.
On January 1, 2000, the Company loaned an executive of the Company money
in connection with the executive's purchase of 36,000 shares of common stock.
The note receivable of $159,000 was a full recourse promissory note bearing
interest at 8% and was collateralized by the 36,000 shares of stock issued.
On November 9, 2000, the Company's Board of Directors approved the
exchange of these notes for all of the Company's common stock purchased through
these notes.
Options
As of December 31, 1999, options outstanding under the Employee Plan
exceeded the shares available for grant by 1,995,468 shares. The Board of
Directors granted these options to certain executive officers and directors
subject to stockholder approval of the increase in the number of shares
available under the Employee Plan. The stockholders approved the increase of
the number of shares available under the Employee Plan from 3,250,000 to
7,000,000 shares on March 23, 2000. During the period from January 1, 2000
through March 23, 2000, an additional 567,070 options were granted that
exceeded the shares available under the Employee Plan. This amount excludes the
532,163 options granted to certain IDX employees and others as discussed below.
The excess of the market price of $9.94 on March 23, 2000
25
<PAGE>
EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- STOCKHOLDERS' EQUITY -- (CONTINUED)
(stockholder approval date) and the option exercise price for these options was
$15.2 million and is being recorded as compensation expense over the vesting
period of the options. For the three and nine months ended September 30, 2000,
$2.0 million and $10.5 million, respectively has been recorded as compensation
expense.
As discussed in Note 4, the Company granted 532,163 options on January 7,
2000 to certain IDX employees and others. These options exceeded the shares
available for grant under the Employee Plan. The excess of (1) the excess of
the market price of the Company's common stock on March 23, 2000 over the
exercise price of the options granted to current IDX employees over (2) the
carrying value as of March 23, 2000 of the original grants to these employees,
was $1.2 million.
This amount is being recorded as compensation expense over the vesting
period of the options and $0.3 and $0.9 million was recorded for the three and
nine months ended September 30, 2000, respectively. The 244,673 options granted
to non-employees were valued using the Black Scholes option-pricing model. The
$1.1 million excess value of the fair value of these options over the carrying
value of the original grants was recorded as compensation expense for the nine
months ended September 30, 2000.
In the nine months ended September 30, 2000, pursuant to a termination
agreement, the Company accelerated the vesting of certain options issued to an
employee. The intrinsic value of these options on this date of $0.3 million was
recorded as compensation expense for the three and nine months ended September
30, 2000.
On October 25, 2000, the Company's stockholders approved an increase in
the number of shares available for issuance under the Employee Plan to
12,000,000.
NOTE 10 -- EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are calculated in accordance with SFAS No. 128,
"Earnings Per Share". The net loss of $19.5 million and $20.5 million
attributable to common stockholders for the three months ended September 30,
2000 and 1999 includes preferred stock dividends of $294,000 and $6.5 million,
respectively. The net loss of $85.6 million and $44.5 million attributable to
common stockholders for the nine months ended September 30, 2000 and 1999
includes preferred stock dividends of $16.9 million and $10.8 million,
respectively. The weighted average shares outstanding for calculating basic
earnings (loss) per share were 19,891,057 and 12,747,542 for the three months
ended September 30, 2000 and 1999, respectively. The weighted average shares
outstanding for calculating basic earnings (loss) per share were 18,634,512 and
12,632,966 for the nine months ended September 30, 2000 and 1999, respectively.
Common stock options and warrants of 1,146,199 and 1,180,638 outstanding at
September 30, 2000 and 557,053 and 1,803,050 outstanding at September 30,1999
were not included in diluted earnings (loss) per share as the effect was
antidilutive due to the Company recording a loss in the periods presented.
Contingent warrants of 247,340 and 53,191 were not included in diluted earnings
(loss) per share for the nine months ended September 30, 2000 and 1999, as
conditions for inclusion had not been met.
In addition, convertible preferred stock, stock to be issued, and debt
convertible into 1.6 million and 2.6 million shares of common stock for the
three and nine months ended September 30, 2000 and 1999, respectively, were not
included in diluted earnings (loss) per share due to the losses for the
respective periods.
The shares of common stock held in escrow to cover eGlobe's potential
indemnification obligations under the Trans Global merger agreement, are not
included in the computation of basic and diluted loss per share.
The following table lists preferred dividends by preferred stock series
for the three months ended September 30, 2000 and 1999.
26
<PAGE>
EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- EARNINGS (LOSS) PER SHARE -- (CONTINUED)
<TABLE>
<CAPTION>
THREE THREE
MONTHS ENDED MONTHS ENDED
PREFERRED STOCK SERIES SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------------ -------------------- -------------------
<S> <C> <C>
B .................... $ -- $6,033,000
D .................... -- 253,000
E .................... -- 100,000
G .................... -- (6,000)
I .................... 9,000 59,000
K .................... -- 15,000
M .................... -- --
O .................... -- --
P .................... 225,000 --
Q .................... 60,000 --
-------- ----------
TOTAL ................ $294,000 $6,454,000
======== ==========
</TABLE>
27
<PAGE>
EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- EARNINGS (LOSS) PER SHARE -- (CONTINUED)
The following table lists preferred dividends by preferred stock series
for the nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
NINE NINE
MONTHS ENDED MONTHS ENDED
PREFERRED STOCK SERIES SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------------ -------------------- -------------------
<S> <C> <C>
B .................... $ -- $ 6,033,000
C .................... -- 2,215,000
D .................... -- 1,750,000
E .................... 33,000 695,000
G .................... -- (6,000)
I .................... 336,000 81,000
J .................... 17,000 --
K .................... 13,000 15,000
M .................... 6,291,000 --
N .................... 571,000 --
O .................... 643,000 --
P .................... 7,114,000 --
Q .................... 1,979,000 --
----------- -----------
TOTAL ................ $16,997,000 $10,783,000
=========== ===========
</TABLE>
NOTE 11 -- REDEEMABLE CONVERTIBLE PREFERRED STOCK
The following is a summary of the Company's series of redeemable preferred
stock and the amounts authorized and outstanding as of September 30, 2000 and
December 31, 1999.
Series P Redeemable Convertible Preferred Stock, 15,000 and 0 shares
authorized, 15,000 and 0 shares, respectively, issued and outstanding ($15.0
million plus 5% per annum aggregate liquidation preference).
Series Q Redeemable Convertible Preferred Stock, 10,000 and 0 shares
authorized, 4,000 and 0 shares, respectively, issued and outstanding ($4.0
million plus 5% per annum aggregate liquidation preference).
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
-------------------- ------------------
(UNAUDITED)
<S> <C> <C>
Series P Convertible Preferred Stock ......... $18,610,000 $ --
Series Q Convertible Preferred Stock ......... 4,930,000 --
----------- -----
Total ........................................ $23,540,000 $ --
=========== =====
</TABLE>
Following is a detailed discussion of each series of redeemable
convertible preferred stock outstanding at September 30, 2000.
Series P Convertible Preferred Stock
On January 27, 2000, the Company issued 15,000 shares of Series P
Redeemable Convertible Preferred Stock ("Series P Preferred Stock") and warrants
to purchase 79.707 shares of common stock with an exercise price of $56.59 per
share for proceeds of $15.0 million to RGC International Investors, LDC ("RGC").
The Series P Preferred Stock is classified as redeemable stock on the balance
sheet at
28
<PAGE>
EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- REDEEMABLE CONVERTIBLE PREFERRED STOCK -- (CONTINUED)
the redemption value. The shares of Series P Preferred Stock carry an effective
annual yield of 5% (payable in kind at the time of conversion) and are
convertible, at the holder's option, into shares of common stock. The shares of
Series P Preferred Stock will automatically be converted into shares of common
stock on January 26, 2003, subject to delay for specified events. The
conversion price for the Series P Preferred Stock was $56.59 until April 26,
2000, and thereafter is equal to the lesser of: (i) the average closing price
of the Company's common stock on Nasdaq for any five consecutive trading days
during the 22 trading days prior to conversion, or (ii) $56.59. The Company can
force a conversion of the Series P Preferred Stock on any trading day following
a period in which the closing bid price of the Company's common stock has been
greater than $113.18 for a period of at least 35 trading days after the earlier
of (1) the first anniversary of the date the common stock issuable upon
conversion of the Series P Preferred Stock and warrants are registered for
resale, or (2) the completion of a firm commitment underwritten public offering
with gross proceeds to the Company of at least $45.0 million provided that
shares issuable upon conversion and warrants have been registered for resale
for at least 45 days.
No holder may convert the Series P Preferred Stock or exercise the
warrants it owns for any shares of common stock that would cause it to own
following such conversion or exercise in excess of 4.9% of the shares of the
Company's common stock then outstanding.
Except in the event of a firm commitment underwritten public offering of
eGlobe's securities, the issuance of securities in connection with a merger,
acquisition or purchase of assets or a sale of up $15.0 million of common stock
to a specified investor, the Company may not obtain any additional equity
financing without the Series P Preferred holder's consent for a period of 120
days following the date the common stock issuable upon conversion of the Series
P Preferred Stock and warrants is registered for resale. The holder also has a
right of first offer to provide any additional equity financing that the
Company needs until the first anniversary of such registration.
The Company may be required to redeem the Series P Preferred Stock in the
following circumstances:
(a) if the Company fails to perform specified obligations under the securities
purchase agreement or related agreements;
(b) if the Company or any of its subsidiaries make an assignment for the
benefit of creditors or becomes involved in bankruptcy, insolvency,
reorganization or liquidation proceedings;
(c) if the Company merges out of existence without the surviving company
assuming the obligations relating to the Series P Preferred Stock;
(d) if the Company's common stock is no longer listed on the Nasdaq National
Market, which is where the Company's common stock is listed at present or
if the Company ceases to be listed on the Nasdaq National Market, the
common stock is not alternatively listed on the Nasdaq SmallCap Market,
the NYSE or the AMEX;
If the Series P Preferred Stock is redeemed under situations (a), (b), (c)
or (d) above, the redemption value is equal to the greater of (a) 120%
multiplied by the sum of (i) the stated value ($1,000 per share) plus (ii) 5%
per annum plus (iii) any penalties in arrears (as defined in the agreement) and
(b) the sum of (i) the stated value plus (ii) 5% per annum, divided by the then
effective conversion rate (as defined above) multiplied by the highest closing
price for the common stock during the period from the date of the first
occurrence of the mandatory redemption event until one day prior to the
mandatory redemption date.
On July 15, 2000, the Company failed to register the shares of common
stock issuable upon conversion of the Series P Preferred Stock and associated
warrants with the SEC, however the holder of the Series P Preferred Stock has
advised the Company in writing that it has no present intention to exercise its
right to
29
<PAGE>
EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- REDEEMABLE CONVERTIBLE PREFERRED STOCK -- (CONTINUED)
demand redemption described in (a) above, so long as the common stock and
associated warrants are registered and declared effective by October 15, 2000.
The registration statement covering shares issuable upon conversion of the
Series P Preferred was declared effective on November 9, 2000.
The warrants valued at $2.6 million are exercisable from issuance and
expire five years from issuance. The exercise price is $56.59 per share.
The Series P Preferred Stock has been recorded at the maximum redemption
value of $18.4 million as of September 30, 2000. The difference of $6.9 million
between the redemption value and the fair value at issuance, including offering
costs of $0.9 million and the warrant value of $2.6 million, was recorded as a
dividend because the Series P Preferred Stock is redeemable upon the occurrence
of any of the above events.
Series Q Convertible Preferred Stock
On March 15, 2000, the Company issued 4,000 shares of Series Q Redeemable
Convertible Preferred Stock ("Series Q Preferred Stock") and warrants to
purchase 100,000 shares of eGlobe common stock with an exercise price per share
equal to $12.04, subject to adjustment for issuances of shares of common stock
below market price, for proceeds of $4.0 million to RGC.
The Series Q Preferred Stock agreement also provides that the Company may
issue up to 6,000 additional shares of Series Q Preferred Stock and warrants to
purchase an additional 150,000 shares of common stock to RGC for an additional
$6.0 million at a second closing to be completed no later than July 15, 2000.
The primary condition to the second closing is the effectiveness of a
registration statement registering the resale of common stock underlying the
Series Q Preferred Stock and the warrants and the Series P Preferred Stock and
warrants issued in January 2000 to RGC (see above discussion "Series P
Convertible Preferred Stock"). RGC has advised the Company in writing that it
has no present intention to exercise its right to demand redemption so long as
the shares are registered and declared effective by October 15, 2000. The
registration statement covering the shares of common stock issuable upon
conversion of the Series Q Preferred Stock was declared effective on November
9, 2000. The Series Q Preferred Stock is classified as redeemable stock on the
balance sheet at the redemption value.
The shares of Series Q Preferred Stock carry an effective annual yield of
5% (payable in kind at the time of conversion) and are convertible, at the
holder's option, into shares of common stock. The shares of Series Q Preferred
Stock will automatically be converted into shares of common stock on March 15,
2003, subject to delay for specified events. The conversion price for the
Series Q Preferred Stock was $56.59 until April 26, 2000, and thereafter is
equal to the lesser of: (i) the average closing price of the Company's common
stock on Nasdaq for any five consecutive trading days during the 22-trading
days prior to conversion, or (ii) $56.59.
The Company can force a conversion of the Series Q Preferred Stock on any
trading day following a period in which the closing bid price of the Company's
common stock has been greater than $24.08 for a period of at least 35 trading
days after the earlier of (1) the first anniversary of the date the common
stock issuable upon conversion of the Series Q Preferred Stock and warrants is
registered for resale, or (2) the completion of a firm commitment underwritten
public offering with gross proceeds to the Company of at least $45.0 million
provided that shares issuable upon conversion and warrants have been registered
for resale for at least 45 days.
No holder may convert the Series Q Preferred Stock or exercise the
warrants it owns for any shares of common stock that would cause it to own
following such conversion or exercise in excess of 4.9% of the shares of the
Company's common stock then outstanding.
The Company may be required to redeem the Series Q Preferred Stock in the
following circumstances:
(a) if the Company fails to perform specified obligations under the securities
purchase agreement or related agreements;
30
<PAGE>
EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- REDEEMABLE CONVERTIBLE PREFERRED STOCK -- (CONTINUED)
(b) if the Company or any of its subsidiaries makes an assignment for the
benefit of creditors or become involved in bankruptcy insolvency,
reorganization or liquidation proceedings;
(c) if the Company's common stock is no longer listed on the Nasdaq National
Market, the Nasdaq SmallCap Market, the NYSE or the AMEX;
If the Series Q Preferred Stock is redeemed under situations (a), (b) or
(c) above, the redemption value is equal to the greater of (a) 120% multiplied
by the sum of (i) the stated value ($1,000 per share) plus (ii) 5% per annum
plus (iii) any penalties in arrears (as defined in the agreement) and (b) the
sum of (i) the stated value plus (ii) 5% per annum, divided by the then
effective conversion rate (as defined above) multiplied by the highest closing
price for the common stock during the period from the date of the first
occurrence of the mandatory redemption event until one day prior to the
mandatory redemption date.
The warrants, valued at $0.8 million, are exercisable from issuance and
expire five years from issuance. The exercise price is $12.04 per share.
On July 15, 2000, the Company failed to register the shares of common
stock issuable upon conversion of the Series Q Preferred Stock and associated
warrants with the SEC, however the holder of the Series Q Preferred Stock has
advised the Company in writing that it has no present intention to exercise its
right to demand redemption described in (a) above, so long as the common stock
and associated warrants are registered and declared effective by October 15,
2000.
The Series Q Preferred Stock has been recorded at the maximum redemption
value of $4.9 million as of September 30, 2000. The difference of $1.9 million
between the redemption value and the fair value at issuance, including offering
costs of $0.2 million and the warrant value of $0.8 million, was recorded as a
dividend because the Series Q Preferred Stock is redeemable upon the occurrence
of any of the above events.
NOTE 12 -- OPERATING SEGMENT INFORMATION
The Company has four operating reporting segments consisting of Enhanced
Services Network Services, Customer Care and Retail Services. The Company's
basis for determining the segments relates to the type of services each segment
provides. Enhanced Services includes the unified messaging services, telephone
portal services, interactive voice and data services and the card services.
Network Services includes low-cost transmission services, voice services
(CyberCall and CyberFax) and several other additional services including
billing and report generation designed exclusively to support CyberCall and
CyberFax. Customer Care Services includes the state-of-art call center, which
was part of the Company's acquisition of ORS. Retail Services primarily
includes a small North American retail center. Segment results reviewed by the
Company decision makers do not include general and administrative expenses,
interest, depreciation and amortization and other miscellaneous income and
expense items. All material intercompany transactions have been eliminated in
consolidation.
31
<PAGE>
EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- OPERATING SEGMENT INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
ENHANCED NETWORK CUSTOMER RETAIL
SERVICES SERVICES CARE SERVICES TOTAL
--------------- ---------------- ------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDING
SEPTEMBER 30, 2000
Revenue ..................... $ 3,135,000 $ 19,539,000 $1,113,000 $ 1,270,000 $ 25,057,000
Inter-Segment ............... (8,000) (986,000) (138,000) -- (1,132,000)
------------ ------------ ---------- ----------- ------------
Total Revenue ............... $ 3,127,000 $ 18,553,000 $ 975,000 $ 1,270,000 $ 23,925,000
Gross profit (loss) ......... $ 1,015,000 $ 1,953,000 $ 21,000 $ 607,000 $ 3,596,000
Total Assets ................ $ 26,320,000 $ 48,625,000 $4,923,000 $19,607,000 $ 99,475,000
FOR THE THREE MONTHS ENDING
SEPTEMBER 30, 1999
Revenue ..................... $ 4,121,000 $ 27,608,000 $ 480,000 $ 107,000 $ 32,316,000
Inter-Segment ............... -- (339,000) -- -- (339,000)
------------ ------------ ---------- ----------- ------------
Total Revenue ............... $ 4,121,000 $ 27,608,000 $ 480,000 $ 107,000 $ 31,977,000
Gross profit (loss) ......... $ 992,000 $ 328,000 $ 99,000 $ (28,000) $ 1,392,000
Total Assets ................ $ 78,773,000 $ 31,244,000 $2,972,000 $ 806,000 $113,795,000
</TABLE>
<TABLE>
<CAPTION>
ENHANCED NETWORK CUSTOMER RETAIL
SERVICES SERVICES CARE SERVICES TOTAL
---------------- ---------------- ------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
FOR THE NINE MONTHS ENDING
SEPTEMBER 30, 2000
Revenue ..................... $ 10,360,000 $ 78,099,000 $3,788,000 $ 4,756,000 $ 97,003,000
Inter-Segment ............... (11,000) (7,578,000) (448,000) -- (8,037,000)
------------ ------------ ---------- ----------- -------------
Total Revenue ............... $ 10,349,000 $ 70,521,000 $3,340,000 $ 4,756,000 $ 88,966,000
Gross profit ................ $ 2,623,000 $ 4,093,000 $ 104,000 $ 2,445,000 $ 9,265,000
Total Assets ................ $ 26,320,000 $ 48,625,000 $4,923,000 $19,607,000 $ 99,475,000
FOR THE NINE MONTHS ENDING
SEPTEMBER 30, 1999
Revenue ..................... $ 15,907,000 $ 96,238,000 $ 480,000 $ 342,000 $ 112,967,000
Inter-Segment ............... -- (875,000) -- -- (875,000)
------------ ------------ ---------- ----------- -------------
Total Revenue ............... $ 15,907,000 $ 95,363,000 $ 480,000 $ 342,000 $ 112,092,000
Gross profit (loss) ......... $ 3,071,000 $ 1,349,000 $ 99,000 $ (68,000) $ 4,451,000
Total Assets ................ $ 78,773,000 $ 31,244,000 $2,972,000 $ 806,000 $ 113,795,000
</TABLE>
The following unaudited table presents operating segment information:
NOTE 13 -- SUBSEQUENT EVENTS
Sale of Evans Building (Asset Held for Sale)
On October 13, 2000, the Company sold a building that it owned on Evans
Avenue in Denver, Colorado for $990,000. The Evans building was the former
location of the Company's card services business (part of the Enhanced Service
segment). The $312,000 carrying value was reclassified as an asset held for
sale during the third quarter of 2000 when the Company moved its card services
business to Reston, Virginia. The gain on sale will be recorded in the fourth
quarter of 2000.
32
<PAGE>
EGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- SUBSEQUENT EVENTS -- (CONTINUED)
Reverse Stock Split
On October 25, 2000, the Company's stockholders approved a reverse stock
split of 1-for-2.7, 1-for-3.7, and 1-for-4.7 with the precise ratio to be
determined by the Company's Board of Directors, and on October 31, 2000, the
Company's Board of Directors declared a 1-for-4.7 reverse stock split. The
reverse stock split became effective on November 13, 2000, and each 4.7 shares
of the Company's common stock that was issued and outstanding immediately prior
to the effective time was changed into one validly issued, fully paid and
non-assessable share of the Company's common stock without any further action
by the holders of shares of the Company's common stock. The financial
statements and all references to common stock contained in this Form 10-Q give
retroactive effect to the reverse stock split.
Stock Option Grant to Employees
On November 9, 2000, the Company's Compensation Committee of the Board of
Directors approved a grant of stock options for 2,506,347 pre-split and 533,265
post-split shares of common stock to substantially all of its existing employees
for equitable and retention purposes. The number of shares each grantee will
receive approximates a portion of the shares under current unexercised options
the recipient holds as of November 9, 2000, whether such options are vested or
unvested. The option exercise price is equal to fair market value on the date of
grant. This new grant will vest one-third in 120 days and then one-third on each
of the first and second anniversary, so long as the grantee is not terminated
for cause or does not voluntarily resign within the next 6 months. The terms of
previously granted options were not affected.
Visual Bridge Agreement
On November 16, 2000 the Company entered into a five-year strategic
agreement with Visual Bridge, Inc., in which the Company agreed to supply its
Vogo Networks voice, portal and universal messaging services to Visual Bridge,
a supplier of synchronized audio and video content including video messaging
technology and services. The agreement includes a stock swap under which the
Company will acquire approximately 5% of Visual Bridge equity in return for up
to three million shares of the Company's common stock.
33
<PAGE>
EGLOBE
SEPTEMBER 30, 2000
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q, in particular the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and other documents filed by the Company with the U.S. Securities
and Exchange Commission (SEC) contain "forward-looking statements" within the
meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. In addition, the Company's senior management may make
forward-looking statements orally to analysts, investors, the media and others.
Forward-looking statements might include one or more of the following:
- Projections of revenues, income, earnings per share, capital
expenditures, dividends, capital structure or other financial items;
- Descriptions of plans or objectives of management for future operations,
products or services, including pending acquisition transactions;
- Forecasts of future economic performance, liquidity, need for funding
and income; and
- Descriptions of assumptions underlying or relating to any of the
foregoing.
Forward-looking statements can be identified by the fact that they do not
relate strictly to historical or current facts. They often include words such
as "believe," "expect," "anticipate," "intend," "plan," "estimate," "aim,"
"projects," or words of similar meaning and expressions that indicate future
events and trends, or future or conditional verbs such as "will," "would,"
"should," "could," or "may". All statements that address expectations or
projections about the future, including statements about the Company's strategy
for growth, product development, market position, expenditures and financial
results are forward-looking statements.
Forward-looking statements give the Company's expectations or predictions
of future conditions, events or results. They are not guarantees of future
performance. By their nature, forward-looking statements are subject to risks
and uncertainties. There are a number of factors - many of which are beyond the
Company's control - that could cause actual future conditions, events, results
or trends to differ significantly and/or materially from historical results or
those projected in the forward-looking statements depending on a variety of
factors, including but not limited to those described below, such as the rapid
technological and market changes that create significant business risks in the
market for the Company's services, the intensely competitive nature of the
Company's industry and the possible adverse effects of such competition, the
Company's need for significant additional financing, the availability of such
financing, and the Company's dependence on strategic relationships, among
others, and other risks and factors identified from time to time in the
Company's reports filed with the SEC, including the risk factors set forth in
Part I, Item 1, under the caption "The Business - Risk Factors" on page 31 of
the Company's Annual Report on Form 10-K/A for the year ended December 31,
1999, filed with the SEC on November 6, 2000.
While some of these factors are described below, other factors, such as
market, operational, liquidity, interest rate, and other risks, are described
elsewhere in this Quarterly Report on Form 10-Q. Factors relating to the
regulation and supervision of the company are also described or incorporated in
the Company's Annual Report on Form 10-K filed with the SEC. There are other
factors besides those described or incorporated in this report or in the Form
10-K that could cause actual conditions, events or results to differ from those
in the forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date on which they are made. The Company
does not undertake any obligation to update publicly or revise any
forward-looking statements to reflect circumstances or events that occur after
the date the forward-looking statements are made.
34
<PAGE>
EGLOBE
SEPTEMBER 30, 2000 - (CONTINUED )
OVERVIEW
The Company incurred a net loss of $19.0 million and $68.7 million for the
three months and nine months ended September 30, 2000 compared to a net loss of
$14.1 million and $33.7 million for the same periods in 1999.
A majority of those losses in 2000 reflect non-cash items, but the Company
did incur substantial cash operating losses, particularly in the first quarter
of the year and continuing, although declining, in the second and third
quarters. At the beginning of the year, all segments of the Company's business
contributed to the cash losses, but by the end of the third quarter to VoIP
focused Network Services segment became positive on a cash operating basis. The
continuing losses are primarily in the Enhanced Services business and, to a
more limited extent, in the small retail segment, both of which have far
greater overhead costs than the Network Services segment. The Enhances Services
segment is a key element of the current growth plan of the Company, but the
Company cannot continue to sustain the losses in the Enhances Services segment
without a substantial capital infusion. Furthermore, the Company has determined
that those funds are unlikely to be raised with the plan that it has been
pursuing.
In seeking financing to fund its growth plan, the Company has encountered
investor interest in one or the other of the principal business areas of the
Company (its Voice over IP (VoIP) focused Network Services and its Enhanced
Services) but not in both; indeed, some prospective investors have advised the
Company that they will not invest in the business which interests them as long
as it is tied to the other line of business. In addition, the changing
character of the capital markets over the last six months has made some avenues
of funding unavailable to the Company. Therefore, the Company does not believe
that it can reasonably meet the capital needs of the development plan that it
has been pursuing.
Management and the Board of Directors of the Company have determined that
it is in the best interests of the Company to split off the infant,
money-losing, enhanced service operations of the company and augment the value
of the VoIP business of the company. Selling a substantial majority or all of
the Enhanced Services business and its underlying technology will remove the
negative cash flow that the Company is currently experiencing and provide funds
for existing liabilities and note payment obligations; the sale will also
permit the proper capitalization of the Enhanced Service businesses going
forward. Perhaps most important, the Company believes that the split should
permit the VoIP focused Network Services business of the Company to return to
rapid growth with much more modest capital requirements (less than $15 million)
over the next 12 months than would be required by seeking to continue
development of both lines of business. The Company has had initial discussions
with parties interested in participating in the separated Enhanced Services
business and current indications are that an agreement is possible by the end
of the fourth quarter. While the Company will be, at best, a minority
participant in the separated Enhanced Services business, it anticipates that it
will continue to employ and sell the services provided by the Enhanced Services
business to its customers.
There is no assurance, however, that the Company will not encounter delays
in splitting off the Enhanced Services business, or that it will complete such
a separation. In that event, it will be forced to put all development
activities in this area on hold and sharply curtail any operational development
in the Company, except in its VoIP based Network Services. Under these
circumstances, all additional capital (including the further proceeds of $6
million from Series Q Preferred Stock) will be focused on VoIP.
Under this plan, the Company anticipates receiving financing from the sale
of the Enhanced Services business segment (in one or more transactions) as well
as $6.0 million from the previously agreed sale of Series Q Convertible
Preferred Stock which was contingent, in pertinent part, on the registration of
the underlying common shares and on the approval by shareholders of the
conversion of a substantial portion of the preferred stock into common stock.
Both the registration and the approval have been completed.
Should the Company be unable to complete the split-off of its Enhanced
Services business for a sufficient price, or obtain sufficient additional
capital or financing to enable the Company to meet future capital expenditure
and working capital requirements, or successfully complete the other actions
described above, management would be required to significantly modify its
current business plan for the remainder of the current year and fiscal year
2001. Such modifications would likely result in a significant reduction in
planned capital expenditures. Despite the efforts currently underway, there can
be no assurance that the Company will be able to split-off such business, have
access to sufficient additional
35
<PAGE>
EGLOBE
SEPTEMBER 30, 2000 -- (CONTINUED)
OVERVIEW -- (CONTINUED)
capital or financing on satisfactory terms to enable it to meet future capital
expenditure and working capital requirements or that it will be able to
successfully implement such modifications. In the event the Company is unable
to sell such business, obtain such capital or financing or implement such
modifications, it could be unable to satisfy its obligations to third parties,
which could result in defaults under the existing debt and other financing
agreements and, after the passage of any applicable time and notice provisions,
would enable creditors in respect to those obligations to accelerate the
indebtedness and assert other remedies against the Company. Such events would
have a material adverse effect upon the Company and would threaten its ability
to continue as a going concern.
Under this plan, the Company anticipates receiving financing from the sale
of the Enhanced Services business segment (in one or more transactions) as well
as $6.0 million from the previously agreed sale of Series Q Convertible
Preferred Stock which was contingent, in pertinent part, on the registration of
the underlying common shares and on the approval by shareholders of the
conversion of a substantial portion of the preferred stock into common stock.
Both the registration and the approval have been completed. The Company also
anticipates that it may enter into one or more financings that involve debt
and/or equity in order to bridge the transition to the separation of the
Enhanced Services. The Company may also seek follow-on financing (in the form
of debt or equity) for its VoIP focused Network Services business after the
separation of the Enhanced Services business segment.
Turning to the specified of the 2000 losses, the table below shows a
comparative summary of certain significant charges to income, which affected
the reported losses:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED, FOR THE THREE MONTHS ENDED,
--------------------------------- --------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
--------------- --------------- --------------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Additional allowance for doubtful accounts ......... 3.7 0.6 0.2 0.1
Amortization of goodwill and other intangibles
(primarily related to acquisitions) ............... 8.0 4.9 2.3 3.3
Deferred compensation to employees of
acquired companies ................................ 1.4 1.1 -- 0.1
Deferred compensation expense related to
stock options ..................................... 10.5 -- 2.1 --
Depreciation and amortization ...................... 9.1 4.7 3.0 1.9
Interest expense, net of the amortization of
debt discounts related to debt .................... 5.1 5.9 3.0 4.8
Amortization of debt discounts ..................... 3.0 5.3 1.4 0.3
Merger expenses .................................... 2.5 -- -- --
Penalty warrants expense ........................... 1.6 -- -- --
Other items ........................................ 1.7 -- -- --
---- ---- ---- ----
Total .............................................. 46.6 22.5 12.0 10.5
==== ==== ==== ====
</TABLE>
The $2.5 million of merger expenses incurred by the Company related to
investment banking and advisory fees, legal and accounting costs and expenses
associated with printing and mailing the proxy statement for the special
stockholders' meeting.
After deducting the above items, the net loss for three and nine months
ended September 30, 2000 was $6.9 million and $22.0 million respectively,
compared to a net loss, of $3.6 million and $13.2 million, for the three and
nine months ended September 30, 1999, respectively. The principal factors for
the losses incurred for the three and nine months ended September 30, 2000 are:
(1) the incurrence of upfront costs to support development and initial
operations in key portions of the Enhanced Srvices business segment
36
<PAGE>
EGLOBE
SEPTEMBER 30, 2000 -- (CONTINUED)
OVERVIEW -- (CONTINUED)
of the Company, (2) the incurrence of upfront costs to build out capacity to
meet the Company's anticipated VoIP growth (3) increased competition in the
international telecommunications market, (4) a change in pricing by Trans
Global's primary supplier during 1999 which increased costs and drove margins
down, (5) the costs of integrating the Company's acquisitions, (6) headcount
increases related to the Company's acquisitions, and (7) legal and other
charges for professional services principally incurred to support the
acquisition operations.
On June 28, 2000, the Company received written notice from Nasdaq advising
it that it had failed to maintain a $5.00 bid price over the last 30
consecutive trading days, which is required for continued listing on the Nasdaq
National Market, and that, if such problem was not remedied within 90 days,
Nasdaq would delist the Company's common stock from the Nasdaq National Market.
At a hearing before the Nasdaq Listing Qualifications panel on October 26,
2000, the Company requested a transfer of its listing to the Nasdaq SmallCap
Market. The Company's request for such transfer remains pending.
On October 25, 2000, the Company's stockholders approved a reverse stock
split of 1-for-2.7, 1-for-3.7, and 1-for-4.7 with the precise ratio to be
determined by the Company's Board of Directors, and on October 31, 2000, the
Company's Board of Directors declared a 1-for-4.7 reverse stock split. The
reverse stock split became effective on November 13, 2000, and each 4.7 shares
of the Company's common stock that was issued and outstanding immediately prior
to the effective time was changed into one validly issued, fully paid and
non-assessable share of the Company's common stock without any further action
by the holders of shares of the Company's common stock. The financial
statements and all references to common stock contained in this Form 10-Q give
retroactive effect to the reverse stock split.
On November 9, 2000, the Company's Compensation Committee of the Board of
Directors approved a grant of stock options for 2,506,347 pre-split and 533,265
post split shares of common stock to substantially all of its existing employees
for equitable and retention purposes. The number of shares each grantee will
receive approximates a portion of the shares under current unexercised options
the recipient holds as of November 9, 2000, whether such options are vested or
unvested. The option exercise price is equal to fair market value on the date of
grant. This new grant will vest one-third in 120 days and then one-third on each
of the first and second anniversary, so long as the grantee is not terminated
for cause or does not voluntarily resign the next 6 months. The terms of
previously granted options were not affected.
GENERAL
As the new plan to split-off the Enhanced Services business segment
illustrates, the Company continually evaluates our operations and organization
to ensure our operations are conducted in the most efficient manner possible.
As the Company identifies redundant or inefficient operations, the Company may
restructure the organization to increase efficiency. Such an evaluation may
lead to a restructuring which could include the closing or removal of
non-essential equipment or facilities or selective reduction on head count. The
Company may incur charges in connection with such an action.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1999.
REVENUE. Revenues for the three months ended September 30, 2000 of $23.9
million decreased $8.0 million (25.1%) from $31.9 million for the same period
in 1999. This decrease in revenue occurred primarily in the Network Services
segment (primarily Trans Global). This decrease was in part due to the
Company's decision to shift away from the arbitrage resale elements of the
former Trans Global business structure, gaining operating efficiencies and
better gross profit margins. Additionally, declines were
37
<PAGE>
EGLOBE
SEPTEMBER 30, 2000 -- (CONTINUED)
RESULTS OF OPERATIONS -- (CONTINUED)
experienced in both Enhanced Services and Network Services due to increasing
competition, which has put downward pressure on both prices and margins. This
decrease was offset by revenue from the acquisitions of ORS and Coast, which
occurred in the third and fourth quarters of 1999.
GROSS PROFIT. Gross profit for the three months ended September 30, 2000
was $3.6 million or 15.1% of revenue as compared to $1.4 million or 4.3% of
revenue for the same period in 1999. Network Services margins rose to 25.8%
from 20.0% while Enhanced Services margins decline to 7% from 20.0% for the
three months ended September 30, 2000 and September 30, 1999, respectively.
This increase was offset by revenue from the acquisitions of ORS and Coast,
which occurred in the third and fourth quarters of 1999. The increase in gross
margins in the Network Services segment is related to the cost reductions
beginning to be realized from the consolidation of acquisitions and the
Company's decision to shift away from the arbitrage resale business to a direct
route, IP structure. The Company believes that the added efficiencies of the IP
routes will continue to add positively to the gross margin, and that some
further gains will be realized from consolidation. Management believes margins
will continue to improve as the Company more efficiently fill its routes and
expand them.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES, EXCLUSIVE OF, $2.0 MILLION
REPORTED BELOW OF DEFERRED COMPENSATION RELATED TO STOCK OPTIONS. Selling,
general and administrative expenses, exclusive of $2.0 million reported below
of deferred compensation related to stock options, totaled $10.2 million for
the three months ended September 30, 2000 compared to $8.7 million for the same
period, in 1999, for an increase of $1.5 million. The increase in selling,
general and administrative expenses is in part due to certain non cash charges
detailed above as well as the last elements of transitional costs from
acquisitions.
DEFERRED COMPENSATION RELATED TO STOCK OPTIONS. Deferred compensation
expense related to stock options of $2.0 million was recorded for the three
months ended September 30, 2000. This charge was to record the value of options
granted in excess of shares available for grant under the Employee Stock Option
Plan ("Employee Plan"). The Board of Directors granted these options to certain
executives and directors subject to stockholder approval of the increase in the
number of shares available under the Employee Plan. The stockholders approved
the increase of the number of shares available under the Employee Plan from
3,250,000 to 7,000,000 shares on March 23, 2000. The excess of the market price
of $9.94 on March 23, 2000 (stockholder approval date) and the option exercise
price for these options was $15.2 million and is being recorded as compensation
expense over the vesting period of the options. There were no similar charges
recorded in the quarter ended September 30, 1999.
DEFERRED COMPENSATION RELATED TO ACQUISITIONS. The Company recorded no
deferred compensation expense for the three months ended September 30, 2000
compared to $.015 million for the same period in 1999. This non-cash charge
relates to stock allocated to employees of acquired companies by their former
owners out of acquisition consideration paid by the Company. Such transactions,
adopted by the acquired companies prior to acquisition, require the Company to
record the market value of the stock issuable to employees as of the date of
acquisition as compensation expense with a corresponding credit to
stockholders' equity and to continue to record the effect of subsequent changes
in the market price of the issuable stock until actual issuance.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expenses totaled $2.9 million for the three months ended September 30, 2000
compared to $1.9 million for the same period in 1999. This increase of $1.0
million is principally due to amortization charges of $0.6 million related to
goodwill and other intangibles associated with the acquisitions completed since
December 2, 1998. The remaining balance of $0.4 million was primarily
attributable to increases in the fixed assets related to acquired companies and
additions at Trans Global.
38
<PAGE>
EGLOBE
SEPTEMBER 30, 2000 -- (CONTINUED)
RESULTS OF OPERATIONS -- (CONTINUED)
INTEREST EXPENSE. Interest expense totaled $1.3 million for the three
months ended September 30, 2000 compared to $1.9 million for the same period in
1999. This decrease was primarily due to a decrease in debt and amortization of
the debt discounts related to the value of the warrants associated with various
debt financings.
INTEREST INCOME. Interest income for the three months ended September 30,
2000 was $0.09 million compared to $0.1 million for the same period in 1999.
This decrease in interest income is the result of the decrease in revenues and
the increase in acquisition activity both of which reduced cash reserves
available for investment.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1999.
REVENUE. Revenues for the nine months ended September 30, 2000 of $88.9
million reflects a decrease of $23.1 million (20.6%) from $112.1 million for
the same period in 1999. This decrease in revenue occurred primarily in the
Network Services segment. This decrease was in part due to the Company's
decision to shift away from arbitrage resale elements of the Trans Global
business and focus on a direct route, IP structure. Additionally, declines were
experienced in both Enhanced Services and Network Services due to increasing
competition, which has put downward pressure on both prices and margins. This
decrease was offset by revenue from the acquisitions of ORS and Coast, which
occurred in the third and fourth quarters of 1999.
GROSS PROFIT. Gross profit for the nine months ended September 30, 2000
was $9.3 million or 10.4% of revenue as compared to $4.5 million or 4.1% of
revenue for the same period in 1999. Network Services margins rose to 6.6% from
1.4% while Enhanced Services margins decline to 3.5% from 19.3% for the nine
months ended September 30, 2000 and September 30, 1999, respectively. The
Company believes that the added efficiencies of the IP routes will continue to
add positively to the gross margin. Management believes margins will continue
to improve as the Company more efficiently fill its routes and obtains
additional owned capacity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES, EXCLUSIVE OF $10.5 MILLION,
$1.4 MILLION AND $1.1 MILLION REPORTED BELOW OF DEFERRED COMPENSATION RELATED
TO STOCK OPTIONS AND ACQUISITIONS. Selling, general and administrative
expenses, exclusive of $10.5 million, $1.4 million and $1.1 million reported
below of deferred compensation related to stock options and acquisitions
totaled $39.5 million for the nine months ended September 30, 2000 compared to
$22.0 million for the same period in 1999, for an increase of $17.5 million The
increase in selling, general and administrative expenses is in part due to
certain non-cash charges of $9.4 million, including $3.6 million increase in
the reserve for doubtful accounts, other costs associated with the Trans Global
merger, the special proxy filing and related professional charges which added
an additional $2.5 million in costs. After taking out the effect of these
charges, the change in selling, general and administrative costs total $6.8
million.
COMPENSATION RELATED TO STOCK OPTIONS. Compensation expense related to
stock options of $10.5 million was recorded for the nine months ended September
30, 2000. This charge was to record the value of options granted in excess of
shares available for grant under the Employee Stock Option Plan ("Employee
Plan"). The Board of Directors granted these options to certain executives and
directors subject to stockholder approval of the increase in the number of
shares available under the Employee Plan. The stockholders approved the
increase of the number of shares available under the Employee Plan from
3,250,000 to 7,000,000 shares on March 23, 2000. The excess of the market price
of $9.94 on March 23, 2000 (stockholder approval date) and the option exercise
price for these options was $15.2 million and is being recorded as compensation
expense over the vesting period of the options. There were no similar charges
recorded in the nine months ended September 30, 1999.
39
<PAGE>
EGLOBE
SEPTEMBER 30, 2000 -- (CONTINUED)
RESULTS OF OPERATIONS -- (CONTINUED)
DEFERRED COMPENSATION RELATED TO ACQUISITIONS. The Company recorded a
deferred compensation expense of $1.4 million for the nine months ended
September 30, 2000 compared to $1.1 million for the same period in 1999. This
non-cash charge relates to stock allocated to employees of acquired companies
by their former owners out of acquisition consideration paid by the Company.
Such transactions, adopted by the acquired companies prior to acquisition,
required the Company to record the market value of the stock issuable to
employees as of the date of acquisition as compensation expense with a
corresponding credit to stockholders' equity and
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expenses totaled $9.1 million for the nine months ended September 30, 2000
compared to $4.7 million for the same period in 1999. This increase of $4.4
million is principally due to amortization charges of $4.1 million related to
goodwill and other intangibles associated with the acquisitions completed since
December 2, 1998. The remaining balance of $0.3 million was primarily
attributable to increases in the fixed assets related to acquired companies and
additions at Trans Global.
INTEREST EXPENSE. Interest expense totaled $5.1 million for the nine
months ended September 30, 2000 compared to $5.9 million for the same period in
1999. This decrease was primarily due a decrease in debt and $3.0 million of
amortization of the debt discounts related to the value of the warrants
associated with various debt financings.
INTEREST INCOME. Interest income for the nine months ended September 30,
2000 was $0.3 million compared to $0.7 million for the same period in 1999.
This decrease in interest income is the result of the decrease in revenues and
the increase in acquisition activity both of which reduced cash reserves
available for investment.
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA
The Company cannot continue the growth plan that it had pursued during
1999 and the earlier part of 2000. The large cash demands and aggressive cash
management that are required are not sustainable in the existing circumstances.
Therefore, the Company has determined that it will split off its Enhanced
Services business segment and concentrate on its VoIP Focused Network Services.
The Company has raised significant financing through a combination of issuances
of preferred stock and proceeds from the exercise of warrants and options. Cash
and cash equivalents were $925,000 at September 30, 2000 compared to $2.7
million at December 31, 1999. Short-term investments were $2.9 million at
September 30, 2000 as compared to $1.5 million at December 31, 1999. The
decrease in cash and cash equivalents of $1.7 million was primarily due to use
of cash to support the Company's planned expansion of its telecommunication
networks and its increased operational costs associated with the various
acquisitions and the merger with Trans Global. The increase in short-term
investments of $1.5 million was primarily due to an increase in cash placed in
Money Market Funds received from equity-based financings and Certificates of
Deposit purchased to back letters of credit given as security for payments to
various vendors. Accounts receivable, net, increased by $1.0 million to $16.1
million at September 30, 2000 from $15.1 million at December 31, 1999, mainly
due to increased revenues and the extension of credit to new customers. Cash
outflows for operating activities for the nine months September 30, 2000
totaled $17.3 million, as compared to cash outflows of $19.0 million for the
nine months ended September 30, 1999. This increase in outflows was due
primarily to the Company's growth through acquisitions and the effect that the
acquisition activity and upfront costs to add capacity had on operating losses
and higher selling, general and administrative expenses. See further discussion
in "Results of Operations."
There was a net working capital deficiency of $53.9 million at September
30, 2000 compared to a deficiency of $44.7 million at December 31, 1999.
Cash outflows for investing activities during the nine months ended
September 30, 2000 totaled $2.7 million, which was $0.3 million lower than the
cash outflows for the nine months ended September 30, 1999. This decreased
outflow was due to a increase in net purchases of property and equipment to
40
<PAGE>
EGLOBE
SEPTEMBER 30, 2000 -- (CONTINUED)
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA -- (CONTINUED)
$946,000 in 2000 from $11,000 in 1999, and a decrease in investments in
acquisitions to zero in 2000 from $2.0 million in 1999. In addition the Company
purchased short-term investments of $1.5 million in 2000 as compared to selling
short-term investments of $6,000 in 1999.
Cash generated from financing activities totaled $18.2 million during the
nine months ended September 30, 2000 compared to $22.8 million during the nine
months ended September 30, 1999. This decrease of $4.6 million was primarily
due to net proceeds from sales of preferred stock of $18.4 million (as compared
to net proceeds of $10.0 million in 1999), proceeds from the exercise of
warrants and options of $2.7 million and proceeds from notes payable-related
party of $0.7 million. These proceeds were offset by principal payments of $3.1
million on notes payable, and payments of $1.9 million on various capital
leases.
On an operating level, the Company is continuing to try to negotiate
certain contract and payment terms with an Enhanced Services customer that has
a significant outstanding balance due to the Company. The Company has recorded
significant reserves to cover this outstanding balance. The Company has not
been able to work out a resolution with this customer. The Company may have to
take a more aggressive course of action to resolve this matter and is
considering all alternatives at this time.
CURRENT FUNDING REQUIREMENTS
For the first nine months of 2000, the Company met its cash requirements
from (1) proceeds from the exercise of options and warrants of $2.7 million,
(2) proceeds of $0.5 million from the sales of Series N Preferred Stock, (3)
proceeds of $15.0 million from the sale of Series P Convertible Preferred Stock
("Series P Preferred Stock"), and (4) proceeds of $4.0 million from the sale of
Series Q Convertible Preferred Stock ("Series Q Preferred Stock").
Current funds will not permit the Company to achieve the growth, both
short and long-term, that were the goals of the plan in 1999 and the first part
of 2000. That plan requires substantial additional funding through the second
quarter of 2001 more than to $41.0 million. This estimate is based on
conservative projections of a scaled growth plan using worst-case scenarios for
operations. Even if the Company meets its projections for becoming EBITDA
(Earnings Before Interest, Taxes, Depreciation and Amortization) positive after
eliminating non-cash items during the next few months, the Company will have
significant capital requirements through September 2001. The Company will need
to fund its pre-existing liabilities and notes payable obligations and the
purchase of capital equipment, along with financing its growth plans.
The Company further anticipates that increased sales in the VoIP focused
Network Services segment should reduce its net working capital deficiency and
contribute to its funding requirements through the third quarter of 2001.
There is no assurance, however, that the Company will not encounter
substantial delays in splitting off the Enhanced Services business, or that
will complete such a separation.
There is also a risk that the Company will not reach breakeven on a cash
basis (excluding non-cash charges) as projected and will continue to incur
operating losses. If the events occur and should the Company be unsuccessful in
its efforts to raise additional funds to cover such losses, then the Company's
plans would be sharply curtailed and its business would be adversely affected.
On December 14, 1999, Trans Global entered into a letter agreement with a
single vendor with whom the company no longer does business. Pursuant to that
agreement, Trans Global agreed to pay approximately $13.8 million in
consecutive monthly installments at 9% interest through January 1, 2001. The
payable is secured by certain assets of Trans Global. As of September 30, 2000,
the remaining balance due was $10.5 million. Trans Global, as of August 11,
2000 has not paid $5.5 million of scheduled payments
41
<PAGE>
EGLOBE
SEPTEMBER 30, 2000 -- (CONTINUED)
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA -- (CONTINUED)
that were due in April, May and June 2000. In addition, approximately $3.8
million of payables for current usage are in arrears. Trans Global is currently
in discussions regarding alternative arrangements for settlement of the
outstanding obligations, and believes that conclusion of an arrangement that is
not materially adverse to the immediate or long-term future operations of the
Company is possible. There can be no assurance that Trans Global will be able
to satisfactorily resolve this matter. Should this not be resolved and should
this vendor take action to take possession of the assets held as security,
Trans Global believes that its business will not be adversely impacted. There
is no guarantee that Trans Global, and therefore the Company, will not have its
operations affected adversely should a satisfactory resolution between the
parties not be reached.
The Company is obligated under certain conditions to redeem the shares of
Series P Preferred Stock and Series Q Preferred Stock. See Note 11 to the
Consolidated Financial Statements for further discussion.
In order to be able to continue to pursue its growth plans, the Company
believes that it needs to conclude a significant financing in the second half
of 2000. Without such a financing, the Company will have to sharply curtail its
activities, specifically development of its enhanced IP services.
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
At September 30, 2000, we had other financial instruments consisting of
cash and fixed and variable rate debt which are held for purposes other than
trading. The substantial majority of our debt obligations have fixed interest
rates and are denominated in U.S. dollars, which is our reporting currency. We
measure our exposure to market risk at any point in time by comparing the open
positions to a market risk of fair value. The market prices we use to determine
fair value are based on management's best estimates, which consider various
factors including: closing exchange prices, volatility factors and the time
value of money. At September 30, 2000, the carrying value of our debt
obligations, excluding capital lease obligations, was $21.1million, (net of
unamortized discount of $5.2 million) which also approximates fair value. The
weighted average interest rate of our debt obligations excluding capital lease
obligations, at September 30, 2000 was 10.7%. We actively monitor the capital
and investing markets in analyzing our capital raising and investing decisions.
At September 30, 2000, we were exposed to some market risk through interest
rates on our long-term debt and preferred stock and foreign currency. At
September 30, 2000, our exposure to market risk was not material. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 1 -- LEGAL PROCEEDINGS
The following information sets forth information relating to our
involvement in material legal proceedings. From time to time, we 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 us or our executive officers and directors.
AMERICAN INTERNATIONAL TELEPHONE V. EXECUTIVE TELECARD, LTD. This suit was
filed in July 1999 in the Supreme Court of New York, New York County and
concerns a transmission vendor seeking to collect approximately $300,000. We,
as successor to Executive Telecard, Ltd., have substantial counterclaims and
are vigorously defending this suit.
MCI WORLDCOM, INC. LITIGATION. In October 1999, MCI WorldCom filed suit
against us in the District Court, City and County of Denver, Colorado seeking
in excess of $2,500,000 pursuant to various service contracts. We dispute the
amount allegedly owed based on erroneous invoices, the quality of service
provided and unfair and deceptive billing practices. Moreover, we have filed a
counterclaim alleging significant offsets, among other items. We will continue
to vigorously defend this suit and prosecute our counterclaims.
42
<PAGE>
EGLOBE
SEPTEMBER 30, 2000 -- (CONTINUED)
ITEM 1 -- LEGAL PROCEEDINGS-- (CONTINUED)
SWIFTCALL HOLDINGS (USA) LTD. V. EGLOBE, INC. This lawsuit was filed on
May 19, 2000, claiming damages on account of an alleged failure by us to file a
registration statement for the resale of the shares of common stock received by
the plaintiff in connection with our acquisition of an affiliate of the
plaintiff. We have not had the opportunity to fully evaluate the claim but
believe that it has credible defense.
IDT CORP V. EGLOBE, INC. This lawsuit was filed in June 2000, claiming
damages of approximately $300,000 for amounts allegedly past due under a
Service Agreement and Note and $5,500,000 in damages for the alleged failure to
register shares so that IDT Corp. could sell its shares in the market. The
plaintiff has moved for judgment on the pleadings and we have moved to dismiss
the federal claims upon which jurisdiction is based.
AMERICAN UNITED GLOBAL, INC. V EGLOBE, INC. This lawsuit was filed in
August 2000 by the parent of Connectsoft, claiming damages of $20 million in
damages for breach of an alleged obligation to register shares acquired by the
plaintiff under a registration rights agreements.
ITEM 2 -- CHANGES IN SECURITIES
CHANGES IN SECURITIES
On October 25, 2000, the Company's stockholders approved reverse stock
splits of 1-for-2.7, 1-for-3.7 and 1-for-4.7 with the precise ratio to be
determined by the Company's Board of Directors, and on October 31, 2000, the
Company's Board of Directors declared a 1-for-4.7 reverse stock split. The
reverse stock split became effective on November 13, 2000 and each 4.7 shares
of the Company's common stock that was issued and outstanding immediately prior
to the effective time was changed into one validly issued, fully paid and
non-assessable share of the Company's common stock without any further action
by the holders of shares of the Company's common stock. References in this
Quarterly Report on Form 10-Q give effect to that 1-for-4.7 reverse stock
split.
SALE OF UNREGISTERED SECURITIES
Since July 1, 2000, we offered and sold the following equity securities
that were not registered under the Securities Act:
1. On July 11, 2000, we issued 199,619 shares of common stock to the former
stockholders of IDX upon conversion of the Series I Preferred Stock.
2. On July 12, 2000, we issued 7,979 shares of common stock to Seymour
Gordon. The shares issued in such private placement were exempt from the
registration requirements of the Securities Act under Rule 506 of
Regulation D because the purchaser was an accredited investor.
3. On July 12, 2000, we issued 79,080 shares of common stock to Swiftcall
Holding (USA), Ltd., the former stockholder of Swiftcall, as payment of
the second purchase price installment under the Swiftcall purchase
agreement and 15,720 shares as common stock into escrow pursuant to the
same agreement. The shares issued in such private placement were exempt
from the registration requirements of the Securities Act under Rule 506 of
Regulation D because the purchaser was an accredited investor.
4. On August 25, 2000, we issued Tower Hill Investments Limited 227,964
shares of our common stock and warrants to purchase 34,194 shares of our
common stock in a private placement for an aggregate purchase price of
$1,500,000. The warrants have an exercise price of $6.58 per share and are
exercisable immediately and expire on August 24, 2005. The securities
issued in such private placement were exempt from the registration
requirements of the Securities Act under Rule 506
43
<PAGE>
EGLOBE
SEPTEMBER 30, 2000 -- (CONTINUED)
ITEM 2 -- CHANGES IN SECURITIES -- (CONTINUED)
of Regulation D because the purchaser was an accredited investor. We used
the proceeds of such private placement for general corporate purposes
and/or working capital expenses incurred in the ordinary course of
business.
5. On September 12, 2000, we issued EXTL-Special Investment Risks, LLC
warrants to purchase 212,766 shares of our common stock in connection
with the amendment of a loan agreement. The warrants have an exercise
price of $9.12 per share and are exercisable immediately and expire on
July 1, 2004. The securities issued in such private placement were exempt
from the registration requirements of the Securities Act under Rule 506 of
Regulation D because the purchaser was an accredited investor.
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 -- OTHER INFORMATION
None
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
3.1 Certificate of Amendment to Restated Certificate of Incorporation,
dated as of October 31, 2000.
b. Reports on Form 8-K
1. A report on Form 8-K dated March 23, 2000 under Item 5 was filed with
the Securities and Exchange Commission on August 7, 2000 to file financial
statements for the month ended April 30, 2000.
2. A report on Form 8-K/A dated March 23, 2000 under Item 7 was filed with
the Securities and Exchange Commission on August 18, 2000 to file restated
combined financial statements which reflect the merger with Trans Global
Communications, Inc. using pooling of interests accounting.
3. A report on Form 8-K/A dated January 27, 2000 under Item 5 was filed
with the Securities and Exchange Commission on August 18, 2000 to report
the closing of a $15 million equity private placement with RGC
International Investors LDC.
4. A report on Form 8-K/A dated March 17, 2000 under Item 5 was filed with
the Securities and Exchange Commission on August 18, 2000 to report the
closing of a $4 million equity private placement with RGC International
Investors LDC.
5. A report on Form 8-K/A dated March 23, 2000 under Item 7 was filed with
the Securities and Exchange Commission on September 14, 2000 to file
restated combined financial statements which reflect the merger with Trans
Global Communications, Inc. using pooling of interests accounting.
6. A report on Form 8-K dated October 13, 2000 under Item 5 was filed with
the Securities and Exchange Commission on October 20, 2000 to report the
resignation of two of the Company's directors.
7. A report on Form 8-K dated October 31, 2000 under Item 5 was filed with
the Securities and Exchange Commission on November 1, 2000 to report that
the Company's board of directors had declared a reverse stock split of the
Company's common stock.
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
in its behalf by the undersigned, thereunto duly authorized.
EGLOBE, INC.
(Registrant)
<TABLE>
<S> <C>
Date: November 20, 2000 By /s/ Anne Haas
-------------------------------------
Anne Haas
Chief Accounting Officer, Treasurer
(Principal Accounting Officer)
Date: November 20, 2000 By /s/ David Skriloff
-------------------------------------
David Skriloff
Chief Financial Officer
</TABLE>
45
