SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
March 31, 2000 1-10210
eGLOBE, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3486421
(State or other jurisdiction of (I.R.S. Employer
incorporation of Identification No.)
organization)
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.
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YES X NO
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The number of shares outstanding of each of the registrant's classes of common
stock, as of May 12, 2000 is 87,792,569 shares, all of one class of $.001 par
value common stock.
1
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eGLOBE, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
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PAGE
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PART I Item 1 Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2000 and December 31, 3 - 4
1999
Consolidated Statements of Operations for the three months ended
March 31, 2000 and 1999 5
Consolidated Statements of Comprehensive Income (Loss) for the
three months ended March 31, 2000 and 1999 6
Consolidated Statements of Cash Flows for the three months ended 7
March 31, 2000 and 1999
Notes to Consolidated Financial Statements 8 - 34
Supplemental Disclosures of Cash Flow Information 35
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 36 - 40
Item 7A Quantitative and Qualitative Disclosure About Market Risk 41
PART II Item 1 Legal Proceedings 41
Item 2 Changes in Securities 42
Item 3 Defaults Upon Senior Securities 42
Item 4 Submission of Matters to a Vote of Security Holders 42
Item 5 Other Information 42
Item 6 Exhibits and Reports on Form 8-K 42
SIGNATURES 43
</TABLE>
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eGLOBE, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 (UNAUDITED) AND DECEMBER 31, 1999
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MARCH 31, 2000 DECEMBER 31,
(UNAUDITED) 1999
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ASSETS (Note 6)
CURRENT:
Cash and cash equivalents $ 1,329,000 $ 2,659,000
Restricted cash 158,000 158,000
Restricted short-term investments 3,042,000 1,492,000
Accounts receivable, less
allowance of $4,001,000 and
$3,206,000 for doubtful accounts 21,071,000 15,142,000
Other receivables 1,291,000 1,406,000
Prepaid expenses 1,502,000 1,584,000
Other current assets 429,000 639,000
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TOTAL CURRENT ASSETS 28,822,000 23,080,000
PROPERTY AND EQUIPMENT,
net of accumulated depreciation and
amortization of $27,525,000 and
$24,351,000 40,740,000 42,078,000
GOODWILL, net of accumulated amortization
of $2,513,000 and $1,572,000 (Note 4) 22,987,000 24,904,000
OTHER INTANGIBLE ASSETS,
net of accumulated amortization
of $8,401,000 and $6,466,000 (Note 4) 20,130,000 21,674,000
OTHER:
Deposits 1,696,000 1,659,000
Other assets 220,000 400,000
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TOTAL OTHER ASSETS 1,916,000 2,059,000
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TOTAL ASSETS $114,595,000 $113,795,000
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</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
3
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eGLOBE, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 (UNAUDITED) AND DECEMBER 31, 1999
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MARCH 31, 2000 DECEMBER 31,
(UNAUDITED) 1999
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LIABILITIES, MINORITY INTEREST, REDEEMABLE STOCK AND
STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable (Note 11) $ 40,708,000 $ 41,558,000
Accrued expenses 12,835,000 10,992,000
Income taxes payable 560,000 560,000
Notes payable and current maturities of long-
term debt (Note 5) 6,767,000 7,868,000
Notes payable and current maturities of long-
tern debt-related parties (Note 6) 4,836,000 4,676,000
Deferred revenue 1,383,000 1,331,000
Other liabilities 1,639,000 797,000
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TOTAL CURRENT LIABILITIES 68,728,000 67,782,000
ACCOUNTS PAYABLE - LONG-TERM (Note 11) -- 1,000,000
LONG-TERM DEBT, net of current maturities (Note 5) 4,054,000 5,194,000
LONG-TERM DEBT - RELATED PARTIES, net of current
maturities (Note 6) 8,927,000 8,301,000
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TOTAL LIABILITIES 81,709,000 82,277,000
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COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 2,710,000 2,800,000
REDEEMABLE STOCK (Notes 7 and 9) 22,970,000 700,000
STOCKHOLDERS' EQUITY :
Preferred stock, all series, $.001 par value,
10,000,000 and 5,000,000 shares
authorized, 266,101 and 1,927,791 shares outstanding 1,000 2,000
Common stock, $.001 par value, 200,000,000
shares authorized, 85,754,179 and 69,580,604
shares outstanding 86,000 70,000
Stock to be issued 2,624,000 2,624,000
Notes receivable (Note 7) (1,369,000) (1,210,000)
Additional paid-in capital 113,931,000 106,718,000
Accumulated deficit (108,855,000) (80,682,000)
Accumulated other comprehensive income 788,000 496,000
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TOTAL STOCKHOLDERS' EQUITY 7,206,000 28,018,000
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TOTAL LIABILITIES, MINORITY INTEREST, REDEEMABLE
STOCK AND STOCKHOLDERS' EQUITY $ 114,595,000 $ 113,795,000
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</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
4
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eGLOBE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
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<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
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REVENUE (Notes 2 and 10) $ 35,087,000 $ 44,192,000
COST OF REVENUE 32,419,000 42,075,000
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GROSS PROFIT 2,668,000 2,117,000
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COSTS AND EXPENSES:
Selling, general and administrative 15,477,000 6,146,000
Deferred compensation related to stock
options (Note 7) 5,895,000 --
Deferred compensation related to
acquisitions (Note 4) 1,438,000 919,000
Depreciation and amortization 3,208,000 1,392,000
Amortization of goodwill and other
intangible assets 2,876,000 555,000
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TOTAL COSTS AND EXPENSES 28,894,000 9,012,000
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LOSS FROM OPERATIONS (26,226,000) (6,895,000)
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OTHER INCOME (EXPENSE):
Interest expense (2,019,000) (869,000)
Interest income 88,000 240,000
Other expense, net (16,000) (8,000)
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TOTAL OTHER EXPENSE (1,947,000) (637,000)
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NET LOSS (28,173,000) (7,532,000)
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PREFERRED STOCK DIVIDENDS (Notes 7 and 9) (10,224,000) (3,712,000)
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NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(38,397,000) $(11,244,000)
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NET LOSS PER SHARE (BASIC AND DILUTED) (Note 8) $ (0.47) $ (0.19)
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</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
5
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eGLOBE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
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THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
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NET LOSS $(28,173,000) $ (7,532,000)
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS 292,000 91,000
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COMPREHENSIVE NET LOSS $(27,881,000) $ (7,441,000)
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See accompanying summary of accounting policies and notes to consolidated
financial statements.
6
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eGLOBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
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<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS MARCH 31, 2000 MARCH 31, 1999
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OPERATING ACTIVITIES:
Net loss $(28,173,000) $ (7,532,000)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Depreciation and amortization 6,084,000 1,947,000
Provision for bad debts 1,072,000 199,000
Non-cash interest expense -- 202,000
Minority interest in loss (37,000) --
Issuance of options and warrants 1,594,000 19,000
Deferred compensation costs related to acquisitions 1,438,000 919,000
Deferred compensation costs related to stock options 5,895,000 --
Amortization of warrant value for services 451,000 --
Amortization of debt discounts 831,000 304,000
Changes in operating assets and liabilities (net of changes
from acquisition):
Accounts receivable (7,001,000) (1,559,000)
Other receivables 115,000 (736,000)
Prepaid expenses (369,000) (759,000)
Other current assets 210,000 (754,000)
Other assets 244,000 618,000
Accounts payable (1,850,000) 10,281,000
Income taxes payable -- (147,000)
Accrued expenses 1,359,000 (3,108,000)
Deferred revenue 52,000 533,000)
Other liabilities 842,000 669,000
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CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (17,243,000) 1,096,000
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INVESTING ACTIVITIES:
Purchases of property and equipment (356,000) (189,000)
Purchase of intangibles (137,000) --
Net sales (purchases) of restricted short-term investments (1,550,000) 3,706,000
Advances to non-affiliate, subsequently acquired -- (503,000)
Acquisition of Telekey, net of cash acquired -- (95,000)
Increase in restricted cash -- (1,000)
Deposits (37,000) (36,000)
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CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (2,080,000) 2,882,000
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FINANCING ACTIVITIES:
Proceeds from notes payable (Note 5) -- 50,000
Proceeds from notes payable-related party (Note 6) 685,000 200,000
Proceeds from issuance of preferred stock 19,525,000 8,000,000
Stock issuance costs (1,114,000) (321,000)
Proceeds from exercise of warrants (Note 7) 755,000 --
Proceeds from exercise of options (Note 7) 1,613,000 --
Deferred financing and acquisition costs -- (40,000)
Payments on capital leases (598,000) (160,000)
Payments on notes payable (Note 5) (2,145,000) --
Payments on notes payable - related party (Note 6) (728,000) (141,000)
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CASH PROVIDED BY FINANCING ACTIVITIES 17,993,000 7,588,000
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NET INCREASE (DECREASE) IN CASH (1,330,000) 11,566,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,659,000 4,031,000
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,329,000 $ 15,597,000
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</TABLE>
See Note 12 for Supplemental Information to Consolidated Statements of Cash
Flows.
See accompanying summary of accounting policies and notes to consolidated
financial statements.
7
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eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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NOTE 1 - BASIS OF PRESENTATION
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The accompanying consolidated financial statements include the accounts of
eGlobe, Inc. and its wholly-owned subsidiaries and controlling interest in an
LLC ("the Company") and have been prepared in accordance with United States
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been included consisting only of normal recurring accruals.
Operating results for the three month period ended March 31, 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 months ended
March 31, 2000 and 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 filed with the
Securities & Exchange Commission on May 22, 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
8
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eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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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 manages and controls the LLC. In December 1999, the
Company completed the acquisition of Coast International, Inc. ("Coast"), a
provider of enhanced long-distance interactive voice and internet services. See
Notes 4, 5, 6 and 7 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.
NOTE 2 - MERGER WITH TRANS GLOBAL
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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 has
been accounted for as a pooling of interests. The Merger provided for the
issuance of 40,000,000 shares of eGlobe common stock in exchange for all of the
outstanding common stock of Trans Global. In addition, eGlobe issued 2,000,000
shares of its common stock into escrow to cover its potential indemnification
obligations under the Merger agreement.
9
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eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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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:
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2000 1999
-----------------------------
Revenue:
eGlobe $ 13,757,000 $ 8,385,000
Trans Global 23,476,000 35,807,000
Elimination of intercompany revenue (2,146,000) --
-----------------------------
eGlobe, consolidated $ 35,087,000 $ 44,192,000
=============================
Net loss:
eGlobe $(26,332,000) $ (7,502,000)
Trans Global (1,841,000) (30,000)
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eGlobe, consolidated $(28,173,000) $ (7,532,000)
=============================
Net loss attributable to common stockholders:
eGlobe $(36,556,000) $(11,214,000)
Trans Global (1,841,000) (30,000)
-----------------------------
eGlobe, consolidated $(38,397,000) $(11,244,000)
=============================
Net loss per share (basic and diluted)
As previously reported $ -- $ (0.63)
eGlobe, consolidated $ (0.47) $ (0.19)
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10
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eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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NOTE 3 - MANAGEMENT'S PLAN
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As of March 31, 2000, the Company had a net working capital deficiency of $39.9
million. This net working capital deficiency resulted principally from a loss
from operations of $26.2 million (including deferred compensation, depreciation,
amortization and other non-cash charges which totaled $16.8 million for the
three months ended March 31, 2000). Also contributing to the working capital
deficiency were $6.8 million in notes payable and current maturities of
long-term debt, $4.8 million in notes payable and current maturities of
long-term debt due to related parties, and $57.1 million in accounts payable,
accrued expenses, other liabilities and deferred revenue. Accounts payable
includes approximately $12.0 million of payables which are being renegotiated
with AT&T and MCI Worldcom. The current maturities of $6.8 million consists of
$3.8 million primarily related to acquisition/merger debt and $3.0 million
related to capital lease payments due over the one year period ending March 31,
2001. The current maturities of $4.8 million due to related parties, net of
unamortized discount of $2.9 million, consists of a $1.0 million note due to a
stockholder on April 18, 2000, term payments of $0.6 million, net of unamortized
discount of $2.9 million, due to EXTL Investors, the Company's third largest
stockholder, and notes payable of $3.2 million due to an affiliate of EXTL
Investors.
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.
Thus far in 2000, the Company has met its cash requirements from (1) proceeds
from the exercise of options and warrants of $2.4 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 Convertible
Preferred Stock ("Series P Preferred") and (4) proceeds of $4.0 million from the
sale of Series Q 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 third quarter of 2000, the Company will still have additional
capital requirements through March 2001 of up to $20.0 million. The Company will
need to fund pre-existing liabilities and note payable obligations and the
purchase of capital equipment.
11
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eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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The Company will 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 April
2000 through March 2001. There is the possibility that the amount of financing
required could be diminished by secured equipment-based financings.
In addition to the firm commitment discussed previously, the Company is
proceeding with other financing opportunities, which have not been finalized.
The Company has a variety of opportunities in both the debt and equity markets
to raise the necessary funds, which it needs to achieve its growth plan through
the end of the quarter ended March 31, 2001.
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 first quarter of 2001. As a result, the
projected funding requirements discussed above could be reduced should this
occur.
There is 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 this occurs and should the Company be unsuccessful in its efforts to
raise additional funds to cover such losses, then the Company's growth plans
would be sharply curtailed and its business would be adversely affected.
On December 14, 1999, Trans Global entered into a letter agreement with AT&T,
Trans Global's largest supplier, regarding the payment of various past due 1999
switch and circuit costs. Pursuant to that agreement, Trans Global agreed to pay
AT&T 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 March 31, 2000, the remaining balance due to AT&T was $10.5
million. Trans Global, as of May 22, 2000, has not paid $2.5 million of
scheduled payments that were due in April and May 2000. In addition,
approximately $2.7 million of payables for current usage are in arrears. Trans
Global is currently in discussions with AT&T 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 likely. There can be no assurance that
Trans Global will be able to satisfactorily resolve this matter. Should this not
be resolved and should AT&T 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 9 for further
discussion.
12
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eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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NOTE 4 - ACQUISITIONS
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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. The
financial statements reflect the preliminary purchase price allocation for
iGlobe pending final management review. In addition, there are certain
contingent purchase elements in some of these acquisitions.
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.
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. The increase in market price for the three
months ended March 31, 1999 of the underlying common stock granted by the
IDX stockholders to certain employees resulted in a charge to income of $0.3
million. 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 subsequent to December 31, 1999. The
increase in market price for the three months ended March 31, 2000 of the
underlying common stock granted by the IDX stockholders to certain employees
resulted in a charge to income of $1.3 million. See Note 7 for further
discussion.
13
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eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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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 March 31, 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 $0.6 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 non-contingent shares after
this date.
In February 2000, the Company reached a preliminary agreement with the
former stockholders of Telekey to restructure certain terms of the original
purchase agreement. Such restructuring, which is subject to completion of
the final negotiation documentation, includes an acceleration of the
original earn-out provisions as well as the termination dates of certain
employment agreements. The final purchase amount will be determined when
these negotiations are completed. Goodwill may materially increase when this
contingency is resolved.
14
<PAGE>
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
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. In March 2000, based on further management review, $0.7
million and $0.3 million were reclassified from goodwill to intangibles and
fixed assets, respectively. The Company will determine the final purchase
price allocation based on completion of management's review.
ORS
The LLC was 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 three warrants to purchase additional shares of its common stock to the
LLC. The warrants are exercisable at a price equal to $.001 per share for
the shares of common stock as discussed below:
(a) Under the first warrant, shares equal to the (i) 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; and (ii) 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 March 31, 2000, shares equal to $300,000 are
issuable upon registration under the warrant);
(b) 204,909 shares, valued at approximately $2.0 million, are issuable
under the second warrant based on ORS meeting certain defined
performance objectives;
15
<PAGE>
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
(c) Under the third warrant, 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) the number of shares of the
Company's common stock determined by dividing $8.0 million by the
Second Measurement Period Date Market Value (as defined in the
agreements); and provided further, that if the basis for issuance of
such shares is incremental revenue over $9.0 million then EBITDA for
the Second Measurement Period must be at least $1.0 million for the
revenue between $9.0 million and $12.0 million or at least $1.5 million
for revenue above $12.0 million. In addition, the LLC may receive 0.5
million shares of the Company's common stock if the revenue for the
Second Measurement Period is equal to or greater than $37.0 million and
the Adjusted EBITDA for the Second Measurement Period is equal to or
greater than $5.0 million. The measurement periods for determining the
number of shares issuable under the third warrant have not yet expired.
Depending upon the number, if any, of shares issuable under the third
warrant, the purchase amount and goodwill may increase.
On May 12, 2000, Oasis exercised its option under the LLC's operating
agreement to exchange its interest in the LLC and receive the shares of
common stock and warrants contributed to the LLC by the Company. This
exchange will be completed shortly, at which time the Company will become
the sole member of the LLC.
16
<PAGE>
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
COAST
The consolidated financial statements of the Company as of March 31, 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.
NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBT
- --------------------------------------------------------------------------------
At March 31, 2000 and December 31, 1999, notes payable and long-term debt
consisted of the following:
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
2000 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 297,000 299,000
Promissory note of Telekey payable to a telecommunication
company (2) 379,000 454,000
Promissory note due to seller of iGlobe (3) 1,129,000 1,831,000
Promissory note due to seller of ORS (4) 389,000 451,000
Promissory note secured by certain equipment (5) 2,474,000 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) 5,653,000 5,750,000
- ----------------------------------------------------------------------------------------------------------------
Total 10,821,000 13,062,000
Less current maturities 6,767,000 7,868,000
- ----------------------------------------------------------------------------------------------------------------
Total notes payable and long-term debt $ 4,054,000 $ 5,194,000
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
(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 has 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 is secured by certain assets of the
previous stockholders of Telekey.
(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 balance bears interest at 15% per annum. As of
March 31, 2000, the Company has repaid $713,000 of the note and will pay
the remaining balance on or before June 1, 2000 (See Notes 4 and 11).
(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.
(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 $1,606,000 and $1,395,000 at March
31, 2000 and December 31, 1999, respectively.
18
<PAGE>
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
NOTE 6 - NOTES PAYABLE AND LONG-TERM DEBT - RELATED PARTIES
- --------------------------------------------------------------------------------
As of March 31, 2000 and December 31, 1999, notes payable and long-term debt
with related parties consisted of the following:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
2000 1999
--------------------------------------
<S> <C> <C>
Accounts receivable revolving credit note (1) $ 1,743,000 $ 1,058,000
Secured notes, net of unamortized discount of
$6,415,000 and $7,128,000 (1) 7,790,000 7,806,000
Promissory note of Coast (2) 3,000,000 3,000,000
Promissory note of Coast (2) 250,000 250,000
Promissory note payable to a stockholder, net of
unamortized discount of $20,000 and
$137,000 (3) 980,000 863,000
- ------------------------------------------------------------------------------------------------------------------
Total, net of unamortized discount of $ 6,435,000 and
$7,265,000 13,763,000 12,977,000
Less current maturities, net of unamortized discount of
$2,871,000 and $2,988,000 4,836,000 4,676,000
- ------------------------------------------------------------------------------------------------------------------
Total long-term debt, net of unamortized discount
of $3,564,000 and $4,277,000 $ 8,927,000 $ 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.
19
<PAGE>
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
Principal and interest on the Notes are payable over three years in monthly
installments commencing August 1, 1999 with a balloon payment for the
remaining balance due on the earlier to occur of (i) June 30, 2002, or (ii)
the date of closing of an offering ("Qualified Offering") by the Company of
debt or equity securities, in a single transaction or series of related
transactions, from which the Company receives net proceeds of $100.0
million or more. Alternatively, the Company may elect to pay up to 50% of
the original principal amount of the Notes in shares of the Company's
common stock, at its option, if: (i) the closing price of the Company's
common stock is $8.00 or more per share for more than 15 consecutive
trading days; (ii) the Company completes a public offering of equity
securities at a price of at least $5.00 per share and with proceeds of at
least $30.0 million; or (iii) the Company completes an offering of
securities with proceeds in excess of $100.0 million.
Also, under the Agreement, 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
($1,794,000 as of March 31, 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 on early retirement of debt. As a
result of this agreement, the $4.0 million is not subject to redraw under
the Revolver.
These Notes and Revolver are secured by substantially all of the Company's
existing unencumbered operating assets and the Company's accounts
receivables although the Company can pursue certain additional permitted
financing, including equipment and facilities financing, for certain
capital expenditures. The Agreement contains certain debt covenants and
restrictions by and on the Company, as defined. The Company was in arrears
on a scheduled principal payment under this debt facility as of March 31,
2000 for which it received a waiver from EXTL through January 1, 2001.
Subsequent to March 31, 2000, the Company and EXTL agreed to revise the
installment schedule to allow for future payment of the principal payments
then in arrears. Following this revision, the Company was in arrears on the
first scheduled principal and interest payment. The Company received a
waiver from EXTL through April 1, 2001. The Company was also technically in
default under the Notes as of March 31, 2000 due to the Company's
assumption of the Coast notes, as discussed in footnote (2) below. However,
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
noteholder.
20
<PAGE>
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
(2) As of March 31, 2000, 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 is payable monthly with
the principal due July 1, 2000 and November 29, 2000, respectively. In
April 2000, the agreement was amended and the noteholder consented to (1)
waive any events of default that may have occurred as result of the Coast
merger, (2) permit Coast to guarantee the EXTL Notes and Revolver and to
secure such guarantee, and (3) revise the debt covenants to be consistent
with those in the EXTL Notes. The Company agreed to guarantee these notes
and granted a security interest in the assets securing the EXTL Notes as
well as the Coast assets to the Coast noteholder.
(3) At March 31, 2000, the Company had an outstanding 14% unsecured $1.0
million note with an existing stockholder. On April 17, 2000, the lender
exchanged this $1.0 million note for 543,270 shares of common stock and
the lender was granted warrants to purchase 180,000 shares of common
stock.
NOTE 7 - 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 March 31, 2000 and December 31,
1999. See Note 9 for a 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.) (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, 250,000 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).
21
<PAGE>
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
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, 1 and 1 share,
respectively, issued and outstanding ($9.0 million aggregate liquidation
preference) (exchanged on April 17, 2000 for 3,773,584 shares of common
stock) (See Note 11).
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, 16,100 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).
Following is a detailed discussion of each series of preferred stock
outstanding at March 31, 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 stock agreement.
The Company has an option to redeem the remaining 250,000 shares of Series I
Preferred Stock prior to July 17, 2000 at a price of $10.00 per share plus 8%
of the value of Series I Preferred Stock per annum from December 2, 1998
through the date of redemption for cash, common stock or a combination of the
two. Any Series I Preferred Stock not redeemed by July 17, 2000 as discussed
above automatically converts into common stock based on a conversion price of
$10.00 per share plus 8% per annum of the value of the Series I Preferred
Stock from December 2, 1998 through the date of conversion divided by the
greater of the average closing price of common stock over the 15 days
immediately prior to conversion or $2.00 up to a maximum (considering the
shares issued in February 2000) of 2.4 million shares of common stock. The
Company made a written election in August 1999 to pay the 8% premium in
shares of common stock upon redemption or conversion.
22
<PAGE>
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
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.
Subsequent to March 31, 2000, the one share of Series M Preferred Stock was
exchanged for 3,773,584 shares of common stock. See Note 11 for further
discussion.
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 to $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 cashless 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 expenses for the three months ended
March 31, 2000.
23
<PAGE>
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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
carries an annual dividend of 10% and all dividends that would accrue through
November 30, 2001 on each share of Series O Preferred Stock are 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 is being
accrued as a dividend over the period from the issuance date to the date that
the Series O Preferred Stock can first be converted by the holder.
The shares of Series O Preferred Stock have a liquidation value of $16.1
million and are 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 has 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 is 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.
24
<PAGE>
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
COMMON STOCK
During the three months ended March 31, 2000, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock, Series H Preferred
Stock, 150,000 shares of the Series I Preferred Stock plus the 8% premium,
Series J Preferred Stock, Series K Preferred Stock and Series N 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
Stock at December 31, 1999. In January 2000, this employee waived the
redemption feature. As a result, this amount was reclassified to
Stockholders' Equity as of March 31, 2000.
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
eGlobe 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
eGlobe's stock certificates. Such shares of common stock are included in the
outstanding shares at March 31, 2000 at par value. The lender returned the
certificates on April 17, 2000.
In the three months ended March 31, 2000, the Company received proceeds of
approximately $1.6 million from the exercise of options to acquire 659,480
shares of common stock.
In the three months ended March 31, 2000, the Company received proceeds of
approximately $0.8 million from the exercise of warrants to acquire 500,000
shares of common stock. In addition, there was a cashless exercise of
warrants to purchase 306,667 shares of common stock for which 184,218 shares
were issued.
The Company loaned certain of its executive officers money in connection
with their exercise of non-qualified stock options in December 1999. These
options were not granted under the Employee Stock Option and Appreciation
Rights Plan (the "Employee Plan") discussed below. The notes receivable of
$1,210,000 are full recourse promissory notes bearing interest at 6% and are
collateralized by the 430,128 shares of stock issued
25
<PAGE>
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
upon exercise of the stock options. Interest is payable quarterly in arrears
and principal is due the earlier of (a) for $177,000 of the notes December
16, 2003 and for $1,033,000 of the notes December 16, 2004 or (b) the date
that is 90 days after the date that the employee's employment terminates,
unless such termination occurs other than "for cause" (as defined). The
employees also agreed to promptly redeem the outstanding note balances upon
the sale of the underlying stock. The notes receivable are shown in the
consolidated balance sheet as a reduction to stockholders' equity.
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 is a full recourse promissory note bearing
interest at 8% and is collateralized by the 36,000 shares of stock issued.
Interest in arrears and principal are due the earlier of (a) January 1, 2004
or (b) the date that is 90 days after the date that the employee's
employment terminates, unless such termination occurs other than "for cause"
(as defined).
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
(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 months ended March 31, 2000,
$4.2 million 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 $0.6 million was recorded
for the three months ended March 31, 2000. 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 also recorded as compensation
expense for the three months ended March 31, 2000.
26
<PAGE>
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
NOTE 8 - EARNINGS (LOSS) PER SHARE
- --------------------------------------------------------------------------------
Earnings (loss) per share are calculated in accordance with SFAS No. 128,
"Earnings Per Share". The net loss of $38.4 million and $11.2 million
attributable to common stockholders for the three months ended March 31,
2000 and 1999 includes preferred stock dividends of $10.2 million and $3.7
million, respectively. The weighted average shares outstanding for
calculating basic earnings (loss) per share were 81,337,248 and 57,873,564
for the three months ended March 31, 2000 and 1999, respectively. Common
stock options and warrants of 14,924,153 and 413,889 for the three months
ended March 31, 2000 and 1999, respectively, were not included in diluted
earnings (loss) per share as the effect was antidilutive due to the Company
recording a loss in the periods presented.
In addition, convertible preferred stock, stock to be issued and convertible
debt convertible into 11.0 million and 9.1 million shares of common stock
for the three months ended March 31, 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 and the contingent warrants held by the LLC and
the 2,000,000 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.
NOTE 9 - REDEEMABLE CONVERTIBLE PREFERRED STOCK
- --------------------------------------------------------------------------------
The following is a detailed discussion of each series of redeemable
convertible preferred stock issued during the quarter ended March 31, 2000
and outstanding as of March 31, 2000:
Series P Convertible Preferred Stock, 15,000 shares authorized, 15,000
shares issued and outstanding ($15.0 million plus 5% per annum aggregate
liquidation preference).
Series Q Convertible Preferred Stock, 10,000 shares authorized, 4,000 shares
issued and outstanding ($4.0 million plus 5% per annum aggregate liquidation
preference).
27
<PAGE>
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
SERIES P CONVERTIBLE PREFERRED STOCK
On January 27, 2000, the Company issued 15,000 shares of Series P
Convertible Preferred Stock ("Series P Preferred Stock") and warrants to
purchase 375,000 shares of common stock with an exercise price of $12.04 per
share for proceeds of $15.0 million to RGC International Investors, LDC
("RGC"). 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 $12.04 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) $12.04. 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 $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 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.
The shares of Series P Preferred Stock are convertible into a maximum of
5,151,871 shares of common stock. This maximum share amount is subject to
increase if the average closing bid prices of the Company's common stock for
the 20 trading days ending on the later of June 30, 2000 and the 60th
calendar day after the common stock issuable upon conversion of the Series P
Preferred Stock and warrants is registered is less than $9.375, provided
that under no circumstances will the Series P Preferred Stock be convertible
into more than 7,157,063 shares of the Company's common stock. In addition,
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.
28
<PAGE>
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
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, the Nasdaq SmallCap Market, the NYSE or the AMEX;
(e) if the Series P Preferred Stock is no longer convertible into common
stock because it would result in an aggregate issuance of more than
5,151,871 shares of common stock, as such number may be adjusted, and
the Company has not waived such limit or obtained stockholder approval
of a higher limit; or
(f) if the Series P Preferred Stock is no longer convertible into common
stock because it would result in an aggregate issuance of more than
7,157,063 shares of the Company's common stock and the Company has not
obtained stockholder approval of a higher limit.
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), (ii) 5%
per annum and (iii) any penalties in arrears (as defined in the agreement)
or (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.
If the Series P Preferred Stock is redeemed under situation (e) or (f)
above, the redemption value is equal to $1,000 per share multiplied by 5%
per annum.
The warrants valued at $2.6 million are exercisable from the date of
issuance and expire five years from issuance. The exercise price is $12.04
per share.
The Series P Preferred Stock has been recorded at the maximum redemption
value of $18.2 million as of March 31, 2000. The difference of $6.7 million
between this 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.
29
<PAGE>
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
SERIES Q CONVERTIBLE PREFERRED STOCK
On March 15, 2000, the Company issued 4,000 shares of Series Q 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").
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 $12.04 until April 26, 2000, and
thereafter was 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) $12.04.
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.
30
<PAGE>
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
The Series Q Preferred Stock is convertible into a maximum of 3,434,581
shares of common stock. This maximum share amount is subject to increase if
the average closing bid prices of the Company's common stock for the 20
trading days ending on the later of June 30, 2000 and the 60th calendar day
after the common stock issuable upon conversion of the Series Q Preferred
Stock and warrants is registered is less than $9.375, provided that under no
circumstances will the Series Q Preferred Stock be converted into more than
7,157,063 shares of common stock (the maximum share amount will increase to
9,365,463 shares of the Company's common stock if the Company receives
written guidance from Nasdaq that the issuance of the Series Q Preferred
Stock and the warrants will not be integrated with the issuances of the
Series P
31
<PAGE>
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
Preferred Stock and related warrants). In addition, 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;
(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;
(d) if the Series Q Preferred Stock is no longer convertible into common
stock because it would result in an aggregate issuance of more than
3,434,581 shares of common stock, as such number may be adjusted, and
the Company has not waived such limit or obtained stockholder approval
of a higher limit; or
(e) if the Series Q Preferred Stock is no longer convertible into common
stock because it would result in an aggregate issuance of more than
7,157,063 shares of the Company's common stock (the maximum share
amount will increase to 9,365,463 shares of common stock if the Company
receives written guidance from Nasdaq that the issuance of the Series Q
Preferred Stock and the warrants will not be integrated with the
issuances of the Series P Preferred Stock and related warrants) and the
Company has not obtained stockholder approval of a higher limit.
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), (ii) 5% per annum and
(iii) any penalties in arrears (as defined in the agreement) or (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.
If the Series Q Preferred Stock is redeemed under situations (d) or (e)
above, the redemption value is equal to $1,000 per share multiplied by 5%
per annum.
32
<PAGE>
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
The warrants valued at $0.8 million are exercisable from the date of
issuance and expire five years from issuance. The exercise price is $12.04
per share.
The Series Q Preferred Stock has been recorded at the maximum redemption
value of $4.8 million as of March 31, 2000. The difference of $1.8 million
between this 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 10 - 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. The following unaudited
table presents operating segment information:
<TABLE>
<CAPTION>
ENHANCED NETWORK CUSTOMER RETAIL
SERVICES SERVICES CARE SERVICES TOTAL
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE THREE
MONTHS ENDING
MARCH 31, 2000
--------------
REVENUE $ 3,535,000 $32,115,000 $1,366,000 $ 1,797,000 $ 38,813,000
INTER-SEGMENT -- (3,572,000) (154,000) -- (3,726,000)
---------------------------------------------------------------------------------
TOTAL REVENUE $ 3,535,000 $28,543,000 $1,212,000 $ 1,797,000 $ 35,087,000
GROSS PROFIT $ 635,000 $ 1,028,000 $ 100,000 $ 905,000 $ 2,668,000
TOTAL ASSETS $51,528,000 $41,960,000 $3,741,000 $17,366,000 $114,595,000
FOR THE THREE
MONTHS ENDING
MARCH 31, 1999
--------------
REVENUE $ 6,415,000 $37,742,000 $ -- $ 119,000 $ 44,276,000
INTER-SEGMENT -- (84,000) -- -- (84,000)
---------------------------------------------------------------------------------
TOTAL REVENUE $ 6,415,000 $37,658,000 $ -- $ 119,000 $ 44,192,000
GROSS PROFIT (LOSS) $ 638,000 $ 1,565,000 $ -- $ (86,000) $ 2,117,000
TOTAL ASSETS $30,216,000 $49,253,000 $ -- $ 796,000 $ 80,265,000
</TABLE>
33
<PAGE>
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
NOTE 11 - SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
EXCHANGE OF SERIES M PREFERRED STOCK
The Company and HGP entered into a renegotiation agreement dated April 17,
2000 which is summarized as follows:
(1) The one share of Series M Preferred Stock was exchanged for 3,773,584
shares of common stock and HGP waived all rights to accrued Series M
dividends. The 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) will be recorded as a dividend in
the second quarter.
HGP has agreed in the event it wishes to sell all or part of eGlobe's
common stock, it will notify eGlobe ("Revelant Date") at least 30 days
prior to the sale. eGlobe 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
eGlobe's common stock over the ten trading days prior to the Revelant
Date, if such average is $8 or less; (ii) 15% less than the average
closing price of eGlobe's common stock over the ten trading days prior
to the Revelant Date, if such price is $8.00 or more but less than
$14.00; and (iii) 10% less than the average closing price of eGlobe's
common stock over the ten trading days prior to the Revelant Date, if
such average price is $14.00 or more. If eGlobe 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 eGlobe's common stock. This repurchase
agreement expires 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. If the registration
statement is not filed on or before September 1, 2000, then the Company
shall pay HGP an additional penalty of $250,000; and
(3) The Company agreed to pay the amounts in arrears under the note owed in
connection with the acquisition (see Note 5) prior to June 1, 2000.
SECURED ACCOUNT PAYABLE
As of March 31, 2000, Trans Global has a 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. On April 2, 2000,
Trans Global was 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 discussion.
34
<PAGE>
eGLOBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
- --------------------------------------------------------------------------------
NOTE 12 - SUPPLEMENTAL INFORMATION TO CONSOLIDATED STATEMENTS OF CASH FLOWS
AND NON-CASH INVESTING AND FINANCING ACTIVITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
2000 1999
(unaudited) (unaudited)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash paid during the period for:
Interest $ 1,189,000 $ 90,000
Income taxes $ 78,000 $ 212,000
Non-cash investing and financing
activities:
Equipment acquired under
capital lease obligations $ 502,000 $ 349,000
Unamortized debt discount
related to warrants $ 6,435,000 $ 273,000
Common stock issued as
repayment of debt $ -- $ 1,023,000
Common stock to be issued for payment
of debt $ -- $ 200,000
Preferred stock dividends $10,224,000 $ 3,712,000
Acquisition, net of cash acquired (Note 4):
TELEKEY
Working capital deficit, other than
cash acquired $ -- $(1,284,000)
Property and equipment -- 481,000
Intangible assets -- 2,975,000
Purchase price in excess of the net -- 2,025,000
Acquired debt -- (1,016,000)
Notes payable issued in acquisition -- (150,000)
Issuance of Series F Convertible
Preferred Stock -- (1,000)
Additional paid-in capital -- (1,956,000)
Stock to be issued -- (979,000)
- ----------------------------------------------------------------------------------------------------------
Net cash used to acquire Telekey $ -- $ 95,000
- ----------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
eGLOBE, INC.
MARCH 31, 2000
- --------------------------------------------------------------------------------
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature are
intended to be, and are hereby identified as, "forward-looking statements"
for purposes of the safe harbor provided by the Private Securities
Litigation Reform Act of 1995. Forward-looking statements may be identified
by words including "believes," "anticipates," "expects" and similar
expressions. The Company cautions readers that forward-looking statements,
including without limitation, those relating to the Company's business
operations, business plan, revenues, working capital, liquidity, need for
funding and income, are subject to certain risks and uncertainties that
would cause actual results to differ materially from those indicated in the
forward-looking statements, due to several important factors such as the
rapid technological and market changes that create significant business
risks in the market for the Company's services, the intensely competitive
nature of the Company's industry and the possible adverse effects of such
competition, the Company's need for significant additional financing, the
availability of such financing, and the Company's dependence on strategic
relationships, among others, and other risks and factors identified from
time to time in the Company's reports filed with the Securities and Exchange
Commission, including the risk factors set forth under the caption "The
Business - Risk Factors" in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
36
<PAGE>
The Company incurred a net loss of $28.2 million for the quarter ended March 31,
2000 as compared to a net loss of $7.5 million for the quarter ended March 31,
1999 of which $22.1 million and $4.0 million are attributable to the following
non-cash charges and other expenses, related primarily to the Trans Global
merger and the special proxy filing:
<TABLE>
<CAPTION>
For the Three Months Ended,
March 31, 2000 March 31, 1999
(in millions)
<S> <C> <C>
Additional allowance for doubtful accounts $ 1.1 $ 0.2
Amortization of goodwill and other intangibles (primarily
related to acquisitions) 2.9 0.6
Deferred compensation to employees of acquired companies 1.4 0.9
Deferred compensation expense related to stock options 5.8 -
Depreciation and amortization 3.2 1.4
Interest expense, net of the amortization of debt discounts
related to debt 1.2 0.6
Amortization of debt discounts 0.8 0.3
Merger expenses 2.5 -
Penalty warrants expense 1.5 -
Other items 1.7 -
----- -----
Total $22.1 $ 4.0
===== =====
</TABLE>
After deducting the above items, the loss for the quarter ended March 31, 2000
was $6.1 million, compared to a net loss of $3.5 million for the quarter ended
March 31, 1999. The principal factors for the losses incurred for the quarter
ended March 31, 2000 are: (1) the continued incurrence of upfront costs to build
out capacity to meet the Company's anticipated growth relating primarily to the
traffic that will result from the Trans Global merger, (2) increased competition
in certain international telecommunications markets, (3) a change in pricing by
Trans Global's primary supplier during 1999 which increased costs and drove
margins down, (4) the costs of integrating the Company's acquisitions, (5)
headcount increases, and (6) legal and other charges for professional services
principally incurred to support the acquisition operations.
Results of Operations
For the Three Months Ended March 31, 2000 Compared to the Three Months Ended
March 31, 1999.
Revenue. Revenues for the three months ended March 31, 2000 of $35.1 million
decreased $9.1 million (20.6%) from $44.2 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 Trans Global's
decision to shift away from being a purely arbitrage resale business to a direct
route and IP structure in order to gain the advantage of better gross profit
margins. Positive effects of the shift to the direct route and IP structure were
evident in the 37% growth in revenue from the fourth quarter of 1999 of $16.5
million to revenue for the first quarter of 2000 of $22.6 million. 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. These
acquisitions added an additional $1.4 million and $1.8 million of revenue in the
quarter ended March 31, 2000 to the Customer Care and Retail Services segments,
respectively.
37
<PAGE>
Gross Profit. Gross profit for the three months ended March 31, 2000 was $2.7
million or 7.6% of revenue as compared to $2.1 million or 4.8% of revenue for
the same period in 1999. Network Services margins declined to 3.6% from 4.2%
while Enhanced Services margins improved to 18.0% from 9.9% for the quarters
ended March 31, 2000 and March 31, 1999, respectively. The improvement in
margins in the Customer Care and Retail segments of the business is due to
acquisitions which occurred in the third and fourth quarters of 1999. The
improvement in Enhanced Services is in part due to acquisitions of companies in
February and December of 1999 as well as more cost effective routing of
telecommunications traffic. The decline in the Network Services segment is
related to leases of capacity and other up-front costs necessary to implement
new routes and services, primarily in the Middle East and in the Asia Pacific
regions. As long as the Company continues to expand its global IP network and
adds additional IP routes, there will be pressure on gross margins since the
Company expenses the cost of starting up a new IP route. Although there are some
initial start up costs, a significant amount of the routes are now beginning to
make a positive contribution. However, the Company believes that the added
efficiencies of the IP routes will quickly (usually within two quarters) begin
to add positively to the gross margin. It is also expected that costs to build
out the network to accommodate the anticipated threefold increase in traffic
resulting from the Trans Global merger and the need to build out routes for
Latin America to grow routes and services will continue to contribute negatively
to gross margins. Management believes margins will continue to improve as the
Company more efficiently fills its routes and obtains additional owned capacity.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $15.5 million for the three months ended March
31, 2000 compared to $6.1 million for the same period in 1999, for an increase
of $9.4 million. The increase in selling, general and administrative expenses is
in part due to certain non-cash charges of $2.9 million, including a $0.9
million increase in the reserve for doubtful accounts, and costs associated with
the Trans Global merger, the special proxy filing and related professional
charges which added an additional $3.7 million in costs. After taking out the
effect of these charges, the change in selling, general and administrative costs
totaled $2.8 million. This remaining increase is principally the result of
increases in personnel as a result of the acquisition activity which added an
additional $2.5 million in payroll related costs and a net increased headcount
of 80 employees from March 31, 1999 through March 31, 2000. Subsequent to the
close of the quarter ended March 31, 2000, the Company has continued to take
steps to eliminate duplicate facilities and other redundancies.
Deferred Compensation Related to Stock Options. Deferred compensation expense
related to stock options of $5.8 million was recorded for the three months ended
March 31, 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 March 31, 1999.
Deferred Compensation Related to Acquisitions. The Company recorded a deferred
compensation expense of $1.4 million for the three months ended March 31, 2000
compared to $0.9 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.
38
<PAGE>
Depreciation and Amortization Expense. Depreciation and amortization expenses
totaled $6.1 million for the three months ended March 31, 2000 compared to $2.0
million for the same period in 1999. This increase of $4.1 million is
principally due to amortization charges of $2.9 million related to goodwill and
other intangibles associated with the acquisitions completed since December 2,
1998. The remaining balance of $1.3 million was primarily attributable to
increases in the fixed assets related to acquired companies and additions at
Trans Global.
Interest Expense. Interest expense totaled $2.0 million for the three months
ended March 31, 2000 compared to $0.9 million for the same period in 1999. This
increase was primarily due to an increase in debt and $0.8 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 three months ended March 31, 2000 was
$0.1 million compared to $0.2 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
As the Company continues its aggressive growth plan during the year 2000 and as
it intends to pursue that plan into the foreseeable future, the Company will
require large cash infusions and aggressive cash management. 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 $1.3 million at March 31, 2000 compared to $2.7 million at
December 31, 1999. Short-term investments were $3.0 million at March 31, 2000 as
compared to $1.5 million at December 31, 1999. The decrease in cash and cash
equivalents of $1.4 was primarily due to the 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 Certificates of Deposit purchased to back
letters of credit given as security for payments to various vendors. Accounts
receivable, net, increased by $6.0 million to $21.1 million at March 31, 2000
from $15.1 million at December 31, 1999, mainly due to increased revenues and
the extension of credit to new wholesale carrier customers. Cash outflows for
operating activities for the three months ended March 31, 2000 totaled $17.2
million, as compared to cash inflows of $1.1 million for the three months ended
March 31, 1999. This decrease 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 $39.9 million at March 31, 2000
compared to a deficiency of $44.7 million at December 31, 1999.
Cash outflows for investing activities during the three months ended March 31,
2000 totaled $2.1 million, which was $5.0 million higher than the cash inflows
for the three months ended March 31, 1999. This increased outflow was due
primarily to net purchases of short-term investments of $1.6 million in 2000 as
compared to net sales of these investments of $3.7 million in 1999, offset by no
advances in 2000 to non-affiliates subsequently acquired as compared to $0.5
million of advances in 1999.
Cash generated from financing activities totaled $18.0 million during the three
months ended March 31, 2000 compared to $7.6 million during the three months
ended March 31, 1999. This increase of $10.4 million was primarily due to net
proceeds from sales of preferred stock of $18.4 million (as compared to net
proceeds of $7.7 million in 1999), proceeds from the exercise of warrants and
options of $2.4 million and proceeds from notes payable-related party of $0.7
million. These proceeds were offset by principal payments of $2.9 million on
notes payable and payments of $0.6 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.
39
<PAGE>
Current Funding Requirements
For the first quarter of 2000, the Company met its cash requirements from (1)
proceeds from the exercise of options and warrants of $2.4 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 management is targeting. This growth will require additional
capital. The plan under which the Company is currently operating requires
substantial additional funding through the first quarter of 2001 of up to $20
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 third
quarter of 2000, the Company will still have capital requirements through March
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 to meet the needs of its acquisition program.
The Company will 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 April
2000 through March 2001. There is the possibility that the amount of financing
required could be diminished by secured equipment-based financings.
In addition to the firm commitment discussed previously, the Company is
proceeding with other financing opportunities, which have not been finalized.
The Company has a variety of opportunities in both the debt and equity markets
to raise the necessary funds, which it needs to achieve its growth plan through
the end of the quarter ended March 31, 2001.
The Company anticipates that increased sales in international markets where the
company is focusing its efforts could lead to higher margins and therefore
reduce its net working capital deficiency and contribute to its funding
requirements through the first quarter of 2001. As a result, the projected
funding requirements discussed above could be reduced should this occur.
There is 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 this occurs and should the Company be unsuccessful in its efforts to
raise additional funds to cover such losses, then the Company's growth plans
would be sharply curtailed and its business would be adversely affected.
On December 14, 1999, Trans Global entered into a letter agreement with AT&T,
Trans Global's largest supplier, regarding the payment of various past due 1999
switch and circuit costs. Pursuant to that agreement, Trans Global agreed to pay
AT&T 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 March 31, 2000, the remaining balance due to AT&T was $10.5
million. Trans Global, as of May 22, 2000 has not paid $2.5 million of scheduled
payments that were due in April and May 2000. In addition, approximately $2.7
million of payables for current usage are in arrears. Trans Global is currently
in discussions with AT&T 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 likely. There can be no assurance that Trans Global will be able to
satisfactorily resolve this matter. Should this not be resolved and should AT&T
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 9 to the Consolidated
Financial Statements for further discussion.
40
<PAGE>
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- --------------------------------------------------------------------------------
The Company measures its exposure to market risk at any point in time by
comparing the open positions to a market risk of fair value. The market prices
the Company uses to determine fair value are based on management's best
estimates, which consider various factors including: closing exchange prices,
volatility factors and the time value of money. At March 31, 2000, the Company
was exposed to some market risk through interest rates on its long-term debt,
preferred stock, cash balances, short-term investments and foreign currency. At
March 31, 2000, the Company's exposure to market risk was not material. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 1 LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
The following information sets forth information relating to material legal
proceedings involving the Company and certain of its executive officers and
directors. From time to time, the Company and its executive officers and
directors become subject to litigation which is incidental to and arises in
the ordinary course of business. Other than as set forth herein, there are
no material pending legal proceedings involving the Company or its
executive officers and directors.
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.
The Company has substantial counterclaims and is 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. The
Company disputes the amount allegedly owed based on erroneous invoices, the
quality of service provided and unfair and deceptive billing practices.
Moreover, the Company has filed a counterclaim alleging significant
offsets, among other items. The Company will continue to vigorously defend
this suit and prosecute its counterclaims.
SWIFTCALL HOLDINGS (USA) LTD. V. EGLOBE, INC. This lawsuit was filed on May
19, 2000, claiming damages on account of an alleged failure by the Company
to file a registration statement for resale of the shares of common stock
received by the plaintiff in connection with the Company's acquisition of
an affiliate of the plaintiff. The Company has not had an opportunity to
fully evaluate this claim but believes that it has credible defenses.
41
<PAGE>
ITEM 2 CHANGES IN SECURITIES
- --------------------------------------------------------------------------------
During the three months ended March 31, 2000 the Company offered and
sold the following equity securities that were not registered under the
Securites Act:
1. On January 2, 2000, the Company sold 36,000 shares of its common
stock to a member of its senior management team. This employee
issued a note receivable to the Company for this purchase of common
stock.
2. The Company offered and sold additional securities during the three
months ended March 31, 2000. These transactions were included in the
Company's Form 10-K filed on April 7, 2000.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
- --------------------------------------------------------------------------------
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
On March 23, 2000, the Company held a special meeting of stockholders.
The results of the meeting were included in the Company's Form 10-K
filed with the Securities and Exchange Commission on April 7, 2000.
ITEM 5 OTHER INFORMATION
- --------------------------------------------------------------------------------
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
a. Exhibits
27 Financial Data Schedule
b. Reports on Form 8-K
1. A report on Form 8-K dated March 17, 2000 under Item 2 was filed
with the Securities and Exchange Commission on March 23, 2000 to
report the closing of a $4 million equity private placement with RGC
International Investors, LDC.
2. The Company filed additional reports on Form 8-K during the three
months ended March 31, 2000. These are listed in the Company's Form
10-K filed on April 7, 2000.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed in its
behalf by the undersigned, thereunto duly authorized.
eGlobe, Inc.
(Registrant)
Date: May 22, 2000 By /S/ Anne Haas
--------------------------------
Anne Haas
Controller, Treasurer
(Principal Accounting Officer)
Date: May 22, 2000 By /S/ David Skriloff
--------------------------------
David Skriloff
Chief Financial Officer
(Principal Financial Officer)
43
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