SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Commission File
earliest event reported): Number:
March 23, 2000 1-10210
eGLOBE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3486421
(State or other jurisdiction of (IRS Employer
incorporation) Identification Number)
1250 24th Street, NW, Suite 725
Washington, D.C. 20037
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(202) 822-8981
(Former name or former address, if changed since last report)
NA
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eGLOBE, INC.
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ITEM 5. OTHER EVENTS
Effective March 23, 2000, pursuant to an Agreement and Plan of Merger (the
"Merger") entered into on December 16, 1999, a wholly-owned subsidiary of
eGlobe, Inc. (the "Company" or "eGlobe"), merged with and into Trans Global
Communications, Inc. ("Trans Global") with Trans Global continuing as the
surviving corporation and becoming a wholly-owned subsidiary of the Company. 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. The Merger has
been accounted for as a pooling of interests.
The Company's consolidated financial statements have been retroactively restated
as of December 31, 1999 and December 31, 1998 and for the year ended December
31, 1999, the nine months ended December 31, 1998 and the year ended March 31,
1998, to reflect the consummation of the Merger. The supplemental consolidated
financial statements included herein give retroactive effect to the Merger,
which was accounted for using the pooling of interests method. As a result, the
financial position, results of operations, and statements of comprehensive loss
and cash flows are presented as if Trans Global had been consolidated for all
periods presented. The supplemental consolidated statements of stockholders'
equity reflect the accounts of the Company as if the common stock issued in
connection with the Merger had been issued for all periods presented. As
required by generally accepted accounting principles, the supplemental
consolidated financial statements will become the historical financial
statements of the Company upon issuance of the financial statements for the
period that includes the consummation of the Merger.
In the supplemental consolidated balance sheets, the balance sheets of eGlobe as
of December 31, 1999 and 1998 have been combined with those of Trans Global as
of December 31, 1999 and 1998. The supplemental consolidated statements of
operations, supplemental consolidated statements of cash flows, supplemental
consolidated statements of stockholders' equity and supplemental consolidated
statements of comprehensive loss combine the results of the Company for the year
ended December 31, 1999 and the nine months ended December 31, 1998 with those
of Trans Global for the same periods. The supplemental consolidated statement of
operations, supplemental consolidated statement of cash flows, supplemental
consolidated statement of stockholders' equity and supplemental consolidated
statement of comprehensive loss for the year ended March 31, 1998 combines the
results of the Company for the year ended March 31, 1998 with results of Trans
Global for the year ended December 31, 1997.
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Trans Global's net income for the three months ended March 31, 1998 has been
reflected in the supplemental consolidated statements of stockholders' equity as
an adjustment to accumulated deficit. The cash activity during the three months
ended March 31, 1998 has been reflected as an adjustment in the year ended March
31, 1998 supplemental consolidated statement of cash flows. There were no
seasonal trends in operations during the three months ended March 31, 1998.
The supplemental consolidated financial statements, including the notes thereto,
should be read in conjunction with the Company's historical consolidated
financial statements included in its Annual Report on Form 10-K for the year
ended December 31, 1999 and the financial statements of Trans Global included in
the Company's Current Report on Form 8-K/A filed on May 22, 2000.
The following is the Company's Management's Discussion and Analysis of Financial
Condition and Results of Operations relating to the Company's supplemental
consolidated financial statements set forth in Item 7 below.
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eGlobe, Inc.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. Our actual
results may differ significantly from the results discussed in the
forward-looking statements.
The Management's Discussion and Analysis of Financial Condition and Results of
Operations which follows is reflective of the supplemental consolidated
financial statements referred to above.
GENERAL
During 1998 and 1999 we have restructured and refocused our business and
implemented a new, broader services strategy. A fundamental part of that
strategy has been to actively acquire companies which add new services and
technology which assist us in achieving our goal of becoming a premier outsource
provider of applications that globally connect the telephone to the internet.
Most of the services and technologies needed to achieve our goal were acquired
through acquisitions. As a result of the restructuring and the acquisitions, we
believe that we are reaching our goal and can now offer services such as
Internet protocol transmission services, telephone portal and unified messaging
services. We provide our global outsourced services primarily to national or
former national telecommunications companies, to competitive telephone companies
in liberalized markets and to Internet service providers.
Beginning in December 1998 and throughout 1999, we completed eight acquisitions
and in the first quarter of 2000 we completed a merger with Trans Global, which
was accounted for using the pooling of interests method. As a result of this
merger, all financial information and Management's Discussion and Analysis of
Financial Condition and Results of Operations have been restated to include
Trans Global for all periods presented. The following highlights significant
business events for the Company primarily as a result of these acquisitions.
o In 1998 and 1999, we extended our global technology platforms to
enable us to offer multiple products that allow one to utilize the
internet through a telephone, including IP voice and fax capabilities
and unified messaging products and services.
o In 1998, we made two principal investments in technology to allow us
to achieve our vision - the acquisition of IDX for our underlying
voice over the Internet technology and the investment in a technology
license for our unified messaging service. (see discussion of
Connectsoft below).
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o We changed our year-end to a calendar year-end, beginning with the
nine month period ended December 31, 1998.
o To gain greater control over the development of the technology, we
acquired a unified messaging technology company, Connectsoft
Communications (now Vogo) in mid-1999.
o In 1999, we acquired companies that added a network operating center,
switches and call center operations needed to expand our business and
to offer the highest quality services to our customers.
o We acquired a specialty calling card business in early 1999.
o We acquired operations in late 1999 that allowed us to expand our
voice over Internet protocol operations into Latin American. We
acquired satellite transponder space, uplink and downlink facilities
and key relationships with several major carriers within Latin
America.
o Our merger with Trans Global at the end of March 2000 has provided us
with significant network, revenues, key relationships within the
Caribbean and the Middle East, and a number of new members of our
senior management team. The March 2000 Trans Global merger was
accounted for as a pooling of interests and therefore the financial
information discussed has been restated to combine our financial
information with Trans Global's.
As a result of the acquisitions, we now have the following business segments:
Network Services, Customer Care, Retail Services and Enhanced Services. Network
Services includes our facilities-based, direct connection and resale network
with voice, fax and data termination capabilities, our Internet protocol voice
and fax capabilities and our toll free services. Enhanced Services consists of
global IP-based enhanced services including, unified messaging, telephone
portal, our clearing and settlement services and our combined IVR (Interactive
Voice Response) and IDR (Interactive Data Response) services and our legacy
global card services enhancement business. Customer Care, consists of our
state-of-the-art calling center for eGlobe services and other customers,
including customer care for a number of e-commerce companies. Retail Services
primarily consists of our domestic long-distance and Internet service provider
business acquired as part of the Coast acquisition. All of Trans Global's
operations were in the Network Services segment.
The extensive acquisition activity, the addition of new lines of business, the
organic growth of these new lines, the change in year-end, the change in revenue
and expense mix, rate changes and the raising of new financing discussed below
have caused our financial information to no longer be comparable to the prior
periods. The following table reflects the acquisitions and the merger in
chronological order, by acquisition date. This table also identifies the
acquisitions and merger with a segment or segments and provides revenue
comparisons, after the elimination of inter-segment revenues, for the year ended
December 31, 1999 as compared to the nine month period ended December 31, 1998
and to the year ended March 31, 1998.
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<TABLE>
<CAPTION>
REVENUE
------------ ------------ -------------
FOR THE
FOR THE YEAR NINE MONTHS FOR THE YEAR
ENDED ENDED ENDED
(IN THOUSANDS) DATE OF BUSINESS DECEMBER 31, DECEMBER 31, MARCH 31, DESCRIPTION OF
COMPANY NAME TRANSACTION SEGMENT 1999 1998 1998 SERVICES
------------ ----------- ------- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
eGlobe-Card Services Legacy Enhanced $ 16,840 $21,360 $31,819 Pre Paid and Global
Post Paid Card Services
Executive TeleCard, Inc. Legacy Retail 394 553 1,304 Domestic long-distance
(TeleCall) services
IDX International, Inc. Dec.-98 Network 15,522 578 -- Internet protocol
transmission services
UCI Dec.-98 Enhanced -- -- -- Development stage
company in
Mediterranean region
Telekey, Inc. Feb.-99 Enhanced 2,968 -- -- Specialty calling card
services
Connectsoft (Vogo) June-99 Enhanced 125 -- -- Global unified
messaging, telephone
portal services and a
technology license for
unified messaging
technology
Swiftcall July-99 Network -- -- -- Network operating
center
iGlobe, Inc. August-99 Network 3,608 -- -- Latin American Internet
protocol transmission
operations
Oasis Reservations Sept.-99 Customer 1,637 -- -- Support services and
Services (ORS) Care call center
Interactive Media Dec.-99 Enhanced 133 -- -- Interactive voice and
Works (IMW) Internet services
Coast International, Inc. Dec.-99 Retail 607 -- -- Enhanced long-distance
services
Facilities-based, direct
Trans Global connection and resale
Communications, Inc. March-00 Network 100,114 67,929 46,473 network
--------- -------- --------
Total Revenue for the
period $ 141,948 $ 90,420 $ 79,596
========= ======== ========
</TABLE>
For a detailed discussion of each acquisition and segment information, see Notes
4 and 12 to the Supplemental Consolidated Financial Statements.
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We also completed several debt and equity financings during 1999 from which we
received approximately $48.0 million in gross proceeds. In addition we received
approximately $0.8 million from the exercise of options and warrants. These
proceeds, which total approximately $48.8 million were used to pay off debt,
further invest in the growth of the businesses, pay down outstanding liabilities
and provide other support for ongoing operations. See further discussion of the
various debt financings in Note 5, "Notes Payables and Long-Term Debt" and Note
7, "Related Party Transactions" to the Supplemental Consolidated Financial
Statements. For further discussion of the various equity financings, the
exercise of options and warrants and purchase of common stock by an existing
investor, see Note 10, "Stockholders' Equity" to the Supplemental Consolidated
Financial Statements. In January 2000, we completed a $15.0 million equity
financing with Rose Glen and in March 2000 we completed $4.0 million of an
additional $10.0 million in equity financing with Rose Glen. We have received
$19.0 million of the total financing. The remaining balance of the $10.0 million
Rose Glen financing will be made available upon the registration of the
underlying stock. See Note 16, "Subsequent Events" to the Supplemental
Consolidated Financial Statements.
OVERVIEW
We incurred a net loss of $55.1 million, $6.0 million and $11.3 million for the
year ended December 31, 1999, the nine months ended December 31, 1998 and the
year ended March 31, 1998, respectively, of which $29.1 million, $6.9 million
and $16.0 million is attributable to the following charges to income:
<TABLE>
<CAPTION>
(NINE MONTHS)
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Additional allowance for doubtful accounts $ 2.5 $1.0 $ 1.6
Amortization of goodwill and other intangibles
(primarily related to acquisitions) 7.1 0.2 0.2
Deferred compensation to employees of acquired
companies 1.5 0.4 --
Depreciation and amortization 8.4 3.2 3.3
Interest expense net of the amortization
of debt discounts related to debt 2.5 0.7 1.3
Amortization of debt discounts 5.2 0.3 0.5
Loss on early retirement of debt 1.9 -- --
Settlement costs -- 1.0 --
Proxy-related litigation settlement costs -- 0.1 3.9
Corporate realignment costs -- -- 3.1
Additional provision for taxes on income -- -- 1.5
Other items -- -- 0.6
----- ---- -----
Total $29.1 $6.9 $16.0
===== ==== =====
</TABLE>
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After deducting these items, the loss for the year ended December 31, 1999 was
$26.0 million, compared to net income of $0.9 million for the nine months ended
December 31, 1998 and net income of $4.7 million for the year ended March 31,
1998.
The principal factors for the losses incurred for the year ended December 31,
1999 are: (1) the incurrence of upfront costs to build out capacity to meet our
anticipated growth relating primarily to the traffic that will result from the
Trans Global merger, (2) increased competition in the international
telecommunications market, (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 our acquisitions, (5) headcount increases, and (6) legal and
administrative charges principally incurred to support the acquisition
operations.
REVENUE
During 1999, 14% of our revenue was generated from Enhanced Services and 84%
from Network Services. The predominant contributors to revenue for 1999 were
card enhancement services in Enhanced Services and voice and data over Internet
protocol transport and facilities-based, direct connection and resale network in
Network Services. Most of our Enhanced Services revenue is generated from
providing various card services to customers under contracted terms who are
charged on a per call basis. Certain new offerings such as unified messaging and
telephone portal and the interactive voice and Internet protocol services often
have monthly subscriber charges in addition to per transaction charges. The
transaction charge for service is on a per call basis, determined primarily by
minutes of use and originating and terminating points of call. The charging
structure for Network Services transmissions revenues are based on the number of
minutes used upon the completion of a call. However, some contracts call for
monthly minimums to be paid for the monthly services to be provided and limited
recurring revenues for monthly service fees for circuit capacity and for
co-location/switch partitioning services. Non-recurring charges to customers for
Network Services vary with the amount of minutes utilized and the country of
termination. In prior years we also generated revenue from other sources,
generally sales of billing and platform systems and non-recurring special
projects.
For the year ended December 31, 1999, Network Services and Enhanced Services
were the principal contributors to revenue. However, the card enhancement
services element of the Enhanced Services segment has declined while the unified
messaging and telephone portal services have begun to realize initial revenues
to offset this decline.
COST
The principal component of the cost of revenue is transmission costs and
termination charges by other U.S. and foreign carriers to originate, carry or
terminate calls. Transmission expenses are largely fixed monthly payments
associated with capacity on domestic and international facilities and associated
switch expenses. Termination expenses consist of variable cost per minute
charges paid to domestic and international carriers to terminate long distance
traffic. Traffic under resale arrangements is typically obtained on a
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variable, per minute and short term basis which could subject the Company to
unanticipated price increases and potential service cancellations. We continue
to pursue strategies for reducing costs of transmissions. These strategies
include purchasing underlying capacity, increasing minutes to generate economies
of scale, establishing partnering arrangements with various carriers,
negotiating more cost-effective agreements with other carriers and routing
traffic to the lowest-cost, highest quality providers. Also in fiscal year 1999
and thereafter, the strategy includes cost effective provisioning of our own IP
trunks.
Other components of operating costs are selling and administrative expenses,
which include personnel costs, consulting and legal fees, travel expenses, bad
debt allowances and other administrative expenses. Depreciation and amortization
expense includes the allocation of the cost of transmission equipment, property
and office equipment, and various intangible assets, which include goodwill and
intangibles arising principally from our acquisitions, over their useful lives.
RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE NINE MONTH PERIOD ENDED
DECEMBER 31, 1998 AND THE YEAR ENDED MARCH 31, 1998
REVENUE. Our revenues for 1999 have increased to $141.9 million as compared to
$90.4 million for the nine months ended December 31, 1998. This increase in
revenue represents a 18% increase in revenues when compared on an annualized
basis with the prior period, with Network Services ($119.2 million) and Enhanced
Services ($20.1 million) being the primary business segments contributing to the
increase. Our revenues increased to $90.4 million for the nine months ended
December 31, 1998 as compared to $79.6 million for the year ended March 31,
1998. When annualized for comparative purposes, we experienced a 51% increase in
revenue for the nine months ended December 31, 1998 as compared to the year
ended March 31, 1998. The increase in revenue for 1999 as compared to the nine
months ended December 31, 1998 was primarily attributable to the growth in the
Network Services segments. The growth in Network Services (from $68.5 million
for the nine months ended December 31, 1998 to $119.2 million for the year ended
December 31, 1999) can be principally attributed to the additions related to the
revenues of the IDX and iGlobe acquisitions and increased revenues for Trans
Global of $32.2 million. The growth in Trans Global revenue from $67.9 million
for the nine months ended December 31, 1998 to $100.4 for the year ended
December 31, 1999, was primarily due to the addition of over 15 new
wholesale-carrier customers, which increased the number of customers to 40 at
December 31, 1999 as compared to approximately 26 at December 31, 1998. The
demand for minutes increased at Trans Global to approximately 307 million
minutes at December 31, 1999 from approximately 228 million minutes as of
December 31, 1998 as a result of decreasing prices. This increase in Trans
Global revenue approximates an 11% improvement in revenue (as annualized for
1998) or approximately a $10.0 million increase in revenue. Also, $19.0 million
of the increase in Network Services revenues was due to expansion of the
facilities-based, direct connection and resale and Internet networks which are
now in 30 countries. Other increases in 1999 revenues included approximately
$3.0 million attributable to Telekey which was acquired in February 1999 and
$1.6 million attributable
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to our call center operations which were acquired in September 1999. As
anticipated by management, unified messaging and telephone portal services did
not generate material revenues during the two month period subsequent to the
initial commercial launch of the service in October 1999.
The increase in revenues for the nine months ended December 31, 1998 as compared
to the year ended March 31, 1998 was primarily due to the increase in Trans
Global revenues of $21.5 million ($44.1 million on an annualized basis). This
increase was due primarily to the addition of new customers, market growth and
an increased demand for services from existing clients.
Offsetting a portion of the increase in the 1999 revenue was a decline in the
card enhancement services revenue of 41% for the year ended December 31, 1999 as
compared to the nine month period ended December 31, 1998 (as annualized) and
10% for the nine month period ended December 31, 1998 as compared to the year
ended March 31, 1998 (as annualized). The decline in the card services business
resulted directly from a combination of a precipitous decline in global prices
over 1999 and a series of management policy decisions that removed us from most
aspects of the prepaid card business in North America. These decisions led to
the migration of customers off our platforms and a decline in minutes and
associated revenue as a result of contract modifications to strengthen services
and control.
GROSS PROFIT. For the year ended December 31, 1999, the nine month period ended
December 31, 1998, and the year ended March 31, 1998, gross profit was $5.0
million (representing less than 4% of sales), $16.5 million (representing 18% of
sales), and $20.8 million (representing 26% of sales), respectively. An
anticipated increase in the cost of revenue related to leases of capacity in the
Network Services segment and other up-front costs necessary to implement new
routes and services were the key elements behind this margin decline in 1999. In
addition, margins were driven down in 1999 by increased competition in the
wholesale telecommunications markets and as the direct result of several major
carriers demanding lower prices. Trans Global's circuit costs incurred in
transmitting telecommunication services increased in 1999 by approximately $2.0
million due to the expansion of its international network in Europe and the
Middle East. As long as the IP voice network of Network Services is being
expanded with new routes and services being added, such up-front costs will be
incurred. 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 iGlobe routes
and services will contribute negatively to gross margins through the first
quarter of 2000. Also included in the difference between the margins for the
year ended December 31, 1999, as compared to prior periods, are costs incurred
primarily in the first quarter of 1999 due to pricing decisions which led to
large negative margins in some card services contracts. During the nine months
ended December 31, 1998 as compared to the year ended March 31, 1998, the
reduction in gross margin percentage was primarily due to the effect of the
increasingly competitive environment for international wholesale services. We
believe margins will improve as we more efficiently fill our routes and realize
the benefits of additional owned capacity through the Trans Global merger.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $35.0 million, $16.3 million and $17.3 million
for the year ended December 31, 1999, the nine months ended December 31, 1998
and the year ended March 31, 1998, respectively. Included in these costs is a
$2.5 million provision for doubtful accounts compared to a $1.0 million
provision for the nine months ended December 31, 1998 and a $1.6 million
provision for the year ended March 31, 1998. Excluding these
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charges, other selling, general and administrative expenses, principally
salaries and related expenses are averaging $8.1 million per quarter for the
year ended December 31, 1999, $5.1 million per quarter for the nine months ended
December 31, 1998 and $4.0 million per quarter for the year ended March 31,
1998. The principal factors for the increase in the 1999 and 1998 quarterly
average sales, general and administrative costs were increases in headcount and
the related occupancy costs associated with the increase in headcount. Headcount
was 314 at December 31, 1999, 235 at December 31, 1998 and 164 at March 31,
1998. Most of the increase in 1999 was related to the acquisition activity
through which approximately 95 employees were added (before adjustment for
terminations/departures). Most of these were added in the third quarter of 1999
related to the iGlobe (33 employees) and ORS (3 full-time employees)
acquisitions and the fourth quarter of 1999 related to the Coast (59 employees)
acquisition. As included in the totals above, Trans Global's headcount was 38 at
December 31, 1999, 33 as of December 31, 1998 and 19 as of March 31, 1998. As
the operations of these acquired companies are integrated, these costs as a
percentage of revenue are expected to continue to decrease.
SETTLEMENT COSTS. As described in Note 7 to the Supplemental Consolidated
Financial Statements we entered into a settlement agreement with our then
largest stockholder to resolve all current and future claims. The difference in
value between the convertible preferred stock issued to the stockholder and the
common stock surrendered by the stockholder was $1.0 million, which resulted in
a non-cash charge to the Supplemental Consolidated Statement of Operations in
the quarter ended September 30, 1998.
CORPORATE REALIGNMENT COSTS. We incurred various realignment costs during the
fiscal year ended March 31, 1998, resulting from the review of operations and
activities undertaken by new corporate management. These costs, which totaled
$3.1 million, include employee severance, legal and consulting fees and the
write down of certain investments made in our Internet service development
program. We did not incur realignment costs during the nine months ended
December 31, 1998 nor for the year ended December 31, 1999.
DEFERRED COMPENSATION. These non-cash charges totaled $1.5 million for the year
ended December 31, 1999 and $0.4 million for the nine months ended December 31,
1998. This expense relates to stock allocated to employees of acquired companies
by their former owners out of acquisition consideration paid by us. Such
transactions, adopted by the acquired companies prior to acquisition, require us
to record the market value of the stock issuable to employees as of the date of
acquisition as compensation expense with a corresponding credit to stockholders'
equity and to continue to record the effect of subsequent changes in the market
price of the issuable stock until actual issuance. Accordingly, deferred
compensation in future reporting periods will be reported based on changes in
the market price of our common stock. See Note 4 to the Supplemental
Consolidated Financial Statements for further discussion of subsequent
renegotiations of certain of these issuances.
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DEPRECIATION AND AMORTIZATION EXPENSE. These expenses increased to $15.5 million
from $3.4 million and $3.5 million for the year ended December 31, 1999, the
nine months ended December 31, 1998 and the year ended March 31, 1998,
respectively. The increase is principally due to amortization charges of $7.1
million related to goodwill and other intangibles associated with the
acquisitions completed since December 1, 1998. The balance of the increase was
primarily attributable to increases in the fixed assets of acquired companies
and Trans Global.
PROXY RELATED LITIGATION EXPENSE. During the nine month period ended December
31, 1998, we incurred $0.1 million in proxy related litigation expenses as
compared to $3.9 million for the year ended March 31, 1998 related to the class
action lawsuit for which a settlement agreement was reached in April 1998. Of
the amount recorded in the year ended March 31, 1998, $3.5 million related to
the value assigned to the 350,000 shares of common stock referred to above,
which were valued at $10.00 per share pursuant to the terms of the settlement
agreement. Such value related to our obligation under the Stipulation of
Settlement to issue additional stock if the market price of our stock was less
than $10.00 per share during the defined periods. We had no obligation to issue
additional stock if its share price is above $10.00 per share for fifteen
consecutive days during the two year period after all shares have been
distributed to the Class. In March 2000, that condition was satisfied and we
have no further obligations under the Stipulation of Settlement. All shares
required to be issued under the settlement agreement were issued to the class
action litigants and we have no further obligations under the settlement
agreement.
Additionally, we settled with another stockholder related to the same securities
class action in May 1988 and issued that stockholder 28,700 shares of common
stock at the market price at the date of settlement for a total value of
$81,000.
INTEREST EXPENSE. Interest expense totaled $7.7 million for the year ended
December 31, 1999 as compared to $1.0 million and $1.8 million for the nine
months ended December 31, 1998 and the year ended March 31, 1998, respectively.
The increase was primarily due to amortization of the debt discounts related to
the value of the warrants associated with acquisitions and financings, and in
part due to an increase in debt.
OTHER EXPENSE. We recorded a foreign currency transaction loss of $0.1 million
during the year ended December 31, 1999, $0.1 million during the nine months
ended December 31, 1998 and $0.4 million for the year ended March 31, 1998. The
losses for all periods arose from foreign currency cash and accounts receivable
balances we maintained during the period in which the U.S. dollar strengthened.
Our exposure to foreign currency losses is mitigated due to the variety of
customers and markets which comprise our customer base, as well as geographic
diversification of that customer base. In addition, the majority of our largest
customers settle their accounts in U.S. dollars.
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INTEREST INCOME. Interest income totaled $0.7 million for the year ended
December 31, 1999 as compared to $0.5 million and $0.2 million for the nine
month period ended December 31, 1998 and the year ended March 31, 1998. The
increase period to period is primarily due to higher interest income earned as a
result of the increased sales revenue and from cash received from various equity
and debt financings.
TAXES (BENEFIT) ON INCOME. A tax benefit of approximately $1.0 million was
recorded for the year ended December 31, 1999 due to the operating loss incurred
by Trans Global that will be carried back to prior years as a deduction
resulting in a federal income tax refund. This refund is expected to be received
during the second quarter of 2000. For the nine months ended December 31, 1998
and for the year ended March 31, 1998, we recorded a $0.6 million and a $2.0
million provision for income taxes, respectively. These provisions were based on
Trans Global having operating income in both periods resulting in current tax
provisions. Also, we recorded an additional provision of $1.5 million in the
year ended March 31, 1998 based on the initial results of a restructuring study,
which identified potential international tax issues. Settlements and payments
made with various tax jurisdictions have decreased our estimated remaining
liabilities to $0.6 million as of December 31, 1999. We continue to work with
various jurisdictions to settle outstanding tax obligations for prior years.
LOSS ON EARLY RETIREMENT OF DEBT. In August 1999, we repaid $4.0 million under
the $20.0 million notes with EXTL Investors by issuing 40 shares of Series J
Preferred Stock. At the date of the exchange, the carrying value of the $4.0
million notes, net of the unamortized discount of approximately $1.9 million ,
was approximately $2.1 million. The excess of the fair value of the Series J
Preferred Stock of $4.0 million over the carrying value of the notes of $1.9
million was recorded as an extraordinary loss on early retirement of debt during
1999.
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA
As we continue our aggressive growth plan into the year 2000 and we intend to
pursue that plan into the foreseeable future, it will require large cash demands
and aggressive cash management. In meeting our objectives, we have raised
significant financing through a combination of issuances of preferred stock,
proceeds from the exercise of warrants and options and a significant debt
placement with one of our major stockholders. Cash and cash equivalents were
$2.7 million at December 31, 1999 compared to $4.0 million at December 31, 1998.
Short-term investments were $1.5 million at December 31, 1999 as compared to
$12.3 million at December 31, 1998. The decrease in cash and cash equivalents of
$1.3 million and decrease in short-term investments of $10.8 million in 1999 was
primarily due to growing cash and investment needs as a result of the
acquisition activity during the year and due to fixed asset purchases of $12.3
million associated with the expansion and development of Trans Global's
international network. Accounts receivable, net, increased by $4.9 million to
$15.1 million at December 31, 1999 from $10.2 million at December 31, 1998,
mainly due to increased revenues and the extension of credit to new wholesale
carrier customers. Accounts payable and accrued expenses totaled $53.6 million
at December 31, 1999 (as compared to $36.8 million at December 31, 1998)
resulting principally from
13
<PAGE>
liabilities assumed through acquisitions for which the outstanding balances as
of the year ended December 31, 1999 approximate $14.8 million. In addition, the
increase was in part due to deferrals of payments to certain vendors. Cash
outflows from operating activities for the year ended December 31, 1999 totaled
$23.7 million, as compared to cash inflows of $14.1 million for the nine month
period ended December 31, 1998. This decrease was due primarily to our growth
through acquisitions and the effect that the acquisition activity had on
operating losses, resulting in overall lower gross margins and higher selling
general and administrative expenses. Also, we experienced lower margins in
wholesale transmission services and in some card services as discussed earlier
in "Results of Operations".
There was a net working capital deficiency of $44.7 million at December 31, 1999
compared to a deficiency of $25.5 million at December 31, 1998.
Cash outflows for investing activities during the year ended December 31, 1999
totaled $5.7 million, which was $9.3 million less than the cash outflows for the
nine months ended December 31, 1998. This decrease was due primarily to net
purchases of short-term investments of $5.0 million in 1998 as compared to net
sales of these investments of $10.8 million in 1999 and no 1999 advances to
non-affiliates subsequently acquired as compared to 1998. These decreases were
offset by higher 1999 purchases of property and equipment and by our 1999
purchases of Telekey, Connectsoft, Swiftcall, iGlobe, ORS and Coast which
required approximately $2.8 million, as compared to $2.2 million required to
purchase IDX in 1998. See Note 4, "Business Acquisitions" to the Supplemental
Consolidated Financial Statements for further discussion regarding the
acquisitions.
Cash generated from financing activities totaled $28.1 million during the year
ended December 31, 1999 compared to less than $0.1 million during the nine
months ended December 31, 1998. This increase of $28.0 million was primarily due
to our receiving a financing commitment of $20.0 million in the form of
long-term debt with our largest stockholder ("Lender"). Under this arrangement,
we initially received an unsecured loan of $7.0 million until stockholder
approval was received. Upon stockholder approval in June 1999, the Lender
purchased $20.0 million in secured notes with which we repaid the initial $7.0
million loan. Under this agreement, we could borrow up to $20.0 million with
monthly principal and interest payment of $377,000 with a balloon payment of
$8.6 million due in June 2002. Also, under the agreement, the Lender provided an
accounts receivable revolver credit note ("Revolver") for an amount up to the
lesser of (1) 50% of eligible receivables (as defined) or (2) the aggregate
amount of principal that has been repaid to date. Principal and interest on the
Revolver are payable on the earliest to occur of (i) the third anniversary of
the agreement, June 30, 2002, or (ii) the date of closing of a Qualified
Offering as defined in the agreement. In August 1999 we agreed to issue to the
Lender 40 shares of Series J Preferred Stock as prepayment of $4.0 million of
the outstanding $20.0 million. The exchange was finalized in November 1999.
Pursuant to the exchange agreement, the $4.0 million is not subject to redraw
under the Revolver. As of December 31, 1999, we have drawn down $1.2 million on
the Revolver.
14
<PAGE>
We also received proceeds of $0.8 million from the exercise of options and
warrants, $12.7 million in proceeds from equity-based financings of preferred
stock and $0.3 million from the sale of common stock. Additionally, Trans Global
entered into a financing agreement with a telecommunications vendor to fund the
purchase of switch hardware and software for a total of $3.3 million payable in
36 monthly payments of $0.1 million through June 2002. These proceeds were
offset by principal payments of $18.2 million on notes payable primarily
consisting of the payment of $7.0 million on the unsecured loan, as discussed
earlier, and payment of $7.5 million on an unsecured note due to a
telecommunications company. In addition, we have made payments of $0.9 million
on various capital leases. See Notes 5, "Notes Payable and Long-Term Debt" and 7
"Related Party Transactions" to the Supplemental Consolidated Financial
Statement for further discussion.
In the nine month period ended December 31, 1998, in addition to the $2.2
million paid in connection with the acquisition of IDX, the Company purchased
property and equipment of approximately $5.0 million and made other investments,
principally net purchases of short-term investments by Trans Global of $6.7
million and advances totaling $1.0 million to Connectsoft prior to acquisition.
The property and equipment expenditures were principally for upgrades and
additions to the global network of operating platforms. Cash generated from
financing activities totaled less than $0.1 million during the nine month period
ended December 31, 1998, mainly due to proceeds from a $1.0 million loan from an
existing stockholder received in June 1998, which was payable in December 1999
and subsequently extended to April 2000 offset by payments on capital leases of
$0.2 million and payments on notes of $0.7 million.
On an operating level, we are continuing to renegotiate our relationship with an
entity that was formerly one of our largest customers. As of December 31, 1999,
7.7% of our net accounts receivable of $15.1 million was due from this entity to
which extended credit terms have been granted. The new arrangement, once
finalized, will establish payment terms and sales growth, which will assure more
effective and timely collection of receivables from the customer and will permit
renewed growth in the customer's business. This arrangement will also assist in
the collection of certain amounts due to us under the extended credit terms.
On December 14, 1999, Trans Global entered into an 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 has agreed to pay
AT&T approximately $13.8 million in consecutive monthly installments at 9%
interest through January 1, 2001. As of December 31, 1999, the remaining balance
due to AT&T was $13.5 million. As part of the agreement with AT&T, Trans Global
entered into a security agreement (Security Agreement) granting AT&T a security
interest in certain fixed assets owned by Trans Global as of December 14, 1999.
As of April 6, 2000, Trans Global has not paid $1.5 million of scheduled
payments that were due in April 2000. Trans Global is currently in discussions
with AT&T regarding alternative options for settlement of the outstanding
obligation. There can be no assurances that Trans Global will be able to
satisfactorily resolve this matter. Should this not be resolved and should AT&T
take possession of the assets held as security, Trans Global believes that their
business will not be adversely impacted. There is no guarantee that Trans Global
and therefore our business will not have its operations affected adversely
should a satisfactory resolution between the parties not be reached.
CURRENT FUNDING REQUIREMENTS
Current funds will not permit us to achieve the growth, both short and
long-term, that management is targeting. That growth will require additional
capital. The plan under which we are currently operating requires substantial
additional funding from April 2000 through the end of the year 2000 of up to
$48.0 million. We anticipate that this capital 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 year, with the possibility
that the amount of financing could be diminished by secured equipment-based
financings.
15
<PAGE>
Even if we meet our projections for becoming EBITDA (Earnings Before Interest,
Taxes, Depreciation and Amortization) positive at the end of third quarter of
2000, we will still have capital requirements through December 2000. We need to
fund the pre-existing liabilities and notes payable obligations and the purchase
of capital equipment, along with financing our growths plans to meet the needs
of our announced acquisition program.
For the first quarter of 2000, we have met our initial cash requirements from
(1) proceeds from the exercise of options and warrants of $2.4 million, (2)
proceeds of $0.5 million from the sale of Series N Preferred Stock, (3) proceeds
of $15.0 million from the sale of Series P Convertible Preferred Stock, and (4)
proceeds of $4.0 million from the sale of Series Q Convertible Preferred Stock.
These capital transactions are discussed below.
o During January 2000 and thereafter, we received proceeds totaling $2.4
million, from the exercise of various options and warrants. These
exercises occurred primarily as a result of the improvement in our
stock price during the month of January 2000 and as sustained
thereafter.
o In January 2000, we received proceeds of approximately $0.5 million
from the sale of Series N Preferred Stock. See Note 16, "Subsequent
Events" to the Supplemental Consolidated Financial Statements for
further discussion.
o On January 27, 2000, we received proceeds of $15.0 million from the
sale of Series P Convertible Preferred Stock. See Note 16, "Subsequent
Events" to the Supplemental Consolidated Financial Statements for
further discussion.
o On March 17, 2000, we received proceeds of $4.0 million from the sale
of Series Q Convertible Preferred Stock. We will receive an addition
$6.0 million in proceeds immediately upon the effectiveness of the
registration of the common stock underlying this Preferred Stock.
In addition to the firm commitments discussed previously, we are proceeding with
other financing opportunities, which have not been finalized. We have a variety
of opportunities in both the debt and equity market to raise the necessary funds
which we need to achieve our growth plan through the end of the year 2000.
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 during the remainder of 2000. However, the Company will
be required to borrow or raise additional capital in order to meet its funding
requirements through December 31, 2000.
16
<PAGE>
There is a risk that we will not reach breakeven as projected and will continue
to incur operating losses. If this occurs and should we be unsuccessful in our
efforts to raise additional funds to cover such losses, then our growth plans
would have to be sharply curtailed and our business would be adversely affected.
TAXES. During 1998, we undertook a study to simplify eGlobe's organizational and
tax structure and identified potential international tax issues. In connection
with this study, we determined that we had potential tax liabilities and
recorded an additional tax provision of $1.5 million in the year ended March 31,
1998 to reserve against liabilities which could have arisen under the existing
structure. We initiated discussions with the Internal Revenue Service ("IRS")
related to the U.S. Federal income tax issues identified by the study and
findings. The IRS has accepted our returns and has decided not to audit these
returns. We have paid all taxes associated with these returns and all interest
invoiced by the IRS to date. Neither the final outcome of this process or the
outcome of any other issues can be predicted with certainty.
As of December 31, 1999, we have recorded a net deferred tax asset of $26.5
million and have approximately $57.7 million U.S. and $2.0 million foreign net
operating loss carryforwards available. We have recorded a valuation allowance
equal to the net deferred tax asset as management has not been able to determine
that it is more likely than not that the deferred tax asset will be realized
based in part on the foreign operations and availability of the operating loss
carryforwards to offset U.S. and foreign tax provisions. The U.S. carryforwards
expire in various years through 2019 and are subject to limitation under the
Internal Revenue Code of 1986, as amended. The foreign net operating loss
carryforwards expire in various years through 2004 and are subject to local
limitations on use.
17
<PAGE>
A receivable for a federal income tax refund of approximately $1.0 million was
recorded as of December 31, 1999 relating to Trans Global's loss carrybacks.
This refund is expected to be received during the second quarter of 2000. See
Note 11, "Taxes (Benefit) on Income (Loss)" to the Supplemental Consolidated
Financial Statements regarding further discussion of taxes on income.
EFFECT OF INFLATION. We believe that inflation has not had a material effect on
the results of operations to date.
ACCOUNTING ISSUES
Recent Accounting Pronouncements - The Financial Accounting Standards Board
("FASB") has issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 requires companies to record derivatives on
the balance sheet as assets or liabilities, measured at fair market value. Gains
or losses resulting from changes in the values of those derivatives are
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. SFAS No. 133, as extended by SFAS No. 137, is effective for
fiscal years beginning after June 15, 2000 and is currently not applicable to us
because we do not enter into hedging or derivative transactions.
18
<PAGE>
eGLOBE, INC.
ITEM 7 - FINANCIAL STATEMENTS AND EXHIBITS
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
The following are the supplemental consolidated financial statements
and exhibits of eGlobe, Inc. and subsidiaries which are filed as part
of this report:
<TABLE>
<CAPTION>
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS:
<S> <C>
Report of Independent Certified Public Accountants F-2
Report of Independent Auditors F-3
Supplemental Consolidated Balance Sheets as of December 31, 1999 and 1998 F-4 - F-5
Supplemental Consolidated Statements of Operations for the Year Ended
December 31, 1999, the Nine Months Ended December 31, 1998 and the
Year Ended March 31, 1998 F-6 - F-7
Supplemental Consolidated Statements of Stockholders' Equity for the Year
Ended December 31, 1999, the Nine Months Ended December 31, 1998
and the Year Ended March 31, 1998 F-8 - F-9
Supplemental Consolidated Statements of Comprehensive Loss for the Year
Ended December 31, 1999, the Nine Months Ended December 31, 1998
and the Year Ended March 31, 1998 F-10
Supplemental Consolidated Statements of Cash Flows for the Year Ended
December 31, 1999, the Nine Months Ended December 31, 1998 and the
Year Ended March 31, 1998 F-11
Summary of Accounting Policies F-12 - F-26
Notes to Supplemental Consolidated Financial Statements F-27 - F-101
SUPPLEMENTAL SCHEDULE -
II - Valuation and Qualifying Accounts F-102
All other schedules are omitted because the required information is either
inapplicable or is included in the supplemental consolidated financial
statements or the notes thereto.
Exhibit 23.1 Consent of Independent Certified Public Accountants
Exhibit 23.2 Consent of Independent Auditors
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
eGlobe, Inc.
Washington, D.C.
We have audited the accompanying supplemental consolidated balance sheets of
eGlobe, Inc. and subsidiaries as of December 31, 1999 and 1998 and the related
supplemental consolidated statements of operations, stockholders' equity,
comprehensive loss and cash flows for the year ended December 31, 1999, the nine
months ended December 31, 1998 and the year ended March 31, 1998. The
supplemental consolidated financial statements give retroactive effect to the
merger of eGlobe, Inc. and Trans Global Communications, Inc. on March 23, 2000,
which has been accounted for as a pooling of interests as described in the
Summary of Accounting Policies to the supplemental consolidated financial
statements. These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of Trans Global Communications, Inc., which financial statements
reflect total assets of approximately $27,988,000 and $28,087,000 as of December
31, 1999 and 1998, respectively, and total revenues of approximately
$100,445,000, $85,119,000 and $46,473,000 for each of three years in the period
ended December 31, 1999, respectively. Those financial statements were audited
by another auditor whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for Trans Global Communications,
Inc., is based solely on the report of the other auditor.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits and the report of the other auditor provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of the other auditor, the
supplemental consolidated financial statements referred to above present fairly,
in all material respects, the financial position of eGlobe, Inc. and
subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for the year ended December 31, 1999, the nine months ended
December 31, 1998 and the year ended March 31, 1998, after giving retroactive
effect to the merger referred to above, in conformity with generally accepted
accounting principles.
/s/ BDO SEIDMAN, LLP
March 24, 2000, except for Notes 10 and 18,
which are as of April 6, 2000
Denver, Colorado
F-2
<PAGE>
Report of Independent Auditors
Board of Directors
Trans Global Communications, Inc.
New York, New York
We have audited the consolidated balance sheets of Trans Global Communications,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at December 31, 1999 and 1998, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
February 25, 2000
New York, New York
F-3
<PAGE>
eGLOBE, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (Notes 7 and 13)
CURRENT:
Cash and cash equivalents $ 2,659,000 $ 4,031,000
Restricted cash 158,000 101,000
Short-term investments -- 11,167,000
Restricted short-term investments 1,492,000 1,131,000
Accounts receivable, less
allowance of $3,206,000 and
$1,216,000 for doubtful accounts 15,142,000 10,226,000
Other receivables 1,406,000 651,000
Prepaid expenses 1,584,000 1,628,000
Other current assets 639,000 245,000
- ----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 23,080,000 29,180,000
PROPERTY AND EQUIPMENT,
net of accumulated depreciation
and amortization (Notes 1, 5 and 13) 42,078,000 20,198,000
GOODWILL, net of accumulated amortization
of $1,572,000 and $140,000 (Note 4) 24,904,000 11,865,000
OTHER INTANGIBLE ASSETS,
net of accumulated amortization
of $6,466,000 and $786,000 (Note 2) 21,674,000 241,000
OTHER:
Advances to non-affiliate, subsequently
acquired (Note 4) -- 971,000
Deposits 1,659,000 519,000
Other assets 400,000 1,405,000
- ----------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 2,059,000 2,895,000
================================================================================================================
TOTAL ASSETS $113,795,000 $64,379,000
================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to supplemental
consolidated financial statements.
F-4
<PAGE>
eGLOBE, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES, MINORITY INTEREST, REDEEMABLE COMMON STOCK AND
STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable (Note 13) $41,558,000 $ 29,913,000
Accrued expenses (Note 3) 10,992,000 6,915,000
Income taxes payable (Note 11) 560,000 1,915,000
Notes payable and current maturities of long-
term debt (Note 5) 7,868,000 13,685,000
Notes payable and current maturities of long-
term debt-related parties (Note 7) 4,676,000 1,154,000
Deferred revenue 1,331,000 486,000
Other liabilities 797,000 567,000
- ----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 67,782,000 54,635,000
ACCOUNTS PAYABLE - LONG-TERM (Note 13) 1,000,000 -
LONG-TERM DEBT, net of current maturities (Note 5) 5,194,000 1,237,000
LONG-TERM DEBT - RELATED PARTIES, net of current
maturities (Note 7) 8,301,000 -
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 82,277,000 55,872,000
- ----------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
(Notes 3, 4, 9, 10, 11, 13, 14 and 16)
MINORITY INTEREST (Note 4) 2,800,000 --
REDEEMABLE COMMON STOCK (Note 7) 700,000 --
STOCKHOLDERS' EQUITY (Note 10):
Preferred stock, all series, $.001 par value,
10,000,000 and 5,000,000 shares
authorized, 1,927,791 and 500,075 shares
outstanding 2,000 1,000
Common stock, $.001 par value, 100,000,000
Shares authorized, 69,580,604 and 56,362,966
Shares outstanding 70,000 56,000
Stock to be issued 2,624,000 --
Notes receivable (1,210,000) --
Additional paid-in capital 106,718,000 34,117,000
Accumulated deficit (80,682,000) (25,578,000)
Accumulated other comprehensive income (loss) 496,000 (89,000)
- ----------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 28,018,000 8,507,000
================================================================================================================
TOTAL LIABILITIES, MINORITY INTEREST,
REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
EQUITY $113,795,000 $64,379,000
================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to supplemental
consolidated financial statements.
F-5
<PAGE>
eGLOBE, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE (Note 12) $141,948,000 $ 90,420,000 $ 79,596,000
COST OF REVENUE 136,941,000 73,929,000 58,751,000
- ---------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 5,007,000 16,491,000 20,845,000
- ---------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Selling, general and administrative 34,967,000 16,333,000 17,255,000
Deferred compensation related to
acquisitions (Note 4) 1,485,000 420,000 --
Depreciation and amortization 8,356,000 3,196,000 3,342,000
Amortization of goodwill and other
intangible assets 7,112,000 201,000 186,000
Settlement costs (Note 7) -- 996,000 --
Corporate realignment expense (Note 3) -- -- 3,139,000
- ---------------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 51,920,000 21,146,000 23,922,000
- ---------------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (46,913,000) (4,655,000) (3,077,000)
- ---------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (7,733,000) (1,039,000) (1,818,000)
Interest income 686,000 482,000 247,000
Foreign currency transaction loss (99,000) (131,000) (410,000)
Minority interest in income (Note 4) (78,000) -- --
Proxy related litigation expense (Note 8) -- (119,000) (3,901,000)
Other income (expense), net (28,000) 82,000 (337,000)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE (7,252,000) (725,000) (6,219,000)
- ---------------------------------------------------------------------------------------------------------------------
LOSS BEFORE TAXES (BENEFIT) ON INCOME AND
EXTRAORDINARY ITEM (54,165,000) (5,380,000) (9,296,000)
TAXES (BENEFIT) ON INCOME (LOSS) (Note 11) (962,000) 578,000 1,961,000
=====================================================================================================================
NET LOSS BEFORE EXTRAORDINARY ITEM (53,203,000) (5,958,000) (11,257,000)
=====================================================================================================================
</TABLE>
F-6
<PAGE>
eGLOBE, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LOSS ON EARLY RETIREMENT OF DEBT (Note 7) (1,901,000) -- --
- --------------------------------------------------------------------------------------------------------------------------
NET LOSS (55,104,000) (5,958,000) (11,257,000)
PREFERRED STOCK DIVIDENDS (Note 10) (11,930,000) -- --
- --------------------------------------------------------------------------------------------------------------------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(67,034,000) $(5,958,000) $ (11,257,000)
- --------------------------------------------------------------------------------------------------------------------------
NET LOSS PER SHARE (BASIC AND DILUTED) (Note 6):
Net loss before extraordinary item $ (1.08) $ (0.10) $ (0.20)
Loss on early retirement of debt (0.03) -- --
- --------------------------------------------------------------------------------------------------------------------------
NET LOSS PER SHARE (Note 6) $ (1.11) $ (0.10) $ (0.20)
==========================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING (Note 6) 60,610,548 57,736,654 57,082,495
==========================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to supplemental
consolidated financial statements.
F-7
<PAGE>
eGLOBE, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999, THE NINE MONTHS ENDED DECEMBER 31, 1998
AND THE YEAR ENDED MARCH 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- ------------ STOCK TO BE NOTES PAID- IN
SHARES AMOUNT SHARES AMOUNT ISSUED RECEIVABLE CAPITAL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD -- $ -- 55,861,240 $ 56,000 $ -- $ -- $16,190,000
Stock issued in lieu of cash payments -- -- 42,178 -- -- -- 244,000
Stock issued in connection with
private placement, net (Notes 7 and 10) -- -- 1,425,000 1,000 -- -- 7,481,000
Stock to be issued (Note 8) -- -- -- -- 3,500,000 -- --
Exercise of stock appreciation rights -- -- 18,348 -- -- -- 138,000
Issuance of warrants to purchase
stock (Note 10) -- -- -- -- -- -- 1,136,000
Foreign currency translation adjustment -- -- -- -- -- -- --
Net loss for the year -- -- -- -- -- -- --
Trans Global net income for the three
months ended March 31, 1998 -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 -- -- 57,346,766 57,000 3,500,000 -- 25,189,000
Stock issued in connection with
litigation settlement (Note 8) -- -- 28,700 -- -- -- 81,000
Stock issued to common
escrow (Note 8) -- -- 350,000 -- (3,500,000) -- 3,500,000
Issuance of warrants to purchase stock
(Note 7) -- -- -- -- -- -- 328,000
Stock issued in connection with
acquisitions (Notes 4 and 10) 500,000 1,000 62,500 -- -- -- 3,601,000
Exchange of common stock for Series C
Preferred Stock (Notes 7 and 10) 75 -- (1,425,000) (1,000) -- -- 998,000
Deferred compensation costs (Note 4) -- -- -- -- -- -- 420,000
Foreign currency translation adjustment -- -- -- -- -- -- --
Net loss for the period -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 500,075 1,000 56,362,966 56,000 -- -- 34,117,000
====================================================================================================================================
<CAPTION>
ACCUMULATED
OTHER TOTAL
ACCUMULATED COMPREHENSIVE STOCKHOLDERS
DEFICIT INCOME (LOSS) EQUITY
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD $ (8,779,000) $ 82,000 $7,549,000
Stock issued in lieu of cash payments -- -- 244,000
Stock issued in connection with
private placement, net (Notes 7 and 10) -- -- 7,482,000
Stock to be issued (Note 8) -- -- 3,500,000
Exercise of stock appreciation rights -- -- 138,000
Issuance of warrants to purchase
stock (Note 10) -- -- 1,136,000
Foreign currency translation adjustment -- (50,000) (50,000)
Net loss for the year (11,257,000) -- (11,257,000)
Trans Global net income for the three
months ended March 31, 1998 416,000 -- 416,000
- -------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 (19,620,000) 32,000 9,158,000
Stock issued in connection with
litigation settlement (Note 8) -- -- 81,000
Stock issued to common
escrow (Note 8) -- -- --
Issuance of warrants to purchase stock
(Note 7) -- -- 328,000
Stock issued in connection with
acquisitions (Notes 4 and 10) -- -- 3,602,000
Exchange of common stock for Series C
Preferred Stock (Notes 7 and 10) -- -- 997,000
Deferred compensation costs (Note 4) -- -- 420,000
Foreign currency translation adjustment -- (121,000) (121,000)
Net loss for the period (5,958,000) -- (5,958,000)
- -------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 (25,578,000) (89,000) 8,507,000
=====================================================================================
</TABLE>
F-8
<PAGE>
eGLOBE, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999, THE NINE MONTHS ENDED DECEMBER 31, 1998
AND THE YEAR ENDED MARCH 31, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------- ------------ STOCK TO BE NOTES
SHARES AMOUNT SHARES AMOUNT ISSUED RECEIVABLE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 500,075 $1,000 56,362,966 $56,000 $ -- $ --
Issuance of warrants to purchase stock (Notes 4, 5,
7 and 10) -- -- -- -- -- --
Stock issued in connection with acquisitions, net of
$135,000 premium amortization (Note 4) 1,026,101 1,000 1,161,755 1,000 -- --
Stock to be issued in connection with acquisitions
(Note 4) -- -- -- -- 2,624,000 --
Stock issued in connection with debt repayments, net
of cost of $40,000 (Notes 5 and 7) 40 -- 697,328 1,000 -- --
Stock issued in connection with private placements,
net of costs of $2,084,000 (Note 10) 2,770 -- 160,257 -- -- --
Value of beneficial conversion feature on Preferred
Stocks and debt, net of unamoritized portion of
$1,085,000 (Notes 7 and 10) -- -- -- -- -- --
Value of increase in conversion feature of Series B
Preferred (Note 4) -- -- -- -- -- --
Exchange of Series C Preferred for common stock,
net of dividend of $2,215,000 and costs of
$118,000 (Note 7) (75) -- 3,000,000 3,000 -- --
Exchange of Series G Preferred for
Series K Preferred (Note 4 and 10) 30 -- -- -- -- --
Exchange of Series B Preferred and Notes for Series H
and I Preferred, net of dividends of $4,600,000 and
$18,000 (Note 4) 400,000 -- -- -- -- --
Deferred compensation costs (Notes 4 and 10) -- -- -- -- -- --
Exercise of stock options and warrants (Note 10) -- -- 1,638,163 2,000 -- (1,210,000)
Conversion of Series D and N Preferred into common
stock, including coversion of dividends of
$240,000 (Note 10) (1,150) -- 1,544,662 2,000 -- --
Stock to be issued for dividends -- -- -- -- -- --
Cumulative Preferred Stock dividends -- -- -- -- -- --
Amortization of discounts (premium) on Preferred
Stocks -- -- -- -- -- --
Other issuances and registration costs -- -- 5,015,473 5,000 -- --
Foreign currency translation adjustment -- -- -- -- -- --
Net loss for the year -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 1,927,791 $ 2,000 69,580,604 $70,000 $2,624,000 $(1,210,000)
==============================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to supplemental
consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
CAPITAL DEFICIT INCOME (LOSS) EQUITY
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 $34,117,000 $(25,578,000) $ (89,000) $ 8,507,000
Issuance of warrants to purchase stock (Notes 4, 5,
7 and 10) 18,474,000 -- -- 18,474,000
Stock issued in connection with acquisitions, net of
$135,000 premium amortization (Note 4) 28,788,000 -- -- 28,790,000
Stock to be issued in connection with acquisitions
(Note 4) -- -- -- 2,624,000
Stock issued in connection with debt repayments, net
of cost of $40,000 (Notes 5 and 7) 5,615,000 -- -- 5,616,000
Stock issued in connection with private placements,
net of costs of $2,084,000 (Note 10) 10,836,000 -- -- 10,836,000
Value of beneficial conversion feature on Preferred
Stocks and debt, net of unamoritized portion of
$1,085,000 (Notes 7 and 10) 835,000 -- -- 835,000
Value of increase in conversion feature of Series B
Preferred (Note 4) 1,485,000 -- -- 1,485,000
Exchange of Series C Preferred for common stock,
net of dividend of $2,215,000 and costs of
$118,000 (Note 7) (121,000) -- -- (118,000)
Exchange of Series G Preferred for
Series K Preferred (Note 4 and 10) 3,000,000 -- -- 3,000,000
Exchange of Series B Preferred and Notes for Series H
and I Preferred, net of dividends of $4,600,000 and
$18,000 (Note 4) 3,982,000 -- -- 3,982,000
Deferred compensation costs (Notes 4 and 10) 1,485,000 -- -- 1,485,000
Exercise of stock options and warrants (Note 10) 1,990,000 -- -- 782,000
Conversion of Series D and N Preferred into common
stock, including coversion of dividends of
$240,000 (Note 10) 238,000 -- -- 240,000
Stock to be issued for dividends 1,043,000 -- -- 1,043,000
Cumulative Preferred Stock dividends (2,300,000) -- -- (2,300,000)
Amortization of discounts (premium) on Preferred
Stocks (2,797,000) -- -- (2,797,000)
Other issuances and registration costs 48,000 -- -- 53,000
Foreign currency translation adjustment -- -- 585,000 585,000
Net loss for the year -- (55,104,000) -- (55,104,000)
- ----------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $106,718,000 $(80,682,000) $496,000 $ 28,018,000
================================================================================================================
</TABLE>
F-9
<PAGE>
eGLOBE, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE YEAR ENDED DECEMBER 31, 1999, THE NINE MONTHS ENDED DECEMBER 31, 1998
AND THE YEAR ENDED MARCH 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
-----------------------------------------------------------
<S> <C> <C> <C>
NET LOSS $ (55,104,000) $(5,958,000) $ (11,257,000)
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS 585,000 (121,000) (50,000)
===========================================================
COMPREHENSIVE NET LOSS $ (54,519,000) $(6,079,000) $ (11,307,000)
===========================================================
</TABLE>
See accompanying summary of accounting policies and notes to supplemental
consolidated financial statements.
F-10
<PAGE>
eGLOBE, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1999 1998 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(55,104,000) $ (5,958,000) $(11,257,000)
Adjustments to reconcile net loss to cash
Provided by (used in) operating activities:
Depreciation and amortization 15,468,000 3,397,000 3,528,000
Provision for bad debts 2,528,000 1,018,000 1,564,000
Non-cash interest expense 889,000 -- --
Minority interest in income 78,000 -- --
Settlement costs (Note 7) -- 996,000 --
Common stock issued in lieu of cash payments -- -- 144,000
Issuance of options and warrants for services (Note 10) 181,000 190,000 220,000
Compensation costs related to acquisitions (Note 4) 1,485,000 420,000 --
Amortization of debt discounts (Notes 5 and 7) 5,182,000 255,000 479,000
Proxy related litigation expense (Note 8) -- 81,000 3,500,000
Loss on early retirement of debt (Note 7) 1,901,000 -- --
Other, net -- (57,000) 281,000
Changes in operating assets and liabilities (net of changes
from acquisitions - Note 4):
Accounts receivable (5,445,000) (1,202,000) (1,716,000)
Other receivables (755,000) (350,000) (159,000)
Prepaid expenses 946,000 (216,000) (206,000)
Other current assets (37,000) (611,000) (351,000)
Other assets 303,000 407,000 (10,000)
Accounts payable 10,750,000 14,447,000 5,011,000
Income tax payable (815,000) (90,000) 1,500,000
Accrued expenses (1,193,000) 1,035,000 2,635,000
Deferred revenue (153,000) 311,000 19,000
Other liabilities 87,000 26,000 (89,000)
- -------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (23,704,000) 14,099,000 5,093,000
- -------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment (13,203,000) (5,044,000) (6,131,000)
Net sales (purchases) of short-term investments 10,806,000 (6,677,000) (2,275,000)
Proceeds from sale of property and equipment -- 126,000 --
Advances to non-affiliate, subsequently acquired (Note 4) -- (971,000) --
Purchase of intangibles (299,000) -- --
Acquisitions of companies, net of cash acquired (Notes 4 and 17) (2,799,000) (2,207,000) --
Increase in restricted cash (4,000) (100,000) --
Other assets (224,000) (109,000) 26,000
- -------------------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (5,723,000) (14,982,000) (8,380,000)
- -------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from notes payable (Notes 4 and 5) 6,835,000 250,000 7,810,000
Proceeds from notes payable-related party (Note 7) 28,258,000 1,200,000 --
Proceeds from issuance of preferred stock 12,670,000 -- --
Stock issuance costs (1,582,000) -- --
Proceeds from exercise of warrants 721,000 -- --
Proceeds from exercise of options 61,000 -- 138,000
Proceeds from issuance of common stock 250,000 -- 7,345,000
Deferred financing and acquisition costs -- (524,000) --
Distribution to minority interest holder (52,000) -- --
Payments on capital leases (860,000) (198,000) (448,000)
Payments on notes payable (10,180,000) (716,000) (10,864,000)
Payments on notes payable - related party (Note 7) (8,066,000) -- --
- -------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 28,055,000 12,000 3,981,000
- -------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (1,372,000) (871,000) 694,000
TRANS GLOBAL CASH ACTIVITY FOR THE THREE MONTHS ENDED MARCH 31, 1998 -- -- 1,466,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,031,000 4,902,000 2,742,000
===============================================================================================================================
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,659,000 $ 4,031,000 $ 4,902,000
===============================================================================================================================
</TABLE>
See Note 17 for Supplemental Cash Flow Information.
See accompanying summary of accounting policies and notes to supplemental
consolidated financial statements.
F-11
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
ORGANIZATION eGlobe, Inc. and subsidiaries, (collectively, the
AND BUSINESS "Company") is a global supplier of enhanced
telecommunications and information services, including
Internet Protocol ("IP") transmission services,
international and domestic long distance telephone
services, switching services, co-location services,
telephone portal, unified messaging services and
international voice and data services. The Company
operates in partnership with telephone companies and
Internet service providers around the world. Through the
Company's World Direct network, the Company originates
traffic in 90 territories and countries and terminates
traffic anywhere in the world and through its IP
network, the Company can originate and terminate
IP-based telecommunication services in 30 countries and
5 continents. In addition, the Company can transport and
terminate voice, fax or data calls to any country with a
hard wire or cell-based communications system. The
Company provides its services principally to large
national telecommunications companies, card providers,
Internet service providers and financial institutions
around the world.
In December 1998, the Company acquired IDX
International, Inc. ("IDX"), a supplier of IP
transmission services, principally to telecommunications
carriers, in 14 countries. This acquisition allows the
Company to offer two additional services, IP voice and
IP fax, to its customer base. Also, in December 1998,
the Company acquired UCI Tele Network, Ltd. ("UCI"), a
development stage calling card business, with contracts
to provide calling card services in Cyprus and Greece
(See Note 4 for further discussion).
In February 1999, the Company completed the acquisition
of Telekey, Inc. ("Telekey"), a provider of card-based
telecommunications services. In June 1999, the Company,
through its newly formed subsidiary, Vogo Networks, LLC
("Vogo"), purchased substantially all of the assets and
assumed certain liabilities of Connectsoft
Communications Corporation and Connectsoft Holdings,
Corp. (collectively "Connectsoft"), which developed and
continues to enhance a server based communication system
that integrates various forms of messaging, Internet and
web content, personal services, and provides telephone
access to Internet content (including email and
e-commerce functions). In July 1999, the Company
completed the acquisition of Swiftcall Equipment and
Services (USA) Inc., ("Swiftcall"), a telecommunications
company, and certain network operating equipment held by
an affiliate of Swiftcall. Effective August 1, 1999, the
Company assumed operational control of Highpoint
International Telecom, Inc. and certain assets and
operations of Highpoint Carrier Services, Inc. and
Vitacom, Inc. (collectively "Highpoint"). The three
entities were majority owned subsidiaries of Highpoint
Telecommunications Inc. ("HGP"), a publicly traded
company on the Canadian Venture Exchange. On October 14,
1999, substantially all of the operating assets of
Highpoint were transferred to iGlobe, Inc. ("iGlobe"), a
newly formed subsidiary of HGP, and the Company
concurrently acquired all of the issued and outstanding
common stock of iGlobe. iGlobe possesses an
infrastructure supplying 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
F-12
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
ORGANIZATION sole stockholder, Outsourced Automated Services and
AND BUSINESS Integrated Solutions, Inc. ("Oasis"). The Company and
(CON'T) 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, 7 and 10 for further discussion.
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 Communications, Inc. ("Trans Global"), with
Trans Global continuing as the surviving corporation and
becoming a wholly-owned subsidiary of eGlobe (the
"Merger"). Trans Global is a provider of
facilities-based, direct connection and resale network
services. The Merger provided for the issuance of
40,000,000 shares of the eGlobe common stock in exchange
for all of the outstanding common stock of Trans Global.
Pursuant to the merger agreement, the Company withheld
and deposited into escrow 2,000,000 shares of the
40,000,000 shares of its common stock issued to the
Trans Global stockholders in the Merger. These escrowed
shares cover the indemnification obligations of the
Trans Global stockholders under the merger agreement.
The Company deposited an additional 2,000,000 shares of
its common stock into escrow to cover its
indemnification obligations under the merger agreement.
The merger was accounted for as a pooling of interests,
and as such, the 40,000,000 shares of common stock have
been treated as if outstanding for all periods presented
in the supplemental consolidated financial statements.
The Company's consolidated financial statements have
been retroactively restated as of December 31, 1999 and
December 31, 1998 and for the year ended December 31,
1999, the nine months ended December 31, 1998 and the
year ended March 31, 1998, to reflect the consummation
of the Trans Global merger. The supplemental
consolidated financial statements included herein give
retroactive effect to the Trans Global merger, which was
accounted for using the pooling of interests method. As
a result, the financial position, results of operations,
and statements of comprehensive income (loss) and cash
flows are presented as if Trans Global had been
consolidated for all periods presented. The supplemental
consolidated statements of stockholders' equity reflect
the accounts of eGlobe as if the common stock issued in
connection with the Trans Global merger had been issued
for all periods presented. As required by generally
accepted accounting principles, the supplemental
consolidated financial statements will become the
historical financial statements of the Company upon
issuance of the financial statements for the period that
includes the consummation of the Trans Global merger.
F-13
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
ORGANIZATION In the supplemental consolidated balance sheets, the
AND BUSINESS balance sheets of eGlobe as of December 31, 1999 and
(CON'T) 1998 have been combined with those of Trans Global as of
December 31, 1999 and 1998. The supplemental
consolidated statements of operations combine the
results of eGlobe for the year ended December 31, 1999
and the nine months ended December 31, 1998 with those
of Trans Global for the same periods. The results of
operations for the year ended March 31, 1998 include the
combined results of eGlobe's results for the twelve
months ended March 31, 1998 and Trans Global's results
for the year ended December 31, 1997. Trans Global's net
income for the three months ended March 31, 1998 has
been reflected in the supplemental consolidated
statements of stockholders' equity as an adjustment to
accumulated deficit. In addition, the cash activity
during the three months ended March 31, 1998 has been
reflected as an adjustment in the year ended March 31,
1998 supplemental consolidated statement of cash flows.
There were no seasonal trends in operations during the
three months ended March 31, 1998.
The supplemental consolidated financial statements,
including the notes thereto, should be read in
conjunction with eGlobe's historical consolidated
financial statements included in its Annual Report on
Form 10-K for the year ended December 31, 1999 and the
financial statements of Trans Global included in the
Company's Current Report on Form 8-K/A dated March 23,
2000 and filed on May 22, 2000.
F-14
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
ORGANIZATION Revenue, extraordinary loss on early retirement of debt,
AND BUSINESS net income (loss), net loss attributable to common
(CON'T) stockholders and net loss per common share previously
reported by eGlobe and Trans Global and the combined
amounts presented in the accompanying supplemental
consolidated financial statements for the year ended
December 31, 1999, the nine months ended December 31,
1998 and the year ended March 31, 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
-------------------------------------------------------
<S> <C> <C> <C>
REVENUE:
eGlobe as previously presented in Form
10-K $ 42,002,000 $22,491,000 $ 33,123,000
Trans Global as previously presented in
Form 8-K/A 100,445,000 85,119,000 46,473,000
Adjustments:
Intercompany revenue (499,000) -- --
Trans Global revenue for the three
months ended March 31, 1998 -- (17,190,000) --
-------------------------------------------------------
eGlobe, as restated combined $ 141,948,000 $90,420,000 $ 79,596,000
=======================================================
EXTRAORDINARY LOSS ON EARLY
RETIREMENT OF DEBT:
eGlobe, as previously presented in $ (1,901,000) $ -- $ --
Form 10-K
Trans Global as previously reported
in Form 8-K/A -- -- --
-------------------------------------------------------
eGlobe, as restated combined $ (1,901,000) $ -- $ --
=======================================================
NET INCOME (LOSS):
eGlobe as previously presented in
Form 10-K $(51,468,000) $(7,090,000) $(13,290,000)
Trans Global as previously presented in
Form 8-K/A (3,383,000) 1,406,000 1,565,000
Adjustments:
Deferred tax adjustment (253,000) 142,000 468,000
Trans Global net income for the
three months ended March 31,
1998 -- (416,000) --
-------------------------------------------------------
eGlobe, as restated combined $(55,104,000) $(5,958,000) $(11,257,000)
=======================================================
</TABLE>
F-15
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
ORGANIZATION
AND BUSINESS
(CON'T)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
-------------------------------------------------------
<S> <C> <C> <C>
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
eGlobe net loss, as restated combined $ (55,104,000) $(5,958,000) $(11,257,000)
eGlobe preferred stock dividends as
previously reported in Form 10-K (11,930,000) -- --
-------------------------------------------------------
eGlobe, as restated combined $ (67,034,000) $(5,958,000) $(11,257,000)
=======================================================
NET LOSS PER SHARE:
As previously presented in Form 10-K:
Basic and diluted $(3.08) $(0.40) $(0.78)
Restated combined:
Basic and diluted $(1.11) $(0.10) $(0.20)
</TABLE>
Adjustments were made to reflect deferred income taxes
on a combined basis in the supplemental consolidated
results of operations for the year ended December 31,
1999, the nine months ended December 31, 1998 and the
year ended March 31, 1998.
An adjustment was made to decrease consolidated
stockholders' equity as of the beginning of the periods
presented of $183,000 to record the deferred income tax
adjustment for the previous periods. An adjustment of
$416,000 was also made to increase consolidated
stockholders' equity as of March 31, 1998 to reflect
Trans Global's net income for the three months ended
March 31, 1998.
F-16
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
MANAGEMENT'S As of December 31, 1999, the Company had a net working
PLAN capital deficiency of $44.7 million. This net working
capital deficiency resulted principally from a loss from
operations of $46.9 million (including depreciation,
amortization and other non-cash charges) for the year
ended December 31, 1999. Also contributing to the
working capital deficiency was $7.9 million in notes
payable and current maturities of long-term debt, $4.7
million in notes payable and current maturities of
long-term debt due to related parties, and $53.9 million
in accounts payable, accrued expenses and deferred
revenue. The $7.9 million current maturities consists of
$4.2 million primarily related to acquisition debt, $1.1
million related to a note collatoralized by equipment
and $2.6 million related to capital lease payments due
over the one year period ending December 31, 2000. The
$4.7 million current maturities due to a related
parties, net of unamortized discount of $3.0 million,
consists of a $0.9 million note, net of unamortized
discount of $0.1 million, due to a stockholder on April
18, 2000, term payments of $3.5 million, net of
unamortized discount of $2.9 million, due to EXTL
Investors, the Company's 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
renegotiate its relationship with an entity that was
formerly one of the Company's largest customers. At
December 31, 1999, 7.7% of the Company's net accounts
receivable of $15.1 million was due from this entity to
which extended credit terms have been granted. The new
arrangement, once finalized, will establish payment
terms and sales growth, which will assure more effective
and timely collection of receivables from the customer
and will permit renewed growth in the customer's
business. This arrangement will also assist in the
collection of certain amounts due to the Company under
the extended credit terms.
If the Company meets its projections for reaching
breakeven at the end of the second quarter of 2000, the
Company will still have additional capital requirements
through December 2000 of up to $66.0 million. The
Company will need to fund pre-existing liabilities and
note payable obligations and the purchase of capital
equipment, along with financing the Company's growth
plans.
Thus far in 2000, the Company has met its initial 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
thereafter, (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"), (4) proceeds of $4.0 million from the sale
of Series Q Convertible Preferred Stock ("Series Q
Preferred") with an additional $6.0 million to be
received upon registration of the underlying shares of
common stock. These capital transactions are discussed
in Note 16.
F-17
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
MANAGEMENT'S In addition to the firm commitments discussed
PLAN (CON'T) previously, the Company is proceeding with other
financing opportunities, which have not been finalized.
The Company is working on several different debt and
equity fund raising efforts to raise the funds that the
Company will require to achieve its growth plan through
the end of the year 2000.
There is some risk that the Company will not reach
breakeven 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 its growth plans would have
to be sharply curtailed and its business would be
adversely affected.
As discussed in Note 13, in December 1999, Trans Global
entered into an 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 has agreed to pay AT&T
approximately $13.8 million in consecutive monthly
installments at 9% interest through January 1, 2001. As
of December 31, 1999, the remaining balance due to AT&T
was $13.5 million. As part of the agreement with AT&T,
Trans Global entered into a security agreement (Security
Agreement) granting AT&T a security interest in certain
fixed assets owned by Trans Global as of December 14,
1999. As of April 6, 2000, Trans Global has not paid
$1.5 million of scheduled payments that were due in
April 2000. Trans Global is currently in discussions
with AT&T regarding alternative options for settlement
of the outstanding obligation. There can be no
assurances that Trans Global will be able to
satisfactorily resolve this matter. Should this not be
resolved and should AT&T take possession of the assets
held as security, Trans Global believes that their
business will not be adversely impacted. There is no
guarantee that Trans Global and therefore the Company's
business will not have its operations affected adversely
should a satisfactory resolution between the parties not
be reached.
CHANGE OF Effective with the period ended December 31, 1998, the
FISCAL YEAR stockholders of the Company approved the change of the
fiscal year to a December 31 fiscal year end. Therefore,
the period ended December 31, 1998 represents a
nine-month period as compared to a twelve month period
for fiscal years ended December 31, 1999 and March 31,
1998.
Information for the comparable nine month period ended
December 31, 1997 is summarized below (unaudited):
Revenue $63,102,000
Gross profit $16,746,000
Taxes on income $ 436,000
Net loss $(3,352,000)
Net loss per common share-
Basic and diluted $ (0.06)
CHANGE OF At the annual meeting of the stockholders of the Company
COMPANY on June 16, 1999, the stockholders approved and adopted
NAME a proposal for amending the Certificate of Incorporation
to change the name of the Company from Executive
TeleCard, Ltd. to eGlobe, Inc. The amended Certificate
of Incorporation has been filed with and accepted by the
State of Delaware.
BASIS OF The consolidated financial statements have been prepared
PRESENTATION in accordance with generally accepted accounting
AND principles and include the accounts of the Company, its
CONSOLIDATION wholly-owned subsidiaries, and its controlling interest
in a limited liability company ("LLC"). All material
intercompany transactions and balances have been
eliminated in consolidation. As the Company controls the
operations of the LLC, the LLC has been included in the
supplemental, consolidated financial statements with the
other member's interests recorded as Minority Interest.
F-18
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
USE OF The preparation of financial statements in conformity
ESTIMATES with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the
reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
FOREIGN For subsidiaries whose functional currency is the local
CURRENCY currency and which do not operate in highly inflationary
TRANSLATION economies, all net monetary and non-monetary assets and
liabilities are translated into U.S. dollars at current
exchange rates and translation adjustments are included
in stockholders' equity. Revenues and expenses are
translated at the weighted average rate for the period.
Foreign currency gains and losses resulting from
transactions are included in the results of operations
in the period in which the transactions occurred.
Cumulative translation gains and losses are reported as
accumulated other comprehensive income (loss) in the
supplemental consolidated statements of stockholders'
equity and are included in comprehensive loss.
FINANCIAL Financial instruments, which potentially subject the
INSTRUMENTS Company to concentrations of credit risk consist
AND principally of cash and cash equivalents, short-term
CONCENTRATIONS investments and trade accounts receivable.
OF CREDIT RISK
The Company places its cash and temporary cash
investments with quality financial institutions. At
times, these amounts may exceed federally insured
limits.
Concentrations of credit risk with respect to trade
accounts receivable are generally limited due to the
variety of customers and markets which comprise the
Company's customer base, as well as the geographic
diversification of the customer base. In certain
circumstances, the Company has purchased credit
insurance on its accounts receivables.
The Company routinely assesses the financial strength of
its customers and, as a consequence, believes that its
trade accounts receivable credit risk exposure is
limited. In certain circumstances the Company will
require security deposits; however, generally, the
Company does not require collateral or other security to
support customer receivables. As of December 31, 1999,
the Company had approximately 16.2% and 7.7% in net
trade accounts receivable from two customers. The
Company is negotiating with the one customer whose
account is 7.7% of net trade accounts receivable for a
long-term payment agreement. There is no assurance the
Company will receive full payment of this receivable.
F-19
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
FINANCIAL Some of the Company's customers are permitted to choose
INSTRUMENTS AND the currency in which they pay for calling services from
CONCENTRATIONS among several different currencies determined by the
OF CREDIT RISK Company. Thus, the Company's earnings may be materially
(CON'T) affected by movements in the exchange rate between the
U.S. dollar and such other currencies. The Company does
not engage in the practice of entering into foreign
currency contracts in order to hedge the effects of
foreign currency fluctuations. The majority of the
Company's largest customers settle their accounts in
U.S. Dollars.
The carrying amounts of financial instruments, including
cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued
expenses approximated fair value because of the
immediate or short-term maturity of these instruments.
The difference between the carrying amount and fair
value of the Company's notes payable and long-term debt
is not significant.
RESTRICTED CASH Restricted cash consists of deposits with a financial
institution to secure a letter of credit issued to a
transmission vendor related to an agreement whereby the
Company will perform platform and transmission services.
In addition, a credit card processing company requires
that cash balances be deposited with the processor in
order to ensure that any disputed claims by the credit
card customers can be readily settled.
RESTRICTED Restricted short-term investments consist of
SHORT-TERM certificates of deposits with a financial institution to
INVESTMENTS secure letters of credit issued to transmission vendors
related to an agreement whereby the vendors will perform
transmission services.
PROPERTY, Property and equipment are recorded at the lower of cost
EQUIPMENT, or fair market value. Additions, installation costs and
DEPRECIATION major improvements of property and equipment are
AND capitalized. Expenditures for maintenance and repairs
AMORTIZATION are expensed as incurred. The cost of property and
equipment retired or sold, together with the related
accumulated depreciation or amortization, are removed
from the appropriate accounts and the resulting gain or
loss is included in the supplemental consolidated
statement of operations.
Depreciation and amortization is computed using the
straight-line method over the estimated useful lives of
the related assets ranging from three to twenty years.
Leasehold improvements are amortized over the terms of
the respective leases and/or service lives of the
improvements, whichever is shorter. See discussion of
impairment policy under "Long-Lived Assets".
F-20
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
SOFTWARE Statement of Financial Accounting Standards ("SFAS") No.
DEVELOPMENT 86, "Accounting for the Costs of Computer Software to be
COSTS Sold, Leased, or Otherwise Marketed", requires the
capitalization of certain software development costs
incurred subsequent to the date when technological
feasibility is established and prior to the date when
the product is generally available for licensing. The
Company defines technological feasibility as being
attained at the time a working model of a software
product is completed.
The Company expenses all costs incurred to establish
technological feasibility of computer software products
to be sold or leased or otherwise marketed. Upon
establishing technological feasibility of a software
product, the Company capitalizes direct and indirect
costs related to the product up to the time the product
is available for sale to customers. Capitalized software
development costs are generally amortized on a
product-by-product basis each year based upon the
greater of: (1) the amount computed using the ratio of
current year gross revenue to the sum of current and
anticipated future gross revenue for that product, or
(2) five year straight-line amortization. The Company
acquired $8.4 million of software development costs for
which technological feasibility had already been
established in connection with the acquisition of
Connectsoft as discussed in Note 4. Additional software
development costs of $573,000 were capitalized during
1999.
Under the provisions of the American Institute of
Certified Public Accountants' ("AICPA") Statement of
Position ("SOP") 98-1, "Accouting for the Costs of
Computer Software Developed or Obtained for Internal
Use", the Company expenses cost incurred in the
preliminary project stage and, thereafter, capitalizes
costs incurred in the developing or obtaining of
internal use software. Certain costs, such as
maintenance and training, are expensed as incurred.
Capitalized costs are amortized over a period of not
more than five years. The Company acquired $2.9 million
of internally developed software in connection with the
acquisition of Telekey, Connectsoft and Coasts discussed
in Note 4. These amounts are included in other
intangible assets in the supplemental consolidated
balance sheet as of December 31, 1999. The Company
recorded amortization expense related to software
development costs of $1.1 million during 1999. No
related amortization expense was recorded in the
December 1998 and March 1998 periods. The Company
assesses the carrying amount of capitalized costs for
impairment based upon the impairment policy as discussed
under "Long-Lived Assets".
RESEARCH AND Research and development costs and costs related to
DEVELOPMENT significant improvements and refinements of existing
products are expensed as incurred. For the year ended
December 31, 1999, the nine month period ended December
31, 1998 and the year ended March 31, 1998 the
Company's expensed research and development costs were
nominal.
F-21
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
GOODWILL AND OTHER As of December 31, 1999 and 1998, the Company has
INTANGIBLE ASSETS recorded goodwill in connection with certain
acquisitions, as discussed in Note 4, of $26.5 million
and $12.0 million, respectively. Certain goodwill
amounts recorded in 1998 were based upon preliminary
information and during 1999 goodwill adjustments were
recorded to reflect the final asset appraisal
information. In addition, as discussed in Note 4, an
adjustment was recorded in 1999 to increase the goodwill
related to the IDX acquisition as a result of an
increase in the value of the purchase consideration.
Amortization of goodwill is provided over seven years on
a straight-line method. Goodwill amortization expense
for the year ended December 31, 1999 and the nine months
ended December 31, 1998 was $1.4 million and $0.1
million, respectively. There was no goodwill recorded
prior to March 31, 1998.
As of December 31, 1998, the Company had recorded $1.0
million in other intangible assets, consisting primarily
of licenses and trademarks. During 1999, intangible
assets of $26.4 million were recorded in connection with
the acquisitions discussed in Note 4. These intangible
assets were recorded based on third party appraisals and
consist of the value related to assembled and trained
work forces, customer contract bases, distribution
partnership network, non-compete agreements, internally
developed software, long distance infrastructure,
licenses and existing technologies. Intangibles are
being amortized on a straight-line basis over the
estimated useful lives from one to ten years.
The carrying value of goodwill and other intangibles are
reviewed on a periodic basis for recoverability based on
the undiscounted cash flows of the businesses acquired
over the remaining amortization period. Should the
review indicate that these amounts are not recoverable,
the Company's carrying value of the goodwill and/or
other intangibles would be reduced by the estimated
shortfall of the cash flows. In addition, the Company
assesses the carrying amount of these intangible assets
for impairment based upon the policy discussed under
"Long-Lived Assets" below. No reduction of goodwill or
intangibles for impairment was necessary in 1999 or
1998.
LONG-LIVED ASSETS The Company follows the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets to
be Disposed Of" for long-lived assets and certain
identifiable intangibles to be held and used by the
Company. These assets are reviewed for impairment
whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be
recoverable. If the fair value is less than the carrying
amount of the asset, a loss is recognized for the
difference.
DEPOSITS The Company provides long-term cash deposits to certain
vendors to secure contracts for telecommunications
services.
F-22
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
DEFERRED Deferred financing and acquisition costs included in
FINANCING AND other assets in the accompanying supplemental
ACQUISITION consolidated balance sheets represent third party costs
COSTS and expenses incurred which are directly traceable to
pending acquisitions and financing efforts. The costs
and expenses will be matched with completed financings
and acquisitions and accounted for according to the
underlying transaction. The costs and expenses
associated with unsuccessful efforts will be expensed in
the period in which the acquisition or financing has
been deemed to be unsuccessful. The Company evaluates
all pending acquisition and financing costs quarterly to
determine if any deferred costs should be expensed in
the period.
REVENUE Some revenues from the Company's card services business
RECOGNITION come from supplying underlying services to issuers of
prepaid cards. Those issuers prepay some or all of the
services provided. Payments received in advance for such
services are recorded in the accompanying supplemental
consolidated balance sheets as deferred revenue.
Consequently, revenues from such services are recognized
as the cards are used and service is provided. Direct
costs associated with these revenues are also recognized
when the related services are provided or expired.
Payments related to unrecognized revenues are included
as a reduction to deferred revenue. When a card for
which service has been contracted expires without being
fully used (cards generally have effective lives of up
to one year), then the unused value is referred to as
breakage and recorded as revenue at the date of
expiration.
In addition, the Company, following its recent
acquisition of ORS, has recorded deferred revenue
related to certain reservations service contracts.
Customers are required to pay the Company for
reservation services in advance based on forecasted
amounts. These advance payments are recorded by the
Company as deferred revenue, which is subsequently
recognized as revenue when the related services are
performed.
Revenue for all services is recognized on an individual
product basis as provided to the customer. Revenue from
the provision of the Calling Card and transmission
services is recognized as utilized by customers or upon
the completion of telephone calls by the end user.
Billings to customers are based upon established tariffs
filed with the United States Federal Communications
Commission, or for usage outside of the tariff
requirements, at rates established by the Company.
For Vogo, the Company's provider of software products,
revenue is recognized from the license of its
proprietary software in accordance with the provisions
of SOP 97-2, "Software Revenue Recognition." SOP 97-2
provides guidelines concerning the recognition of
revenue of software products. This statement requires,
among other things, the individual elements of a
contract for the sale of software products to be
identified and accounted for separately.
F-23
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
REVENUE IDX operates and manages Cyberpost equipment and
RECOGNITION associated software licenses to its Internet Backbone
(CON'T) Providers. Under such licensing agreements, IDX is
generally obligated to provide maintenance and upgrades
and Internet Backbone Providers are responsible for the
marketing and sale of voice and data store-and-forward
services as well as for the operations and management of
Cyberposts. IDX's revenues are generated principally
from (i) routing charges for voice and fax traffic
through the network, (ii) licensing and royalty fees and
(iii) system hardware and accessory sales. IDX
recognizes fixed license fees on the straight-line basis
over the service period, royalties and routing charges
as services are rendered to the ultimate customer, and
system hardware and accessory sales upon delivery and
customer acceptance.
Coast recognizes revenue upon completion of telephone
calls by the end users. Interactive Media Works ("IMW")
and ISPN, divisions of Coast, as well as iGlobe,
recognize revenue as service is provided.
TAXES ON The Company accounts for income taxes under SFAS No.
INCOME 109, "Accounting for Income Taxes". Under SFAS No. 109,
deferred tax assets and liabilities are determined based
on the temporary differences between the tax basis of
assets and liabilities and their reported amounts in the
financial statements using enacted tax rates in effect
for the year in which the differences are expected to
reverse.
NET EARNINGS The Company applies SFAS No. 128, "Earnings Per Share"
(LOSS) for the calculation of "Basic" and "Diluted" earnings
PER SHARE (loss) per share. Basic earnings (loss) per share
includes no dilution and is computed by dividing income
(loss) available to common stockholders by the weighted
average number of common shares outstanding for the
period. Diluted earnings (loss) per share reflects the
potential dilution of securities that could share in the
earnings (loss) of an entity.
F-24
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
STOCK The Company applies Accounting Principles Board ("APB")
OPTIONS Opinion 25, "Accounting for Stock Issued to Employees,"
and related Interpretations in accounting for all stock
option plans. Compensation cost of stock options is
measured as the excess, if any, of the quoted market
price of the Company's stock at the date of grant over
the option exercise price and is charged to operations
over the vesting period.
SFAS No. 123, "Accounting for Stock-Based Compensation,"
requires the Company to provide pro forma information
regarding net income (loss) as if compensation cost for
the Company's stock option plans had been determined in
accordance with the fair value based method prescribed
in SFAS No. 123. To provide the required pro forma
information, the Company estimates the fair value of
each stock option at the grant date by using the
Black-Scholes option-pricing model. See Note 10 for
required disclosures.
Under SFAS No. 123, compensation cost is recognized for
stock options granted to non-employees at the grant date
by using the Black-Scholes option-pricing model.
CASH The Company considers cash and all highly liquid
EQUIVALENTS investments purchased with an original maturity of three
months or less to be cash equivalents.
SHORT-TERM Short-term investments include funds invested in a money
INVESTMENTS market fund which invests in a broad range of money
market securities, including, but not limited to,
short-term U.S. government and agency securities, bank
certificates of deposit and corporate commercial paper.
Short-term investments are carried at amortized cost,
which approximates fair value.
COMPREHENSIVE The Company applies SFAS No. 130, "Reporting
INCOME (LOSS) Comprehensive Income". Comprehensive income (loss) is
comprised of net income (loss) and all changes to
stockholders' equity, except those due to investments by
stockholders, changes in paid-in capital and
distributions to stockholders. The Company has elected
to report comprehensive net loss in a separate
supplemental consolidated statement of comprehensive
loss.
F-25
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
FAIR VALUE The estimated fair value of financial instruments has
OF FINANCIAL been determined using available market information or
INSTRUMENTS other appropriate valuation methodologies. However,
considerable judgment is required in interpreting market
data to develop estimates of fair value. Consequently,
the estimates are not necessarily indicative of the
amounts that could be realized or would be paid in a
current market exchange. The carrying amounts reported
on the supplemental consolidated balance sheets
approximate their respective fair values.
SEGMENT The Company follows the provisions of SFAS No. 131,
INFORMATION "Disclosures about Segments of an Enterprise and Related
Information". This statement establishes standards for
the reporting of information about operating segments in
annual and interim financial statements. Operating
segments are defined as components of an enterprise for
which separate financial information is available that
is evaluated regularly by the chief operating decision
maker(s) in deciding how to allocate resources and in
assessing performance. SFAS No. 131 also requires
disclosures about products and services, geographic
areas and major customers. The Company has four
operating reporting segments consisting of Enhanced
Services, Network Services, Customer Care and Retail
Services.
RECENT The Financial Accounting Standards Board ("FASB") has
ACCOUNTING recently issued SFAS No. 133, "Accounting for Derivative
PRONOUNCEMENT Instruments and Hedging Activities". SFAS No. 133
requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair market
value. Gains or losses resulting from changes in the
values of those derivatives are accounted for depending
on the use of the derivative and whether it qualifies
for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in fair
value or cash flows. SFAS No. 133, as extended by SFAS
No. 137, is effective for fiscal years beginning after
June 15, 2000 and is currently not applicable to the
Company.
RECLASSIFICATIONS Certain consolidated financial amounts have been
reclassified for consistent presentation.
F-26
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. PROPERTY AND Property and equipment consist of the following:
EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
--------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 122,000 $ 122,000
Buildings and improvements 1,985,000 1,920,000
Calling card platform equipment 14,722,000 13,480,000
Telecom equipment 8,628,000 1,140,000
IP transmission equipment 4,229,000 888,000
Operations center equipment and furniture 13,255,000 8,789,000
Call diverters 18,016,000 8,175,000
Equipment under capital leases (Note 5) 4,910,000 1,279,000
Internet communications equipment 563,000 562,000
--------------------------------------------------------------------------------------------
66,430,000 36,355,000
Less accumulated depreciation and amortization 24,352,000 16,157,000
--------------------------------------------------------------------------------------------
$42,078,000 $20,198,000
============================================================================================
</TABLE>
Depreciation expense for the year ended December 31,
1999, the nine months ended December 31, 1998 and the
year ended March 31, 1998 was $8.4 million, $3.2 million
and $3.3 million, respectively.
2. OTHER Other intangible assets consist of the following:
INTANGIBLE
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Existing technology $ 8,400,000 $ --
Distribution partnership network 5,290,000 --
Assembled and trained workforce 4,391,000 --
Internally developed software 3,488,000 --
Long distance infrastructure 1,580,000 --
Non-compete agreements 1,540,000 --
Customer contract base 1,343,000 --
Licenses 1,143,000 433,000
Trademarks 549,000 518,000
Other 416,000 76,000
---------------------------------------------------------------------------------------------------
28,140,000 1,027,000
Less accumulated amortization 6,466,000 786,000
---------------------------------------------------------------------------------------------------
$21,674,000 $ 241,000
===================================================================================================
</TABLE>
F-27
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
2. OTHER Intangible assets amortization expense for the year
INTANGIBLE ended December 31, 1999, the nine month period ended
ASSETS December 31, 1998 and the year ended March 31, 1998 was
(CON'T) $5.7 million, $0.1 million and $0.2 million,
respectively. Included in internally developed software
is approximately $0.6 million of additional software
development costs capitalized in 1999 related to
enhancements for the existing technology acquired in the
Connectsoft acquisition.
3. ACCRUED Accrued expenses consist of the following:
EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Telephone carriers $ 2,658,000 $ 3,091,000
Accrued telecom taxes 1,930,000 --
External development costs 1,582,000 --
Dividends on preferred stock 1,277,000 --
Legal and professional fees 1,165,000 479,000
Salaries and benefits 895,000 737,000
Interest 313,000 647,000
Costs associated with acquisitions 296,000 697,000
Other 876,000 1,264,000
-----------------------------------------------------------------------------------------------------
$ 10,992,000 $ 6,915,000
=====================================================================================================
</TABLE>
The Company incurred $3.1 million of various realignment
expenses, including primarily employee severance, legal
and consulting fees and the write down of certain
investments during the year ended March 31, 1998. As of
December 31, 1999, there was a remaining accrual of
$281,000 included in other accrued expenses related to
litigation with a former employee that was settled in
October 1999. Final payment to the former employee was
made subsequent to December 31, 1999.
4. BUSINESS As discussed previously, the Company acquired IDX and
ACQUISITIONS 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 supplemental consolidated financial statements from
the date of acquisition.
F-28
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
- --------------------------------------------------------------------------------
4. BUSINESS IDX
ACQUISITIONS
(CON'T) On December 2, 1998, the Company acquired all of the
common and preferred stock of IDX, for an original value
of approximately $10.8 million consisting of (a) 500,000
shares of the Company's Series B Convertible Preferred
Stock ("Series B Preferred") originally valued at $3.5
million which were convertible into 2,500,000 shares
(2,000,000 shares until stockholder approval was
obtained on June 16, 1999 and subject to adjustment as
described below) of common stock; (b) warrants ("IDX
Warrants") to purchase up to an additional 2,500,000
shares of common stock (subject to stockholder approval
which was obtained on June 16, 1999 and an adjustment as
described below); (c) $5.0 million in 7.75% convertible
subordinated promissory notes ("IDX Notes") (subject to
adjustment as described below); (d) $1.5 million in
bridge loan advances to IDX made by the Company prior to
the acquisition which were converted into part of the
purchase price plus associated accrued interest of
$40,000; (e) $418,000 convertible subordinated
promissory note for IDX dividends accrued and unpaid on
IDX's Preferred Stock and (f) direct costs associated
with the acquisition of $0.4 million (another $0.3
million of direct costs were recorded in 1999). This
acquisition was accounted for using the purchase method
of accounting. The shares of Series B Preferred Stock,
IDX Warrants and IDX Notes were subject to certain
adjustments related to IDX's ability to achieve certain
performance criteria, working capital levels and price
guarantees for the Series B Preferred Stock and IDX
Warrants providing IDX met its performance objectives.
At the Company's annual meeting in June 1999, the
stockholders approved the increase of the convertibility
of the Series B Preferred Stock and IDX Warrants as
discussed in (a) and (b) above, respectively. As a
result, the acquired goodwill associated with the IDX
purchase was increased by approximately $1.5 million in
the second quarter to reflect the higher conversion
feature approved in June 1999.
The Company obtained a final appraisal of IDX's assets
from independent appraisers in the third quarter of
1999. This appraisal resulted in a gross
reclassification of approximately $6.5 million of IDX's
goodwill to other identifiable intangibles as of
December 31, 1999. As a result, the purchase allocation
as of December 31, 1999 resulted in goodwill of $6.4
million (including final allocations of other acquired
assets of $0.2 million) and other intangibles of $6.5
million. These other identifiable intangibles consist of
assembled and trained workforce, partnership network and
non-compete agreements and are being amortized on a
straight-line basis from one to four years. Goodwill is
being amortized on a straight-line basis over seven
years.
In July 1999, the Company renegotiated the terms of the
IDX purchase agreement with the IDX stockholders as
follows:
F-29
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4. BUSINESS (a) The 500,000 shares of Series B Preferred Stock
ACQUISITIONS were reacquired by the Company in exchange for
(CON'T) 500,000 shares of Series H Convertible Preferred
Stock ("Series H Preferred").
(b) The Company reacquired the original IDX Warrants
in exchange for new warrants to acquire up to
1,250,000 shares of the Company's common stock,
subject to IDX meeting certain revenue, traffic
and EBITDA ("Earnings Before Interest, Taxes,
Depreciation and Amortization") levels at either
September 30, 2000 or December 31, 2000 if not
achieved by September 30, 2000.
(c) The Company reacquired the outstanding IDX Notes
of $4.0 million in exchange for 400,000 shares
of Series I Convertible Optional Redemption
Preferred Stock ("Series I Preferred"). (See
Note 10 for further discussion) .
(d) The maturity date of the convertible
subordinated promissory note, face value of
$418,000, was extended to July 15, 1999 from May
31, 1999, and subsequently paid by issuance of
140,599 shares of common stock.
(e) The Company waived its right to reduce the
principal balance of the $2.5 million note
payable by certain claims as provided for under
the terms of the original IDX purchase
agreement.
As a result of the July 1999 exchange agreement, the
Company recorded the excess of the fair market value of
the new preferred stock issuances and the warrants over
the carrying value of the reacquired preferred stock,
warrants and notes payable as a dividend to Series B
Preferred Stock stockholders of approximately $6.0
million (subsequently reduced by $1.4 million, see
discussion below).
The Company will determine the final goodwill amount
when the contingent purchase element is resolved and the
contingent warrants are exercised. Goodwill may
materially increase when this contingency is resolved.
At the acquisition date, the stockholders of IDX
originally received Series B Preferred Stock and
warrants as discussed above, which were ultimately
convertible into common stock subject to IDX meeting its
performance objectives. These stockholders in turn
granted preferred stock and warrants, each of which was
convertible into a maximum of 240,000 shares of the
Company's common stock, to certain IDX employees. The
increase in the market price during the year ended
December 31, 1999 and the nine months ended December 31,
1998 of the underlying common stock granted by the IDX
stockholders to certain employees resulted in a charge
to income of $0.6 million and $0.4 million,
respectively. The stock grants were performance based
and were adjusted each reporting period (but not below
zero) for the changes in the stock price until the
shares and/or warrants (if and when) issued were
converted to common stock.
F-30
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4. BUSINESS In December 1999, the Company and the IDX stockholders
ACQUISITIONS agreed to reduce the Series H Preferred Stock and
(CON'T) warrant consideration paid by the Company by a value
equivalent to the consideration paid by the Company for
4,500 shares of IDX. In exchange, the IDX stockholders
will not issue the original preferred stock and warrants
to the above IDX employees or other parties. The Company
agreed to issue eGlobe options to these employees and
others related to IDX. The options will have an exercise
price of $1.20 and a three year term. The options will
vest 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
by eGlobe on January 7, 2000. The Company also agreed to
issue 150,000 shares of common stock as payment of the
original consideration allocated as purchase
consideration for an acquisition of a subsidiary by IDX
prior to the Company's purchase of IDX.
As a result of the above renegotiation, which resulted
in the reduction of the fair value of the Series H
Preferred Stock and the new warrants and the issuance of
eGlobe's options, the Company recorded the reduction in
consideration of approximately $1.4 million to be paid
to the IDX stockholders as a negative dividend
(offsetting the dividend recorded from the July
renegotiation) and reduced the net loss attributable to
common stockholders in the fourth quarter of 1999.
UCI
On December 31, 1998, the Company acquired all of the
common stock issued and outstanding of UCI, a
privately-held corporation established under the laws of
the Republic of Cyprus, for a value of approximately
$1.2 million for 125,000 shares of common stock (50%
delivered at the acquisition date (valued at $102,000)
and 50% to be delivered February 1, 2000, subject to
adjustment), and $2.1 million payable as follows: (a)
$75,000 paid in cash in January 1999; (b) $1.0 million
in the form of two notes; (c) $1.0 million in the form
of a non-interest bearing note payable only depending on
the percentage of projected revenue achieved, subject to
adjustment; and (d) warrants to purchase 50,000 shares
of common stock with an exercise price of $1.63 per
share. See Note 5 for the terms and conditions of the
notes. This acquisition has been accounted for under the
purchase method of accounting.
In 1999, the Company obtained a final appraisal of UCI's
assets from independent appraisers which resulted in
acquired goodwill of $0.5 million and an acquired
intangible of $0.7 million related to customer
contracts. Goodwill is being amortized on a
straight-line basis over seven years and the acquired
intangible is being amortized on a straight-line basis
over two years. The Company may issue additional
purchase consideration (see discussion above of $1.0
million note) if UCI meets certain defined revenue
targets. The Company is currently renegotiating the
original agreement and timing of the performance
measurement. The goodwill amount will be finalized
pending resolution of these purchase price
contingencies. As a result, goodwill may increase when
these contingencies are resolved.
F-31
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4. BUSINESS TELEKEY
ACQUISITIONS
(CON'T) On February 12, 1999, the Company completed the
acquisition of Telekey for a value of approximately $3.4
million for which it: (i) paid $0.1 million at closing;
(ii) issued a promissory note for $150,000 payable in
equal monthly installments over one year; (iii) issued
1,010,000 shares of Series F Convertible Preferred Stock
("Series F Preferred") valued at $2.0 million; and (iv)
agreed to issue 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 (or upon a change of control or
certain events of default if they occur before the end
of two years), subject to Telekey meeting certain
revenue and EBITDA objectives; and (v) direct costs
associated with the acquisition of $0.2 million. See
Notes 5 and 10 for further discussion. The value of
$979,000 for the above 505,000 shares of Series F
Preferred Stock has been included in the purchase
consideration.
This acquisition was accounted for using the purchase
method of accounting. The purchase price allocation
based on management's review and third party appraisals
resulted in goodwill of $2.1 million and acquired
intangibles of approximately $3.0 million related to the
value of certain distribution networks, internally
developed software and assembled and trained workforce.
Goodwill is being amortized on a straight-line basis
over seven years. The acquired intangibles are being
amortized on a straight-line basis over the useful lives
of three to seven years. The final purchase amount will
be determined when the contingent purchase element
related to Telekey's ability to achieve certain revenue
and EBITDA objectives is resolved and the additional
shares are issued. Goodwill may increase when this
contingency is resolved.
At the acquisition date, the stockholders of Telekey
received Series F Preferred Stock as discussed above,
which is ultimately convertible into common stock. In
addition, the stockholders may receive additional shares
of Series F Preferred Stock subject to Telekey meeting
its performance objectives. These stockholders in turn
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 will be issued only if Telekey
meets certain performance objectives. As of December 31,
1999, the value of the underlying non-contingent 180,000
shares of common stock granted by the Telekey
stockholders to certain employees has resulted in a
charge to income of $0.8 million. The stock grants are
performance based and will be adjusted each reporting
period (but not less than zero) for the changes in the
stock price until the shares are issued to the
employees. As discussed in Note 10, the Telekey
stockholders converted their shares of Series F
Preferred Stock on January 3, 2000; therefore, no
additional compensation expense will be recorded for the
non-contingent shares after this date.
F-32
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4. BUSINESS In February 2000, the Company reached a preliminary
ACQUISITIONS agreement with the former stockholders of Telekey to
(CON'T) restructure certain terms of the original acquisition
agreement. Such restructuring, which is subject to
completion of final documentation, includes an
acceleration of the original earn out provisions as well
as the termination dates of certain employment
agreements.
CONNECTSOFT
In June 1999, the Company, through its subsidiary Vogo,
purchased substantially all the assets of Connectsoft,
for a value of approximately $5.3 million consisting of
the following: (a) one share of the Company's 6% Series
G Cumulative Convertible Redeemable Preferred Stock
("Series G Preferred") valued at $3.0 million; (b) $1.8
million in advances (includes $971,000 in 1998) to
Connectsoft made by the Company prior to the acquisition
which were converted into part of the purchase price and
(c) direct costs associated with the acquisition of $0.5
million. This acquisition was accounted for under the
purchase method of accounting and the financial
statements of the Company reflect the final allocation
of the purchase price based on appraisals performed by a
third party. The final allocation resulted in goodwill
of $1.0 million and acquired intangibles of $9.1
million. The acquired intangibles consist of internally
developed software, existing technology, assembled
workforce and customer base. Intangibles are being
amortized on a straight-line basis over useful lives of
three to five years. Goodwill is being amortized on a
straight-line basis over seven years.
The Company also borrowed $0.5 million from the seller
which bears interest at a variable rate (8.5% at
December 31, 1999). Principal and interest payments are
due in twelve (12) equal monthly payments commencing on
September 1, 1999. The remaining principal and accrued
interest also become due on the first date on which (i)
the Company receives in any transaction or series of
transactions any equity or debt financing of at least
$50.0 million or (ii) Vogo receives in any transaction
or series of transactions any equity or debt financing
of at least $5.0 million. See Note 5 for further
discussion.
F-33
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4. BUSINESS In August 1999, the Company issued 30 shares of Series K
ACQUISITIONS Cumulative Convertible Preferred Stock ("Series K
(CON'T) Preferred Stock") in exchange for its Series G Preferred
Stock held by the seller of Connectsoft. (See Note 10
for further discussion).
SWIFTCALL
In July 1999, the Company acquired all the common stock
of Swiftcall, a privately-held telecommunications
company, and certain network operating equipment held by
an affiliate of Swiftcall. The aggregate purchase price
equaled $3.3 million, due in two equal payments on
December 3, 1999 and June 1, 2000. The agreement
provided that payments could be made at the option of
the Company, in whole or in part, (i) in cash or (ii) in
stock, by issuing to the stockholder of Swiftcall the
number of shares of common stock of the Company equal to
the first payment amount or the second payment amount,
as the case may be, divided by the market price as
defined. On August 12, 1999, the Company elected to make
both payments by issuing common stock. In December 1999,
the Company issued 526,063 shares of common stock valued
at $1,645,000 as payment for the first of the two
installment payments. The final payment is payable June
1, 2000 in shares of common stock.
As part of the transaction, the former stockholder of
Swiftcall, who also owns VIP Communications, Inc.,
("VIP") a calling card company in Herndon, Virginia,
agreed to cause VIP to purchase services from the
Company's IDX subsidiary, of the type presently being
purchased by VIP from the Company's IDX subsidiary,
which results in revenue to the Company of at least
$500,000 during the 12 months ending August 3, 2000. Any
revenue shortfall will be paid by a reduction in the
number of shares of common stock issued to the former
stockholder of Swiftcall. The Company may deposit the
applicable portion of the second payment of the purchase
price of shares of common stock into escrow on June 1,
2000 if it appears that there will be a revenue
shortfall under the arrangement with VIP.
The acquisition was accounted for using the purchase
method of accounting. The financial statements of the
Company reflect the final allocation of the purchase
price based on appraisals performed by a third party.
The final allocation resulted in acquired property and
equipment valued at approximately $5.1 million that is
being depreciated on a straight-line basis over seven
years.
F-34
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4. BUSINESS iGLOBE
ACQUISITIONS
(CON'T) Effective August 1, 1999, the Company assumed
operational control of Highpoint, owned by Highpoint
Telecommunications, Inc. ("HGP"). On October 14, 1999,
substantially all of the operating assets of Highpoint
were transferred to iGlobe, a newly formed subsidiary of
HGP, and the Company acquired all of the issued and
outstanding common stock of iGlobe for a value of
approximately $9.9 million.. In July 1999, the Company
and Highpoint agreed that the Company would manage the
business of iGlobe and would take responsibility for the
ongoing financial condition of iGlobe from August 1,
1999, pursuant to a Transition Services and Management
Agreement ("TSA"). Pursuant to this agreement, HGP
financed working capital through the closing date to
iGlobe for which the Company issued a short-term note
payable of $1.8 million (see Note 5). The acquisition
closed October 14, 1999. The purchase price consisted of
(i) one share of 20% Series M Convertible Preferred
Stock ("Series M Preferred Stock") valued at $9.6
million (see Note 10 for further discussion), (ii)
direct acquisition costs of approximately $0.3 million;
and (iii) HGP was given a non-voting beneficial 20%
interest of the equity interest subscribed or held by
the Company in a yet-to-be-completed joint venture known
as IP Solutions B.V.
The acquisition was accounted for using the purchase
method of accounting. This initial preliminary purchase
price allocation based on management's review and third
party appraisals has resulted in 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. Goodwill is
being amortized on a straight-line basis over seven
years. The acquired intangibles are being amortized on a
straight-line basis over the estimated useful lives of
three years. The Company will determine the final
purchase price allocation based on completion of
management's review.
F-35
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4. BUSINESS ORS
ACQUISITIONS
(CON'T) In September 1999, the Company acquired control of ORS
from its sole stockholder, Oasis. The Company and Oasis
formed eGlobe/Oasis Reservations LLC, ("LLC"), which is
responsible for conducting the business operations of
ORS. The Company manages and controls the LLC and
receives 90% of the profits and losses from ORS'
business. The LLC was funded by contributions effected
by the members under a Contribution Agreement
("Contribution Agreement"). Oasis contributed all the
outstanding shares of ORS valued at approximately $2.3
million as its contribution to the LLC. The Company
contributed 1.5 million shares of its common stock
valued at $3.0 million on the date of issuance and
warrants to purchase additional shares of its common
stock to the LLC. The warrants are exercisable for the
shares of common stock as discussed below:
(a) shares equal to the difference between $3.0
million and the value of the Company's 1.5
million share contribution on the date that the
shares of common stock (including the shares
underlying the warrants) contributed to the LLC
are registered with the SEC if the value of the
1.5 million shares on that date is less than
$3.0 million;
(b) shares equal to $100,000 of the Company's common
stock for each 30-day period beyond 90 days
following the date of contribution that the
shares of the Company's common stock (including
the shares underlying the warrants) contributed
to the LLC remain unregistered;
(c) shares up to $2.0 million of the Company's
common stock, subject to adjustment based upon
ORS achieving certain revenue and EBITDA targets
during the measurement period of August 1, 1999
to January 31, 2000: provided however, that
Oasis may select a different period if: (i) ORS
obtains a new customer contract at any time
between the closing date and March 31, 2000, and
(ii) the Company enters into a new contract with
a specific customer at any time between the
closing date and March 31, 2000. If either of
these events occur, then Oasis may select as the
measurement period, in its discretion, any of
the following; (x) the period from August 1,
1999 to January 31, 2000, (y) the period from
September 1, 1999 to February 29, 2000 or (z)
the period from October 1, 1999 to March 31,
2000;
F-36
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4. BUSINESS (d) additional shares based upon (1) ORS achieving
ACQUISITIONS certain revenue and EBITDA targets, and (2) the
(CON'T) Company's share price at the date of registration
of the shares for this transaction. Under certain
circumstances, these shares may be equal to the
greater of (A) 50% of the incremental revenue for
the Second Measurement Period (as defined in the
agreements) over $9.0 million or (B) four times the
incremental Adjusted EBITDA (as defined in the
agreements) for the Second Measurement Period over
$1.0 million provided, however, that such number of
shares shall not exceed the greater of; (i)
1,000,000 shares of the Company's common stock or
(ii) that the number of shares of the Company's
common stock determined by dividing $8.0 million by
the Second Measurement Period Date Market Value (as
defined in the agreements); and provided further,
that if the basis for issuance of such shares is
incremental revenue over $9.0 million then EBITDA
for the Second Measurement Period must be at least
$1.0 million for the revenue between $9.0 million
and $12.0 million or at least $1.5 million for
revenue above $12.0 million. In addition, the LLC
may receive 0.5 million shares of the Company's
common stock if the revenue for the Second
Measurement Period is equal to or greater than $37.0
million and the Adjusted EBITDA for the Second
Measurement Period is equal to or greater than $5.0
million.
According to the Operating Agreement, the net profits
and net losses of the LLC are allocated 90% to the
Company and 10% to Oasis. Proceeds from the sale of the
Company's common stock or warrants would be allocated
90% to the Company and 10% to Oasis. Proceeds from the
sale of the ORS stock or its assets will be allocated
100% to Oasis until Oasis has received distributions of
at least $9.0 million and then 90% to Oasis and 10% to
the Company. Pursuant to the LLC's Operating Agreement,
the LLC is an interim step to full ownership of ORS by
the Company. Once the Company has either raised $10.0
million in new capital or generated three consecutive
months of positive cash flow and registered the shares
issued in this transaction, the LLC will be dissolved
and ORS will become a wholly-owned subsidiary of the
Company. Under these circumstances, Oasis would receive
the shares of common stock and warrants contributed to
the LLC by the Company. Additionally, even if these
conditions are not fulfilled, Oasis has the right to
redeem its interest in the LLC at any time in exchange
for the shares of common stock and the warrants issued
to the LLC by eGlobe.
In January 2000, the Company raised more than $10.0
million in new capital. Once the Company registers the
shares issued in this transaction, the LLC will be
dissolved and ORS will become a wholly-owned subsidiary
of the Company.
F-37
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4. BUSINESS This acquisition was accounted for using the purchase
ACQUISITIONS method of accounting. The purchase allocation based on
(CON'T) management's review and third party appraisals resulted
in goodwill of $0.4 million and acquired intangibles of
$1.6 million related to assembled and trained workforce
and customer contracts. The goodwill is being amortized
on a straight-line basis over seven years. The acquired
intangibles are being amortized on a straight-line basis
over the estimated useful lives of three to five years.
The Company has not determined at this time if certain
performance measures have been met. The purchase amount
may increase upon resolution of the contingencies
discussed earlier.
As the Company controls the operations of the LLC, the
LLC has been included in the supplemental consolidated
financial statements with Oasis' interest in the LLC
recorded as Minority Interests.
In connection with the purchase and installation of
equipment and leasehold improvements at ORS' new
facility in Miami, Florida, Oasis agreed to loan ORS up
to $451,000. The loan is required to be repaid in six
equal quarterly principal installments beginning
November 30, 1999. The Company guaranteed ORS'
obligations under this loan and granted Oasis a security
interest in its ownership interest in the LLC. As of
December 31, 1999, there was $451,000 outstanding under
this commitment. See Note 5 for further discussion.
Subsequent to the acquisition, $1.0 million of costs
were incurred related to the purchase and installation
of equipment and leasehold improvements at this new
facility. Of these costs, $0.6 million was paid by Oasis
and contributed to the LLC resulting in an increase in
the Minority Interests.
F-38
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4. BUSINESS COAST
ACQUISITIONS
(CON'T) On December 2, 1999, the Company acquired all the common
shares of Coast which was majority owned by the
Company's largest stockholder (See Note 7). The purchase
consideration valued at approximately $16.7 million
consisted of: (a) 16,100 shares of Series O Convertible
Preferred Stock ("Series O Preferred Stock") valued at
approximately $13.4 million; (b) 882,904 shares of
common stock valued at approximately $3.0 million; and
(c) direct costs associated with the acquisition of
approximately $0.3 million. The Series O Preferred Stock
is convertible into a maximum of 3,220,000 shares of
common stock. See Note 10 for further discussion.
The acquisition was accounted for using the purchase
method of accounting. The financial statements of the
Company reflect the preliminary allocation of the
purchase price based on management's review and
preliminary third party appraisals. The preliminary
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. Goodwill is being
amortized on a straight-line basis over seven years, and
the acquired intangibles are being amortized on a
straight-line basis over the estimated useful lives of
five years. The final purchase price allocation has not
been finalized pending final third party appraisals and
completion of management's review.
PRO FORMA RESULTS OF OPERATIONS
The IDX and UCI acquisitions as well as the subsequent
increase in the preferred conversion factor for
preferred shares originally issued to IDX stockholders,
the renegotiations of the terms of the IDX purchase
agreement and the 1999 reclassification of acquired
goodwill to other identifiable intangibles, are
reflected in the following unaudited pro forma
supplemental consolidated results of operations assuming
the acquisitions had occurred at the beginning of the
year ended March 31, 1998. The Telekey, Connectsoft,
Swiftcall, iGlobe, ORS, and Coast acquisitions, as well
as the exchange of the Series G Preferred Stock for the
Series K Preferred Stock, are reflected in the following
unaudited pro forma supplemental consolidated results of
operations assuming the acquisitions had occurred at the
beginning of the nine month period ended December 31,
1998.
F-39
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4. BUSINESS The unaudited pro forma supplemental consolidated
ACQUISITIONS results of operations for the year ended March 31, 1998
(CON'T) include IDX's results of operations for the year ended
December 31, 1997 and eGlobe's results of operations for
the year ended March 31, 1998. The IDX, UCI, Telekey,
Connectsoft, Swiftcall, iGlobe, ORS and Coast results of
operations for the nine months ended December 31, 1998
are estimated based on annualized results for the year
ended December 31, 1998 and seasonal trends in
operations.
<TABLE>
<CAPTION>
Unaudited Pro Forma Results
-----------------------------------------------------------------
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
1999 1998 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 163,103,000 $ 116,630,000 $ 80,164,000
Net loss before
extraordinary item $ (66,533,000) $ (22,085,000) $ (19,615,000)
Net loss $ (68,434,000) $ (22,085,000) $ (19,615,000)
Net loss attributable to
common stockholders $ (77,215,000) $ (24,764,000) $ (24,527,000)
Basic and diluted net
loss per share $ (1.20) $ (0.40) $ (0.43)
</TABLE>
In management's opinion, these unaudited pro forma
amounts are not necessarily indicative of what the
actual combined results of operations might have been if
the acquisitions had been effective at the beginning of
each respective period, as presented above.
F-40
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
5. NOTES PAYABLE Notes payable and long-term debt consist of the
AND LONG- following:
TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Promissory note to a telecommunications company, net of
unamortized discount of $0 and $206,000 (1) $ -- $ 7,294,000
Promissory notes for acquisition of IDX (2) -- 5,418,000
Promissory note for acquisition of UCI, net of unamortized
discount of $0 and $43,000 (3) 250,000 457,000
Promissory note for acquisition of UCI (4) 500,000 500,000
Promissory note to an investor, net of unamortized
discount of $0 and $26,000 (5) 282,000 224,000
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 299,000 305,000
Promissory note of Telekey payable to a telecommunication
company (6) 454,000 --
Promissory note for acquisition of Connectsoft (7) 500,000 --
Promissory note for acquisition of Telekey (8) 25,000 --
Promissory note due to seller of iGlobe (9) 1,831,000 --
Promissory note due to seller of ORS (10) 451,000 --
Promissory note secured by certain equipment (11) 2,720,000 --
Capitalized lease obligations (12) 5,750,000 724,000
----------------------------------------------------------------------------------------------------
Total 13,062,000 14,922,000
Less current maturities, net of unamortized discount
of $0 and $275,000 7,868,000 13,685,000
----------------------------------------------------------------------------------------------------
Total notes payable and long-term debt $5,194,000 $1,237,000
====================================================================================================
</TABLE>
F-41
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
5. NOTES PAYABLE (1) In February 1998, the Company borrowed $7.5
AND LONG- million from a telecommunications company. The
TERM DEBT note was unsecured and bore interest at 8.875%.
(CON'T) In connection with this transaction, the lender
was granted warrants expiring February 23, 2001
to purchase 500,000 shares of the Company's
common stock at a price of $3.03 per share. The
value of approximately $0.5 million assigned to
such warrants when granted in connection with
the above note agreement was recorded as a
discount to long-term debt and amortized over
the term of the note as interest expense. In
January 1999, pursuant to the anti-dilution
provisions of the loan agreement, the exercise
price of the warrants was adjusted to $1.5125
per share, resulting in additional debt discount
of $0.2 million. This amount was amortized over
the remaining term of the note. In July 1999,
this note plus accrued interest was repaid and
the remaining unamortized discount was recorded
as interest expense.
(2) In connection with the IDX acquisition, the
Company originally issued $5.0 million unsecured
convertible subordinated promissory notes and a
$418,000 convertible subordinated promissory
note for accrued but unpaid dividends owed by
IDX. The notes bore interest at LIBOR plus 2.5%.
Each of the notes, plus accrued interest, could
be paid in cash or shares of the Company's
common stock, at the sole discretion of the
Company. In March 1999, the Company elected to
pay the first note, which had a face value of
$1.0 million, plus accrued interest, in shares
of common stock and issued 431,729 shares of
common stock to discharge this indebtedness. In
connection with the discharge of this
indebtedness, the IDX stockholders were granted
warrants expiring March 23, 2002 to purchase
43,173 shares of the Company's common stock at a
price of $2.37 per share. The value assigned to
the warrants of $62,000 was recorded as interest
expense in March 1999.
In July 1999, the Company renegotiated the terms
of the purchase agreement with the IDX
stockholders. As a result of the renegotiations,
the Company exchanged the remaining notes
payable totaling $4.0 million for 400,000 shares
of Series I Preferred Stock valued at $4.0
million. In addition, the maturity date of the
$418,000 note was extended and repaid in August
1999 with 140,599 shares of common stock. See
Notes 4 and 10 for further discussion.
(3) On December 31, 1998, the Company acquired UCI.
In connection with this transaction, the Company
issued a $0.5 million unsecured promissory note
bearing interest at 8% with principal and
interest originally due June 27, 1999. In
connection with the note, UCI was granted
warrants expiring in December 31, 2003 to
purchase 50,000 shares of the Company's common
stock at a price of $1.63 per share. The value
assigned to the warrants of $43,000 was recorded
as a discount to the note and was amortized
through June 1999 as additional interest
expense. In August 1999, the Company completed
renegotiation of the terms of this note pursuant
to which the Company paid $250,000 in November
1999 with the remaining $250,000 plus accrued
interest payable on December 31, 1999. The
remaining note was paid in full subsequent to
year end.
(4) 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.
F-42
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
5. NOTES PAYABLE (5) In September 1998, a subsidiary of the Company
AND LONG- entered into a 12% unsecured bridge loan
TERM DEBT agreement with an investor for $250,000 and the
(CON'T) proceeds were advanced to Connectsoft, a company
acquired in September 1999 as discussed in Note
4. In connection with this transaction, the
lender was granted warrants to purchase 25,000
shares of the Company's common stock at a price
of $2.00 per share. The value assigned to the
warrants of $34,000 was recorded as a discount
to the note and has been fully amortized as of
December 31, 1999 as additional interest
expense. As part of the acquisition of
Connectsoft, the Company renegotiated the terms
of this note with the investor in July 1999.
Pursuant to the renegotiations, the original
note was replaced with a new note due September
12, 1999 representing principal plus accrued
interest due on the original note. In connection
with this new note, the lender was granted
warrants to purchase 25,000 shares of the
Company's common stock at a price of $2.82 per
share. The value of $34,000 assigned to the
warrants was recorded as a discount to the note
and amortized over the term of the loan. In
December 1999, the lender extended the note and
was granted warrants to purchase 10,000 shares
of the Company's common stock at a price of
$2.82 per share. The value of $15,000 was
recorded as interest expense in December 1999.
On January 28, 2000, the Company paid the
principal and interest in full.
(6) Telekey has an outstanding promissory note for
$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.
(7) In connection with the acquisition of
Connectsoft, the Company issued a $0.5 million
note to the seller. The note bears interest at a
variable rate (8.5% at December 31, 1999) and
principal and interest payments are due in
twelve equal monthly payments commencing on
September 1, 1999. The remaining principal and
accrued interest also become due on the first
date on which (i) the Company receives in any
transaction or series of transactions any equity
or debt financing of at least $50.0 million or
(ii) Vogo receives in any transaction or series
of transactions any equity or debt financing of
at least $5.0 million. The note is secured by
all the acquired assets and property of
Connectsoft. The Company repaid the note and
accrued interest subsequent to December 31,
1999.
<PAGE>
(8) In connection with the acquisition of Telekey,
the Company issued an unsecured,
non-interest-bearing note for $150,000.
Principal payments are due in equal monthly
payments through February 2000. Telekey also had
a $1.0 million line of credit due on demand and
bearing interest at a variable rate to
facilitate operational financing needs. The line
of credit was personally guaranteed by previous
stockholders of Telekey and was due on demand.
This line of credit expired in October 1999 and
the balance was repaid on November 2, 1999.
(9) Effective August 1, 1999, the Company acquired
iGlobe. In connection with this transaction,
Highpoint financed working capital for iGlobe
through the closing date for which the Company
has issued an unsecured note payable for
approximately $1.8 million which was subject to
adjustment. The outstanding past due balance
bears interest at 15% per annum. As of March 24,
2000, the Company has repaid $713,000 of the
note and the parties are currently negotiating
payment terms on the remaining balance.
(10) In connection with the purchase of ORS, the
seller loaned ORS up to $451,000 which was used
to purchase and install equipment and leasehold
improvements at ORS' new facility in Miami,
Florida. The note 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.
F-43
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
5. NOTES PAYABLE (11) Effective June 11, 1999, Trans Global entered
AND LONG- into a financing agreement to fund the purchase
TERM DEBT of certain switch hardware and software. The
(CON'T) note is payable for a total of $3.3 million in
36 consecutive monthly installments of
approximately $105,000 (principal and interest)
at a fixed interest rate of 8.88%. The note is
collateralized by the equipment which has a net
carrying value of $2.9 million at December 31,
1999.
(12) During 1999, the Company acquired certain
capital lease obligations of approximately $5.0
million through its acquisitions of Telekey,
Connectsoft, iGlobe and Coast as discussed in
Note 4. 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 8.52% to 28.0%. Accumulated depreciation on
equipment held under capital leases was
$1,395,000 and $150,000 at December 31, 1999 and
1998, respectively.
Notes payable, future maturities of long-term
debt and future minimum lease payments under
capital lease obligations at December 31, 1999
are as follows:
<TABLE>
<CAPTION>
NOTES PAYABLE
AND
LONG-TERM CAPITAL
YEARS ENDING DECEMBER 31, DEBT LEASES TOTAL
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2000 $ 5,280,000 $ 3,252,000 $ 8,532,000
2001 1,237,000 2,427,000 3,664,000
2002 521,000 915,000 1,436,000
2003 9,000 -- 9,000
2004 10,000 -- 10,000
Thereafter 255,000 -- 255,000
------------------------------------------------------------------------------------------------------
Total payments 7,312,000 6,594,000 13,906,000
Less amounts
representing interest -- 844,000 844,000
------------------------------------------------------------------------------------------------------
Principal payments 7,312,000 5,750,000 13,062,000
Less current maturities 5,280,000 2,588,000 7,868,000
------------------------------------------------------------------------------------------------------
Total long-term debt $ 2,032,000 $ 3,162,000 $ 5,194,000
======================================================================================================
</TABLE>
F-44
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
6. EARNINGS (LOSS) Earnings per share are calculated in accordance
PER SHARE with SFAS No. 128, "Earnings Per Share". Under
SFAS No. 128, basic earnings (loss) per share is
calculated as income (loss) available to common
stockholders divided by the weighted average
number of common shares outstanding. Diluted
earnings per share are calculated as net income
(loss) divided by the diluted weighted average
number of common shares. The diluted weighted
average number of common shares is calculated
using the treasury stock method for common stock
issuable pursuant to outstanding stock options
and common stock warrants. Common stock options
of 5,245,468, 2,538,159 and 2,020,822 and
warrants of 9,188,974, 4,093,167 and 1,391,667
were not included in diluted earning (loss) per
share for the year ended December 31, 1999, the
nine months ended December 31, 1998 and the year
ended March 31, 1998, respectively, as the
effect was antidilutive due to the Company
recording a loss for these periods. In addition,
convertible preferred stock, including dividends
payable in shares of common stock, stock to be
issued, and convertible subordinated promissory
notes convertible into 26,223,940 and 5,323,926
shares of common stock were not included in
diluted earnings (loss) per share for the year
ended December 31, 1999 and for the nine month
period ended December 31, 1998, respectively,
due to the loss for the periods. There was no
convertible preferred stock or convertible debt
outstanding at March 31, 1998.
Subsequent to December 31, 1999, the Company
issued additional preferred stock and warrants
convertible into shares of common stock. See
Note 10 for discussion. Also, the Company
renegotiated the terms of a preferred stock
issuance and certain preferred stock was
converted into common stock. (See Note 16 for
discussion). 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.
F-45
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
6. EARNINGS (LOSS)
PER SHARE (CON'T)
<TABLE>
<CAPTION>
YEAR NINE YEAR
ENDED MONTHS ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
NUMERATOR
Net loss before extraordinary item $(53,203,000) $ (5,958,000) $ (11,257,000)
Preferred stock dividends (11,930,000) -- --
--------------------------------------------------------
Net loss before extraordinary item
attributable to common stockholders (65,133,000) (5,958,000) (11,257,000)
Loss on early retirement of debt (1,901,000) -- --
--------------------------------------------------------
Net loss attributable to common stockholders $(67,034,000) $ (5,958,000) $ (11,257,000)
--------------------------------------------------------
DENOMINATOR
Weighted average shares outstanding 60,610,548 57,736,654 57,082,495
--------------------------------------------------------
PER SHARE AMOUNTS (BASIC AND DILUTED)
Net loss before extraordinary item $ (1.08) $ (0.10) $ (0.20)
Loss on early retirement of debt (0.03) -- --
=========================================================
Net loss per share $ (1.11) $ (0.10) $ (0.20)
=========================================================
</TABLE>
F-46
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
7. RELATED PARTY NOTES PAYABLE AND LONG-TERM DEBT
TRANSACTIONS
Notes payable and long-term debt with related parties
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Accounts receivable revolving credit note (1) $1,058,000 $ --
Secured notes, net of unamortized discount of
$7,128,000 and $0 (1) 7,806,000 --
Promissory note of Coast (2) 3,000,000 --
Promissory note of Coast (2) 250,000 --
Promissory note payable to a stockholder, net of
unamoritized discount of $137,000 and $46,000 (3) 863,000 954,000
Short-term loan from two officers and an investor (4) -- 200,000
---------------------------------------------------------------------------------------------------
Total, net of unamortized discount of $7,265,000
and $46,000 12,977,000 1,154,000
Less current maturities, net of unamortized discount
of $2,988,000 and $46,000. 4,676,000 1,154,000
---------------------------------------------------------------------------------------------------
Total long-term debt, net of unamortized discount
of $4,277,000 and $0 $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 is
the Company's largest stockholder. Under the
terms of this Loan and Note Purchase Agreement
("Agreement"), in April 1999, the Company
initially received an unsecured loan ("Loan") of
$7.0 million bearing interest at 8% payable
monthly with principal and remaining interest
due on the earlier of (i) April 2000, (ii) the
date of closing of an offering by the Company
from which the Company received net proceeds of
$30.0 million or more, or (iii) the closing of
the $20.0 million purchase of the Company's 5%
Secured Notes. As additional consideration, EXTL
received warrants to purchase 1,500,000 shares
of the Company's common stock at an exercise
price of $0.01 per share, of which 500,000
warrants were immediately exercisable and
1,000,000 warrants were exercisable only in the
event that the stockholders did not approve the
repayment of the $20.0 million credit facility
committed by EXTL in shares of the Company's
common stock and grant of warrants to purchase
5,000,000 shares of the Company's common stock
or the Company elected not to draw it down. The
1,000,000 warrants did not become exercisable
because both the stockholder approval was
received and the Company elected to draw down
the funds as discussed below.
The value of approximately $2.9 million assigned
to the 500,000 warrants was recorded as a
discount to the note payable and amortized
through July 1999 when the note was repaid.
F-47
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
7. RELATED PARTY Under the Agreement, in July 1999, EXTL purchased $20.0
TRANSACTIONS million of 5% Secured Notes ("Notes") dated June 30,
(CON'T) 1999 at the Company's request. The transactions
contemplated by the Agreement were approved by the
Company's stockholders at the annual stockholders
meeting in June 1999. The initial $7.0 million note was
repaid from the proceeds of the Notes along with accrued
interest of $0.1 million.
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.
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 ($1,066,000 as of December 31, 1999). Interest
payments are due monthly with the unpaid principal and
interest on the Revolver due on the earliest to occur of
(i) the third anniversary of the agreement, June 30,
2002, or (ii) the date of closing of a Qualified
Offering as defined above.
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"). At the date of exchange, the carrying value
of the $4.0 million Notes, net of the unamortized
discount of approximately $1.9 million, was
approximately $2.1 million. The excess of the fair value
of the Series J Preferred Stock of $4.0 million over the
carrying value of the Notes of $1.9 million was recorded
as an extraordinary loss on early retirement of debt.
The transaction does not result in a tax benefit to the
Company. As a result of this agreement, the $4.0 million
is not subject to redraw under the Revolver. (See Note
10 for further discussion.)
F-48
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
7. RELATED PARTY These Notes and Revolver are secured by
TRANSACTIONS substantially all of eGlobe's existing operating
(CON'T) assets (excluding Trans Global) and eGlobe's and
IDX'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
December 31, 1999 for which it received a waiver
from EXTL through January 1, 2001. In addition
the Company was in default under certain of its
other debt agreements as a result of
non-payments of scheduled payments at December
31, 1999 and obtained a waiver through February
14, 2000 from EXTL. The Company repaid these
other notes by February 14, 2000. The Company
was technically in default under the Notes due
to the Company's assumption of the Coast notes,
as discussed below in (2). However, in April
2000, the Agreement was amended and this event
of default was permanently cured as discussed in
Note 18.
(2) Coast, acquired in December 1999, has two
outstanding unsecured promissory notes with an
affiliate of EXTL for $3.0 million and $250,000.
The notes bear interest at a variable rate (10%
at December 31, 1999) and 11%, respectively.
Interest on both notes is payable monthly with
the principal due July 1, 2000 and November 29,
2000, respectively. A change of control is
considered an event of default under the
existing $3.0 million note. In April 2000, the
agreement was amended and the event of default
was permanently cured as discussed in Note 18.
<PAGE>
(3) In June 1998, the Company borrowed $1.0 million
from an existing stockholder under an 8.875%
unsecured note. In connection with this
transaction, the lender was granted warrants
expiring September 2001 to purchase 67,000
shares of the Company's common stock at a price
of $3.03 per share. The stockholder also
received as consideration for the loan, the
repricing and extension of an existing warrant
for 55,000 shares exercisable before February
2001 at a price of $3.75 per share. The value
assigned to such warrants, including the
revision of terms, of approximately $69,000, was
recorded as a discount to the note payable and
was amortized over the term of the note as
interest expense through December 31, 1999. In
January 1999, the exercise price of the 122,000
warrants was lowered to $1.5125 per share and
the expiration dates were extended through
January 31, 2002. The value of $57,000 assigned
to the revision in terms was recorded as
additional debt discount and was amortized as
interest expense through December 31, 1999.
In August 1999, the Company entered into a stock
purchase agreement with the lender. Under this
agreement, the lender agreed to purchase 160,257
shares of common stock of the Company at a price
per share of $1.56 and received a warrant to
purchase 60,000 shares of common stock of the
Company at a price per share of $1.00.
Additionally, the lender acquired an option to
exchange the principal of the note (up to a
maximum amount of $500,000) for: (1) shares of
common stock of the Company at a price per share
of $1.56 and (2) warrants to purchase shares of
common stock of the Company at a price of $1.00
(60,000 shares per $250,000 of debt exchanged).
The value of the maximum number of warrants that
would be issued upon exercise of the option of
approximately $71,000 was recorded as additional
debt discount and was amortized as interest
expense through December 31, 1999.
F-49
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
7. RELATED PARTY Effective December 16, 1999 the Company and the
TRANSACTIONS lender extended the maturity date of the note to
(CON'T) April 18, 2000 and increased the interest rate
on the balance outstanding from December 18,
1999 to maturity to 14%. Additionally, the
option to exchange up to 50% of the principal
balance for shares of common stock was increased
to 75% under the same terms as discussed
earlier. As a result, the value of the
additional 60,000 warrants that would be issued
upon exercise of the option of $137,000 was
recorded as additional debt discount and will be
amortized as interest expense through April 18,
2000. The value of $313,000 related to the
excess of the market value of the Company's
common stock over the conversion price under the
option was recorded as interest expense because
the debt is convertible at the election of the
lender until April 2000.
During 1999, the same stockholder loaned $0.2
million to the Company for short term needs.
This note was converted into 125,000 shares of
common stock during 1999. Upon conversion, the
stockholder was issued warrants to purchase
40,000 shares of common stock at an exercise
price of $1.60 per share and warrants to
purchase 40,000 shares of common stock at an
exercise price of $1.00 per share. The value of
$102,000 related to these warrants was recorded
as interest expense.
(4) On December 31, 1998, two officers of the
Company each loaned $50,000 and an investor
loaned $100,000 to the Company for short-term
needs. The loans were repaid in 1999.
Future maturities of notes payable and long-term debt
with related parties at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, TOTAL
----------------------------------------------------------------------------------------------------
<S> <C>
2000 $7,664,000
2001 3,076,000
2002 9,502,000
----------------------------------------------------------------------------------------------------
Total principal payments 20,242,000
Less unamortized discount 7,265,000
----------------------------------------------------------------------------------------------------
Total debt 12,977,000
Less current maturities, net of unamortized discount of $2,988,000 4,676,000
----------------------------------------------------------------------------------------------------
Total long-term debt, net of unamortized discount of $4,277,000 $8,301,000
====================================================================================================
</TABLE>
F-50
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
7. RELATED PARTY SETTLEMENT WITH PRINCIPAL STOCKHOLDER
TRANSACTIONS
(CON'T) In November 1998, the Company reached an agreement with
its former chairman, Mr. Ronald Jensen, who at the time
was also the Company's largest stockholder. Mr. Jensen
is also a member of EXTL, the Company's current largest
stockholder. The agreement concerned settlement of his
unreimbursed costs and other potential claims.
Mr. Jensen had purchased $7.5 million of eGlobe's common
stock in a private placement in June 1997 and later was
elected Chairman of the Board of Directors. After
approximately three months, Mr. Jensen resigned his
position citing both other business demands and the
demands presented by the challenges of the Company.
During his tenure as Chairman, Mr. Jensen incurred staff
and other costs, which were not billed to the Company.
Also, Mr. Jensen subsequently communicated with the
Company's current management indicating that there were
a number of issues raised during his involvement with
the Company relating to the provisions of his share
purchase agreement which could result in claims against
the Company.
In order to resolve all current and potential issues,
Mr. Jensen and the Company agreed to exchange his
current holding of 1,425,000 shares of common stock for
75 shares of 8% Series C Cumulative Convertible
Preferred Stock ("Series C Preferred Stock"), which
management estimated to have a fair market value of
approximately $3.4 million and a face value of $7.5
million. The terms of the Series C Preferred Stock
permitted Mr. Jensen to convert the face value of the
preferred stock to common stock at 90% of the market
price, subject to a minimum conversion price of $4.00
per share and a maximum of $6.00 per share. The
difference between the estimated fair value of the
preferred stock issued and the market value of the
common stock surrendered resulted in a non-cash charge
to the Company's statement of operations of
approximately $1.0 million in the nine months ended
December 31, 1998.
In February 1999, contemporaneous with the Company's
issuance of Series E Cumulative Convertible Redeemable
Preferred Stock ("Series E Preferred Stock") to EXTL
which is discussed below, the terms of the Series C
Preferred Stock were amended and the Company issued
3,000,000 shares of common stock in exchange for the 75
shares of outstanding Series C Preferred Stock
(convertible into 1,875,000 shares of common stock on
the exchange date). The market value of the 1,125,000
incremental shares of common stock issued was recorded
as a preferred stock dividend of approximately $2.2
million. See Note 10 for further discussion.
F-51
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
7. RELATED PARTY PREFERRED STOCK ISSUANCES
TRANSACTIONS
(CON'T) In February 1999, the Company issued 50 shares of Series
E Preferred Stock to the Company's largest stockholder
for $5.0 million. See Note 10 for further discussion.
As discussed earlier, in August 1999, the Company issued
40 shares of Series J Preferred Stock as prepayment of
$4.0 million of the Secured Notes. See Note 10 for
further discussion.
ACQUISITION OF COMPANIES
In December 1999, the Company acquired Coast, which was
majority owned by Mr. Jensen. See Note 4 for further
discussion. In addition, Coast has outstanding
promissory notes with an affiliate of EXTL as discussed
above.
Effective August 1, 1999, the Company acquired iGlobe, a
wholly-owned subsidiary of HGP. An eGlobe director is
the president and chief executive officer of HGP. See
Note 4 for further discussion.
REDEEMABLE COMMON STOCK
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 this employee in
the Coast acquisition for $700,000 under certain
conditions. Accordingly, the redemption value of
$700,000 for these shares was reclassified and reflected
as Redeemable Common Stock at December 31, 1999.
Subsequent to December 31, 1999, this employee waived
the redemption feature. As a result, this amount will be
reclassified to stockholders' equity in the first
quarter of 2000.
OFFICE LEASES
A company owned by the Co-Chairman, director and
significant stockholder of eGlobe leases certain offices
to the Company. The monthly rent of these office leases
approximates $50,000 through March 31, 2003. Rent
expense paid to companies owned by the stockholder was
approximately $573,000, $197,000 and $209,000 for the
year ended December 31, 1999, the nine months ended
December 31, 1998 and the year ended March 31, 1998,
respectively.
F-52
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
8. PROXY RELATED The Company, its former auditors, certain of its present
LITIGATION AND and former directors and others were defendants in a
SETTLEMENT consolidated securities class action which alleged that
COSTS certain public filings and reports made by the Company,
including its Forms 10-K for the 1991, 1992, 1993 and
1994 fiscal years (i) did not present fairly the
financial condition of the Company and its earnings; and
(ii) failed to disclose the role of a consultant to the
Company. The Company and its former auditors vigorously
opposed the action; however, the Company decided it was
in the stockholders' best interest to curtail costly
legal proceedings and settle the case.
Under an Order and Final Judgment entered in this action
on September 21, 1998 pursuant to the Stipulation of
Settlement dated April 2, 1998, the Company issued
350,000 shares of its common stock into a Settlement
Fund that was distributed as of October 1999 among the
Class on whose behalf the action was brought.
As a result of the above action and related matters, the
Company recorded $0.1 million and $3.9 million in costs
and expenses during the nine months ended December 31,
1998 and the year ended March 31, 1998. Included in the
March 31, 1998 amount, is a charge of $3.5 million which
represented the value assigned to the 350,000 shares of
common stock referred to above, which were valued at
$10.00 per share pursuant to the terms of the settlement
agreement. Such value related to the Company's
obligation under the Stipulation of Settlement to issue
additional stock if the market price of the Company's
stock was less than $10.00 per share during the defined
periods. The Company had no obligation to issue
additional stock if its share price is above $10.00 per
share for fifteen consecutive days during the two year
period after all shares have been distributed to the
Class. In March 2000, that condition was satisfied and
the Company has no further obligations under the
Stipulation of Settlement.
Additionally, the Company settled with another
stockholder related to the same securities class action
in May 1998 and issued that stockholder 28,700 shares of
common stock at the market price at the date of
settlement for a total value of $81,000.
F-53
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
9. OTHER In October 1999, a major telecommunications carrier
LITIGATION filed suit against the Company seeking approximately
$2.5 million pursuant to various service contracts. The
Company disputes the amounts allegedly owed based on
erroneous invoices, the quality of service provided and
unfair and deceptive billing practices. The Company
believes it has substantial counterclaims and is
vigorously defending this suit. The ultimate outcome of
this litigation is unknown at this time.
In July 1999, a certain transmission vendor filed suit
against the Company, seeking to collect approximately
$300,000. The Company believes it has substantial
counterclaims and is vigorously defending this suit
based upon breach of contract.
The Company and its subsidiaries are also parties to
various other legal actions and various claims arising
in the ordinary course of business. Management of the
Company believes that the disposition of the items
discussed above and such other actions and claims will
not have a material effect on the financial position,
operating results or cash flows of the Company.
F-54
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' PREFERRED STOCK AND REDEEMABLE PREFERRED STOCK
EQUITY
At the June 16, 1999 annual stockholder meeting, a
proposal to amend the Company's Certificate of
Incorporation to increase the Company's authorized
preferred stock to 10,000,000 was approved and adopted.
Par value for all preferred stock remained at $.001 per
share. In addition, the stockholders also approved and
adopted a prohibition on stockholders increasing their
percentage of ownership of the Company above 30% of the
outstanding stock or 40% on a fully diluted basis other
than by a tender offer resulting in the stockholder
owning 85% or more of the outstanding common stock. The
following is a summary of the Company's series of
preferred stock and the amounts authorized and
outstanding at December 31, 1999 and 1998:
Series B Convertible Preferred Stock, 500,000
shares authorized, and 0 and 500,000 shares,
respectively, issued and outstanding (series
eliminated in December 1999).
8% Series C Cumulative Convertible Preferred
Stock, 275 shares authorized, 0 and 75 shares,
respectively, issued and outstanding (series
eliminated in December 1999).
8% Series D Cumulative Convertible Preferred
Stock, 125 shares authorized, 35 and 0 shares,
respectively, issued and outstanding ($3.5
million aggregate liquidation preference)
(converted in January 2000).
8% Series E Cumulative Convertible Preferred
Stock, 125 shares authorized, 50 and 0 shares,
respectively, issued and outstanding (converted
on January 31, 2000).
Series F Convertible Preferred Stock, 2,020,000
authorized, 1,010,000 and 0 shares,
respectively, issued and outstanding (converted
on January 3, 2000).
6% Series G Cumulative Convertible Redeemable
Preferred Stock, 1 share authorized, no shares
issued and outstanding (series eliminated in
December 1999).
F-55
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' Series H Convertible Preferred Stock, 500,000
EQUITY (CON'T) shares authorized, 500,000 and 0 shares,
respectively, issued and outstanding (converted
on January 31, 2000).
Series I Convertible Optional Redemption
Preferred Stock, 400,000 shares authorized,
400,000 and 0 shares, respectively, issued and
outstanding (150,000 shares converted on
February 14, 2000).
5% Series J Cumulative Convertible Preferred
Stock, 40 shares authorized, 40 and 0 shares,
respectively, issued and outstanding ($4.0
million aggregate liquidation preference)
(converted on January 31, 2000).
5% Series K Cumulative Convertible Preferred
Stock, 30 shares authorized, 30 and 0 shares,
respectively, issued and outstanding ($3.0
million aggregate liquidation preference)
(converted on January 31, 2000).
20% Series M Convertible Preferred Stock, 1
share authorized, 1 and 0 share, respectively,
issued and outstanding ($9.0 million aggregate
liquidation preference).
8% Series N Cumulative Convertible Preferred
Stock, 20,000 shares authorized, 1,535 and 0
shares, respectively, issued and outstanding
($1.5 million liquidation preference) (converted
during January 2000).
Series O Convertible Preferred Stock, 16,100
shares authorized, 16,100 and 0 shares,
respectively, issued and outstanding ($16.0
million aggregate liquidation preference).
Following is a detailed discussion of each series of
preferred stock outstanding at December 31, 1999 and
1998:
F-56
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' Series B Convertible Preferred Stock
EQUITY (CON'T)
On December 2, 1998, the Company issued 500,000 shares
of Series B Preferred Stock valued at $3.5 million
(value increased an additional $1.5 million in June
1999) in connection with the acquisition of IDX. In July
1999, the Company renegotiated the terms of the IDX
purchase agreement with the IDX stockholders. Pursuant
to the renegotiations, the Series B Preferred Stock was
reacquired by the Company in exchange for 500,000 shares
of Series H Preferred Stock. As a result of the exchange
agreement, the Company recorded the excess of the fair
market value of the new preferred stock over the
carrying value of the reacquired preferred stock, as a
dividend to the Series B Preferred stockholders of
approximately $6.0 million. Pursuant to further
renegotiations in December 1999, this dividend was
reduced by approximately $1.4 million. (See Note 4 for
further discussion).
8% Series C Cumulative Convertible Preferred Stock
In November 1998, in connection with a settlement with
the Company's largest stockholder (see Note 7), 75
shares of Series C Preferred Stock were issued to Mr.
Ronald Jensen in exchange for 1,425,000 shares of common
stock. The terms of the Series C Preferred Stock
permitted the holders to convert the Series C Preferred
Stock into the number of common shares equal to the face
value of the preferred stock divided by 90% of the
market price, but with a minimum conversion price of
$4.00 per share and a maximum conversion price of $6.00
per share, subject to adjustment if the Company issued
common stock for less than the conversion price.
In February 1999, the Company issued 3,000,000 shares of
common stock in exchange for the 75 shares of
outstanding Series C Preferred Stock. This transaction
was contemporaneous with the Company's issuance of
Series E Preferred Stock to EXTL, an affiliate of Mr.
Jensen, which is discussed below. See Note 7 for
discussion of this transaction.
Series D Cumulative Convertible Preferred Stock
In January 1999, the Company issued 30 shares of Series
Preferred Stock ("Series D Preferred Stock") to a
private investment firm for gross proceeds of $3.0
million. The holder agreed to purchase for $2.0 million
20 additional shares of Series D Preferred Stock upon
registration of the common stock issuable upon
conversion of this preferred stock. In connection with
this transaction, the Company issued warrants to
purchase 112,500 shares of common stock with an exercise
price of $0.01 per share and warrants to purchase 60,000
shares of common stock with an exercise price of $1.60
per share.
F-57
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10.STOCKHOLDERS' Upon the Company's registration in May 1999 of the
EQUITY (CON'T) common stock issuable upon the conversion of the Series
D Preferred Stock, the investor purchased 20 additional
shares of Series D Preferred Stock and warrants for $2.0
million to purchase 75,000 shares of common stock with
an exercise price of $0.01 per share and warrants to
purchase 40,000 shares of common stock with an exercise
price of $1.60.
The value of approximately $634,000 assigned to these
warrants when granted was originally recorded as a
discount to the Series D Preferred Stock. These
discounts were amortized as deemed preferred stock
dividends over the periods from the dates of the grants
to the dates that the Series D Preferred Stock could
first be converted into common stock defined as 90 days
from issuance. On August 20, 1999, the exercise price of
$1.60 for 100,000 warrants was lowered to $1.44 per
share. The value assigned to this revision in terms was
recorded as a preferred stock dividend. In connection
with the revision in terms, the investor exercised the
warrants to purchase 100,000 shares at a price of $1.44
per share and warrants to purchase 75,000 shares at
$0.01 per share. As of December 31, 1999, warrants to
purchase 112,500 shares at $0.01 per share were
outstanding.
Due to the Company's failure to consummate a specific
merger transaction by May 30, 1999, the Company issued
to the investor a warrant exercisable beginning August
1999 to purchase 76,923 shares of common stock with an
exercise price of $.01 per share. The value of $250,000
assigned to the warrant was recorded as a preferred
stock dividend. The warrant is exercisable for three
years. In August 1999, the investor exercised these
warrants.
The Series D Preferred Stock carried an annual dividend
of 8%, payable quarterly beginning December 31, 1999.
All dividends that would accrue through December 31,
2000 on each share of Series D Preferred Stock are
payable in full upon conversion of such share. As a
result, dividends through December 31, 2000 were accrued
over the period from the issuance date to the date that
the Series D Preferred Stock could first be converted by
the holder. The Company accrued approximately $477,000
(net of $240,000 included in the 1999 conversion) in
cumulative Series D Preferred Stock dividends as of
December 31, 1999. The shares of Series D Preferred
Stock were convertible, at the holder's option, into
shares of the Company's common stock any time after 90
days from issuance at a conversion price equal to $1.60.
The shares of Series D Preferred Stock automatically
convert into common stock upon the earliest of (i) the
first date on which the market price of the common stock
is $5.00 or more per share for any 20 consecutive
trading days, (ii) the date on which 80% or more of the
Series D Preferred Stock has been converted into common
stock, or (iii) the date the Company closes a public
offering of equity securities at a price of at least
$3.00 per share with gross proceeds of at least $20.0
million.
F-58
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' In December 1999, 15 shares of Series D Preferred Stock
EQUITY (CON'T) were converted into 1,087,500 shares of common stock.
Subsequent to December 31, 1999, the remaining 35 shares
of Series D Preferred Stock were converted into
2,537,500 shares of common stock. The shares of common
stock issued upon conversion of the 50 shares of Series
D Preferred Stock included payment for dividends through
December 31, 2000.
Series E Cumulative Convertible Preferred Stock
In February 1999, the Company issued 50 shares of Series
E Preferred Stock to the Company's largest stockholder,
for gross proceeds of $5.0 million. The Series E
Preferred Stock carried an annual dividend of 8%,
payable quarterly beginning December 31, 2000. All
dividends that would accrue through December 31, 2000 on
each share of Series E Preferred Stock are payable in
full upon conversion of such share. As a result,
dividends through December 31, 2000 were accrued over
the period from the issuance date to the date that the
Series E Preferred Stock could first be converted by the
holder. The Company accrued approximately $750,000 in
Series E Preferred Stock dividends as of December 31,
1999. As additional consideration, the Company issued to
the holder three year warrants to purchase 723,000
shares of common stock at $2.125 per share and 277,000
shares of common stock at $0.01 per share. The value of
$1.1 million assigned to such warrants was recorded as a
deemed dividend when granted because the Series E
Preferred Stock was convertible at the election of the
holder at the issuance date. In connection with a debt
placement concluded in April 1999 (see Note 7), the
Series E Preferred Stockholder elected to make such
shares convertible; accordingly, such shares were no
longer redeemable.
The shares of Series E Preferred Stock automatically
convert into shares of the Company's common stock, on
the earliest to occur of (a) the first date as of which
the last reported sales price of the Company's common
stock on Nasdaq is $5.00 or more for any 20 consecutive
trading days during any period in which the Series E
Preferred Stock is outstanding, (b) the date that 80% or
more of the Series E Preferred Stock has been converted
into common stock, or (c) the Company completes a public
offering of equity securities at a price of at least
$3.00 per share and with gross proceeds to the Company
of at least $20.0 million. The initial conversion price
for the Series E Preferred Stock is $2.125, subject to
adjustment if the Company issues common stock for less
than the conversion price.
F-59
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' On January 31, 2000, the Series E Preferred Stock
EQUITY (CON'T) automatically converted into 2,352,941 shares of common
stock because the last reported closing sales price of
the Company's common stock was over the required
threshold for the requisite number of trading days.
Series F Convertible Preferred Stock
As discussed in Note 4, in February 1999, the Company
completed the acquisition of Telekey. The purchase
consideration included the issuance of 1,010,000 shares
of Series F Preferred Stock valued at $1,957,000. The
Company originally agreed to issue 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 (or
upon a change of control or certain events of default if
they occur before the end of two years), subject to
Telekey meeting certain revenue and EBITDA objectives.
The 505,000 shares valued at $979,000 are included in
stock to be issued in the accompanying supplemental
consolidated balance sheet.
The shares of Series F Preferred Stock initially issued
automatically convert into shares of common stock on the
earlier to occur of (a) the first date as of which the
market price is $4.00 or more for any 15 consecutive
trading days during any period that the Series F
Preferred Stock is outstanding, or (b) July 1, 2001. The
Company guaranteed a price of $4.00 per share at
December 31, 1999 to recipients of the common stock
issuable upon the conversion of the Series F Preferred
Stock, subject to Telekey's achievement of certain
defined revenue and EBITDA objectives.
On December 31, 1999, the market price of the Company's
common stock exceeded $4.00; therefore, no additional
shares were issuable. On January 3, 2000, the former
stockholders of Telekey converted their combined
1,010,000 shares of Series F Preferred Stock into a
total of 1,209,584 shares of common stock.
In February 2000, the Company reached a preliminary
agreement with the former stockholders of Telekey to
restructure certain terms of the original acquisition
agreement. Such restructuring, which is subject to
completion of final documentation, includes an
acceleration of the original earn-out provision. See
Note 4.
F-60
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' Series G Cumulative Convertible Redeemable Preferred
EQUITY (CON'T) Stock
In connection with the purchase of substantially all of
the assets of Connectsoft in June 1999, as discussed in
Note 4, the Company issued one share of Series G
Preferred Stock valued at $3.0 million. The Series G
Preferred Stock carried an annual dividend of 6%,
payable annually beginning September 30, 2000. In August
1999, the Company issued 30 shares of Series K Preferred
Stock in exchange for the one share of Series G
Preferred Stock. This exchange is discussed in more
detail below.
Series H Convertible Preferred Stock
In July 1999, the Company issued 500,000 shares of
Series H Preferred Stock originally valued at
approximately $11.0 million in exchange for 500,000
shares of Series B Preferred. See Note 4 for discussion
of the exchange agreement. The shares of Series H
Preferred Stock convert automatically into a maximum of
3,750,000 shares of common stock, subject to adjustment
as described below, on January 31, 2000 or earlier if
the closing sale price of the common stock is equal to
or greater than $6.00 for 15 consecutive trading days.
Providing the Series H Preferred Stock had not
converted, the Company guaranteed a price of $6.00 per
share on January 31, 2000.
In December 1999, the Company and the IDX stockholders
agreed to reduce the preferred stock and warrants
consideration paid to the IDX stockholders as discussed
in Note 4. As a result of this renegotiation, the value
of the shares of Series H Preferred Stock was reduced by
$1.4 million. As a result, the shares were convertible
into a maximum of 3,262,500 shares at December 31, 1999.
On January 31, 2000, the shares of Series H Preferred
Stock automatically converted into 3,262,500 shares of
common stock (reflecting the above adjustment negotiated
in December 1999).
F-61
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' Series I Convertible Optional Redemption Preferred Stock
EQUITY (CON'T)
In July 1999, the Company issued 400,000 shares of
Series I Preferred Stock in exchange for notes payable
of $4.0 million due to the IDX stockholders. See Note 4
for discussion of renegotiations. The Company had the
option, which the Company did not exercise, to redeem
150,000 shares of the Series I Preferred Stock prior to
February 14, 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. The
Company still has an option to redeem 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 the applicable dates 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 of 3.9 million shares of common
stock. The Company made a written election in August
1999 to pay the 8% of the value in shares of common
stock upon redemption or conversion.
On February 14, 2000, 150,000 shares of the Series I
Preferred Stock plus the 8% accrual of the value
automatically converted into 166,304 shares of common
stock.
Series J Cumulative Convertible Preferred Stock
In August 1999, the Company reached an agreement with
EXTL which was finalized in November 1999 whereby the
Company issued to EXTL 40 shares of Series J Preferred
Stock valued at $4.0 million as prepayment of $4.0
million of the outstanding $20.0 million Secured Notes
issued to EXTL. (See Note 7 for discussion).
F-62
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' The Series J Preferred Stock carries an annual dividend
EQUITY (CON'T) of 5% which is payable quarterly, beginning December 31,
2000. The Company has accrued approximately $29,000 in
cumulative Series J Preferred Stock dividends as of
December 31, 1999. The shares of Series J Preferred
Stock are convertible, at the holder's option, into
shares of the Company's common stock at any time at a
conversion price, subject to adjustment for certain
defined events, equal to $1.56. The shares of Series J
Preferred Stock automatically converts into the
Company's common stock, on the earliest to occur of (i)
the first date as of which the last reported sales price
of the Company's common stock on Nasdaq is $5.00 or more
for any 20 consecutive trading days during any period in
which Series J Preferred Stock is outstanding, (ii) the
date that 80% or more of the Series J Preferred Stock
the Company has issued has been converted into the
Company's common stock, or (iii) the Company completes a
public offering of equity securities at a price of at
least $3.00 per share and with gross proceeds to the
Company of at least $20.0 million.
On January 31, 2000, the Series J Preferred Stock
automatically converted into 2,564,102 shares of common
stock because the last reported closing sales price of
the Company's common stock was over the required
threshold for the requisite number of trading days.
Series K Cumulative Convertible Preferred Stock
In August 1999, the Company reached an agreement under
which it issued 30 shares of Series K Preferred Stock
valued at $3.0 million in exchange for the one share of
its Series G Preferred Stock. The carrying value of the
Series G Preferred Stock exceeded the fair value of the
Series K Preferred Stock because of accrued dividends
that were not paid pursuant to the exchange. The excess
of $36,000 reduced the loss attributable to common
stockholders.
F-63
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' The Series K Preferred Stock carries an annual dividend
EQUITY (CON'T) of 5% which is payable quarterly, beginning December 31,
2000. All dividends that would accrue through December
31, 2000 on each share of Series K Preferred Stock are
payable in full upon conversion of such share. As a
result, dividends through December 31, 2000 were accrued
over the period from the issuance date to the date that
the Series K Preferred Stock could first be converted by
the holder. The Company accrued approximately $200,000
in Series K Preferred Stock cumulative dividends as of
December 31, 1999. The shares of Series K Preferred
Stock are convertible, at the holder's option, into
shares of the Company's common stock at any time at a
conversion price equal to $1.56, subject to adjustment
for certain defined events. The shares of Series K
Preferred Stock automatically convert into the Company's
common stock, on the earliest to occur of (i) the first
date as of which the last reported sales price of the
Company's common stock on Nasdaq is $5.00 or more for
any 20 consecutive trading days during any period in
which Series K Preferred Stock is outstanding, (ii) the
date that 80% or more of the Series K Preferred Stock
the Company has issued has been converted into the
Company's common stock, or (iii) the Company completes a
public offering of equity securities at a price of at
least $3.00 per share and with gross proceeds to the
Company of at least $20.0 million.
On January 31, 2000, the Series K Preferred Stock
automatically converted into 1,923,077 shares of common
stock because the closing price of the Company's common
stock was over the required threshold for the requisite
number of trading days.
F-64
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' Series M Convertible Preferred Stock
EQUITY (CON'T)
In October 1999, the Company issued one share of Series
M Preferred Stock valued at $9.6 million in connection
with the acquisition of iGlobe. The one share of Series
M Preferred Stock has a liquidation value of $9.0
million and carries an annual cumulative dividend of 20%
which will accrue and be payable annually or at
conversion in cash or shares of common stock, at the
option of the Company. The Company accrued $380,000 in
Series M Preferred Stock dividends as of December 31,
1999. The above market dividend resulted in a premium of
$643,000 which will be amortized as a deemed preferred
dividend stock over the one year period from the
issuance date through October 2000. The Series M
Preferred Stock is 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. This dividend will be amortized as a deemed
preferred dividend over the one year period from the
date of issuance.
The Company has the right, at any time prior to the
holder's exercise of its conversion rights, to
repurchase the Series M Preferred Stock for cash upon a
determination by eGlobe's Board that it has sufficient
cash to fund operations and make the purchase. The share
of Series M Preferred Stock shall automatically be
converted into shares of common stock, based on the
then-effective conversion rate, on the earliest to occur
of (but no earlier than one year from issuance) (i) the
first date as of which the last reported sales price of
the common stock is $5.00 or more for any 10 consecutive
trading days during any period in which Series M
Preferred Stock is outstanding, (ii) the date that is
seven years after the issue date, or (iii) the date upon
which the Company closes a public offering of equity
securities of the Company at a price of at least $4.00
per share and with gross proceeds of at least $20.0
million.
F-65
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' Series N Cumulative Convertible Preferred Stock
EQUITY (CON'T)
During October and November 1999, the Company sold 2,670
shares of 8% Series N Preferred Stock and 304,636
warrants for gross proceeds of $2.7 million. The Series
N Preferred Stock carries an 8% annual dividend payable
in cash or common stock at the holder's option, or in
the absence of an election of the holder, at the
election of the Company. The Company accrued $45,000 in
Series N Preferred Stock dividends as of December 31,
1999.
The shares of Series N Preferred Stock are immediately
convertible, at the holder's option, into shares of the
Company's common stock at a conversion price equal to
the greater of $2.125 and 101% of the average closing
market price per share of common stock for the 15
trading days prior to the binding commitment of the
holder to invest (provided however that no shares of
Series N Preferred Stock sold after the first issuance
shall have an initial conversion price below the initial
conversion of the shares sold at first issuance) or 85%
of the market price per share of common stock, computing
the market price per share for the purpose of such
conversion as equal to the average closing market price
per share for the five trading days immediately prior to
the conversion date, provided however that the
conversion price shall not be greater than the greater
of $3.25 or 150% of the initial conversion price. The
Company recorded dividends at issuance of approximately
$230,000 for the beneficial conversion feature based on
the excess of the common stock market price on the date
of the issuance over the conversion price.
The Series N Preferred Stock automatically converts into
shares of common stock on the earliest to occur of: (i)
the date that is the fifth anniversary of the issuance
of Series N Preferred Stock; (ii) the first date as of
which the last reported sales price of the common stock
on Nasdaq is $6.00 or more for any 15 consecutive
trading days during any period in which Series N
Preferred Stock is outstanding; (iii) the date that 80%
or more of the Series N Preferred issued by the Company
has been converted into common stock, the holders
thereof have agreed with the Company in writing to
convert such Series N Preferred Stock into common stock
or a combination of the foregoing; or (iv) the Company
closes a public offering of equity securities of the
Company with gross proceeds of at least $25.0 million.
F-66
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' The warrants are exercisable one year from issuance and
EQUITY (CON'T) expire three years from issuance. The exercise prices
vary from $3 to $5 per share. In addition, the holders
may elect to make a cash-less exercise. The value of the
warrants of $423,000 was recorded as a dividend at the
issuance date because the Series N Preferred Stock is
immediately convertible.
During December 1999, 1,135 shares of Series N Preferred
Stock were converted into 457,162 shares of common
stock. Subsequent to December 31, 1999, the remaining
shares of Series N Preferred Stock outstanding at
December 31, 1999 were converted into 375,263 shares of
common stock.
See Note 16 for a discussion of additional shares of
Series N Preferred Stock sold and converted subsequent
to year end.
Due to a delay in registering shares of the Company's
common stock, in February 2000, the Company issued
warrants to certain Series N Preferred Stockholders 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.
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 is based upon a preliminary appraisal. The
Series O Preferred Stock carries an annual dividend of
10%. 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 share. The
preliminary appraisal includes 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 that the Series O Preferred
Stock could first be converted by the holder.
F-67
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' The shares of Series O Preferred Stock have a
EQUITY (CON'T) 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 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 will automatically be converted
into shares of common stock, on the earliest to occur of
(i) the fifth anniversary of the first issuance of
Series O Preferred Stock, (ii) the first date as of
which the last reported sales price of 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, (iii) the date that 80% or more of the
Series O Preferred Stock the Company issued has been
converted into common stock, or (iv) the Company
completes a public offering of equity securities with
gross proceeds to the Company of at least $25.0 million
at a price per share of $5.00. Notwithstanding the
foregoing, the Series O Preferred Stock will not be
converted into the Company's common stock prior to the
Company's receipt of stockholder approval for such
conversion, which was obtained at the March 23, 2000
stockholders' meeting, and the expiration or termination
of the applicable Hart-Scott-Rodino waiting period. If
the events discussed above occur prior to the Clearance
Date, the automatic conversion will occur on the
Clearance Date.
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, the outstanding Series O Preferred Stock
will be converted into 3,220,000 shares of common stock.
COMMON STOCK
At the March 23, 2000 stockholders' meeting, a proposal
to amend the Company's Restated Certificate of
Incorporation to increase the Company's authorized
number of shares of common stock available to
200,000,000 was approved and adopted.
In November 1998, the Company agreed to issue 75 shares
of Series C Preferred Stock in exchange for the
1,425,000 shares of common stock originally valued at
$7.5 million as described above. As discussed earlier,
in February 1999, the Company issued 3,000,000 shares of
common stock in exchange for these outstanding shares of
Series C Preferred Stock.
F-68
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' During the nine months ended December 31, 1998 and the
EQUITY (CON'T) year ended March 31, 1998, the Company agreed to issue
28,700 shares valued at $81,000 and 350,000 shares of
common stock valued at $3.5 million in connection with
the settlement of litigation. See Note 8 for further
discussion. Additionally, in June 1999, the Company
issued to a former employee 54,473 shares of the
Company's common stock valued at $99,000 in settlement
of certain potential claims.
In December 1998, the Company issued 62,500 shares of
common stock valued at $102,000 in the UCI acquisition.
During 1999, the Company issued 526,063 shares of common
stock amounting to $1,645,000 as payment of the first of
two installments under the Swiftcall acquisition
agreement, 1.5 million shares of common stock and
warrants to purchase additional shares of common stock
in connection with its acquisition of control of ORS and
882,904 shares (prior to the reclassification of the
value of 247,213 shares reclassified to Redeemable
Common Stock valued at $0.7 million as discussed in Note
7) of common stock valued at $2,980,000 in connection
with the acquisition of Coast. See Notes 4 and 7 for
discussion of acquisitions.
In March 1999, the Company elected to pay the IDX $1.0
million promissory note and accrued interest with shares
of common stock. The Company issued 431,729 shares of
common stock and warrants to purchase 43,173 shares of
common stock valued at $1,023,000 to discharge this
indebtedness. In July 1999, the Company issued 140,599
shares of common stock valued at $433,000 in repayment
of the $418,000 note and related accrued interest
related to the IDX acquisition. In addition, in July
1999, the Company repaid a $200,000 note payable with
125,000 shares of common stock valued at $200,000. In
connection with this transaction, the Company also
issued warrants to purchase 40,000 common shares at an
exercise price of $1.60 and a warrant to purchase 40,000
common shares at an exercise price of $1.00 per share.
See Notes 4 and 7 for discussion.
F-69
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' In August 1999, the Company entered into a stock
EQUITY (CON'T) purchase agreement with a long time stockholder and a
lender. Under this agreement, for $250,000, the investor
purchased 160,257 shares of common stock and warrants to
purchase 60,000 shares of common stock at an exercise
price of $1.00 per share and the option to exchange the
principal of an existing note (up to a maximum amount of
$500,000) for shares of common stock at a price per
share of $1.56 and a warrant to purchase shares of
common stock at a price of $1.00 (60,000 per $250,000 of
debt exchanged). On December 16, 1999, the lender's
option to convert the loan principal outstanding into
common stock was increased from a maximum of $500,000 to
$750,000 and therefore a maximum of 180,000 warrants can
now be issued. (See Note 7 for further discussion).
On December 23, 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. The Company and the lender
concurrently entered into a stock purchase agreement
whereby the lender purchased the shares in exchange for
a $30.0 million stock purchase note. However, the lender
failed to fund the note on a timely basis and in March
2000, eGlobe advised the lender that they were
terminating the agreement and demanded the lender return
eGlobe's stock certificates. As of March 24, 2000, the
lender has not returned the certificates. Such shares of
common stock are included in the outstanding shares at
December 31, 1999 at par value.
In the year ended December 31, 1999, the Company
received proceeds of approximately $721,000 from the
exercise of warrants to acquire 1,168,518 shares of
common stock. No warrants were exercised in the nine
months ended December 31, 1998 and the year ended
March 31, 1998.
In the year ended December 31, 1999, and the year ended
March 31, 1998, the Company received proceeds of
approximately $61,000 and $138,000 from the exercise of
options and stock appreciation rights to acquire 39,517
and 18,348 shares of common stock, respectively. No
proceeds were received during the nine months ended
December 31, 1998.
F-70
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' Notes Receivable from Stock Sales
EQUITY (CON'T)
The Company loaned certain of its executive officers
money in connection with their exercise of non-qualified
stock options in December 1999. 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 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 and (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 employee also agrees to promptly
redeem the outstanding note balances upon the sale of
the underlying stock. The notes receivable are shown on
the supplemental consolidated balance sheet as a
reduction to stockholders' equity. These options were
not granted under the Employee Stock Option and
Appreciation Rights Plan (the "Employee Plan") discussed
below.
F-71
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' EMPLOYEE STOCK OPTION AND APPRECIATION RIGHTS PLAN
EQUITY (CON'T)
On December 14, 1995, the Board of Directors adopted the
Employee Plan, expiring December 15, 2005, reserving for
issuance 1,000,000 shares of the Company's common stock.
The Employee Plan was amended and restated in its
entirety during the year ended March 31, 1998, including
an increase in the number of shares available for grant
to 1,750,000 representing an increase of 750,000 shares.
On June 16, 1999, the Company's stockholders adopted an
amendment to increase the number of shares of the
Company's common stock available for grant to 3,250,000.
This increase included the reduction of the number of
shares available for issuance under the Company's 1995
Director Stock Option and Appreciation Rights Plan by
400,000 shares. On March 23, 2000, the Company's
stockholders adopted an amendment to increase the number
of shares of the Company's common stock available for
grant to 7,000,000 shares.
As of December 31, 1999, options outstanding under this
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. As
discussed earlier, stockholder approval was obtained
March 23, 2000.
The Employee Plan provides for grants to key employees,
advisors or consultants to the Company at the discretion
of the Compensation Committee of the Board of Directors,
of stock options to purchase common stock of the
Company. The Employee Plan provides for the grant of
both "incentive stock options," as defined in the
Internal Revenue Code of 1986, as amended, and
nonqualified stock options. Options that are granted
under the Employee Plan that are incentive stock options
may only be granted to employees (including
employee-directors) of the Company.
Stock options granted under the Employee Plan must have
an exercise price equal in value to the fair market
value, as defined, of the Company's common stock on the
date of grant. Any options granted under the Employee
Plan must be exercised within ten years of the date they
were granted. Under the Employee Plan, Stock
Appreciation Rights ("SAR's") may also be granted in
connection with the granting of an option and may be
exercised in lieu of the exercise of the option. A SAR
is exercisable at the same time or times that the
related option is exercisable. The Company will pay the
SAR in shares of
F-72
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' common stock equal in value to the excess of the fair
EQUITY (CON'T) market value, at the date of exercise, of a share of
common stock over the exercise price of the related
option. The exercise of a SAR automatically results in
the cancellation of the related option on a
share-for-share basis.
During the year ended December 31,1999, the nine months
ended December 31, 1998 and the year ended March 31,
1998, the Compensation Committee of the Board of
Directors granted options to purchase an aggregate of
3,068,054, 996,941 and 1,677,229, respectively, shares
of common stock to its employees under the Employee Plan
at exercise prices ranging from $0.01 to $7.67 per share
for the year ended December 31,1999, $1.47 to $3.81 per
share for the nine months ended December 31, 1998 and
$2.32 to $3.12 per share for the year ended March 31,
1998. The employees were also granted SAR's in tandem
with the options granted to them in connection with
grants prior to December 5, 1997.
DIRECTORS STOCK OPTION AND APPRECIATION RIGHTS PLAN
On December 14, 1995, the Board of Directors adopted the
Directors Stock Option and Appreciation Rights Plan (the
"Director Plan"), expiring December 14, 2005. There were
originally 870,000 shares of the Company's common stock
reserved for issuance under the Director Plan. The
Director Plan was amended and restated in its entirety
during the year ended March 31, 1998 so that it now
closely resembles the Employee Plan. In the nine month
period ended December 31, 1998, the Director Plan was
amended so that grants of options to directors are at
the discretion of the Board of Directors or the
Compensation Committee. On June 16, 1999, the Company's
stockholders approved a transfer of 437,000 shares of
common stock previously available for grant under the
Director Plan to the Employee Plan. As a result, the
number of shares of the Company's common stock available
for grant under the Director Plan was reduced to
433,000.
In November 1997 and April 1998, each director (other
than members of the Compensation Committee) was granted
an option under the Director Plan, each to purchase
10,000 shares of common stock, with each option being
effective for five years commencing on April 1, 1998 and
1999, respectively, and with each option vesting only
upon the achievement of certain corporate economic and
financial goals. By December 31, 1998, all of these
options, totaling 120,000 options, were forfeited
because not all of the corporate and financial goals
were met. Prior to the amendments to the Director Plan,
each director received an automatic grant of ten year
options and a corresponding SAR to purchase 10,000
shares of common stock on the third Friday in December
in each calendar year. During the year ended December
31, 1999,
F-73
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' the nine months ended December 31, 1998 and the year
EQUITY (CON'T) ended March 31, 1998, the Compensation Committee of the
Board of Directors confirmed the grant of total options
(including options with vesting contingencies) to
purchase 300,000, 240,000 and 85,000, respectively,
shares of common stock to its directors pursuant to the
Company's Director Plan at an exercise price of $2.8125
per share for the year ended December 31, 1999, $1.81 to
$3.19 per share for the nine month period ended December
31, 1998 and $2.63 to $2.69 per share for the year ended
March 31, 1998. These exercise prices were equal to the
fair market value of the shares on the date of grants.
WARRANTS
In connection with the issuance of preferred stock, the
Board of Directors granted warrants valued at $2,403,000
to purchase an aggregate of 1,669,058 shares of common
stock during the year ended December 31, 1999 with
exercise prices between $0.001 and $5.00 per share.
During the nine months ended December 31, 1998, 375,000
contingent warrants were granted. See the above
discussion of preferred stock for further information.
In connection with the issuance of debt, the Board of
Directors granted warrants to purchase an aggregate of
5,658,173, 142,000 and 856,667 shares of common stock,
respectively, during the year ended December 31, 1999,
the nine months ended December 31, 1998 and the year
ended March 31, 1998, at exercise prices ranging from
$0.01 to $2.82 per share for the year ended December 31,
1999, $2.00 to $3.03 per share for the nine months ended
December 31, 1998 and $0.01 to $6.61 per share for year
ended March 31, 1998. For the year ended December 31,
1999, the nine months ended December 31, 1998 and the
year ended March 31, 1998, the fair value for these
warrants of $14,277,000, $325,000 and $923,000,
respectively, at the grant date was originally recorded
as a discount to the related debt. These discounts are
being amortized as additional interest expense over the
term of the respective debt using the effective interest
method. Additional interest expense relating to these
warrants for the year ended December 31, 1999, the nine
months ended December 31, 1998 and the year ended March
31, 1998 was $5,182,000, $255,000 and $479,000,
respectively. See Notes 5 and 7 for discussion of
certain significant transactions.
F-74
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' During the year ended December 31, 1999, the nine months
EQUITY (CON'T) ended December 31, 1998 and the year ended March 31,
1998, the Board of Directors granted warrants to
purchase an aggregate of 826,594, 2,500 and 91,200
shares of common stock, respectively, to non-affiliates
at exercise prices ranging from $1.37 to $2.18 per share
for the year ended December 31, 1999, $2.00 per share
for the nine month period ended December 31, 1998 and
$2.75 per share for the year ended March 31, 1998. For
the year ended December 31, 1999, the nine months ended
December 31, 1998 and the year ended March 31, 1998, the
fair value for these warrants of $1,794,000, $3,000 and
$213,000, respectively, at the date of grant was
recorded based on the underlying transactions. The
warrants are exercisable for periods ranging from 12 to
60 months.
During the year ended December 31, 1999 and the nine
months ended December 31, 1998, 3,037,000 and 318,000 of
the warrants granted above expired.
During 1999, in connection with the stock purchase
agreement with an existing stockholder and lender, the
Company granted warrants to purchase an aggregate of
60,000 shares of common stock during the fiscal year
December 31, 1999 with an exercise price of $1.00 per
share.
During the nine months ended December 31, 1998, the
Board of Directors granted warrants to purchase an
aggregate of 2,500,000 (2,000,000 until stockholder
approval) shares of common stock to the stockholders or
owners of companies acquired as an element of the
purchase price at exercise prices of $0.01 to $1.63.
During 1999, the Company renegotiated the IDX purchase
agreement whereby the Company reacquired the warrant for
2,500,000 shares of common stock issued in 1998 and
granted new warrants to purchase an aggregate of
1,087,500 shares of common stock to the stockholders of
IDX at an exercise price of $0.001. These warrants are
exercisable contingent upon IDX meeting certain revenue
and EBITDA objectives at September 30, 2000 or December
31, 2000. See Note 4 for further information.
During 1999, the Board of Directors also issued warrants
in connection with the purchase of ORS. The warrants are
exercisable for shares of common stock as discussed
further in Note 4.
F-75
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' SFAS No. 123, "Accounting for Stock-Based Compensation"
EQUITY (CON'T) requires the Company to provide pro forma information
regarding net income (loss) and net earnings (loss) per
share as if compensation costs for the Company's stock
option plans and other stock awards had been determined
in accordance with the fair value based method
prescribed in SFAS No. 123. The Company estimates the
fair value of each stock award by using the
Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in the year
ended December 31, 1999, the nine months ended December
31, 1998 and the year ended March 31, 1998,
respectively: no expected dividend yields for all
periods; expected volatility of 55% for the first three
quarters of 1999 and 75% for the fourth quarter of 1999,
55% and 55%; risk-free interest rates of 6.00%, 4.51%
and 5.82%; and expected lives of 3 years, 3.65 years and
2 years for the Plans and stock awards.
Under the accounting provisions for SFAS No. 123, the
Company's net loss and loss per share would have been
increased by the pro forma amounts indicated below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
--------------------------------------------------------------
<S> <C> <C> <C>
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
AS REPORTED $(67,034,000) $(5,958,000) $(11,257,000)
PRO FORMA $(68,717,000) $(6,308,000) $(11,425,000)
LOSS PER SHARE - BASIC AND DILUTED
AS REPORTED $ (1.11) $ (0.10) $ (0.20)
PRO FORMA $ (1.13) $ (0.10) $ (0.20)
</TABLE>
F-76
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' A summary of the status of the Company's stock option
EQUITY (CON'T) plans and options issued outside of these plans as of
December 31, 1999 and 1998 and March 31, 1998, and
changes during the periods are presented below:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OUTSTANDING, BEGINNING
OF PERIOD 2,538,159 $3.55 2,020,822 $3.93 1,263,032 $6.70
GRANTED 3,798,182 $2.93 1,236,941 $2.39 1,762,229 $1.85
EXPIRED (621,228) $2.85 (719,604) $2.91 (986,091) $6.87
EXERCISED (469,645) $2.71 -- -- (18,348) $5.75
-------------------------------------------------------------------------
OUTSTANDING, END OF
PERIOD 5,245,468 $2.93 2,538,159 $3.55 2,020,822 $3.93
-------------------------------------------------------------------------
EXERCISABLE, END OF 1,881,788 $3.02 773,049 $5.14 484,193 $7.95
PERIOD
=========================================================================
WEIGHTED AVERAGE FAIR
VALUE OF OPTIONS
GRANTED DURING THE
PERIOD AT MARKET $ 1.41 $ 0.83 $ 0.99
=========== =========== ==========
WEIGHTED AVERAGE FAIR
VALUE OF OPTIONS
GRANTED DURING THE
PERIOD BELOW MARKET $ 3.10 $ -- $ --
=========== =========== ===========
</TABLE>
Included in the above table are certain options for
which vesting is contingent based on various future
performance measures. See earlier discussion under
"Employee Stock Option and Appreciation Rights Plan".
The following table summarizes information about stock
options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------------------------- ---------------------------------
WEIGHTED WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.01 9,885 2.41 $ .01 9,885 $ .01
$ 1.46-2.00 589,833 3.96 $1.67 371,858 $1.69
$ 2.25-3.16 4,065,135 4.38 $2.82 1,104,760 $2.66
$ 3.50-4.50 279,666 2.89 $4.13 94,336 $3.71
$ 5.45-7.67 300,949 2.55 $5.89 300,949 $5.89
----------------------------------------------------------------------------------------------------
$ 0.01-7.67 5,245,468 4.14 $2.93 1,881,788 $3.02
====================================================================================================
</TABLE>
F-77
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' A summary of the status of the Company's outstanding
EQUITY (CON'T) warrants as of December 31, 1999 and 1998, and March 31,
1998, and changes during the periods are presented
below:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
----------------------- --------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER EXERCISE
SHARES PRICE SHARES PRICE OF SHARES PRICE
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OUTSTANDING, BEGINNING
OF PERIOD 4,093,167 $0.91 1,391,667 $4.00 443,800 $6.31
GRANTED 9,301,325 $1.04 3,019,500 $0.12 947,867 $2.61
EXPIRED (3,037,000) $0.32 (318,000) $6.90 -- $ --
EXERCISED (1,168,518) $0.62 -- $ -- -- $ --
-------------------------------------------------------------------------
OUTSTANDING, END OF
PERIOD 9,188,974 $1.35 4,093,167 $0.91 1,391,667 $4.00
=========================================================================
EXERCISABLE, END OF 4,463,507 $1.71 1,218,167 $3.05 1,391,667 $4.00
PERIOD =========================================================================
</TABLE>
Included in the above table are certain warrants that
are contingent based on various future performance
measures. (See Note 4 ).
The following table summarizes information about
warrants outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
---------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ .001 1,087,500 1.00 $ .001 -- $ --
$ .01 404,500 2.29 $ .01 404,500 $ .01
$ 1.00-1.50 5,499,999 2.75 $ 1.04 2,166,667 $1.09
$ 1.51-2.18 1,472,500 2.05 $ 1.92 1,472,500 $1.92
$ 2.37-3.00 124,761 2.84 $ 2.73 78,173 $2.57
$ 5.00 258,047 2.88 $ 5.00 -- $ --
$ 6.00-6.61 341,667 5.76 $ 6.52 341,667 $6.52
====================================================================================================
$0.001-6.61 9,188,974 2.53 $ 1.35 4,463,507 $1.71
====================================================================================================
</TABLE>
F-78
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' The Company may be required to issue additional warrants
EQUITY(CON'T) under the following circumstances:
(a) During 1999, the Company entered into a stock
agreement with a lender pursuant to which the
lender may elect to convert debt in exchange for
shares of common stock and warrants to purchase
60,000 shares of common stock at a price per
share of $1.00 for each $250,000 (up to a
maximum amount of $750,000) of debt exchanged.
See Note 7 for further discussion.
(b) As discussed in Note 4, the Company issued
contingent warrants to purchase common stock in
the ORS acquisition. These warrants are not
included in the outstanding warrants because the
Company includes the operations of ORS in its
supplemental consolidated financial statements.
Upon the exchange by Oasis of its interest in
the LLC for the eGlobe common stock and
warrants, these warrants will be included.
11. TAXES (BENEFIT) Taxes (benefit) on income (loss) for the year ended
ON INCOME December 31, 1999, the nine months ended December 31,
(LOSS) 1998 and the year ended March 31, 1998, consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ (962,000) $ 578,000 $ 321,000
Foreign -- -- 140,000
State -- -- --
Other -- -- 1,500,000
------------------------------------------------------------
Total Current (962,000) 578,000 1,961,000
------------------------------------------------------------
Deferred:
Federal (17,132,000) (286,000) (1,568,000)
State (1,520,000) (25,000) (140,000)
------------------------------------------------------------
(18,652,000) (311,000) (1,708,000)
Change in
valuation allowance 18,652,000 311,000 1,708,000
------------------------------------------------------------
Total $ (962,000) $ 578,000 $ 1,961,000
============================================================
</TABLE>
F-79
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
11. TAXES (BENEFIT) During the year ended December 31, 1999, Trans Global
ON INCOME elected to carryback approximately $2.8 million of
(LOSS) (CON'T) taxable losses, resulting in a receivable and tax
benefit of approximately $962,000.
During the year ended March 31, 1998, eGlobe undertook a
study to simplify its organizational and tax structure
and identified potential international tax issues.
eGlobe determined that it had potential tax liabilities
and recorded an additional tax provision of $1.5 million
to reserve against liabilities. In early 1999, eGlobe
filed with the Internal Revenue Service ("IRS") amended
returns for the years ended March 31, 1991 through 1998.
In May 1999, eGlobe was informed by the IRS that all
amended returns had been accepted as filed. The eventual
outcome of discussions with State Tax Authorities and of
any other issues cannot be predicted with certainty.
As of December 31, 1999 and 1998 and March 31, 1998, the
net deferred tax asset recorded and its approximate tax
effect consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
---------------------------------------------------------------
<S> <C> <C> <C>
Net operating loss carry-
forwards $ 21,290,000 $ 6,041,000 $ 3,496,000
Expense accruals 618,000 1,098,000 1,010,000
Goodwill and intangible
amortization 3,626,000 -- --
Foreign net operating loss
carryforwards 762,000 260,000 --
Other 186,000 431,000 269,000
---------------------------------------------------------------
26,482,000 7,830,000 4,775,000
Valuation allowance (26,482,000) (7,830,000) (4,775,000)
---------------------------------------------------------------
Net deferred tax asset $ -- $ -- $ --
===============================================================
</TABLE>
F-80
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
11. TAXES (BENEFIT) The acquisition of IDX in December 1998 included a net
ON INCOME deferred tax asset of $2.7 million. This net deferred
(LOSS) (CON'T) tax asset consists primarily of U.S. and foreign net
operating losses. The acquisition also included a
valuation allowance equal to the net deferred tax asset
acquired.
For the year ended December 31, 1999, the nine months
ended December 31, 1998 and the year ended March 31,
1988, a reconciliation of the United States Federal
statutory rate to the effective rate is shown below:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Federal tax (benefit), computed
at statutory rate (34.0)% (34.0)% (34.0)%
State tax (benefit), net of
federal tax benefit (0.9) (1.3) (1.2)
Effect of foreign operations 1.1 37.7 23.9
Amendment to prior year net
operating loss carryforwards (4.9) -- --
Additional taxes -- -- 16.1
Change in valuation allowance 35.2 5.8 18.4
Other 1.7 2.5 (2.1)
----- ---- ----
Total (1.8)% 10.7 % 21.1 %
===== ==== ====
</TABLE>
As of December 31, 1999, the Company has net operating
loss carryforwards available of approximately $57.7
million, which can offset future years' U.S. taxable
income. Such carryforwards expire in various years
through 2019 and are subject, as a result of change in
ownership, to limitation under the Internal Revenue Code
of 1986, as amended. The Company also has foreign net
operating loss carryforwards in various jurisdictions of
approximately $2.0 million, which can offset future
year's foreign taxable income. Such carryforwards expire
in various years through 2004 and are subject to local
limitations on use.
F-81
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
12. SEGMENT OPERATING SEGMENT INFORMATION
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, which was part of the Company's
acquisition of Coast, which was effective December 2,
1999. 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 table presents operating
segment information:
<TABLE>
<CAPTION>
ENHANCED NETWORK CUSTOMER RETAIL
SERVICES SERVICES CARE SERVICES TOTAL
---------------- ------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDING
DECEMBER 31, 1999
-----------------
REVENUE $ 20,088,000 $120,918,000 $ 1,637,000 $ 1,001,000 $ 143,644,000
INTER-SEGMENT (22,000) (1,674,000) -- -- (1,696,000)
----------------------------------------------------------------------------------------------
TOTAL REVENUE $ 20,066,000 $119,244,000 $ 1,637,000 $ 1,001,000 $ 141,948,000
GROSS PROFIT $ 2,946,000 $ 1,688,000 $ 308,000 $ 65,000 $ 5,007,000
TOTAL ASSETS $ 38,063,000 $ 51,031,000 $ 3,736,000 $20,965,000 $ 113,795,000
----------------------------------------------------------------------------------------------
FOR THE NINE MONTHS
ENDING
DECEMBER 31, 1998
-----------------
REVENUE $ 21,360,000 $ 68,507,000 $ -- $ 553,000 $ 90,420,000
GROSS PROFIT (LOSS) $ 10,064,000 $ 6,469,000 $ -- $ (42,000) $ 16,491,000
TOTAL ASSETS $ 21,697,000 $ 41,775,000 $ -- $ 907,000 $ 64,379,000
----------------------------------------------------------------------------------------------
FOR THE YEAR ENDING
MARCH 31, 1998
--------------
REVENUE $ 31,819,000 $ 46,473,000 $ -- $ 1,304,000 $ 79,596,000
GROSS PROFIT $ 13,667,000 $ 6,588,000 $ -- $ 590,000 $ 20,845,000
TOTAL ASSETS $ 21,797,000 $ 12,125,000 $ -- $ 1,103,000 $ 35,025,000
----------------------------------------------------------------------------------------------
</TABLE>
F-82
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
12. SEGMENT GEOGRAPHIC INFORMATION
INFORMATION
(CON'T) For purposes of allocating revenues by country, the
Company uses the physical location of its customers as
its basis. Identifiable Long-Lived Assets include only
the tangible assets of the Company. The following table
presents information about the Company by geographic
area:
<TABLE>
<CAPTION>
NORTH
AMERICA
ASIA (EXCLUDING LATIN
EUROPE PACIFIC MEXICO) AMERICA OTHER TOTALS
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDING
DECEMBER 31, 1999
-----------------
REVENUE $ 7,364,000 $ 7,873,000 $121,709,000 $ 3,485,000 $1,517,000 $141,948,000
OPERATING LOSS $(3,074,000) $(6,993,000) $(32,053,000) $(4,374,000) $ (419,000) $(46,913,000)
IDENTIFIABLE LONG-
LIVED ASSETS $ 8,243,000 $ 3,846,000 $ 24,813,000 $ 2,035,000 $3,141,000 $ 42,078,000
---------------------------------------------------------------------------------------------------------
FOR THE NINE
MONTHS ENDING
DECEMBER 31, 1998
-----------------
REVENUE $ 2,241,000 $ 5,949,000 $ 76,664,000 $ 5,244,000 $ 322,000 $90,420,000
OPERATING LOSS $(1,373,000) $(1,460,000) $ (456,000) $(1,287,000) $ (79,000) $(4,655,000)
IDENTIFIABLE LONG-
LIVED ASSETS $ 6,060,000 $ 4,076,000 $ 7,568,000 $ 1,571,000 $ 923,000 $20,198,000
---------------------------------------------------------------------------------------------------------
FOR THE YEAR
ENDING
MARCH 31, 1998
--------------
REVENUE $ 3,468,000 $10,295,000 $56,535,000 $ 8,248,000 $1,050,000 $79,596,000
OPERATING INCOME
(LOSS) $ (759,000) $(1,772,000) $ 1,054,000 $(1,419,000) $ (181,000) $(3,077,000)
IDENTIFIABLE LONG-
LIVED ASSETS $ 3,150,000 $ 4,138,000 $ 9,530,000 $ 440,000 $ -- $17,258,000
---------------------------------------------------------------------------------------------------------
</TABLE>
F-83
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
12. SEGMENT CUSTOMER INFORMATION
INFORMATION
(CON'T) For the year ended December 31, 1999, the nine months
ended December 31, 1998 and the year ended March 31,
1998 revenues from significant customers consisted of
the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998 MARCH 31, 1998
-------------------------------------------------------------------
<S> <C> <C> <C>
Customer:
A 4% 21% 25%
B 21% 7% 6%
C 7% 16% --
D 23% 15% --
</TABLE>
13. COMMITMENTS EMPLOYMENT AGREEMENTS
AND
CONTINGENCIES The Company and certain of its subsidiaries have
agreements with certain key employees expiring at
varying times over the next three years. The Company's
remaining aggregate commitment at December 31, 1999
under such agreements is approximately $3.9 million. The
Company is also currently negotiating employ-ment
agreements with two officers who were former owners of
Trans Global.
CARRIER ARRANGEMENTS
The Company has entered into agreements with certain
long-distance carriers in the United States and with
telephone utilities in various foreign countries to
transmit telephone signals domestically and
internationally. The Company is entirely dependent upon
the cooperation of the telephone utilities with which it
has made arrangements for its operational and certain of
its administrative requirements. The Company's
arrangements are nonexclusive and take various forms.
Although some of these arrangements are embodied in
formal contracts, a telephone utility could cease to
accommodate the Company's arrangements at any time. The
Company does not foresee any threat to existing
arrangements with these utilities; however, depending
upon the location of the telephone utility, such action
could have a material adverse affect on the Company's
financial position, operating results or cash flows.
USAGE COMMITMENT
The Company has a contract with a long-distance
telecommunications company to provide telecommunications
services for the Company's customers. Under the terms of
the agreement, the Company has a minimum usage
commitment of $125,000 per month through September 30,
2000. The minimum usage commitment may be decreased in
the second and third year of the agreement if the
cumulative usage is achieved in the first year of the
agreement.
F-84
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
13. COMMITMENTS RESERVATION SERVICES
AND
CONTINGENCIES The Company has entered into reservation services
(CON'T) contracts with its customers which provide for, among
other things, assigning agents to handle reservation
call volume. These contracts have initial terms ranging
from three months to one year. Either party can
terminate the contracts after the initial term, subject
to certain conditions contained in the contracts.
INTERNATIONAL REGULATIONS
In certain countries where the Company has current or
planned operations, the Company may not have the
necessary regulatory approvals to conduct all or part of
its voice and fax store-and-forward services. In these
jurisdictions, the requirements and level of
telecommunications' deregulation is varied, including
Internet protocol telephony. Management believes that
the degree of active monitoring and enforcement of such
regulations is limited. Statutory provisions for
penalties vary, but could include fines and/or
termination of the Company's operations in the
associated jurisdiction. To date, the Company has not
been required to comply or been notified that it cannot
comply with any material international regulations in
order to pursue its existing business activities. In
consultation with legal counsel, management has
concluded that the likelihood of significant penalties
or injunctive relief is remote. There can be no
assurance, however, that regulatory action against the
Company will not occur.
F-85
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
13. COMMITMENTS TELECOMMUNICATION LINES
AND
CONTINGENCIES In its normal course of business, the Company enters
(CON'T) into agreements for the use of long distance
telecommunication lines. As of December 31, 1999, future
minimum annual payments under such agreements are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, TOTAL
--------------------------------------------------------------------------------------------
<S> <C>
2000 $8,488,000
2001 5,373,000
2002 1,827,000
2003 157,000
2004 75,000
--------------------------------------------------------------------------------------------
$15,920,000
--------------------------------------------------------------------------------------------
</TABLE>
LEASE AGREEMENTS
The Company leases office space and equipment under
various operating leases. The Company has subleased some
office space to third parties. Future minimum lease
payments under the non-cancelable leases and future
minimum rentals receivable under the subleases,
including the related party office leases discussed in
Note 7, are as follows:
<TABLE>
<CAPTION>
MINIMUM
MINIMUM LEASE SUBLEASE
YEARS ENDING LEASE PAYMENTS TO RENTAL
DECEMBER 31, PAYMENTS RELATED PARTY INCOME TOTAL
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000 $ 1,679,000 $ 569,000 $ (551,000) $ 1,697,000
2001 1,105,000 581,000 (227,000) 1,459,000
2002 835,000 596,000 -- 1,431,000
2003 740,000 150,000 -- 890,000
2004 421,000 -- -- 421,000
Thereafter 343,000 -- -- 343,000
---------------------------------------------------------------------------------------------------
$ 5,123,000 $ 1,896,000 $ (778,000) $ 6,241,000
---------------------------------------------------------------------------------------------------
</TABLE>
Rent expense for the year ended December 31, 1999, the
nine months ended December 31, 1998 and the year ended
March 31, 1998 was approximately $2.3 million, $0.8
million, and $0.9 million, respectively. Rent expense
for 1999 includes sublease rental income of $0.2
million.
F-86
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
13. COMMITMENTS As a result of the ORS acquisition, the Company leases
AND certain employees from a professional employment
CONTINGENCIES organization, which also performs human resource and
(CON'T) payroll functions. Total employment lease expense
incurred by the Company related to this contract
amounted to approximately $1.5 million for the period
from acquisition through December 31, 1999.
LETTERS OF CREDIT
Outstanding letters of credit issued as security as
required by certain telecommunications vendors, amounted
to approximately $1,464,000 and $1,100,000 at December
31, 1999 and 1998, respectively. Such amounts were
secured by restricted short-term investments.
FINANCIAL ADVISORY AGREEMENT
On December 1, 1999, the Company entered into an
agreement with an outside investment banking firm to
provide financial advisory services. The term of the
agreement is for six months, however, it is
automatically renewed for an additional six months
unless written notice of termination is given. Warrants
valued at $1.1 million to purchase common stock were
issued as a retainer in January 2000 (See Note 10).
Under the agreement, cash fees are payable by the
Company for acquisition or disposition transactions, and
are based on certain calculated percentages. The Company
shall also reimburse the investment banking firm for
reasonable out-of-pocket expenses incurred in connection
with its services, up to a maximum amount per month.
F-87
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
13. COMMITMENTS SECURED ACCOUNTS PAYABLE
AND
CONTINGENCIES Approximately $9.9 million of Tran Global's capital
(CON'T) assets are subject to security interests in favor of its
major supplier, AT&T Corp. ("AT&T"). Effective December
10, 1999, Trans Global entered into an agreement with
AT&T regarding the payment of approximately $13.8
million in past due 1999 switch and circuit costs.
Pursuant to the agreement, Trans Global has agreed to
repay AT&T in roughly equal monthly installments, which
include interest at 9%, through January 1, 2001. See
Note 18 for further discussions.
14. GOVERNMENT The Company is subject to regulation as a
REGULATIONS telecommunications service provider in some
jurisdictions in the United States and abroad.
Applicable laws and regulations, and the interpretation
of such laws and regulations, differ significantly in
those jurisdictions. In addition, the Company or a local
partner is required to have licenses or approvals in
those countries where it operates and where equipment is
installed. The Company may also be affected indirectly
by the laws of other jurisdictions that affect foreign
carriers with which it does business.
UNITED STATES FEDERAL REGULATION
Pursuant to the Communications Act of 1934, as amended
by the Telecommunications Act of 1996, the Federal
Communications Commission ("FCC") regulates certain
aspects of the telecommunications industry in the United
States. The FCC currently requires common carriers
providing international telecommunications services to
obtain authority under section 214 of the Communications
Act. eGlobe and its subsidiaries have section 214
authority and are regulated as non-dominant providers of
both international and domestic telecommunications
services.
F-88
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
14. GOVERNMENT Any common carrier providing wireline domestic and
REGULATIONS international service also must file a tariff with the
(CON'T) FCC setting forth the terms and conditions under which
it provides those services. With few exceptions, common
carriers are prohibited from providing
telecommunications services to customers under rates,
terms, or conditions different from those that appear in
a tariff. The FCC has determined that it no longer will
require or allow non-dominant providers of domestic
services to file tariffs, but instead will require
carriers to make their rates publicly available, for
example by posting the information on the Internet.
Because this FCC order has only recently been affirmed
by the U.S. Court of Appeals for the District of
Columbia Circuit, it is presently being phased in, and
carriers are permitted to have tariffs on file for their
domestic services. The Company has tariffs on file with
the FCC setting forth the rates, terms and conditions
under which it provides domestic and international
services.
In addition to these authorization and tariff
requirements, the FCC imposes a number of additional
requirements on telecommunications common carriers.
The FCC's international settlements policy places limits
on the arrangements that U.S. international carriers may
enter into with foreign carriers that have market power
in foreign telecommunications markets. The policy is
primarily intended to prevent dominant foreign carriers
from playing U.S. carriers against each other to the
disadvantage of U.S. carriers and U.S. consumers. The
international settlements policy provides that a U.S.
carrier that enters into an operating agreement for the
exchange of public switched traffic with a dominant
foreign carrier must file a copy of that agreement with
the FCC. Any such agreement that is materially different
from an agreement filed by another carrier on the same
international route must be approved by the FCC. Absent
FCC approval, no such agreement may provide for the U.S.
carrier to receive more than its proportionate share of
inbound traffic. Certain competitive routes are exempt
from the international settlements policy. The FCC's
policies also require U.S. international carriers to
negotiate and adopt settlement rates with foreign
correspondents that are at or below certain benchmark
rates.
The FCC's rules also prohibit a U.S. carrier from
accepting a "special concession" from any dominant
foreign carrier. The FCC defines a "special concession"
as an exclusive arrangement (i.e., one not offered to
similarly situated U.S. carriers) involving services,
facilities, or functions on the foreign end of a U.S.
international route that are necessary for providing
basic telecommunications.
F-89
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
14. GOVERNMENT The regulation of IP telephony in the United States is
REGULATIONS still evolving. The FCC has stated that some forms of IP
(CON'T) telephony appear to be similar to "traditional" common
carrier service and may be regulated as such, but the
FCC has not decided whether some other IP services are
unregulated "information services" or are subject to
regulation. In addition, several efforts have been made
to enact U.S. federal legislation that would either
regulate or exempt from regulation services provided
over the Internet. State public utility commissions also
may retain jurisdiction over intrastate IP services and
could initiate proceedings to regulate such services. As
these decisions are made, the Company could become
subject to regulation that might eliminate some of the
advantages that it now enjoys as a provider of IP-based
services.
Management believes that the regulatory requirements in
force today in the United States impose a relatively
minimal burden on the Company. Management also believes
that some of its network services are not subject to
regulation by the FCC or any other state or federal
agency; however, there is some risk that the FCC or a
state regulator could decide that certain services
should require specific authorization or be subject to
other regulations. If that were to occur, these
regulatory requirements could include prior
authorization requirements, tariffing requirements, or
the payment of contributions to federal and state
subsidy mechanisms applicable to providers of
telecommunications services. Some of these contributions
could be required whether or not the Company is subject
to authorization or tariff requirements.
United Kingdom. In the United Kingdom,
telecommunications services that have been offered by
Trans Global through its affiliate, TGC UK Ltd., are
subject to regulation by various U.K. regulatory
agencies. The United Kingdom generally permits
competition in all sectors of the telecommunications
market, subject to licensing requirements and license
conditions. TGC UK has been granted licenses to provide
international traffic on a resale basis and over its own
facilities, which licenses are subject to a number of
restrictions. Use of these licenses has permitted Trans
Global to engage in cost-effective routing of traffic
between the United States and the United Kingdom and
beyond.
<PAGE>
OTHER COUNTRIES
Telecommunications activities are subject to government
regulation to varying degrees in every country
throughout the world. In many countries where the
Company operates, equipment cannot be connected to the
telephone network without regulatory approval, and
therefore installation and operation of the Company's
operating platform or other equipment requires such
approval. The Company has licenses or other equipment
approvals in the jurisdictions where it operates. In
most jurisdictions where the Company conducts business,
the Company relies on its local partner to obtain the
requisite authority. In many countries the Company's
local partner is a national telephone company, and in
some jurisdictions also is (or is controlled by) the
regulatory authority itself.
As a result of relying on our local partners, we are
dependent upon the cooperation of the telephone
utilities with which we have made arrangements for our
authority to conduct business, as well as for some of
our operational and administrative requirements. Our
arrangements with these utilities are nonexclusive and
take various forms. Although some of these arrangements
are embodied in formal contracts, any telephone utility
could cease to accommodate our requirements at any time.
Depending upon the location of the telephone utility,
such action could have a material adverse affect on our
business and prospects. In some cases, principally the
United States and countries that are members of the
European Community, laws and regulations provide that
the arrangements necessary for us to conduct our service
may not be arbitrarily terminated. However, the time and
cost of enforcing our rights may make legal remedies
impractical. We presently have good relations with most
of the foreign utilities with which we do business.
There can be no assurance, however, that such
relationships will continue or that governmental
authorities will not seek to regulate aspects of our
services or require us to obtain a license to conduct
our business.
F-90
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
14. GOVERNMENT Many aspects of the Company's international operations
REGULATIONS and business expansion plans are subject to foreign
(CON'T) government regulations, including currency regulations.
Foreign governments may adopt regulations or take other
actions that would have a direct or indirect adverse
impact on the Company's business opportunities. For
example, the regulatory status of IP telephony in some
countries is uncertain. Some countries prohibit or
regulate IP telephony, and any of those policies may
change at any time.
The Company is planning to expand or initiate services
in certain Middle East countries including Egypt and
Kuwait. These services will include largely voice
services as regulatory liberalization in those countries
permits. Although the Company plans to obtain authority
to provide service under current and future laws of
those countries (or, where permitted, to provide service
without government authorization), there can be no
assurance that foreign laws will be adopted and
implemented providing the Company with effective
practical opportunities to compete in these countries.
The Company's ability or inability to take advantage of
such liberalization could have a material adverse effect
on its ability to expand services as planned.
15. FOURTH In the fourth quarter of the year ended December 31,
QUARTER 1999, certain adjustments related to an increase in the
ADJUSTMENTS accounts receivable reserve allowance, accrued dividends
for certain series of Preferred Stock that are entitled
to receive dividends for specified periods regardless of
the conversation date, capitalized software development
costs related to Vogo and accrued excise and sales and
use taxes which in total amounts to an aggregate of
approximately $1.5 million were recorded and are
discussed in "Summary of Accounting Policies" and Note
10 to the supplemental consolidated financial
statements.
16. SUBSEQUENT SERIES N CUMULATIVE CONVERTIBLE PREFERRED STOCK
EVENTS
In January 2000, the Company sold an additional 525
shares of Series N Preferred Stock and 42,457 warrants
for proceeds of $0.5 million. These shares of Series N
Preferred Stock were immediately converted, at the
holders' option, into 155,394 shares of the Company's
common stock at conversion prices from $3.51 to $3.72.
F-91
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
16. SUBSEQUENT The warrants are exercisable one year from issuance and
EVENTS expire three years from issuance. The exercise prices
(CON'T) vary from $3.00 to $7.50 per share. In addition, the
holders may elect to make a cash-less exercise. The
value of the warrants will be recorded as a dividend at
the issuance dates because the Series N Preferred Stock
is immediately convertible. See Note 10 for further
discussion of Series N Preferred Stock.
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 Rose Glen
("RGC"). The shares of Series P Preferred Stock carry an
effective annual interest rate of 5% 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 is $12.04 until April 27, 2000, and
thereafter is equal to the lesser of 120% of the five
day average closing price of the Company's common stock
on Nasdaq during the 22-day period prior to conversion,
and $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, and (2) the
completion of a firm commitment underwritten public
offering with gross proceeds to the Company of at least
$45.0 million.
F-92
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
16. SUBSEQUENT The shares of Series P Preferred Stock are convertible
EVENTS into a maximum of 5,151,871 shares of common stock. This
(CON'T) 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 or a sale of up
$15.0 million of common stock to a specified investor,
the Company may not obtain any additional equity
financing without the Series P Preferred holder's
consent for a period of 120 days following the date the
common stock issuable upon conversion of the Series P
Preferred Stock and warrants is registered for resale.
The holder also has a right of first offer to provide
any additional equity financing that the Company needs
until the first anniversary of such registration.
The Company may be required to redeem the Series P
Preferred Stock in the following circumstances:
(a) if the Company fails to perform specified
obligations under the securities purchase
agreement or related agreements;
(b) if the Company or any of its subsidiaries make
an assignment for the benefit of creditors or
becomes involved in bankruptcy, insolvency,
reorganization or liquidation proceedings;
(c) if the Company merges out of existence without
the surviving company assuming the obligations
relating to the Series P Preferred Stock;
(d) if the Company's common stock is no longer
listed on the Nasdaq National Market, the Nasdaq
Small Cap Market, the NYSE or the AMEX;
F-93
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. SUBSEQUENT (e) if the Series P Preferred Stock is no longer
EVENTS convertible into common stock because it would
(CON'T) 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.
SERIES Q CONVERTIBLE PREFERRED STOCK
On March 17, 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 is $12.04 until April 26,
2000, and thereafter is equal to the lesser of: (i) the
five day average closing price of the Company's common
stock on Nasdaq during the 22-day period prior to
conversion, and (ii) $12.04.
F-94
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. SUBSEQUENT The Company can force a conversion of the Series Q
EVENTS Preferred Stock on any trading day following a period in
(CON'T) which the closing bid price of the Company's common
stock has been greater than $24.08 for a period of at
least 20 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, and (2) the completion of a
firm commitment underwritten public offering with gross
proceeds to us of at least $45.0 million.
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 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;
F-95
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. SUBSEQUENT (b) if the Company or any of its subsidiaries makes
EVENTS an assignment for the benefit of creditors or
(CON'T) become 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 Q 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 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
(f) 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.
i1.COM
On December 31, 1999, the Company along with a former
IDX executive formed i1.com. i1.com is developing a
distributed network of e-commerce applications that will
allow small and medium-sized businesses to transact
business over the Internet. The Company initially
received a 75% interest in i1.com in exchange for
providing i1.com access to the Company's IP-based
network infrastructure.
i1.com recently completed a $14.0 million equity private
placement. The Company now retains a 35% equity interest
and 45% voting interest in i1.com.
F-96
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. SUBSEQUENT CONVERSION OF PREFERRED STOCK INTO COMMON STOCK
EVENTS
(CON'T) Subsequent to December 31, 1999, the remaining Series D
Preferred Stock plus accrued dividends through December
31, 2000, all of Series E Preferred Stock, Series F
Preferred Stock, Series H Preferred Stock, 150,000
shares of the Series I Preferred Stock plus 8% accrued
value, Series J Preferred Stock, Series K Preferred
Stock and the remaining Series N Preferred Stock
converted into 14,391,271 shares of the Company's common
stock. See Note 10 for further discussion.
F-97
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
17. SUPPLEMENTAL
INFORMATION TO
STATEMENTS OF
CASH FLOWS
AND NON-CASH
INVESTING AND
FINANCING
ACTIVITIES
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Year Nine Months Year
Ended Ended Ended
December 31, December 31, March 31,
1999 1998 1998
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid during the period for:
Interest $ 1,368,000 $ 208,000 $ 1,465,000
Income taxes 696,000 665,000 1,006,000
Non-cash investing and financing
activities:
Equipment acquired under
capital lease obligations 1,036,000 329,000 312,000
Common stock issued for
acquisition of equipment -- -- 100,000
Exercise of stock options for
notes receivable 1,210,000 -- --
Value of warrants issued and
reflected as debt discount 14,026,000 -- --
Value of warrants issued and
reflected as stock offering
cost 706,000 -- --
Unamortized debt discount
related to warrants 7,265,000 321,000 438,000
Stock issued as
prepayment of debt 5,616,000 -- --
Exchange of Notes for Series I
Preferred Stock 3,982,000 -- --
Preferred stock dividends 7,330,000 -- --
Preferred stock dividend related
to exchange of Series B
Preferred Stock for Series H
Preferred Stock 4,600,000 -- --
---------------------------------------------------------------------------------------------------
</TABLE>
F-98
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
17. SUPPLEMENTAL
INFORMATION TO
STATEMENTS OF
CASH FLOWS
AND NON-CASH
INVESTING AND
FINANCING
ACTIVITIES (CON'T)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
YEAR NINE MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ACQUISITIONS, NET OF CASH ACQUIRED (NOTE 4):
IDX:
Working capital deficit, other
than cash acquired $ (197,000) $ (931,000) $ --
Property and equipment -- 975,000 --
Intangible assets 6,510,000 -- --
Purchase price in excess of the net
assets acquired (4,536,000) 10,918,000 --
Other assets -- 163,000 --
Notes payable issued in acquisition -- (5,418,000) --
Series B Convertible Preferred Stock -- (1,000) --
Additional paid-in capital (1,485,000) (3,499,000) --
UCI:
Intangible assets 655,000 -- --
Purchase price in excess of the net
assets acquired (698,000) 1,177,000
Accrued cash payment paid in 1999 -- (75,000) --
Note payable issued in acquisition -- (1,000,000) --
Common stock issued for
acquisition -- (102,000) --
TELEKEY:
Working capital deficit, other than
cash acquired (1,281,000) -- --
Property and equipment 481,000 -- --
Intangible assets 2,975,000 -- --
Purchase price in excess of the net
assets acquired 2,131,000 -- --
Acquired debt (1,015,000) -- --
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) -- --
</TABLE>
F-99
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
17. SUPPLEMENTAL
INFORMATION TO
STATEMENTS OF
CASH FLOWS
AND NON-CASH
INVESTING AND
FINANCING
ACTIVITIES (CON'T)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
YEAR NINE MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ACQUISITIONS, NET OF CASH ACQUIRED (NOTE 4) (CON'T)
CONNECTSOFT:
Working capital deficit, other than
cash acquired (2,142,000) -- --
Property and equipment 514,000 -- --
Intangible assets 9,120,000 -- --
Purchase price in excess of the net
asset acquired 1,017,000 -- --
Acquired debt (2,992,000) -- --
Advances to Connectsoft prior to
acquisition by eGlobe (971,000) -- --
Issuance of Series G Preferred
Stock exchanged for Series K
Preferred Stock -- -- --
Additional paid-in capital (3,000,000) -- --
SWIFTCALL:
Working capital deficit, other than
cash acquired (1,699,000) -- --
Property and equipment 5,144,000 -- --
Common stock (1,000) -- --
Additional paid-in capital (1,644,000) -- --
Stock to be issued (1,645,000) -- --
iGLOBE:
Property and equipment 6,686,000 -- --
Intangible assets 2,383,000 -- --
Purchase price in excess of net assets
acquired 1,760,000 -- --
Deposits 900,000 -- --
Acquired debt (1,786,000) -- --
Issuance of Series M Preferred Stock -- -- --
Additional paid-in capital (9,643,000) -- --
ORS: -- --
Working capital surplus, other than
cash acquired 36,000 --
Property and equipment 671,000 -- --
Intangible assets in LLC 1,580,000 -- --
Other assets 40,000 -- --
Purchase price in excess of the net
assets acquired 363,000 -- --
Minority interest (2,330,000) -- --
</TABLE>
F-100
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
17. SUPPLEMENTAL
INFORMATION TO
STATEMENTS OF
CASH FLOWS
AND NON-CASH
INVESTING AND
FINANCING
ACTIVITIES (CON'T)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
YEAR NINE MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ACQUISITIONS, NET OF CASH ACQUIRED (NOTE 4) (CON'T)
COAST:
Working capital surplus, other than
cash acquired 938,000 -- --
Property and equipment 1,415,000 -- --
Deposits 16,000 -- --
Intangible assets 3,190,000 -- --
Purchase price in excess of net assets
acquired 14,344,000 -- --
Acquired debt (3,539,000) -- --
Common stock (1,000) -- --
Issuance of Series O Convertible
Preferred Stock -- -- --
Additional paid-in capital (16,379,000) -- --
---------------------------------------------------------------------------------------------------
Net cash used to acquire companies $ 2,799,000 $ 2,207,000 $ --
---------------------------------------------------------------------------------------------------
</TABLE>
18. EVENTS DEBT RENEGOTIATIONS
SUBSEQUENT TO
MARCH 24, 2000 On April 5, 2000, the EXTL Note 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) granting of a security interest in the
assets currently securing the Notes as well as the Coast
assets to the Coast noteholder. The Coast notes payable
were also amended on this date and the noteholder
consented to (1) waive any event of default that may
have occurred as a 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.
See Note 7 for further discussion.
SECURED ACCOUNTS PAYABLE
As of April 6, 2000, the Company's subsidiary, Trans
Global, is in arrears on its scheduled payments to AT&T
and is currently in negotiations with AT&T to
restructure this payable. See Note 13 for further
discussion.
F-101
<PAGE>
eGLOBE, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO TRANS GLOBAL BALANCE
BEGINNING COST AND ADJUSTMENT AT END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS (1) PERIOD
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999 $ 1,216,000 $ 2,528,000 $ 538,000 $ -- $3,206,000
- ------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED DECEMBER 31, 1998 $ 1,702,000 $ 1,018,000 $1,504,000 $ -- $1,216,000
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1998 $ 373,000 $ 1,564,000 $ 335,000 $ 100,000 $1,702,000
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The accompanying supplemental consolidated statements of operations do not
include the results of Trans Global's operations for the three months ended
March 31, 1998 as discussed in the Summary of Accounting Policies to the
Supplemental Consolidated Financial Statements. An adjustment is reflected
above to account for the activity in the allowance account during this time
period.
F-102
<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)
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
eGlobe, Inc.
Washington, D.C.
We hereby consent to the incorporation by reference in the previously filed
Registration Statements (Form S-8 No. 333-83699 and Form S-8 No. 333-88633) of
our report dated March 24, 2000, except for Notes 10 and 18 which are as of
April 6, 2000, relating to the supplemental consolidated financial statements of
eGlobe, Inc. appearing in the Company's Form 8-k dated May 22, 2000.
/s/ BDO Seidman, LLP
Denver, Colorado
May 19, 2000
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
Trans Global Communications, Inc.
New York, NY
We hereby consent to the incorporation by reference in the previously filed
Registration Statements (Form S-8 No. 333-83699 and Form S-8 333-88633) of
eGlobe, Inc. of our report dated February 25, 2000, relating to the consolidated
financial statements of Trans Global Communications, Inc. appearing in eGlobe,
Inc.'s Form 8-K/A dated May 22, 2000.
/s/ Ernst & Young, LLP
New York, New York
May 19, 2000
