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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<S> <C>
Date of Report (Date of earliest event reported): Commission File Number:
March 23, 2000 1-10210
</TABLE>
eGLOBE, INC.
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-3486421
(State or other jurisdiction of (IRS Employer
incorporation) Identification Number)
</TABLE>
1250 24TH STREET, NW, SUITE 725, WASHINGTON, D.C. 20037
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(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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<PAGE>
eGLOBE, INC.
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.
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.
1
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eGLOBE, INC. - (CONTINUED)
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).
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.
2
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eGLOBE, INC. - (CONTINUED)
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.
<TABLE>
<CAPTION>
REVENUE
----------------------------------------------
FOR THE
FOR THE YEAR NINE MONTHS
ENDED ENDED FOR THE YEAR
(IN THOUSANDS) DATE OF BUSINESS DECEMBER 31, DECEMBER 31, ENDED
COMPANY NAME TRANSACTION SEGMENT 1999 1998 MARCH 31, 1998
----------------------------------- ------------- ---------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
eGlobe-Card Services .............. Legacy Enhanced $ 16,840 $ 21,360 $ 31,819
Executive TeleCard, Inc.
(TeleCall) ....................... Legacy Retail 394 553 1,304
IDX International, Inc. ........... Dec.-98 Network 15,522 578 --
UCI ............................... Dec.-98 Enhanced -- -- --
Telekey, Inc. ..................... Feb.-99 Enhanced 2,968 -- --
Connectsoft (Vogo) ................ June-99 Enhanced 125 -- --
Swiftcall ......................... July-99 Network -- -- --
iGlobe, Inc. ...................... August-99 Network 3,608 -- --
Oasis Reservations Services Customer
(ORS) ............................ Sept.-99 Care 1,637 -- --
Interactive Media Works
(IMW) ............................ Dec.-99 Enhanced 133 -- --
Coast International, Inc. ......... Dec.-99 Retail 607 -- --
Trans Global
Communications, Inc. ............. March-00 Network 100,114 67,929 46,473
--------- -------- --------
Total Revenue for the period ...... $ 141,948 $ 90,420 $ 79,596
========= ======== ========
<CAPTION>
(IN THOUSANDS) DESCRIPTION OF
COMPANY NAME SERVICES
----------------------------------- ------------------------------------
<S> <C>
eGlobe-Card Services .............. Pre Paid and Global
Post Paid Card Services
Executive TeleCard, Inc.
(TeleCall) ....................... Domestic long-distance services
IDX International, Inc. ........... Internet protocol transmission
services
UCI ............................... Development stage company in
Mediterranean region
Telekey, Inc. ..................... Specialty calling card services
Connectsoft (Vogo) ................ Global unified messaging,
telephone portal services and a
technology license for unified
messaging technology
Swiftcall ......................... Network operating center
iGlobe, Inc. ...................... Latin American Internet protocol
transmission operations
Oasis Reservations Services
(ORS) ............................ Support services and call center
Interactive Media Works
(IMW) ............................ Interactive voice and Internet services
Coast International, Inc. ......... Enhanced long-distance services
Trans Global
Communications, Inc. ............. Facilities-based, direct connection and resale network
------------------------------------
Total Revenue for the period ......
</TABLE>
For a detailed discussion of each acquisition and segment information, see
Notes 4 and 12 to the Supplemental Consolidated Financial Statements.
3
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eGLOBE, INC. - (CONTINUED)
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
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Total ............................................................. $ 29.1 $ 6.9 $ 16.0
======= ====== =======
</TABLE>
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.
4
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eGLOBE, INC. - (CONTINUED )
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 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.
5
<PAGE>
eGLOBE, INC. - (CONTINUED)
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. We generate revenue from providing enhanced, network, customer
care and retail services in Europe, Asia Pacific, North America and Latin
America as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 MARCH 31, 1998
----------------------- ----------------------- -----------------------
(IN MILLIONS OF U.S. DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Enhanced Services ........... $ 20.1 14.2% $ 21.4 23.7% $ 31.8 40.0%
Network Services ............ 119.2 84.0% 68.5 75.8% 46.5 58.4%
Customer Care ............... 1.6 1.1% -- -- -- --
Retail Services ............. 1.0 0.7% 0.5 0.5% 1.3 1.6%
Total by operation ......... $ 141.9 100.0% $ 90.4 100.0% $ 79.6 100.0%
Europe ...................... $ 7.3 5.1% $ 2.2 2.4% $ 3.5 4.4%
Asia Pacific ................ 7.9 5.6% 6.0 6.6% 10.3 12.9%
North America ............... 121.7 85.8% 76.7 84.9% 56.6 71.1%
Latin America ............... 3.5 2.5% 5.2 5.8% 8.2 10.3%
Other ....................... 1.5 1.0% 0.3 0.3% 1.0 1.3%
Total by geography ......... $ 141.9 100.0% $ 90.4 100.0% $ 79.6 100.0%
</TABLE>
Our revenues for 1999 have increased to $141.9 million as compared to $90.4
million for the nine months ended December 31, 1998, with Network Services and
Enhanced Services being the primary business segments contributing to the
increase, as discussed above under "Overview, Revenue". 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. 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 47.9% improvement in revenue or
approximately a $32.5 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 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. 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 6.7% for the year ended December 31,
1999 as compared to the nine month period ended December 31, 1998 with a similar
change for the nine month period ended December 31, 1998 as
6
<PAGE>
eGLOBE, INC. - (CONTINUED)
compared to the year ended March 31, 1998. 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, exclusive of $1.5 million and
$0.4 million reported below of deferred compensation related to acquisitions.
Selling, general and administrative expenses, exclusive of $1.5 million and $0.4
million reported below of deferred compensation related to acquisitions 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. The 56%
increase in the reserve for doubtful accounts from December 31, 1998 to December
31, 1999 was primarily due to a recent deterioration in the payment performance
of one customer. Excluding these 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.
7
<PAGE>
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.
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
8
<PAGE>
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.
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 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.
9
<PAGE>
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.
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.
10
<PAGE>
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.
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.
11
<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.
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.
12
<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>
<S> <C>
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS:
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 - F-12
Summary of Accounting Policies .......................................................... F-13 - F-32
Notes to Supplemental Consolidated Financial Statements ................................. F-33 - F-70
SUPPLEMENTAL SCHEDULE -
II -- Valuation and Qualifying Accounts .................................................
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
ENDED
DECEMBER 31,
1999
---------------------------------------------------------------------------------------------------------------
<S> <C>
REVENUE (NOTE 12) ................................................................ $ 141,948,000
---------------------------------------------------------------------------------------------------------------
COST OF REVENUE .................................................................. 136,941,000
---------------------------------------------------------------------------------------------------------------
GROSS PROFIT ..................................................................... 5,007,000
---------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Selling, general and administrative, exclusive of $1.5
million and $0.4 million reported below of deferred
compensation related to acquisitions. ......................................... 34,967,000
Deferred compensation related to acquisitions (Note 4)........................... 1,485,000
Depreciation and amortization ................................................... 8,356,000
Amortization of goodwill and other intangible assets ............................ 7,112,000
Settlement costs (Note 7) ....................................................... --
Corporate realignment expense (Note 3) .......................................... --
---------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES ......................................................... 51,920,000
---------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS ............................................................. (46,913,000)
---------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense ................................................................ (7,733,000)
Interest income ................................................................. 686,000
Foreign currency transaction loss ............................................... (99,000)
Minority interest in income (Note 4) ............................................ (78,000)
Proxy related litigation expense (Note 8) ....................................... --
Other income .................................................................... 2,000
Other expense ................................................................... (30,000)
---------------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE .............................................................. (7,252,000)
---------------------------------------------------------------------------------------------------------------
LOSS BEFORE TAXES (BENEFIT) ON INCOME AND EXTRAORDINARY
ITEM ............................................................................ (54,165,000)
---------------------------------------------------------------------------------------------------------------
TAXES (BENEFIT) ON INCOME (LOSS) (NOTE 11) ....................................... (962,000)
---------------------------------------------------------------------------------------------------------------
NET LOSS BEFORE EXTRAORDINARY ITEM ............................................... (53,203,000)
---------------------------------------------------------------------------------------------------------------
<CAPTION>
NINE MONTHS YEAR
ENDED ENDED
DECEMBER 31, MARCH 31,
1998 1998
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
------------------------------------------------------------------------------------------------------------------
REVENUE (NOTE 12) ................................................................ $ 90,420,000 $ 79,596,000
------------------------------------------------------------------------------------------------------------------
COST OF REVENUE .................................................................. 73,929,000 58,751,000
------------------------------------------------------------------------------------------------------------------
GROSS PROFIT ..................................................................... 16,491,000 20,845,000
------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Selling, general and administrative, exclusive of $1.5
million and $0.4 million reported below of deferred
compensation related to acquisitions. ......................................... 16,333,000 17,255,000
Deferred compensation related to acquisitions (Note 4)........................... 420,000 --
Depreciation and amortization ................................................... 3,196,000 3,342,000
Amortization of goodwill and other intangible assets ............................ 201,000 186,000
Settlement costs (Note 7) ....................................................... 996,000 --
Corporate realignment expense (Note 3) .......................................... -- 3,139,000
------------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES ......................................................... 21,146,000 23,922,000
------------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS ............................................................. (4,655,000) (3,077,000)
------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense ................................................................ (1,039,000) (1,818,000)
Interest income ................................................................. 482,000 247,000
Foreign currency transaction loss ............................................... (131,000) (410,000)
Minority interest in income (Note 4) ............................................ -- --
Proxy related litigation expense (Note 8) ....................................... (119,000) (3,901,000)
Other income .................................................................... 95,000 6,000
Other expense ................................................................... (13,000) (343,000)
------------------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE .............................................................. (725,000) (6,219,000)
------------------------------------------------------------------------------------------------------------------
LOSS BEFORE TAXES (BENEFIT) ON INCOME AND EXTRAORDINARY
ITEM ............................................................................ (5,380,000) (9,296,000)
------------------------------------------------------------------------------------------------------------------
TAXES (BENEFIT) ON INCOME (LOSS) (NOTE 11) ....................................... 578,000 1,961,000
------------------------------------------------------------------------------------------------------------------
NET LOSS BEFORE EXTRAORDINARY ITEM ............................................... (5,958,000) (11,257,000)
------------------------------------------------------------------------------------------------------------------
</TABLE>
F-6
<PAGE>
eGLOBE, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
YEAR
ENDED
DECEMBER 31,
1999
------------------------------------------------------------------------------------------------------------------
<S> <C>
LOSS ON EARLY RETIREMENT OF DEBT (NOTE 7) ........................................ (1,901,000)
------------------------------------------------------------------------------------------------------------------
NET LOSS ......................................................................... (55,104,000)
------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK DIVIDENDS (NOTE 10) .............................................. (11,930,000)
------------------------------------------------------------------------------------------------------------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS ..................................... $ (67,034,000)
------------------------------------------------------------------------------------------------------------------
NET LOSS PER SHARE (BASIC AND DILUTED) (NOTE 6):
Net loss before extraordinary item .............................................. $ (1.08)
Loss on early retirement of debt ................................................ (0.03)
------------------------------------------------------------------------------------------------------------------
NET LOSS PER SHARE (NOTE 6) ...................................................... $ (1.11)
------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING (NOTE 6) ..................................... 60,610,548
------------------------------------------------------------------------------------------------------------------
<CAPTION>
NINE MONTHS YEAR
ENDED ENDED
DECEMBER 31, MARCH 31,
1998 1998
<S> <C> <C>
------------------------------------------------------------------------------------------------------------------
LOSS ON EARLY RETIREMENT OF DEBT (NOTE 7) ........................................ -- --
------------------------------------------------------------------------------------------------------------------
NET LOSS ......................................................................... (5,958,000) (11,257,000)
------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK DIVIDENDS (NOTE 10) .............................................. -- --
------------------------------------------------------------------------------------------------------------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS ..................................... $ (5,958,000) $ (11,257,000)
------------------------------------------------------------------------------------------------------------------
NET LOSS PER SHARE (BASIC AND DILUTED) (NOTE 6):
Net loss before extraordinary item .............................................. $ (0.10) $ (0.20)
Loss on early retirement of debt ................................................ -- --
------------------------------------------------------------------------------------------------------------------
NET LOSS PER SHARE (NOTE 6) ...................................................... $ (0.10) $ (0.20)
------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING (NOTE 6) ..................................... 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
--------------------
SHARES AMOUNT
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD ................................................... -- $ --
Stock issued in lieu of cash payments ............................................ -- --
Stock issued in connection with private placement, net (Notes
7 and 10) ....................................................................... -- --
Stock to be issued (Note 8) ...................................................... -- --
Exercise of stock appreciation rights ............................................ -- --
Issuance of warrants to purchase stock (Note 10) ................................. -- --
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 .......................................................... -- --
Stock issued in connection with litigation settlement (Note 8).................... -- --
Stock issued to common escrow (Note 8) ........................................... -- --
Issuance of warrants to purchase stock (Note 7) .................................. -- --
Stock issued in connection with acquisitions (Notes 4 and 10)..................... 500,000 1,000
Exchange of common stock for Series C Preferred Stock
(Notes 7 and 10) ................................................................ 75 --
Deferred compensation costs (Note 4) ............................................. -- --
Foreign currency translation adjustment .......................................... -- --
Net loss for the period .......................................................... -- --
------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 ....................................................... 500,075 1,000
------------------------------------------------------------------------------------------------------------------
<CAPTION>
COMMON STOCK
--------------------------
STOCK TO BE
SHARES AMOUNT ISSUED
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD ................................................... 55,861,240 $ 56,000 $ --
Stock issued in lieu of cash payments ............................................ 42,178 -- --
Stock issued in connection with private placement, net (Notes
7 and 10) ....................................................................... 1,425,000 1,000 --
Stock to be issued (Note 8) ...................................................... -- -- 3,500,000
Exercise of stock appreciation rights ............................................ 18,348 -- --
Issuance of warrants to purchase stock (Note 10) ................................. -- -- --
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
Stock issued in connection with litigation settlement (Note 8).................... 28,700 -- --
Stock issued to common escrow (Note 8) ........................................... 350,000 -- (3,500,000)
Issuance of warrants to purchase stock (Note 7) .................................. -- -- --
Stock issued in connection with acquisitions (Notes 4 and 10)..................... 62,500 -- --
Exchange of common stock for Series C Preferred Stock
(Notes 7 and 10) ................................................................ (1,425,000) (1,000) --
Deferred compensation costs (Note 4) ............................................. -- -- --
Foreign currency translation adjustment .......................................... -- -- --
Net loss for the period .......................................................... -- -- --
------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 ....................................................... 56,362,966 56,000 --
------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
ADDITIONAL
NOTES PAID-IN ACCUMULATED
RECEIVABLE CAPITAL DEFICIT
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD ................................................... $-- $16,190,000 $ (8,779,000)
Stock issued in lieu of cash payments ............................................ -- 244,000 --
Stock issued in connection with private placement, net (Notes
7 and 10) ....................................................................... -- 7,481,000 --
Stock to be issued (Note 8) ...................................................... -- -- --
Exercise of stock appreciation rights ............................................ -- 138,000 --
Issuance of warrants to purchase stock (Note 10) ................................. -- 1,136,000 --
Foreign currency translation adjustment .......................................... -- -- --
Net loss for the year ............................................................ -- -- (11,257,000)
Trans Global net income for the three months ended
March 31, 1998 .................................................................. -- -- 416,000
------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 .......................................................... -- 25,189,000 (19,620,000)
Stock issued in connection with litigation settlement (Note 8).................... -- 81,000 --
Stock issued to common escrow (Note 8) ........................................... -- 3,500,000 --
Issuance of warrants to purchase stock (Note 7) .................................. -- 328,000 --
Stock issued in connection with acquisitions (Notes 4 and 10)..................... -- 3,601,000 --
Exchange of common stock for Series C Preferred Stock
(Notes 7 and 10) ................................................................ -- 998,000 --
Deferred compensation costs (Note 4) ............................................. -- 420,000 --
Foreign currency translation adjustment .......................................... -- -- --
Net loss for the period .......................................................... -- -- (5,958,000)
------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 ....................................................... -- 34,117,000 (25,578,000)
------------------------------------------------------------------------------------------------------------------------------
</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>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS
INCOME (LOSS) EQUITY
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD ................................................... $ 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)
Trans Global net income for the three months ended
March 31, 1998 .................................................................. -- 416,000
--------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 .......................................................... 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)
--------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 ....................................................... (89,000) 8,507,000
--------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK COMMON STOCK
--------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------------------------------------------------
<S> <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) ............ -- -- -- --
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
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
--------------------------------------------------------------------------------------------------------------------
<CAPTION>
ADDITIONAL
STOCK TO BE NOTES PAID-IN
ISSUED RECEIVABLE CAPITAL
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 ............................................. $ -- $ -- $ 34,117,000
Issuance of warrants to purchase stock (Notes 4, 5, 7 and 10) .......... -- -- 18,474,000
Stock issued in connection with acquisitions, net of $135,000
premium amortization (Note 4) ......................................... -- -- 28,788,000
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
Stock issued in connection with private placements, net of costs of
$2,084,000 (Note 10)................................................... -- -- 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
Value of increase in conversion feature of Series B Preferred (Note
4) .................................................................... -- -- 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)
Exchange of Series G Preferred for Series K Preferred (Note 4 and
10) ................................................................... -- -- 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
Deferred compensation costs (Notes 4 and 10) ........................... -- -- 1,485,000
Exercise of stock options and warrants (Note 10) ....................... -- (1,210,000) 1,990,000
Conversion of Series D and N Preferred into common stock,
including coversion of dividends of $240,000 (Note 10)................. -- -- 238,000
Stock to be issued for dividends ....................................... -- -- 1,043,000
Cumulative Preferred Stock dividends ................................... -- -- (2,300,000)
Amortization of discounts (premium) on Preferred Stocks ................ -- -- (2,797,000)
Other issuances and registration costs ................................. -- -- 48,000
Foreign currency translation adjustment ................................ -- -- --
Net loss for the year .................................................. -- -- --
----------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 ............................................. $2,624,000 $ (1,210,000) $106,718,000
----------------------------------------------------------------------------------------------------------------------
<CAPTION>
ACCUMULATED
OTHER TOTAL
ACCUMULATED COMPREHENSIVE STOCKHOLDERS
DEFICIT INCOME (LOSS) EQUITY
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 ............................................. $ (25,578,000) $ (89,000) $ 8,507,000
Issuance of warrants to purchase stock (Notes 4, 5, 7 and 10) .......... -- -- 18,474,000
Stock issued in connection with acquisitions, net of $135,000
premium amortization (Note 4) ......................................... -- -- 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)................................................ -- -- 5,616,000
Stock issued in connection with private placements, net of costs of
$2,084,000 (Note 10)................................................... -- -- 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
Value of increase in conversion feature of Series B Preferred (Note
4) .................................................................... -- -- 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).............................. -- -- (118,000)
Exchange of Series G Preferred for Series K Preferred (Note 4 and
10) ................................................................... -- -- 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
Deferred compensation costs (Notes 4 and 10) ........................... -- -- 1,485,000
Exercise of stock options and warrants (Note 10) ....................... -- -- 782,000
Conversion of Series D and N Preferred into common stock,
including coversion of dividends of $240,000 (Note 10)................. -- -- 240,000
Stock to be issued for dividends ....................................... -- -- 1,043,000
Cumulative Preferred Stock dividends ................................... -- -- (2,300,000)
Amortization of discounts (premium) on Preferred Stocks ................ -- -- (2,797,000)
Other issuances and registration costs ................................. -- -- 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 ............................................. $ (80,682,000) $ 496,000 $ 28,018,000
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to supplemental
consolidated financial statements
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
ENDED
DECEMBER 31,
1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C>
NET LOSS ......................................................................... $ (55,104,000)
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ......................................... 585,000
-------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE NET LOSS ........................................................... $ (54,519,000)
-------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NINE MONTHS YEAR
ENDED ENDED
DECEMBER 31, MARCH 31,
1998 1998
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET LOSS ......................................................................... $ (5,958,000) $ (11,257,000)
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ......................................... (121,000) (50,000)
-------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE NET LOSS ........................................................... $ (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
ENDED
DECEMBER 31,
1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
OPERATING ACTIVITIES:
Net loss ........................................................................ $ (55,104,000)
Adjustments to reconcile net loss to cash provided by
(used in) operating activities:
Depreciation and amortization ................................................. 15,468,000
Provision for bad debts ....................................................... 2,528,000
Non-cash interest expense ..................................................... 889,000
Minority interest in income ................................................... 78,000
Settlement costs (Note 7) ..................................................... --
Common stock issued in lieu of cash payments .................................. --
Issuance of options and warrants for services
(Note 10) .................................................................... 181,000
Compensation costs related to acquisitions (Note 4)............................ 1,485,000
Amortization of debt discounts (Notes 5 and 7) ................................ 5,182,000
Proxy related litigation expense (Note 8) ..................................... --
Loss on early retirement of debt (Note 7) ..................................... 1,901,000
Gain on sale of property and equipment ........................................ --
Write off on non-producing internet assets .................................... --
Write down of building to market value ........................................ --
Changes in operating assets and liabilities (net of changes from acquisitions
-- Note 4):
Accounts receivable .......................................................... (5,445,000)
Other receivables ............................................................ (755,000)
Prepaid expenses ............................................................. 946,000
Other current assets ......................................................... (37,000)
Other assets ................................................................. 303,000
Accounts payable ............................................................. 10,750,000
Income tax payable ........................................................... (815,000)
Accrued expenses ............................................................. (1,193,000)
Deferred revenue ............................................................. (153,000)
Other liabilities ............................................................ 87,000
-------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .................................. (23,704,000)
-------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment ............................................. (13,203,000)
Net sales (purchases) of short-term investments ................................. 10,806,000
Proceeds from sale of property and equipment .................................... --
Advances to non-affiliate, subsequently acquired (Note
4) ............................................................................ --
Purchase of intangibles ......................................................... (299,000)
Acquisitions of companies, net of cash acquired (Notes
4 and 17) ..................................................................... (2,799,000)
Increase in restricted cash ..................................................... (4,000)
Other assets .................................................................... (224,000)
-------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NINE MONTHS YEAR
ENDED ENDED
DECEMBER 31, MARCH 31,
1998 1998
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
OPERATING ACTIVITIES:
Net loss ........................................................................ $ (5,958,000) $ (11,257,000)
Adjustments to reconcile net loss to cash provided by
(used in) operating activities:
Depreciation and amortization ................................................. 3,397,000 3,528,000
Provision for bad debts ....................................................... 1,018,000 1,564,000
Non-cash interest expense ..................................................... -- --
Minority interest in income ................................................... -- --
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) .................................................................... 190,000 357,000
Compensation costs related to acquisitions (Note 4)............................ 420,000 --
Amortization of debt discounts (Notes 5 and 7) ................................ 255,000 479,000
Proxy related litigation expense (Note 8) ..................................... 81,000 3,500,000
Loss on early retirement of debt (Note 7) ..................................... -- --
Gain on sale of property and equipment ........................................ (57,000) --
Write off on non-producing internet assets .................................... -- 89,000
Write down of building to market value ........................................ -- 55,000
Changes in operating assets and liabilities (net of changes from acquisitions
-- Note 4):
Accounts receivable .......................................................... (1,202,000) (1,716,000)
Other receivables ............................................................ (350,000) (159,000)
Prepaid expenses ............................................................. (216,000) (206,000)
Other current assets ......................................................... (611,000) (351,000)
Other assets ................................................................. 407,000 (10,000)
Accounts payable ............................................................. 14,447,000 5,011,000
Income tax payable ........................................................... (90,000) 1,500,000
Accrued expenses ............................................................. 1,035,000 2,635,000
Deferred revenue ............................................................. 311,000 19,000
Other liabilities ............................................................ 26,000 (89,000)
-------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .................................. 14,099,000 5,093,000
-------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment ............................................. (5,044,000) (6,131,000)
Net sales (purchases) of short-term investments ................................. (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 ......................................................... -- --
Acquisitions of companies, net of cash acquired (Notes
4 and 17) ..................................................................... (2,207,000) --
Increase in restricted cash ..................................................... (100,000) --
Other assets .................................................................... (109,000) 26,000
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-11
<PAGE>
eGLOBE, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
YEAR
ENDED
DECEMBER 31,
1999
--------------------------------------------------------------------------------------------------------------------------
<S> <C>
CASH USED IN INVESTING ACTIVITIES ................................................ (5,723,000)
--------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES: ............................................................
Proceeds from notes payable (Notes 4 and 5) ..................................... 6,835,000
Proceeds from notes payable-related party (Note 7) .............................. 28,258,000
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
Proceeds from issuance of common stock .......................................... 250,000
Deferred financing and acquisition costs ........................................ --
Distribution to minority interest holder ........................................ (52,000)
Payments on capital leases ...................................................... (860,000)
Payments on notes payable ....................................................... (10,180,000)
Payments on notes payable -- related party (Note 7).............................. (8,066,000)
--------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES ............................................ 28,055,000
NET INCREASE (DECREASE) IN CASH .................................................. (1,372,000)
TRANS GLOBAL CASH ACTIVITY FOR THE THREE MONTHS ENDED
MARCH 31, 1998 .................................................................. --
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................... 4,031,000
--------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......................................... $ 2,659,000
--------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NINE MONTHS YEAR
ENDED ENDED
DECEMBER 31, MARCH 31,
1998 1998
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH USED IN INVESTING ACTIVITIES ................................................ (14,982,000) (8,380,000)
--------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES: ............................................................
Proceeds from notes payable (Notes 4 and 5) ..................................... 250,000 7,810,000
Proceeds from notes payable-related party (Note 7) .............................. 1,200,000 --
Proceeds from issuance of preferred stock ....................................... -- --
Stock issuance costs ............................................................ -- --
Proceeds from exercise of warrants .............................................. -- --
Proceeds from exercise of options ............................................... -- 138,000
Proceeds from issuance of common stock .......................................... -- 7,345,000
Deferred financing and acquisition costs ........................................ (524,000) --
Distribution to minority interest holder ........................................ -- --
Payments on capital leases ...................................................... (198,000) (448,000)
Payments on notes payable ....................................................... (716,000) (10,864,000)
Payments on notes payable -- related party (Note 7).............................. -- --
--------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES ............................................ 12,000 3,981,000
NET INCREASE (DECREASE) IN CASH .................................................. (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 ................................... 4,902,000 2,742,000
--------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......................................... $ 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-12
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
eGlobe, Inc. and subsidiaries, (collectively, the "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 sole stockholder, Outsourced Automated Services and
Integrated Solutions, Inc. ("Oasis"). The Company and Oasis formed eGlobe/Oasis
Reservations LLC ("LLC") which is responsible for conducting ORS' operations.
The Company manages and controls the LLC. In December 1999, the Company
completed the acquisition of Coast International, Inc. ("Coast"), a provider of
enhanced long-distance interactive voice and internet services. See Notes 4, 5,
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
F-13
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES - (CONTINUED)
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 contingency periods for both of the 2,000,000 share
escrows expire on March 23, 2001. 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.
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 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 of $416,000 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.
Information for the Trans Global's three month period ended March 31, 1998
is summarized below (unaudited):
<TABLE>
<S> <C>
Revenue ............ $17,190,000
Expenses ........... $16,774,000
Net Income ......... $ 416,000
</TABLE>
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)
Revenue, extraordinary loss on early retirement of debt, net income (loss),
net loss attributable to common 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 Form 10-K .......... $ (1,901,000) $ -- $ --
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)
============= ============= =============
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-15
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES - (CONTINUED)
MANAGEMENT'S PLAN
As of December 31, 1999, the Company had a net working 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.
In addition to the firm commitments discussed 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
F-16
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES - (CONTINUED)
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.
FISCAL YEAR
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):
<TABLE>
<S> <C>
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)
</TABLE>
CHANGE OF COMPANY NAME
At the annual meeting of the stockholders of the Company on June 16, 1999,
the stockholders approved and adopted a proposal for amending the Certificate of
Incorporation to change the name of the Company from Executive TeleCard, Ltd. to
eGlobe, Inc. The amended Certificate of Incorporation has been filed with and
accepted by the State of Delaware.
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of the
Company, its 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.
USE OF ESTIMATES
The preparation of financial statements in conformity 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 CURRENCY TRANSLATION
For subsidiaries whose functional currency is the local currency and which
do not operate in highly inflationary 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.
F-17
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES - (CONTINUED)
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 INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
short-term investments and trade accounts receivable.
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.
Some of the Company's customers are permitted to choose the currency in
which they pay for calling services from among several different currencies
determined by the Company. Thus, the Company's earnings may be materially
affected by movements in the exchange rate between the U.S. dollar and such
other currencies. The Company does not engage in the practice of entering into
foreign currency contracts in order to hedge the effects of foreign currency
fluctuations. The 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 SHORT-TERM INVESTMENTS
Restricted short-term investments consist of certificates of deposits with
a financial institution to secure letters of credit issued to transmission
vendors related to an agreement whereby the vendors will perform transmission
services.
F-18
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES - (CONTINUED)
PROPERTY, EQUIPMENT, DEPRECIATION AND AMORTIZATION
Property and equipment are recorded at the lower of cost or fair market
value. Additions, installation costs and major improvements of property and
equipment are capitalized. Expenditures for maintenance and repairs 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".
SOFTWARE DEVELOPMENT COSTS
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting
for the Costs of Computer Software to be 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 DEVELOPMENT
Research and development costs and costs related to 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-19
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES - (CONTINUED)
GOODWILL AND OTHER INTANGIBLE ASSETS
As of December 31, 1999 and 1998, the Company has 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.
DEFERRED FINANCING AND ACQUISITION COSTS
Deferred financing and acquisition costs included in other assets in the
accompanying supplemental consolidated balance sheets represent third party
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 RECOGNITION
The Company recognizes revenue when persuasive evidence of an agreement
exists, the terms are fixed or determinable, services are performed, and
collection is probable. Revenue and related direct costs from customer contracts
for Enhanced, Network, Customer Care and Retail services are recognized
F-20
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES - (CONTINUED)
over the terms of the contracts, which are generally one year. Cash received in
advance of revenue earned is recorded as deferred revenue, including monthly
subscriber charges and monthly minimum payments, which are subsequently
recognized as revenue when the services are performed. Revenue is reported on a
gross basis with separate display of cost of revenue to arrive at gross profit
as the Company acts as principal and has the risks and rewards of ownership in
each transaction. The Company has not currently entered into any barter
transactions.
Revenue for all services is recognized on an individual service basis as
provided to each customer. 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.
Revenues from the Company's card services business (Enhanced Services)
comes mainly 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, telephone portal, interactive voice and Internet services, often have
monthly subscriber charges in addition to per transaction charges. Revenues and
direct costs from such services are recognized as the cards are used and the
related service is provided. 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 remaining deferred revenue is referred to as breakage and
recorded as revenue at the date of expiration in accordance with the terms of
the contract.
For Vogo (Enhanced Services), the Company's provider of software products
and related services, revenue is recognized from the license of its proprietary
software and related services in accordance with the provisions of SOP 97-2,
"Software Revenue Recognition." SOP 97-2 requires, among other things, the
individual elements of a contract for the sale of software products to be
identified and accounted for separately. To date, revenue earned under software
products contracts has been insignificant.
IDX (Network Services) provides Internet protocol transmission technology.
Revenue and direct costs from such services, mainly from routing charges for
voice and fax traffic through the network, are recognized as the service is
provided. Some Network Services contracts require monthly minimum payments to be
paid, which are reported as deferred revenue and recognized as the services are
performed.
The Company, following its recent acquisition of ORS (Customer Care
Services), has recorded deferred revenue related to certain reservations service
contracts paid in advance, based on forecasted amounts, which will be recognized
as revenue as the services are provided.
Coast (Retail Services) recognizes revenue upon completion of telephone
calls by the end users. All of the Company's remaining subsidiaries recognize
revenue as service is provided.
TAXES ON INCOME
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes". Under SFAS No. 109, deferred tax assets and liabilities are
determined based on the temporary differences between the tax basis of assets
and liabilities and their reported amounts in the financial statements using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
NET EARNINGS (LOSS) PER SHARE
The Company applies SFAS No. 128, "Earnings Per Share" for the calculation
of "Basic" and "Diluted" earnings (loss) per share. Basic earnings (loss) per
share includes no dilution and is computed by dividing income (loss) available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings (loss) per share reflects the
potential dilution of securities that could share in the earnings (loss) of an
entity.
F-21
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES - (CONTINUED)
STOCK OPTIONS
The Company applies Accounting Principles Board ("APB") Opinion 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for all stock option plans. 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 EQUIVALENTS
The Company considers cash and all highly liquid investments purchased with
an original maturity of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS
Short-term investments include funds invested in a money 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 INCOME (LOSS)
The Company applies SFAS No. 130, "Reporting 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined using
available market information or 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 INFORMATION
The Company follows the provisions of SFAS No. 131, "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
F-22
<PAGE>
eGLOBE, INC.
SUMMARY OF ACCOUNTING POLICIES - (CONTINUED)
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 ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board ("FASB") has recently 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 the Company.
In December 1999, the U.S. Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"), which clarifies the SEC's views on revenue recognition.
The Company believes its existing revenue recognition policies and procedures
are in compliance with SAB 101 and therefore, SAB 101's adoption will not have a
material impact on the Company's financial condition, results of operations or
cash flows.
In March 2000, the FASB issued Emerging Issues Task Force Issue No. 00-2,
"Accounting for Web Site Development Costs" ("EITF 00-2"), which is effective
for all such costs incurred for fiscal quarters beginning after June 30, 2000.
This Issue establishes accounting and reporting standards for costs incurred to
develop a web site based on the nature of each cost. Currently, as the Company
has no web site development costs, the adoption of EITF 00-2 would have no
impact on the Company's financial condition or results of operations. To the
extent the Company begins to enter into such transactions in the future, the
Company will adopt the Issue's disclosure requirements in the quarterly and
annual financial statements for the year ending December 31, 2000.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN 44"), which is
effective July 1, 2000, except that certain conclusions in this Interpretation
which cover specific events that occur after either December 15, 1998, or
January 12, 2000 are recognized on a prospective basis from July 1, 2000. This
Interpretation clarifies the application of APB Opinion 25 for certain issues
related to stock issued to employees. The Company believes its existing stock
based compensation policies and procedures are in compliance with FIN 44 and
therefore, the adoption of FIN 44 will have no material impact on the Company's
financial condition, results of operations or cash flows.
RECLASSIFICATIONS
Certain consolidated financial amounts have been reclassified for
consistent presentation.
F-23
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
LIFE
1999 1998 IN YEARS
------------- ------------- -----------
<S> <C> <C> <C>
Land ................................................... $ 122,000 $ 122,000 --
Buildings and improvements ............................. 1,985,000 1,920,000 5-20
Calling card platform equipment ........................ 14,722,000 13,480,000 5
Telecom equipment ...................................... 8,628,000 1,140,000 5
IP transmission equipment .............................. 4,229,000 888,000 5
Operations center equipment and furniture .............. 13,255,000 8,789,000 3-5
Call diverters ......................................... 18,016,000 8,175,000 5
Equipment under capital leases (Note 5) ................ 4,910,000 1,279,000 Lease Term
Internet communications equipment ...................... 563,000 562,000 5
----------- -----------
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 INTANGIBLE ASSETS
Other intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
LIFE
1999 1998 IN YEARS
------------- ------------ ---------
<S> <C> <C> <C>
Existing technology ...................... $ 8,400,000 $ -- 5
Distribution partnership network ......... 5,290,000 -- 4-7
Assembled and trained workforce .......... 4,391,000 -- 3
Internally developed software ............ 3,488,000 -- 3-5
Long distance infrastructure ............. 1,580,000 -- 5
Non-compete agreements ................... 1,540,000 -- 1
Customer contract base ................... 1,343,000 -- 2-3
Licenses ................................. 1,143,000 433,000 3-5
Trademarks ............................... 549,000 518,000 10
Other .................................... 416,000 76,000 4-5
----------- ---------
28,140,000 1,027,000
Less accumulated amortization ............ 6,466,000 786,000
----------- ---------
$21,674,000 $ 241,000
=========== =========
</TABLE>
Intangible assets amortization expense for the year ended December 31,
1999, the nine month period ended December 31, 1998 and the year ended March 31,
1998 was $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.
F-24
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. ACCRUED EXPENSES
Accrued expenses consist of the following:
<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 ACQUISITIONS
As discussed previously, the Company acquired IDX and UCI in December 1998
and Telekey, Connectsoft, Swiftcall, iGlobe, ORS and Coast in 1999. The results
of operations of the acquired businesses are included in the supplemental
consolidated financial statements from the date of acquisition.
IDX
On December 2, 1998, the Company acquired all of the common and preferred
stock of IDX, 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). See Note
10 for a detailed description of terms of the IDX Notes and the Series B
Preferred Stock and IDX Warrants. 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.
The Company's common stock is currently listed on the Nasdaq National
Market and as such the rules of the National Association of Securities Dealers,
Inc. ("NASD") require stockholder approval of issuances of shares of common
stock (or securities convertible into common stock) in acquisition
F-25
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. BUSINESS ACQUISITIONS- (CONTINUED)
transactions where the present or potential issuance of securities could result
in an increase in the voting power or outstanding common shares of 20% or more.
As a result of NASD rules, the initial issuance of Series B Preferred Stock
provided for a conversion into 2,000,000 shares until such time that stockholder
approval was obtained to increase the convertibility into 2,500,000 shares and
allow for the issuance of common stock related to the IDX Warrants. At the
annual meeting in June 1999, the stockholders approved the increase of the
convertibility of the Series B Preferred Stock to 2,500,000 shares and IDX
warrants to purchase up to 2,500,000 shares contingent on IDX meeting certain
performance objectives, as discussed in (a) and (b) above, respectively. The
fair value of the increase of 500,000 convertible shares was recorded as
additional purchase consideration. 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:
(a) The 500,000 shares of Series B Preferred Stock were reacquired by the
Company in exchange for 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,
F-26
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. BUSINESS ACQUISITIONS- (CONTINUED)
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.
In December 1999, the Company and the IDX stockholders agreed to reduce the
Series H Preferred Stock and 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
description of the terms and conditions of the warrants. 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.
Telekey
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
F-27
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. BUSINESS ACQUISITIONS- (CONTINUED)
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 Note 10
for detailed description of terms and conditions of the Series F Preferred
Stock. 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.
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
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. See Note 10 for detailed description of terms of
the Series G Preferred Stock. 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.
F-28
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. BUSINESS ACQUISITIONS- (CONTINUED)
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.
In August 1999, the Company issued 30 shares of Series K Cumulative
Convertible Preferred Stock ("Series K 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.
iGlobe
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
F-29
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. BUSINESS ACQUISITIONS- (CONTINUED)
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. See Note 10 for
detailed description of the Series M Preferred Stock.
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.
ORS
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;
(d) additional shares based upon (1) ORS achieving certain revenue and EBITDA
targets, and (2) the Company's share price at the date of registration of
the shares for this transaction. Under certain circumstances, these
shares may be equal to the greater of (A) 50% of the incremental revenue
for the Second Measurement Period (as defined in the agreements) over
$9.0 million or (B) four times the incremental Adjusted EBITDA (as
defined in the agreements) for the Second Measurement Period over $1.0
million provided, however, that such number of shares shall not exceed
the greater of; (i) 1,000,000 shares of the Company's common stock or
(ii) that the number of shares of the Company's common stock determined
by dividing $8.0 million by the Second Measurement Period Date Market
Value (as defined in the agreements); and provided
F-30
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. BUSINESS ACQUISITIONS- (CONTINUED)
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.
This acquisition was accounted for using the purchase method of accounting.
The purchase allocation based on 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.
Coast
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
F-31
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. BUSINESS ACQUISITIONS- (CONTINUED)
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
a detailed description of the Series O Preferred Stock and common stock.
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.
The unaudited pro forma supplemental consolidated results of operations for
the year ended March 31, 1998 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. IDX, UCI, Telekey, Connectsoft, Swiftcall, iGlobe, ORS and Coast
present the results of operations for the nine months ended December 31, 1998.
<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-32
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
5. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following:
<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>
----------
(1) In February 1998, the Company borrowed $7.5 million from a
telecommunications company. The note was unsecured and bore interest at
8.875%. 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
F-33
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. NOTES PAYABLE AND LONG-TERM DEBT - (CONTINUED)
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.
(5) In September 1998, a subsidiary of the Company entered into a 12% unsecured
bridge loan agreement with an investor for $250,000 and the proceeds were
advanced to Connectsoft, a company acquired in September 1999 as discussed
in Note 4. In connection with this transaction, the lender was granted
warrants to purchase 25,000 shares of the Company's common stock at a price
of $2.00 per share. The value assigned to the warrants of $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.
(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.
(11) Effective June 11, 1999, Trans Global entered into a financing agreement to
fund the purchase of certain switch hardware and software. The 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.
F-34
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. NOTES PAYABLE AND LONG-TERM DEBT - (CONTINUED)
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>
6. EARNINGS (LOSS) PER SHARE
Earnings per share are calculated in accordance 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 8,101,474, 1,218,167 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. Contingent warrants of 1,087,500 and
2,875,000 were not included in diluted earnings (loss) per share for the year
ended December 31, 1999 and the nine months ended December 31, 1998,
respectively, as conditions for inclusion had not been met. 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-35
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. EARNINGS (LOSS) PER SHARE - (CONTINUED)
<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>
The following table lists preferred dividends by preferred stock series for
the year ended December 31, 1999. There were no preferred dividends for the nine
months ended December 31, 1998 and for the twelve months ended March 31, 1998.
<TABLE>
<CAPTION>
PREFERRED STOCK YEAR ENDED
SERIES DECEMBER 31, 1999
----------------- ------------------
<S> <C>
B $ 4,601,000
C 2,215,000
D 1,608,000
E 1,847,000
F --
G --
H --
I 139,000
J 29,000
K 200,000
M 537,000
N 697,000
O 57,000
-----------
Total $11,930,000
===========
</TABLE>
F-36
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. RELATED PARTY TRANSACTIONS
Notes Payable and Long-Term Debt
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.
Under the Agreement, in July 1999, EXTL purchased $20.0 million of 5% Secured
Notes ("Notes") dated June 30, 1999 at the Company's request. The
transactions contemplated by the Agreement were approved by the Company's
stockholders at the annual stockholders meeting in June 1999. The initial
$7.0 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.
F-37
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. RELATED PARTY TRANSACTIONS - (CONTINUED)
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.)
These Notes and Revolver are secured by substantially all of eGlobe's
existing operating 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.
(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.
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.
F-38
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. RELATED PARTY TRANSACTIONS - (CONTINUED)
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>
Settlement With Principal Stockholder
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-39
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. RELATED PARTY TRANSACTIONS - (CONTINUED)
Preferred Stock Issuances
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. The Company shall, within 180 days of the
date of the Coast stockholder's employment, provided that the Company has raised
at least $15.0 million in equity through a public or private placement, purchase
247,213 shares of the Company's common shares at $2.83 per share. If the
conditions mentioned above do not occur within 120 days of the date of
employment, the shareholder has the option to withdraw the redemption feature.
The Company may purchase up to 50,000 shares of common stock of the Company from
the Coast stockholder at a price per share of $2.83. At any time after the date
that is 120 days after the date of the Coast stockholders employment, they may
elect not to have any portion or all of these Company common shares purchased by
providing written notice of such election to the Company. 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.
8. PROXY RELATED LITIGATION AND SETTLEMENT COSTS
The Company, its former auditors, certain of its present and former
directors and others were defendants in a consolidated securities class action
which alleged that 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.
F-40
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. PROXY RELATED LITIGATION AND SETTLEMENT COSTS - (CONTINUED)
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.
9. OTHER LITIGATION
In October 1999, a major telecommunications carrier 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.
10. STOCKHOLDERS' EQUITY
Preferred Stock and Redeemable Preferred Stock
At the June 16, 1999 annual stockholder meeting, a proposal to amend the
Company's Certificate of Incorporation to increase the Company's authorized
preferred stock to 10,000,000 was approved and adopted. Par value for all
preferred stock remained at $.001 per share. In addition, the stockholders also
approved and adopted a prohibition on stockholders increasing their percentage
of ownership of the Company above 30% of the outstanding stock or 40% on a fully
diluted basis other than by a tender offer resulting in the stockholder owning
85% or more of the outstanding common stock. The following is a summary of the
Company's series of preferred stock and the amounts authorized and outstanding
at 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).
F-41
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. STOCKHOLDERS' EQUITY - (CONTINUED)
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).
Series H Convertible Preferred Stock, 500,000 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:
Series B Convertible Preferred Stock
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. The shares of
Series B Preferred Stock were convertible at the holders' option at any time at
the conversion rate (of a 5 to 1 ratio of common stock to preferred). The shares
of Series B Preferred Stock automatically convert into shares of common stock on
the earlier to occur of (a) the first date that the 15 day average closing sales
price of common stock is equal to or greater than $8.00 or (b) 30 days after
December 2, 1999. The Series B Preferred Stock had no stated liquidation
preferences, was not redeemable and the holders were not entitled to dividends
unless declared by the Board of Directors.
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
F-42
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. STOCKHOLDERS' EQUITY - (CONTINUED)
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 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).
Series B stockholders are entitled to vote with shares of the common stock,
not as a separate class, at any annual or special meeting of stockholders of the
Company, and could act by written consent in the same manner as the common stock
in either case upon the following basis: each holder of shares of the Series B
Preferred Stock shall be entitled to such number of votes as shall be equal to
25% of the number of shares of common stock into which the holder's aggregate
number of shares are convertible.
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.
Series C stockholders had no voting rights unless dividends payable on the
shares of Series C Preferred Stock were in arrears for six quarterly periods in
which case Series C stockholders would vote separately as a class with the
shares of any other preferred stock having similar voting rights. They would be
entitled at the next regular or special meeting of stockholders of the Company
to elect one director. Such voting rights would continue until such time as the
dividend arrearage on Series C Preferred Stock were paid in full. The
affirmative vote of the holder of the Series C Preferred Stock was required for
the issuance of any class or series of stock of the Company ranking senior to or
equal to the Series C Preferred Stock as to dividends or rights on liquidation,
winding up and dissolution.
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.
Upon the Company's registration in May 1999 of the 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
F-43
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. STOCKHOLDERS' EQUITY - (CONTINUED)
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.
Series D stockholders have no voting rights unless dividends payable on the
shares of Series D Preferred Stock are in arrears for 6 quarterly periods in
which case Series D stockholders will vote separately as a class with the shares
of any other preferred stock having similar voting rights. They will be entitled
at the next regular or special meeting of stockholders of the Company to elect
one director. Such voting rights will continue until such time as the dividend
arrearage on Series D Preferred Stock has been paid in full. The affirmative
vote of at least 66 2/3% of the holders of the Series D Preferred Stock is
required for the issuance of any class or series of stock of the Company ranking
senior to or equal with the Series D Preferred Stock as to dividends or rights
on liquidation, winding up and dissolution.
In December 1999, 15 shares of Series D Preferred Stock 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
F-44
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. STOCKHOLDERS' EQUITY - (CONTINUED)
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.
On January 31, 2000, the Series E Preferred Stock 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 E stockholders have no voting rights unless dividends payable on the
shares of Series E Preferred Stock are in arrears for 6 quarterly periods in
which case Series E Preferred stockholders will vote separately as a class with
the shares of any other preferred stock having similar voting rights. They will
be entitled at the next regular or special meeting of stockholders of the
Company to elect one director. Such voting rights will continue until such time
as the dividend arrearage on Series E Preferred Stock has been paid in full. The
affirmative vote of at least 66 2/3% of the holders of the Series E Preferred
Stock is required for the issuance of any class or series of stock of the
Company ranking senior to or equal to the Series E Preferred Stock as to
dividends or rights on liquidation, winding up and dissolution.
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 Series F Preferred Stock can be converted at the option of the holder
at any time after issuance. The Series F Preferred Stock conversion rate is
equal to the quotient obtained by dividing $4.00 by the applicable Series F
Market Factor. The Series F Market Factor is equal to $4.00 if the Series F
Preferred Stock converts prior to December 31, 1999. After such date the Series
F Market Factor is equal to (i) $2.50 if the Market Price (equal to the average
closing price of the Company's common stock over the 15 trading days prior to
the conversion date) is less than or equal to $2.50; (ii) the Market Price if
the Market Price is greater than $2.50 but less than $4.00; or (iii) $4.00 if
the Market Price is greater than or equal to $4.00. 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. The Series F Preferred Stock carries no dividend obligation.
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eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. STOCKHOLDERS' EQUITY - (CONTINUED)
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.
Series F stockholders are entitled to vote with shares of the common stock
and not as a separate class, at any annual or special meeting of stockholders of
the Company, and may act by written consent in the same manner as the common
stock in either case upon the following basis: each holder of shares of the
Series F Preferred Stock shall be entitled to such number of votes as shall be
equal to 25% of the number of shares of common stock into which the holder's
aggregate number of shares are convertible.
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.
Series G Cumulative Convertible Redeemable Preferred Stock
In connection with the purchase of substantially all of the assets of
Connectsoft in June 1999, as discussed in Note 4, the Company issued one share
of 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.
The one share of Series G Preferred Stock was convertible, at the holder's
option, into shares of the Company's common stock any time after October 1, 1999
at a conversion price equal to the greater of (i) 75% of the market price of the
common stock on the date the conversion notification is received by the Company
and (ii) a minimum purchase price of $3.00. The Series G Preferred Stock was
redeemable by the Company upon the first to occur of the following dates (a) on
the first day on which the Company received in any transaction or series of
transactions any equity financing of at least $25.0 million or (b) on June 14,
2004. 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 G stockholders have no voting rights unless dividends payable on the
shares of Series G Preferred Stock are in arrears for 6 quarterly periods in
which case Series G stockholders would vote separately as a class with the
shares of any other preferred stock having similar voting rights. They would be
entitled at the next regular or special meeting of stockholders of the Company
to elect one director. Such voting rights would continue until such time as the
dividend arrearage on Series G Preferred Stock were paid in full. The
affirmative vote of at least 66 2/3% of the holders of the Series G Preferred
Stock was required for the issuance of any class or series of stock of the
Company ranking senior to or equal with the Series G Preferred Stock as to
dividends or rights on liquidation, winding up and dissolution.
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.
F-46
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eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. STOCKHOLDERS' EQUITY - (CONTINUED)
Series H stockholders may vote with shares of the common stock, not as a
separate class, at any annual or special meeting of stockholders of the Company,
and may act by written consent in the same manner as the common stock in either
case upon the following basis: each holder of shares of the Series H Preferred
Stock shall be entitled to such number of votes as shall be equal to 25% of the
number of shares of Common Stock into which the holder's aggregate number of
shares are convertible.
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).
Series I Convertible Optional Redemption Preferred Stock
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.
Series I stockholders have no voting rights, unless otherwise provided by
Delaware corporation law.
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).
The Series J Preferred Stock carries an annual dividend 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.
Series J stockholders have no voting rights unless dividends payable on the
shares of Series J Preferred Stock are in arrears for 6 quarterly periods in
which case Series J stockholders will vote separately as a class with the shares
of any other preferred stock having similar voting rights. They will be entitled
at the next
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eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. STOCKHOLDERS' EQUITY - (CONTINUED)
regular or special meeting of stockholders of the Company to elect one director.
Such voting rights will continue until such time as the dividend arrearage on
Series J Preferred Stock has been paid in full. The affirmative vote of at least
66 2/3% of the holders of the Series J Preferred Stock is required for the
issuance of any class or series of stock of the Company ranking senior to or
equal to the Series J Preferred Stock as to dividends or rights on liquidation,
winding up and dissolution.
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.
The Series K Preferred Stock carries an annual dividend 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.
Series K stockholders have no voting rights unless dividends payable on the
shares of Series K Preferred Stock are in arrears for 6 quarterly periods in
which case Series K stockholders will vote separately as a class with the shares
of any other preferred stock having similar voting rights. They will be entitled
at the next regular or special meeting of stockholders of the Company to elect
one director. Such voting rights will continue until such time as the dividend
arrearage on Series K Preferred Stock has been paid in full. The affirmative
vote of at least 66 2/3% of the holders of the Series K Preferred Stock is
required for the issuance of any class or series of stock of the Company ranking
senior to or equal with the Series K Preferred Stock as to dividends or rights
on liquidation, winding up and dissolution.
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.
Series M Convertible Preferred Stock
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
F-48
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eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. STOCKHOLDERS' EQUITY - (CONTINUED)
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.
Series M stockholders have no voting rights unless dividends payable on the
shares of Series M Preferred Stock are in arrears for 6 quarterly periods in
which case Series M Preferred stockholders will vote separately as a class with
the shares of any other preferred stock having similar voting rights. They will
be entitled at the next regular or special meeting of stockholders of the
Company to elect one director. Such voting rights will continue until such time
as the dividend arrearage on Series M Preferred Stock has been paid in full. The
affirmative vote or consent of the holder of the outstanding share of Series M
Preferred Stock is required for the issuance of any class or series of stock of
the Company ranking senior to or equal to the shares of the Series M Preferred
Stock as to dividends or rights on liquidation, winding up and dissolution.
Series N Cumulative Convertible Preferred Stock
During the fourth quarter of 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
F-49
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eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. STOCKHOLDERS' EQUITY - (CONTINUED)
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.
Series N stockholders have no voting rights.
The warrants are exercisable one year from issuance and expire three years
from issuance. The exercise prices vary from $3 to $5 per share. In addition,
the holders may elect to make a cash-less exercise. The value of the warrants of
$423,000 was recorded as a dividend at the issuance date because the Series N
Preferred Stock is immediately convertible.
During the fourth quarter of 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.
The shares of Series O Preferred Stock have a liquidation value of $16.1
million and are convertible, at the holder's option, into a maximum 3,220,000
shares of common stock at any time after the later of (a) one year after the
date of issuance and (b) the date the Company has received stockholder approval
for such conversion 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.
F-50
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. STOCKHOLDERS' EQUITY - (CONTINUED)
Series O stockholders have no voting rights. The holders of the Series O
Preferred Stock are entitled to notice of all stockholder meetings in accordance
with Bylaws. The affirmative vote of 66 2/3% of the holders of the Series O
Preferred Stock is required for the issuance of any class or series of stock of
eGlobe ranking senior to or on a parity with the Series O Preferred Stock as to
dividends or rights on liquidation, winding up and dissolution.
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.
During the nine months ended December 31, 1998 and the 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.
In August 1999, the Company entered into a stock purchase agreement with a
long time stockholder and a lender. Under this agreement, for $250,000, the
investor purchased 160,257 shares of common stock 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
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eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. STOCKHOLDERS' EQUITY - (CONTINUED)
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.
Notes Receivable from Stock Sales
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.
Employee Stock Option and Appreciation Rights Plan
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.
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<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. STOCKHOLDERS' EQUITY - (CONTINUED)
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 common stock equal in
value to the excess of the fair market value, at the date of exercise, of a
share of common stock over the exercise price of the related option. The
exercise of a SAR automatically results in the cancellation of the related
option on a share-for-share basis.
During the 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, the nine months ended December
31, 1998 and the year ended March 31, 1998, the
F-53
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. STOCKHOLDERS' EQUITY - (CONTINUED)
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.
During the year ended December 31, 1999, the nine months 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.
F-54
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. STOCKHOLDERS' EQUITY - (CONTINUED)
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.
SFAS No. 123, "Accounting for Stock-Based Compensation" 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>
A summary of the status of the Company's stock option 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 PERIOD ......... 1,881,788 $ 3.02 773,049 $ 5.14 484,193 $ 7.95
--------- ------ --------- ------ --------- ------
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".
F-55
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. STOCKHOLDERS' EQUITY - (CONTINUED)
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>
A summary of the status of the Company's outstanding 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 PERIOD ......... 4,463,507 $ 1.71 1,218,167 $ 3.05 1,391,667 $ 4.00
========== ====== ========= ====== ========= ======
</TABLE>
<TABLE>
<S> <C> <C> <C>
Weighted average fair value of warrants
granted during the period above
market ...................................... $ 0.92 $ 1.03 $ 0.47
====== ====== ======
Weighted average fair value of warrants
granted during the period at market ......... $ 1.39 $ 1.63 $ 2.24
====== ====== ======
Weighted average fair value of warrants
granted during the period below
market ...................................... $ 2.47 $ 1.70 $ 0.98
====== ====== ======
</TABLE>
Included in the above table are certain warrants that are contingent based
on various future performance measures. (See Note 4 ).
F-56
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. STOCKHOLDERS' EQUITY - (CONTINUED)
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>
The Company may be required to issue additional warrants 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) OF INCOME (LOSS)
Taxes (benefit) on income (loss) for the year ended December 31, 1999, the
nine months ended December 31, 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-57
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. TAXES (BENEFIT) OF INCOME (LOSS) - (CONTINUED)
During the year ended December 31, 1999, Trans Global elected to carryback
approximately $2.8 million of 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>
The acquisition of IDX in December 1998 included a net deferred tax asset
of $2.7 million. This net deferred 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
F-58
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. TAXES (BENEFIT) OF INCOME (LOSS) - (CONTINUED)
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.
12. SEGMENT INFORMATION
Operating Segment Information
The Company has four operating reporting segments consisting of Enhanced
Services, Network Services, Customer Care and Retail Services. The Company's
basis for determining the segments relates to the type of services each segment
provides. Enhanced Services includes the unified messaging services, telephone
portal services, interactive voice and data services and the card services.
Network Services includes low-cost transmission services, voice services
(CyberCall and CyberFax) and several other additional services including billing
and report generation designed exclusively to support CyberCall and CyberFax.
Customer Care Services includes the state-of-art call center, which was part of
the Company's acquisition of ORS. Retail Services primarily includes a small
North American retail center, 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>
(a) In 1998, IDX was included in Enhanced Services (formerly Telecommunication
Services).
F-59
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. SEGMENT INFORMATION - (CONTINUED)
Geographic Information
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>
ASIA
EUROPE PACIFIC
---------------- ----------------
<S> <C> <C>
FOR THE YEAR ENDING
DECEMBER 31, 1999
-----------------------------------
Revenue ........................... $ 7,364,000 $ 7,873,000
Operating loss .................... $ (3,074,000) $ (6,993,000)
Identifiable long-lived assets..... $ 8,243,000 $ 3,846,000
------------ ------------
FOR THE NINE MONTHS ENDING
DECEMBER 31, 1998
------------------------------------
Revenue ........................... $ 2,241,000 $ 5,949,000
Operating loss .................... $ (1,373,000) $ (1,460,000)
Identifiable long-lived assets..... $ 6,060,000 $ 4,076,000
------------ ------------
FOR THE YEAR ENDING
MARCH 31, 1998
------------------------------------
Revenue ........................... $ 3,468,000 $ 10,295,000
Operating income (loss) ........... $ (759,000) $ (1,772,000)
Identifiable long-lived assets..... $ 3,150,000 $ 4,138,000
------------ ------------
<CAPTION>
NORTH
AMERICA
(EXCLUDING LATIN
MEXICO) AMERICA OTHER TOTALS
----------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
FOR THE YEAR ENDING
DECEMBER 31, 1999
------------------------------------
Revenue ........................... $ 121,709,000 $ 3,485,000 $ 1,517,000 $ 141,948,000
Operating loss .................... $ (32,053,000) $ (4,374,000) $ (419,000) $ (46,913,000)
Identifiable long-lived assets..... $ 24,813,000 $ 2,035,000 $ 3,141,000 $ 42,078,000
------------- ------------ ----------- -------------
FOR THE NINE MONTHS ENDING
DECEMBER 31, 1998
------------------------------------
Revenue ........................... $ 76,664,000 $ 5,244,000 $ 322,000 $ 90,420,000
Operating loss .................... $ (456,000) $ (1,287,000) $ (79,000) $ (4,655,000)
Identifiable long-lived assets..... $ 7,568,000 $ 1,571,000 $ 923,000 $ 20,198,000
------------- ------------ ----------- -------------
FOR THE YEAR ENDING
MARCH 31, 1998
------------------------------------
Revenue ........................... $ 56,535,000 $ 8,248,000 $ 1,050,000 $ 79,596,000
Operating income (loss) ........... $ 1,054,000 $ (1,419,000) $ (181,000) $ (3,077,000)
Identifiable long-lived assets..... $ 9,530,000 $ 440,000 $ -- $ 17,258,000
------------- ------------ ----------- -------------
</TABLE>
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
Payment Agreements
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
employment 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
F-60
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. COMMITMENTS EMPLOYMENT AGREEMENTS AND CONTINGENCIES - (CONTINUED)
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.
Reservation Services
The Company has entered into reservation services 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.
Telecommunication Lines
In its normal course of business, the Company enters 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>
F-61
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. COMMITMENTS EMPLOYMENT AGREEMENTS AND CONTINGENCIES - (CONTINUED)
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
LEASE PAYMENTS TO RENTAL
YEARS ENDING 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.
As a result of the ORS acquisition, the Company leases certain employees
from a professional employment organization, which also performs human resource
and 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.
Secured Accounts Payable
Approximately $9.9 million of Tran Global's capital 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.
F-62
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. GOVERNMENT REGULATIONS
The Company is subject to regulation as a 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.
Any common carrier providing wireline domestic and international service
also must file a tariff with the 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.
The regulation of IP telephony in the United States is still evolving. The
FCC has stated that some forms of IP 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
F-63
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. GOVERNMENT REGULATIONS- (CONTINUED)
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.
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.
Many aspects of the Company's international operations and business
expansion plans are subject to foreign 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.
F-64
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. GOVERNMENT REGULATIONS- (CONTINUED)
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 QUARTER ADJUSTMENTS
In the fourth quarter of the year ended December 31, 1999, certain
adjustments related to an increase in the 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 EVENTS
Series N Cumulative Convertible Preferred Stock
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.
The warrants are exercisable one year from issuance and expire three years
from issuance. The exercise prices 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.
The shares of Series P Preferred Stock are convertible into a maximum of
5,151,871 shares of common stock. This maximum share amount is subject to
increase if the average closing bid prices of the Company's common stock for the
20 trading days ending on the later of June 30, 2000 and the 60th calendar day
after the common stock issuable upon conversion of the Series P Preferred Stock
and
F-65
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
16. SUBSEQUENT EVENTS - (CONTINUED)
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 to $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;
(e) if the Series P Preferred Stock is no longer convertible into common
stock because it would result in an aggregate issuance of more than
5,151,871 shares of common stock, as such number may be adjusted, and
the Company has not waived such limit or obtained stockholder approval
of a higher limit; or
(f) if the Series P Preferred Stock is no longer convertible into common
stock because it would result in an aggregate issuance of more than
7,157,063 shares of the Company's common stock and the Company has not
obtained stockholder approval of a higher limit.
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,
F-66
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
16. SUBSEQUENT EVENTS - (CONTINUED)
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.
The Company can force a conversion of the Series Q Preferred Stock on any
trading day following a period in which the closing bid price of the Company's
common stock has been greater than $24.08 for a period of at least 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;
(b) if the Company or any of its subsidiaries makes an assignment for the
benefit of creditors or become involved in bankruptcy insolvency,
reorganization or liquidation proceedings;
(c) if the Company 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.
F-67
<PAGE>
eGLOBE, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
16. SUBSEQUENT EVENTS - (CONTINUED)
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.
Conversion of Preferred Stock into Common Stock
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.
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 -- --
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) --
</TABLE>
F-68
<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 - (CONTINUED)
<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
-------------- -------------- ----------
<S> <C> <C> <C>
ACQUISITIONS, NET OF CASH ACQUIRED (NOTE 4): (CON'T)
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) -- --
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 -- --
</TABLE>
F-69
<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 - (CONTINUED)
<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
---------------- -------------- ----------
<S> <C> <C> <C>
ACQUISITIONS, NET OF CASH ACQUIRED (NOTE 4): (CON'T)
Minority interest ........................................... (2,330,000) -- --
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 SUBSEQUENT TO MARCH 24, 2000
Debt Renegotiations
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-70
<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)
By /s/ David Skriloff
--------------------------------
David Skriloff
Chief Financial Officer
(Principal Financial Officer)
Date: September 13, 2000
<PAGE>
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<PAGE>
eGLOBE, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND TRANS GLOBAL AT END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS ADJUSTMENT (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.
<PAGE>
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