-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PxedMKdIZcZCoLSPG/EvNYOXzVqeYJJuOpL0hzyQl7xOm9Z08FAnPrvVzRlSCEOq wzGSBiOq/2hJQ9t6gtBn3g== /in/edgar/work/0000950134-00-005618/0000950134-00-005618.txt : 20000712 0000950134-00-005618.hdr.sgml : 20000712 ACCESSION NUMBER: 0000950134-00-005618 CONFORMED SUBMISSION TYPE: 10-12G/A PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20000711 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EVENTURES GROUP INC CENTRAL INDEX KEY: 0000826773 STANDARD INDUSTRIAL CLASSIFICATION: [4812 ] IRS NUMBER: 752233445 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-12G/A SEC ACT: SEC FILE NUMBER: 000-28579 FILM NUMBER: 671337 BUSINESS ADDRESS: STREET 1: 300 CRESCENT COURT STREET 2: SUITE 800 CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2147774100 MAIL ADDRESS: STREET 1: 6959 ARAPAHO STREET 2: SUITE 122 CITY: DALLAS STATE: TX ZIP: 75248 FORMER COMPANY: FORMER CONFORMED NAME: ADINA INC DATE OF NAME CHANGE: 19920703 10-12G/A 1 e10-12ga.txt AMENDMENT NO. 3 TO FORM 10 PURSUANT TO 12(G) 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10/A GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 eVENTURES GROUP, INC. (Exact name of Registrant as Specified in Its Charter) DELAWARE 75-2233445 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) ONE EVERTRUST PLAZA, 8TH FLOOR, 07302 JERSEY CITY, NEW JERSEY (Zip Code) (Address of Principal Executive Offices)
201-200-5515 (Registrant's telephone number, including area code) SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $0.00002 PER SHARE (Title of Class) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 ITEM 1. BUSINESS COMPANY OVERVIEW eVentures Group, Inc., is an Internet communications holding company that provides a range of services including voice, Internet, data, fax, e-mail and video transmission through its consolidated subsidiaries and affiliated companies. Our strategy is to develop and operate our majority-owned subsidiaries, and to make acquisitions of and take strategic positions in other Internet and communications companies that provide services and/or products that complement our core businesses. Our strategy envisions and promotes opportunities for synergistic business relationships among the Internet and communications companies that we own or invest in. We have generated increasing revenues from our core businesses over the last three years. On a historical basis we have generated net revenues and losses from operations during the periods indicated in the table below:
FISCAL YEARS ENDED JUNE 30, 6 MOS. ------------------------------------- ENDED DEC. 31, 1997 1998 1999 1999 --------- ----------- ----------- -------------- Revenues.......................... $ 921,599 $ 1,713,403 $27,248,273 $22,661,838 Loss from Operations.............. (375,707) (4,736,468) (3,273,007) (9,282,036)
We had assets of $4.3 million, $12.6 million and $55.1 million as of June 30, 1998, June 30, 1999 and December 31, 1999, respectively. We operate in one business segment, the provision of communications services over a network which uses communications technologies that allow for the simultaneous high speed, large scale transmission of voice, video and data. ORGANIZATION AND HISTORY In connection with our reorganization in September and October 1999, we acquired the common stock of e.Volve Technology Group, Inc. owned by IEO Holdings Limited and Infinity Investors Limited and the stock of AxisTel Communications, Inc. owned by IEO Holdings Limited. We also acquired a minority interest in i2v2.com, Inc., owned by IEO Holdings Limited, all of the shares of e.Volve common stock not owned by IEO Holdings Limited and Infinity Investors Limited, and all of the shares of AxisTel stock not owned by IEO Holdings Limited. As a result of our reorganization, Infinity Investors Limited and the shareholders of IEO Holdings Limited, which are IEO Investments Limited and Infinity Emerging Subsidiary Limited (all of these entities are collectively referred to as the "Infinity Entities") owned 28,500,000 shares of our common stock, representing 66.7% of the then outstanding shares of our common stock, and became our controlling stockholders. The Infinity Entities are investment funds controlled by affiliates of Barrett Wissman, one of our Directors and our President and Chief Executive Officer, and Clark Hunt, one of our Directors. As a result of our reorganization we became a holding company with two wholly-owned operating subsidiaries, e.Volve and Axistel, a minority interest in i2v2.com, Inc., and a 50% interest in Innovative Calling Technologies, LLC. We have since made minority investments in three additional companies; Fonbox Inc., Televant, Inc. and LC39 Venture Group LLC. We have also agreed to acquire Internet Global Services, Inc. Because we are a holding company, we rely entirely on the business performance of our operating subsidiaries. We were originally incorporated in 1987 as "Adina, Inc." We allowed our corporate existence to lapse in February 1996 and were subsequently reinstated as "eVentures Group, Inc." in August 1999. 2 3 OUR SUBSIDIARIES AND AFFILIATES The following table lists, as of March 7, 2000, our consolidated subsidiaries and affiliates:
DATE OF PERCENTAGE NAME INVESTMENT OWNERSHIP - ---- ------------------------------------- ---------- e.Volve.............................. June, 1998 through October, 1999 100.0% AxisTel.............................. October, 1998 through September, 1999 100.0% Innovative Calling Technologies...... April, 1999 50.0% Fonbox............................... November, 1999 8.0% February, 2000 23.0% ----- 31.0% Callrewards.......................... February, 2000 30.0% PhoneFree.com........................ July, 1999 16.0% Launch Center 39..................... January, 2000 2.1%
eVENTURES' HOLDINGS AND SUBSIDIARIES [GRAPH] Subsidiaries Our wholly-owned subsidiaries, e.Volve and AxisTel, operate a private communications network which consists of digital switching, routing, and signal management equipment, as well as digital fiber optic cable lines. Our current network configuration consists of 18 Points of Presence with over 25,000 voice grade equivalent currents located in North America, Central America, Europe, Asia, the Middle East and Mexico. e.Volve and AxisTel provide voice, Internet, data, fax, e-mail and video transmission services to customers over our network. 3 4 e.Volve e.Volve was incorporated on June 26, 1996 as Orix Leasing, Inc. Orix Leasing changed its name to Orix Global Communications, Inc. on March 20, 1997, then to e.Volution, Inc. on May 17, 1999 and subsequently to e.Volve Technology Group, Inc. on May 18, 1999. e.Volve has one operating subsidiary, e.Volve Technology Group de Mexico, S.A. de C.V. (f/k/a Latin Gate de Mexico, S.A. de C.V.). Prior to our reorganization, each of IEO Holdings Limited and Infinity Investors Limited acquired shares of e.Volve common stock representing one-third of the outstanding shares of e.Volve common stock and warrants to purchase 170 shares of e.Volve common stock. The warrants were cancelled as part of the reorganization. In addition, IEO Holdings Limited and Infinity Investors Limited owned debentures issued by e.Volve in the aggregate amount of approximately $8.0 million. We acquired these debentures on September 22, 1999 and they were reclassified as intercompany loans when we acquired the remaining 33.3% of e.Volve from its other stockholders. Prior to our reorganization, all of the equity interests in IEO Holdings Limited were owned by IEO Investments Limited and Infinity Emerging Subsidiary Limited. AxisTel AxisTel was incorporated on August 25, 1998. Prior to our reorganization, IEO Holdings Limited acquired (i) one Class B Convertible Share of AxisTel (ii) a promissory note of AxisTel in the aggregate principal amount of $3.5 million and (iii) a warrant to purchase 1,499 Class A Common Shares of AxisTel for $3.5 million. Immediately prior to our reorganization, IEO Holdings Limited surrendered the promissory note as consideration for the exercise of the warrant, and converted the Class B Convertible Share into a Class A Common Share. As a result, immediately prior to our reorganization, IEO Holdings Limited owned 1,500 Class A Common Shares of AxisTel, representing 50% of the outstanding equity interest in AxisTel. AFFILIATES Innovative Calling Technologies, LLC Innovative Calling Technologies is a provider of automated operator services with emphasis on software development, billing solutions and network applications for the Internet and voice telephony environment. Innovative Calling Technologies focuses on the processing and billing of credit card, third party, collect, prepaid and long distance calls over private networks and the Internet. Innovative Calling Technologies provides its services primarily to the tele-marketing, pay phone, call center and hotel industries. On April, 19, 1999, e.Volve and Dataten Technologies formed Innovative Calling Technologies, a Nevada limited liability company, with each party owning 50%. e.Volve and Dataten Technologies entered into an agreement pursuant to which e.Volve agreed to fund the capital requirements of Innovative Calling Technologies until Innovative Calling Technologies is able to generate sufficient cash flow to fund its operations and Dataten Technologies agreed to provide certain technology and personnel to Innovative Calling Technologies. e.Volve's agreement to fund Innovative Calling Technologies' capital requirements does not envision any minimum fundings and is entirely subject to e.Volve's discretion. e.Volve entered into this agreement to diversify its business and leverage e.Volve's relationships in Mexico where we believed Dataten's automated operator technology could lead to significant business opportunities in the call center and hotel industries. During the six months ended December 31, 1999, Innovative Calling Technologies had revenues of $1.1 million and a loss from operations of $53,000. We do not exercise majority control of the joint venture and thus accounts for its investment pursuant to the equity method. Under the equity method, we record our funding at cost and adjust the carrying amount of the investment to recognize our share of the income or losses of Innovative Calling Technologies' after the date of acquisition. During fiscal year 1999, we invested $125,000 in Innovative Calling Technologies and recorded equity in loss of affiliate of $34,000. 4 5 PhoneFree.com PhoneFree.com develops and markets an Internet Protocol telephony product and operates a website called PhoneFree.com at the Internet address www.PhoneFree.com. Internet Protocol telephony is the real time transmission of voice communications in the form of digitized "packets" of information over the public Internet or a private network, similar to the way in which e-mail and other data is transmitted. The Phonefree software, which can be downloaded from the website, allows users to conduct "real-time" duplex voice conversations from PC to PC and PC to phone. This software functions with normal multimedia PC hardware over the Internet. PC to PC calls are free to users with Internet Service Provider connections, regardless of their duration and destination while PC to phone service in the U.S. is generally available for a flat monthly fee. PhoneFree.com intends to derive revenues from the sale of banner and other advertising on its website, e-commerce transactions and targeted marketing campaigns. As of March 7, 2000, over 750,000 people were using PhoneFree.com software to make telephone calls over the Internet. In June 1999, we acquired 21% of the common stock of i2v2.com, which does business under the name PhoneFree.com. Subsequently, our ownership interest was diluted to 17% due to a sale of common stock by PhoneFree.com in July of 1999 and was diluted further to 16% due to a sale of common stock by PhoneFree.com in December of 1999. On March 3, 2000, we loaned $3.0 million to PhoneFree.com under a promissory note dated March 2, 2000. The promissory note is due on September 1, 2000 and bears interest at 7%. PhoneFree.com may repay this promissory note at any time, subject to our right to convert it into PhoneFree.com common stock. We can convert the promissory note into PhoneFree.com common stock: (i) if PhoneFree.com raises equity capital from other investors on or before August 31, 2000, in which case our conversion price will be equal to 95% of the per share subscription or conversion price in such equity capital raise; or (ii) if PhoneFree.com does not raise equity capital from other investors on or before August 31, 2000, we can convert the promissory note on or after September 1, 2000, at a per share conversion price that values all the common and preferred stock of PhoneFree.com at $50.0 million. In connection with the loans made under the promissory note, we also received a four-year warrant to purchase 240,000 shares of PhoneFree.com at a price equal to 110% of the conversion price of the promissory note. The warrant may not be called by PhoneFree. If we include this warrant, but not the promissory note, we would beneficially own approximately 18% of the outstanding shares of common stock of PhoneFree.com. Five of our directors are members of the ten-member board of directors of PhoneFree.com, although we have a contractual right to appoint only one director to PhoneFree.com's board. Fonbox Fonbox is a development stage company which offers Internet-based communications solutions for the Portuguese-speaking and Spanish-speaking market in Latin America and elsewhere. They intend to offer cross-messaging, natural language access, and phone-based Internet access technologies through their Lineabox (www.lineabox.com), unified messaging product. Fonbox intends to build a network with Points of Presence in major Latin and Central American markets and in Miami, Florida. Fonbox has deployed network gateways that provide Fonbox services in Miami and Sao Paolo, Brazil, and currently offers Internet fax services in those cities. Our chief executive officer is a member of the board of directors of Fonbox. On November 23, 1999, we acquired 500,000 shares of Series A preferred stock of Fonbox, representing approximately 8.0% of the outstanding equity interests of Fonbox, for $500,000. Pursuant to an option granted in connection with our initial investment in Fonbox, on January 31, 2000, we purchased an additional 1,000,000 newly issued shares of Series A preferred stock of Fonbox for $1.0 million. In addition, in connection with our exercise of this option, we acquired 350,000 shares of common stock of Fonbox from each of Spydre Zeta L.L.C. and NetProvide Ltd. in exchange for an aggregate of 27,860 shares of our common stock. As of February 29, 2000, we own approximately 31% of the capital stock of Fonbox. 5 6 Callrewards Callrewards owns and operates the Callrewards.com(TM) Website. Callrewards is a development stage company that intends to derive its revenues from advertising and e-commerce transactions. Callrewards is integrating loyalty-based marketing programs with advertising. Callrewards intends to offer its users free long distance telephone calls straight from their PC to a telephone anywhere in the world in exchange for agreeing to view advertising and receive targeted e-mail. Callrewards is in the process of deploying a private network consisting of gateway devices and software that allow for the provision of its Internet Protocol telephony services. Callrewards is also in the process of negotiating agreements with software vendors to provide products that will allow Callrewards to broadcast advertising to its members and to implement its loyalty-based marketing programs. On February 11, 2000, we acquired 750,000 shares of Series A-1 convertible preferred stock of Televant, Inc., which does business under the name Callrewards, for $750,000 which represents 30% of the outstanding capital stock of Callrewards. Under our agreement with Callrewards, we are obligated for $1.0 million to purchase, when Callrewards has at least 100,000 active users, shares of Series A-2 convertible preferred stock of Callrewards, which on the date of purchase will be convertible into 20% of the ownership interest in Callrewards on a fully-diluted basis. We are obligated to purchase shares of Series A-3 convertible preferred stock of Callrewards, which on the date of purchase will be convertible into 20% of Callrewards on a fully-diluted basis, for $2.5 million when Callrewards has at least 250,000 active users. Launch Center 39 Launch Center 39 is an incubator which provides a series of services for launching Internet and new media companies. These services include a unique combination of funding, strategic advice and business development, shared legal, financial and other professional services, shared infrastructure, and partnerships for strategic recruiting. These services can be leveraged across all the companies utilizing Launch Center 39 in order to provide substantial benefits and economies of scale for all early stages of growth. This incubator model enables Launch Center 39 to rapidly validate entrepreneurial ideas, create "instant companies," closely supervise the initial growth of these companies, and graduate the businesses through a first round of external venture financing. In return, Launch Center 39 obtains a significant equity stake in these companies at an attractive valuation and has greater control over continued funding than a traditional venture capital or angel fund. On January 27, 2000, we acquired for $1.0 million, 100,000 Series A Preferred Units of LC39 Venture Group, LLC, which does business under the name Launch Center 39. This represented approximately 2.1% of the equity and voting interests of Launch Center 39. ACQUISITIONS Internet Global Services, Inc. iGlobal owns and operates a network for the distribution of communications-based products and services which include voice, DSL, unified messaging, and Internet call waiting. The iGlobal network consists of 22 Points of Presence located in key metropolitan areas throughout the United States. iGlobal has established marketing relationships with Internet Service Providers, which are companies that provide access for customers to the Internet, and affinity groups for the introduction, sales and customer support of these products and services. By providing these services, iGlobal can enable its marketing partners to increase their product and service offerings with minimal additional cost. In return iGlobal can reach more end users than if it developed these marketing and sales channels internally. As of March 7, 2000, iGlobal had approximately 135 marketing partners consisting primarily of local and regional Internet Service Providers, reaching over 400,000 customers. Each product or service is co-branded with iGlobal's brand name Telares(TM) and is marketed under a revenue-sharing agreement. On March 7, 2000 we entered into an agreement to acquire all of the issued and outstanding shares of stock of Internet Global Services, Inc., commonly referred to as iGlobal, in exchange for approximately 6 7 2,588,000 shares of our common stock. This transaction remains subject to customary closing conditions and we expect to close this transaction during our third quarter. OUR BUSINESS AND STRATEGY Our business and strategy involves the following components: - Develop and operate our existing majority owned Internet and communications companies; - Acquire, or take strategic minority positions in, other Internet and communications companies; and - Promote opportunities for synergistic business relationships among the Internet and communications companies that we own or invest in. This business and strategy is generally referred to as creating an "Econet." Our goal is to become a leading communications "Econet." Our Econet strategy is focused on three main "vertical" segments and two "horizontal" segments. Our strategy can be graphically displayed as follows: [GRAPHIC] Our subsidiaries and affiliates may operate in multiple "vertical" or "horizontal" spaces. Networks In the communications industry, the term "network" refers to an integrated electronic system composed of switching equipment and transmission links designed to provide transportation, direction and management of information for specific media. The Internet is comprised of many interconnected networks which use common approaches called "protocols" which define information coding, software, routing and switching requirements to achieve interconnected data transmission. We believe that the Internet has become a medium of mass-communications because of its ability to transmit data between tens of millions of end points, especially personal computers and office desk-top computers. In a further phase of its development, software has been developed which makes possible voice communications over the Internet, and the Internet has become a rapidly growing medium of voice as well as data communication. 7 8 We believe that there is a trend in the communications industry to integrate the data transmission capabilities of the Internet with the quality and convenience associated with traditional telephone networks. Our network can carry high volumes of voice, data, and Internet traffic as well as video and fax traffic. We believe that our network also makes possible more effective exchange of data and voice traffic between the Internet and traditional telephone networks. We believe that these advantages arise because of the high volume of digital information that can be transmitted over our network compared to conventional Internet networks or more conventional communications networks. We have deployed a network which also incorporates Asynchronous Transfer Mode technology, which allows for high speed, large scale digital communications, and as a result is designed to handle streams of digital information from a wide range of media. As transmission capacity, the Internet, and the more conventional communications network, expand, we believe that networks such as ours, will play an increasingly important role in communications as a favorable best means of multi-media transmission. We believe that our network is central to our Econet strategy because our network companies provide facilities and services that can be utilized by all of our subsidiaries and affiliates. We consider Axistel, e.Volve, Fonbox and Callrewards to be network businesses because they each own and operate communications networks and provide their customers with access to those networks as part of their service and product offerings. Enabling Technologies Enabling technologies are hardware and software products and applications that facilitate communications services over the Internet and over private communications networks. We view the licensing, ownership and development of enabling technologies as vital to our strategy because enabling technologies: - enhance our ability to customize services to meet customer demands and requirements; - allow us to improve the speed and efficiency of our networks; - provide new applications and products to our customers; and - are a means to support all of our subsidiaries and affiliates. Both PhoneFree.com and Innovative Calling Technologies provide such enabling technologies. Network User Interfaces Network user interface businesses provide us with the opportunity to reach customers and offer them our services and products. We believe that owning, developing and investing in companies that provide network user interfaces will allow our subsidiaries and affiliates to: - develop relationships with end-users; - enhance our ability to bundle and cross-sell products and services; and - create customer loyalty. PhoneFree.com, Fonbox and Callrewards all provide network user interfaces. We intend to create alliances with these affiliates to provide our communication services to customers. Support Services and Accelerators As part of our strategy, we may own or invest in companies that provide support services to Internet and communications businesses. Support services may include web design and consulting, ad serving or online marketing. We believe that companies offering support services: - enhance the ability of our other companies to organically grow their operations and customer bases; and - facilitate the development of products and services that enhance customer experiences and loyalties. 8 9 As of March 7, 2000, we have not developed, acquired or invested in any companies that provide support services. We may also invest in "accelerators" or "incubators", which are companies that provide various degrees of strategy, guidance, funding and services to start-up businesses on the Internet. We believe that accelerators and incubators can provide us with the opportunity to invest indirectly in promising start-up companies that we might not otherwise obtain. As of March 7, 2000, our only investment in an accelerator or incubator is our investment in Launch Center 39. OUR NETWORK Our network meets operating standards established for Internet data transmission. These standards are termed Internet Protocol, which is software that allows for the transmission and assembly of digitized packets of data over the Internet. In addition, our network incorporates Asynchronous Transfer Mode technologies, which allows for high-speed, large scale digital communications. We believe that Asynchronous Transfer Mode technologies have many important benefits which reduce the cost and improve the quality of digital communications. For example, Asynchronous Transfer Mode technology allows us to utilize bandwidth more efficiently than circuit-switched technology because we can transmit multiple streams of information simultaneously over a single circuit. We can also use Asynchronous Transfer Mode technology to provide voice, video and data services over a single network rather than having to build and operate separate networks for each service. Asynchronous Transfer Mode technology, in conjunction with a private network, also provides quality voice communication on par with that of top tier telecommunications carriers. Our network consists of the following elements: Points of Presence. Points of Presence are the entrance points for communications traffic over our network. At many of our Points of Presence, we use our equipment to translate voice to data for transmission and retrieval over our network, and provide Internet Protocol, Asynchronous Transfer Mode, and leased line data services. Our Points of Presence are also gateways that are connected to the public switched telephone network, Internet or network access points as well as interconnection facilities to large telecommunications carriers, in order to move traffic between our network and those other transmission facilities. The Internet. We use the Internet to transmit some of our voice and fax traffic and to deliver other value-added services, because of its global coverage, rapid growth and flexible connectivity. By using the Internet, we avoid having to extend our network to areas that would not be profitable. Also, our affiliate companies may use the Internet in conjunction with our network. However, until technology allows us to provide guaranteed levels of service, the Internet will remain a secondary means of transmission for our network businesses. 9 10 Our network connects with the networks of telecommunications carriers, government telecommunications authorities and businesses at Points of Presence. Our network is scaleable, which means it can be expanded to serve increased traffic volumes. As of March 7, 2000, we had network facilities and Points of Presence in the following locations:
COUNTRY CITY - ------- ---- United States................................... Jersey City, New Jersey New York, New York (3 Points of Presence) Philadelphia, Pennsylvania Alpharetta and Atlanta, Georgia Boston and Cambridge, Massachusetts Miami, Florida Dallas, Texas Kansas City, Kansas Los Angeles, California Jamaica......................................... Montego Bay Mexico.......................................... Mexico City India........................................... New Delhi Syria........................................... Damascus Sri Lanka....................................... Colombo United Kingdom.................................. London
We transmit voice, data, Internet and fax traffic from the United States to countries around the world through either our own networks or through connections with other telecommunications carriers or Internet Service Providers. During the three months ended December 31, 1999, we transmitted approximately 141.3 million minutes over our network. Our customers can interconnect with this network through dedicated circuits from their facilities to one of our Points of Presence. Alternatively, our customers may elect to colocate and install equipment directly at our facilities in Jersey City, Kansas City, Mexico City or Miami to eliminate the cost of back-hauling traffic from their facilities to one of our enhanced Points of Presence. OUR SERVICES Voice Services We provide telephone and Asynchronous Transfer Mode voice services to all of our customers. We offer global call completion services, and other value-added services, that provide our customers with a cost-effective alternative for the transmission of both voice and fax messages. Through our ability to send voice messages efficiently and inexpensively our customers can utilize our network facilities to their advantage. Data Services International and Domestic Private Line Services. We offer point to point services with a wide range of capacities, providing connections between customers' locations based on customers' bandwidth needs. These can be monitored and maintained by our network operations control center. Hub Service. Hub service provides our customers with the ability to aggregate and distribute bandwidth. For customers who need to distribute circuits to multiple locations, we can provide the connectivity between our hub site and a customer's locations creating a simple, manageable, networking solution. Internet Access Services Direct Access. We offer dedicated Internet services that meet the needs of the smallest commercial user to the most sophisticated high bandwidth customers. We provide a complete end-to-end solution, allowing the service implementation process to be smooth and transparent to the end user. 10 11 Server Colocation Services Server Colocation. Our facilities in Jersey City, Kansas City, Mexico City and Miami offer complete environmentally-controlled areas for customers to house web servers. These colocation sites are physical places where other carriers can interconnect with our own network. Options for server hosting space include open racks, secured cabinets and caged secured areas. We work with customers to find the solution that is right for their business. OUR MARKETS AND CUSTOMERS Our subsidiaries generally compete in the market for voice, Internet, data, fax, e-mail and video transmission services. We compete against many providers of these services, referred to as carriers. Carriers are usually classified by size into first, second and third tier. First tier carriers generally have annual revenues in excess of $2 billion and include certain government-affiliated monopolies. Second tier carriers have revenues generally in the $750 million to $2 billion range, and have fewer direct operating agreements with other carriers and fewer international facilities than first tier carriers. Third tier carriers are typically switch-based resellers with revenues of less than $750 million. We provide services to all three tiers of carriers, who transmit voice, Internet, data, fax, e-mail and video traffic through our Points of Presence for completion worldwide. For fiscal year 1999, 65% of our revenues came from Qwest, 18% from RSL, and 16% from Star. During the six months ended December 31, 1999, Qwest represented approximately 75% of our revenues. With the acquisition of AxisTel in our reorganization, we acquired a more diversified customer base and we began providing retail services to PhoneFree.com's users. As a result, during the three months ended December 31, 1999, Qwest's portion of our total revenue declined to approximately 60%, primarily because of the inclusion of revenue from AxisTel's customers. No other customer accounted for more than 5% of our revenues during either the six month or the three month periods ended December 31, 1999. e.Volve and Qwest have entered into a switched services agreement and a carrier service agreement for international terminating traffic. Under these agreements, e.Volve provides switched interstate telecommunications services and international outbound telecommunications services to Qwest. Our switched services agreement does not obligate Qwest to use our services, but permits Qwest to use our services upon Qwest's periodic acceptance of our rates. Qwest may choose not to use our services for a variety of reasons. Our carrier service agreement for international terminating traffic, which was entered into on September 17, 1998, is for a one year term with automatic successive renewals for one-year periods until termination by either party. In addition to being a customer of e.Volve, Qwest and e.Volve have entered into an Indefeasible Right of Use ("IRU") agreement. Under the IRU agreement, Qwest granted e.Volve an indefeasible right to use a fiber optic circuit between New York and Los Angeles for twenty years, and e.Volve agreed to pay Qwest a total of $15.0 million in four installments between October 1, 1999 and September 30, 2001. In addition, e.Volve agreed to pay Qwest a monthly operation and maintenance charge of $25,000 per month beginning January 1, 2000. As of March 7, 2000, we have not utilized our right to use the fiber optic circuit and have not taken delivery of the circuit because we are in a dispute with Qwest over the terms of the IRU agreement. Qwest has made certain demands for payment under the IRU agreement. e.Volve has not made any payments and e.Volve, eVentures and Qwest have commenced negotiations for a restructuring of the terms of the IRU agreement. Historically, we have terminated traffic for our customers in India through a joint venture with Uni-Tel, Inc. Under the joint venture, we agreed to pay Uni-Tel $250,000 per site in cash and shares of our common stock to open up to ten facilities in India. We also agreed to pay Uni-Tel's termination costs. e.Volve believes that Uni-Tel has breached its agreements by failing to adequately manage its network and pay its expenses related to operations in India, and has stopped making certain payments to Uni-Tel. Uni- 11 12 Tel has stopped terminating our traffic in India. e.Volve and Uni-Tel are negotiating a settlement agreement in order to resolve this dispute. SALES AND MARKETING Our sales efforts target leading telecommunications carriers and Internet Service Providers both in the United States and overseas. Our sales personnel have long-standing relationships in the telecommunications industry and are frequently supplemented by senior members of management. In the United States, we sell directly to carriers and have successfully developed brand awareness and beneficial relationships through numerous channels including the Internet, trade shows, speaking engagements and joint-marketing programs. The ability to provide quality of service acceptable to leading carriers is a strong selling point for us. These carriers have traffic that frequently exceeds their capacity and compels them to seek alternative channels that offer comparable quality, particularly where those channels can offer better pricing. Our sales process often involves a test by our potential customers of our services with traffic to a particular country. Our experience has been that once a carrier has begun to use our network for a single country and has found our quality to be acceptable, the sales process with respect to that carrier becomes easier in other countries where it operates. In overseas markets, we seek to establish relationships with local service providers that have the local market expertise to provide the termination services we need. We believe that the opportunity we offer these companies to terminate a substantial number of minutes makes us an attractive partner. Prime candidates for overseas partners are carriers, call back companies, cellular, and paging companies and Internet Service Providers. COMPETITION We have several public and private competitors who have or are establishing Econets. These competitors include CMGI, Inc., Internet Capital Group, Rare Medium Group, idealab, eCompanies and Divine Interventures. To date only CMGI has announced plans to directly enter the communications field, through a strategic alliance with Pacific Century Cyberworks and through a new investment fund called @Ventures Technology Fund. We also face competition for new acquisitions and investments from hundreds of venture capital and private equity funds. While it is difficult to generalize competitive factors in this market, we believe that we compete on the following factors: - acquisition price or valuation; - perceived value of having our company as an investor; - ability to close transactions quickly; and - reputation of our principals. Many of our competitors have significantly greater capital resources and human resources than we do, which may allow them to analyze and conclude more transactions then we can. Our competitors generally have longer operating histories and well known reputations, which could give them an advantage in terms of developing more promising acquisition and investment opportunities and persuading sellers of businesses or entrepreneurs to choose them over us in a competitive situation. While we feel that we currently have a "first-mover" advantage in assembling a publicly-traded communications Econet, we may not be able to maintain that advantage for very long. Our subsidiaries and affiliates generally compete in markets that are new, intensely competitive, highly fragmented and rapidly changing, primarily on the basis of the following factors: - breadth of geographic presence; - ease of integration; - ability to offer turnkey solutions; - price; 12 13 - performance; - flexibility; - customer service; - scaleability; - reliability; and - network quality and capacity. There are low barriers to entry to new or existing businesses seeking to offer Internet Protocol telephony or other services over networks. Competition can come from many sources and may be focused on different segments of our business. We face competition from a variety of sources, including domestic and international carriers, large Internet Service Providers, and Internet companies such as America Online, Prodigy/Compuserve, Earthlink and Juno Online with more resources, longer operating histories and more established positions in the Internet and communications marketplace. We also compete with small companies who have focused primarily on Internet Protocol telephony. A number of these competitors may merge or form strategic partnerships. As a result, certain of these competitors may be able to offer, or bring to market earlier, products or services that are superior to our own in terms of features, quality, pricing or other factors. Our failure to compete successfully in any of the markets in which we compete could have a material adverse effect on our business, prospects, results of operations or financial condition or on the price of our common stock. We also expect that the ability to offer enhanced service capabilities, including new services, will become an increasingly important competitive factor in the near future. Telecommunications Companies and Long Distance Providers Large carriers around the world, such as British Telecom and Deutsche Telecom, have started to deploy packet-switched networks for voice and fax traffic. These carriers have substantial resources and have large budgets available for research and development. In addition, several companies, such as MCI WorldCom, Level 3 and Qwest Communications, are building fiber-optic networks, primarily in the United States, for Internet Protocol telephony traffic. These networks can be expected to carry voice and fax and these newer companies may expand into international markets. Internet Telephony Service Providers A number of companies have started Internet Protocol telephony operations in last few years. AT&T Clearinghouse, GRIC Communications and IXC Communications sell international voice and fax over the Internet and compete directly with us. Other Internet Protocol telephony companies, including; iBasis, Net2Phone, deltathree.com, and ITXC are currently focusing on the retail market and personal computer-based Internet Protocol telephony, but may compete with us in the future. GOVERNMENT REGULATION Regulation of Internet Telephony United States Government Regulation of the Internet and Internet Telephony. We believe that under United States law the Internet-related services that we provide constitute information services, rather than telecommunications services. As such, our services are not currently regulated by the Federal Communications Commission or state agencies responsible for regulating telecommunications carriers (although aspects of our operations may be subject to state or federal regulation such as regulations governing universal service funding, confidentiality of communications, copyright, and excise taxes). However, several efforts have been made to enact federal legislation that would either regulate or exempt from regulation services provided over the Internet. Therefore, we cannot be sure that Internet-related services such as ours will not be regulated in the future. Increased regulation of the Internet may slow its growth by negatively impacting the cost of doing 13 14 business over the Internet. This would materially adversely affect our business, financial condition and results of operations. We also cannot be sure that Internet Protocol telephony will continue to be lightly regulated by the Federal Communications Commission and state regulatory agencies. Although the Federal Communications Commission has determined that, at present, Information Service Providers, including Internet Protocol telephony providers, are not telecommunications carriers, we cannot be certain that this position will continue. On April 10, 1998, the Federal Communications Commission issued its report to Congress concerning the implementation of the universal service provisions of the Telecommunications Act. In the report, the Federal Communications Commission indicated that it would examine the question of whether certain forms of phone-to-phone Internet Protocol telephony are information services or telecommunications services. The Federal Communications Commission noted that it did not have, as of the date of the report, an adequate record on which to make a definitive pronouncement, but that certain forms of phone-to-phone Internet Protocol telephony appear to have the same functionality as non-Internet telecommunications services and lack the characteristics that would render them information services. If the Federal Communications Commission were to determine that certain information services, like those we provide, are subject to Federal Communications Commission regulation as telecommunications services, the Federal Communications Commission may require providers of Internet Protocol telephony services to make universal service contributions, pay access charges or be subject to traditional common carrier regulation. It is also possible that PC-to-phone and phone-to-phone services may be regulated by the Federal Communications Commission differently in the future. In addition, the Federal Communications Commission sets the access charges on traditional telephony traffic and if it reduces these access charges, the cost of traditional long distance telephone calls will probably be lowered, thereby decreasing our competitive pricing advantage. Changes in the legal and regulatory environment relating to the Internet connectivity market, including regulatory changes which affect telecommunications costs or that may increase the likelihood of competition from the regional Bell operating companies or other telecommunications companies, could increase our costs of providing service. For example, the Federal Communications Commission recently has determined that subscriber calls to Internet service providers should be classified for jurisdictional purposes as interstate calls. This determination could affect a telephone carrier's costs for provision of service to these providers by eliminating the payment of reciprocal compensation to carriers terminating calls to these providers. The Federal Communications Commission has pending a proceeding to encourage the development of cost-based compensation mechanisms for the termination of calls to Internet Service Providers. Meanwhile, state agencies will determine whether carriers receive reciprocal compensation for these calls. If new compensation mechanisms increase the costs to carriers of terminating calls to Internet Service Providers or if states eliminate reciprocal compensation payments, the affected carriers could increase the price of service to Internet Service Providers to compensate, which could raise the cost of Internet access to consumers. In addition, although the Federal Communications Commission to date has determined that providers of Internet services should not be required to pay interstate access charges, this decision may be reconsidered in the future. This decision could occur if the Federal Communications Commission determines that the services provided are basic interstate telecommunications services and no longer subject to the exemption from access charges that we currently benefit from and are also enjoyed by other providers of enhanced services. Access charges are assessed by local telephone companies to long-distance companies for the use of the local telephone network to originate and terminate long- distance calls, generally on a per minute basis. The Federal Communications Commission has stated publicly that it would be inclined to hold the provision of phone-to- phone Internet Protocol telephony to be a basic telecommunications service and therefore subject to access charges and universal service contribution requirements. In a Notice of Inquiry released September 29, 1999, the Federal Communications Commission again asked for comments on the regulatory status of Internet Protocol telephony. Specifically, the Federal Communications Commission asked commentators to address whether Internet Protocol telephony service generally, and phone-to-phone service in particular, may be regulated as a basic telecommunications service. If the Federal Communications Commission concludes that any or all Internet Protocol telephony should be regulated as basic communications service, it eventually could require that Internet Protocol telephony providers must contribute to universal service funds and pay access 14 15 charges to local telephone companies. The imposition of access charges or universal service contributions would substantially increase our costs of serving Internet access customers. International Government Regulation of the Internet and Internet Telephony. We provide our services to customers in various countries in Europe, Asia, Latin America, and the Middle East. The regulatory treatment of Internet and other communications services in these countries varies widely and is subject to constant change. Some countries currently impose little or no regulation on Internet Protocol telephony, as in the United States. Conversely, other countries that prohibit or limit competition for traditional voice telephony services generally do not permit Internet Protocol telephony or strictly limit the terms under which it may be provided. Still other countries regulate Internet Protocol telephony like traditional voice telephony services or determine on a case-by-case basis whether to regulate Internet Protocol telephony as a voice service or as another telecommunications service. Finally, in many countries, Internet Protocol telephony has not been addressed by legislation or the regulatory authorities. The varying and constantly changing regulation of Internet Protocol telephony in the countries in which we currently provide or may provide services may materially adversely affect our business, financial condition and results of operations. We provide our services in other countries in which the regulatory status of Internet Protocol telephony is unclear or in the process of development, and in countries in which regulatory processes are not as transparent as in the United States. Changes in the regulatory regimes of these countries that have the effect of limiting or prohibiting Internet Protocol telephony, or that impose new or additional regulatory requirements on providers of such services, may result in our being unable to provide service to one or more of the countries in which we currently operate. That result could materially adversely affect our business, financial condition and results of operations. In addition, as we expand into additional foreign countries, such countries may require that we qualify to do business in that particular country, that we are otherwise subject to regulation or that we are prohibited from conducting our business in that particular country. Our failure to qualify as a foreign corporation in a jurisdiction in which we are required to do so, or to comply with foreign laws and regulations, would materially adversely affect our business, financial condition and results of operations, including by subjecting us to taxes and penalties and/or by precluding us from, or limiting us in, the enforcement of contracts in such jurisdictions. Likewise, our customers may be or become subject to requirements to qualify to do business in a particular foreign country, to otherwise comply with regulations, or to cease from conducting business in that particular country. We cannot be certain that our customers are currently in compliance with regulatory or other legal requirements in their respective countries, that they will be able to comply with existing or future requirements, and/or that they will continue in compliance with any requirements. The failure of our customers to comply with these requirements could materially adversely affect our business, financial conditions and results of operations. Regulation of the Internet Congress has recently adopted legislation that regulates certain aspects of the Internet, including online content, user privacy, taxation, access charges, liability for third-party activities and jurisdiction. In addition, a number of initiatives pending in Congress and state legislatures would prohibit or restrict advertising or sale of certain products and services on the Internet, which may have the effect of raising the cost of doing business on the Internet generally. The European Union has also enacted several directives relating to the Internet, one of which addresses online commerce. In addition, federal, state, local and foreign governmental organizations are considering other legislative and regulatory proposals that would regulate the Internet. Increased regulation of the Internet may hinder its growth, which may in turn negatively impact the cost of doing business via the Internet or otherwise materially adversely affect our business, results of operations and financial condition. The Federal Trade Commission has adopted regulations regarding the collection and use of personal identifying information obtained from minors when accessing websites, and may adopt additional online privacy regulations. These regulations may include requirements that companies establish certain procedures to disclose and notify users of privacy and security policies, obtain consent from users for certain collection and 15 16 use of information and to provide users with the ability to access, correct and delete personal information stored by the company. These regulations may also include enforcement and redress provisions. There can be no assurance that we will adopt policies that conform with any regulations adopted by the Federal Trade Commission. Moreover, even in the absence of those regulations, the Federal Trade Commission has begun investigations into the privacy practices of companies that collect information on the Internet. One investigation resulted in a consent decree pursuant to which an Internet company agreed to establish programs to implement the principles noted above. We may become subject to a similar investigation, or the Federal Trade Commission's regulatory and enforcement efforts may adversely affect our ability to collect demographic and personal information from users, which could have an adverse effect on our ability to provide highly targeted opportunities for advertisers and electronic commerce marketers. Any of these developments would materially adversely affect our business, results of operations and financial condition. The European Union has adopted a directive that imposes restrictions on the collection and use of personal data. Under the directive, citizens of the European Union are guaranteed rights to access their data, rights to know where the data originated, rights to have inaccurate data rectified, rights to recourse in the event of unlawful processing and rights to withhold permission to use their data for direct marketing. The directive could, among other things, affect United States companies that collect information over the Internet from individuals in European Union member countries, and may impose restrictions that are more stringent than current Internet privacy standards in the United States. In particular, companies with offices located in European Union countries will not be allowed to send personal information to countries that do not maintain adequate standards of privacy. The directive does not, however, define what standards of privacy are adequate. As a result, the directive may adversely affect the activities of entities such as us that engage in data collection from users in European Union member countries. INTELLECTUAL PROPERTY We regard our copyrights, service marks, trademarks, trade dress, trade secrets and similar intellectual property as critical to our success, and we rely on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers, partners and others to protect our proprietary rights. We pursue the registration of our trademarks and service marks in the United States and have applied for the registration of certain of our trademarks and service marks. AxisTel has applied for registration of the names "AxisTel" and "Global Telephony Xchange Service", but has not completed the registration process. However, we have never filed any application to protect the name "eVentures" and do not currently have any patents or other material intellectual property. Additionally, the name "eVentures" is generic in nature and we may not be able to protect it. We do not own the domain name eVentures.com, which is being used by a business that is soliciting business plans, capital and advisors for start-up companies. We have notified that company of the potential confusion and we intend to attempt to fully enforce whatever rights we may have to protect our name. EMPLOYEES As of March 7, 2000, we had 35 full-time employees and one part-time employee. We also employ a limited number of independent contractors and temporary employees on a periodic basis. Our employees are not represented by a labor union and we consider our labor relations to be good. THE REORGANIZATION TRANSACTIONS Prior to September 22, 1999: Mick Y. Wettreich, our then controlling shareholder owned 10,145,830 shares of our common stock, representing approximately 98.3% of our outstanding common stock; each of IEO Holdings Limited and Infinity Investors Limited owned (i) 1,200 shares of common stock of e.Volve, representing one-third of the outstanding common stock of e.Volve, (ii) a 50% interest in e.Volve debentures in an aggregate principal amount of $8.0 million and (iii) a warrant to purchase 170 shares of e.Volve common stock; 16 17 IEO Holdings Limited owned (i) one Class B Convertible Share of AxisTel, (ii) a promissory note of AxisTel in the aggregate principal amount of $3.5 million and (iii) a warrant to purchase 1,499 Class A Common Shares of AxisTel for $3.5 million. Immediately prior to our reorganization, IEO Holdings Limited surrendered the promissory note as consideration for the exercise of the warrant, and converted the Class B Convertible Share into a Class A Common Share. As a result, immediately prior to our reorganization, IEO Holdings Limited owned 1,500 Class A Common Shares of AxisTel, representing 50% of the outstanding equity interest in AxisTel; IEO Holdings Limited owned 1,832,880 shares of common stock of PhoneFree.com, representing approximately 17% of the outstanding equity interest in PhoneFree.com; IEO Investments Limited and Infinity Emerging Subsidiary Limited owned all of the equity interests of IEO Holdings Limited; the remaining shares of e.Volve and AxisTel were held by persons and entities unrelated to Mick Y. Wettreich or the Infinity Entities; and none of the Infinity Entities owned any shares of our common stock. See the chart below for a description of our ownership structure on September 22, 1999, immediately prior to the reorganization. [DIAGRAM] In September and October 1999, we consummated our reorganization pursuant to the terms of an Agreement and Plan of Reorganization dated September 22, 1999 and an Agreement and Plan of Exchange dated as of October 19, 1999. In connection with our reorganization, the following transactions occurred: Infinity Investors Limited, IEO Investments Limited and Infinity Emerging Subsidiary Limited purchased 2,317,193 shares, 3,422,552 shares and 2,515,255 shares, respectively, of our common stock, from Mick Y. Wettreich for at a purchase price of approximately $0.02353 per share or an aggregate of $194,235. In addition, the former President of e.Volve, Steve Loglisci, the Chief Financial Officer of e.Volve, Trevor Huffard, and one of the executive officers appointed as part of our reorganization, Stuart Chasanoff, purchased 150,000 shares, 50,000 shares and 45,000 shares, respectively, of our common stock from Mick Y. Wettreich on the same terms and conditions. 17 18 IEO Holdings Limited merged with and into eVentures Holdings, L.L.C. We issued as merger consideration to IEO Investments Limited and Infinity Emerging Subsidiary Limited, the two shareholders of IEO Holdings Limited, 8,393,648 and 6,168,545 shares of our common stock, respectively. We issued 5,682,807 shares of our common stock to Infinity Investors Limited in exchange for its contribution to eVentures of its shares of e.Volve common stock, its warrant to purchase shares of e.Volve common stock and its interest in the e.Volve debentures to eVentures. We issued an aggregate of 6,381,000 shares of our common stock to the shareholders of AxisTel, other than IEO Holdings Limited, in exchange for their contribution to eVentures of their stock in AxisTel. We issued an aggregate of 5,831,253 shares of our common stock to the shareholders of e.Volve, other than IEO Holdings Limited and Infinity Investors Limited, in exchange for their contribution to eVentures of their e.Volve common stock. We determined the number of shares to be issued to each participant in the reorganization after consideration of the relative values of each of the entities involved and arm's-length negotiations with the shareholders of e.Volve and AxisTel (other than the Infinity Entities). Our decision to effect the reorganization was based on the following factors: - We believed that we could create the first publicly-traded company with a strategy of creating a communications Econet; - We believed that effecting the reorganization could enhance our ability to raise capital and broaden the base of our potential investors; and - We believed that our investors would be best served by combining with AxisTel and e.Volve and acquiring an interest in PhoneFree.com through the reorganization. 18 19 See the chart below for a description of our ownership structure following the completion of our reorganization. [GRAPH] As a result of our reorganization, we own all of the issued and outstanding equity interests in e.Volve and AxisTel, and, after giving effect to recent dilution, own approximately 16% of the outstanding shares of PhoneFree.com. In connection with our reorganization, all of the warrants to purchase shares of e.Volve common stock owned by IEO Holdings Limited and Infinity Investors Limited were canceled and the e.Volve debentures were recharacterized as intercompany indebtedness. Following our reorganization, the Infinity Entities owned an aggregate of 28,500,000 shares of our common stock, representing 64.1% of the then outstanding shares of our common stock, and became our controlling stockholders, and Mick Y. Wettreich owned 1,645,830 shares of our common stock, representing approximately 3.6% of our then outstanding common stock. Infinity Investors Limited also purchased 500,000 shares of our common stock in a private placement of our common stock on September 28, 1999. As of March 7, 2000, the Infinity Entities owned an aggregate of 29,000,000 shares of our outstanding common stock, representing approximately 61.4% of our outstanding shares of common stock. Upon the consummation of our reorganization, Daniel L. Wettreich, Mick Y. Wettreich's brother, resigned as our sole director and the Infinity Entities appointed Messrs. Fred A. Vierra, Clark K. Hunt, Olaf Guerrand-Hermes, Mark R. Graham and Barrett N. Wissman to serve on our board of directors. Information 19 20 about these individuals appears on pages 41 through 43 of this Form 10/A. Also, Daniel L. Wettreich resigned as our president, and the following persons were appointed as our officers: Fred Vierra.............................. Chairman of the Board Barrett N. Wissman....................... President and Chief Executive Officer Stuart Chasanoff......................... Vice President of Business Development, General Counsel and Secretary John Stevens Robling, Jr. ............... Vice President and Chief Financial Officer Samuel Litwin............................ Managing Director of Communications Holdings Mitchell Arthur.......................... Managing Director of Communications Holdings
Information about these persons appears on pages 43 and 44 of this Form 10/A. RISK FACTORS Investors considering acquiring shares of our common stock should consider carefully risks associated with our forward-looking statements, as well as the following investment considerations. Cautionary Statement Concerning Forward-Looking Statements We have made forward-looking statements in this Form 10/A that are subject to risks and uncertainties. These statements generally include the words "believe," "expect," "anticipate," "intend," "estimate" or similar expressions. These statements reflect our current views with respect to future events that are subject to certain risks, uncertainties and assumptions, including without limitation any statements regarding the following: market opportunities, strategies, competition, expected activities, additional financing, strategic alliances and projected expenditures. If one or more of these risks or uncertainties materialize, or should our assumptions prove incorrect, actual results may vary materially from those described in this Form 10/A. We cannot assure our investors that the anticipated results will occur, that these judgments or assumptions will prove correct or that unforeseen developments will not occur. RISK FACTORS RELATING TO OUR COMPANY We Have Never Made A Profit And May Never Generate A Profit We have incurred operating losses of $3.3 million and $9.3 million for the fiscal year ended June 30, 1999 and the six months ended December 31, 1999, respectively, and had an accumulated deficit of $22.3 million as of December 31, 1999. We may continue to incur operating losses in the future while we expand and build our business. If these operating losses continue, we may not have enough money to grow our business or execute our strategy. We Have A Limited Operating History Although we have been in existence since 1987, our business operations were immaterial before our reorganization. We have had no material assets or operations, except for the interests in AxisTel, e.Volve, Innovative Calling Technologies and PhoneFree.com obtained in the reorganization, the November 1999 and January 2000 investments in Fonbox, the January 2000 investment in Launch Center 39 and the February 2000 investment in Callrewards. All of these companies were recently formed and have limited operating histories. Our Success Depends On Our Implementation Of An Unproven Business Model Our Econet strategy is a relatively new and unproven strategy. We may not be able to accurately predict the effects of synergies among our subsidiaries and affiliates, and we may not be able to maximize the synergies that do exist. Creating an Econet can be difficult because our degree of influence over the businesses 20 21 of wholly or majority owned subsidiaries is much stronger than our influence over affiliates that are not majority owned, and we may not be able to structure appropriate strategic relationships due to this potential conflict of interest. Furthermore, our network business is based primarily on our ability to provide services to other communications providers. If we cannot implement those relationships, we will have to develop other distribution channels for our services, which could prove difficult or impossible. We Depend On Two Suppliers And One Principal Customer We depend on a select group of suppliers and customers. If we cannot maintain these relationships on favorable terms, or if these relationships terminate, we would have to enter into new relationships. We may not be able to replace any of our suppliers or customers on reasonable terms, if at all. Our two principal suppliers are Maxcom Telecomunicaciones, S.A. de C.V. and Avantel, S.A. and our principal customer is Qwest. Our customers may discontinue their use of our services at any time, and without notice. Therefore, in any given quarter, we would lose a significant amount of revenue if we were to lose a major customer. For example, since a majority of our business is dependent on Qwest, we would suffer adverse financial consequences should we lose our business with Qwest. Our customers may not regard their relationship with us as important to their business. Therefore, they could elect to terminate their relationship with us in the future or develop competitive services and have no further need of our services. We Will Not Control Some Of The Companies In Which We Invest We hold approximately 16% of the outstanding stock of PhoneFree.com, 31% of the outstanding equity interests in Fonbox, 30% of Callrewards, 50% of Innovative Calling Technologies and 2% of Launch Center 39. We do not control the management or policies of these companies. Although we have representation on the board of directors of PhoneFree.com, Fonbox, Innovative Calling Technologies and Callrewards, no assurance can be given that our representatives will be able to influence their future directions in a manner which results in increased value to us through achieving operating synergies or from our minority ownership interests. We May Not Be Able To Obtain Financing For Our Capital Needs Unless we are able to generate cash from operations or raise capital from outside investors, we may exhaust our existing cash resources for capital expenditures, investments and working capital within twelve months. Even if we do generate cash from operations and/or raise additional capital, we may not have enough money to continue operations, primarily because, due to our limited operating history and the nature of the Internet industry, our future capital needs are difficult to predict. In any event, we may require additional capital to fund any of the following: - continued operating losses; - sales, marketing and advertising; - maintenance and expansion; - research and development; - unanticipated opportunities; - strategic investments; and - strategic alliances. We cannot assure our investors that adequate levels of additional financing will be available at all or on acceptable terms. Any additional financing could involve the issuance of securities with rights superior to those of our common stockholders. The issuance of additional securities could also result in significant dilution to our existing stockholders. If we are unable to raise additional capital, our growth and development could be impeded. If we do not have sufficient capital, we may not be able to take advantage of growth opportunities, respond to competitive pressures or pursue our business strategy. 21 22 We May Not Have Opportunities To Acquire Interests In Additional Companies We may be unable to identify companies that complement our Econet strategy of acquiring or taking strategic minority positions in other Internet and communications companies. If we cannot acquire interests in attractive companies, our strategy to build a collaborative network of partner companies may not succeed. Our Success Depends On Our Management Of Growth And Our Integration Of The Businesses We Acquire We are a new company formed by the combination of two separate and distinct businesses with separate and distinct management teams: AxisTel and e.Volve. We are faced with significant integration issues with respect to these businesses and their management teams. We may not be successful in integrating these management teams, and we may not be able to hire and retain the quality of personnel we need to sustain our business. To the extent that we continue to grow internally or through strategic alliances, we will be faced with many risks, including risks associated with the establishment of new operations, Websites and personnel; the diversion of resources from our existing businesses; and our management's ability to manage increased traffic on our networks. The reorganization has resulted in significant growth of our operations. This growth has and will continue to place a significant strain on our managerial, operational and financial resources. This strain will only increase as we continue to implement our strategy of creating a communications Econet. To manage this growth, we will be required to implement and improve our operating and financial systems and controls, and to expand, train and manage our employee base. We will be dependent upon our management to assume and perform the management functions formerly performed by management of each of the parties to the reorganization. To the extent that our management is unable to assume or perform these combined duties, our business, results of operations and financial condition could be adversely affected. There can be no assurance that the management, systems and controls currently in place or any steps taken to improve such management, systems and controls will be adequate in the future. In addition, the integration of the acquired entities and their operations will require our management to make and implement a number of strategic and operational decisions. The timing and manner of the implementation of these decisions will materially impact our business operations. RISK FACTORS RELATED TO OUR INDUSTRY Our Business May Be Impeded By Proposed Governmental Regulations Regarding The Internet The legal and regulatory environment that pertains to the Internet is uncertain and is changing rapidly as the use of the Internet increases. For example, in the United States, the Federal Communications Commission is considering whether to impose surcharges or additional regulations upon certain providers of Internet Protocol telephony. In addition, regulatory treatment of Internet Protocol telephony outside the United States varies from country to country. There can be no assurance that there will not be interruptions in Internet Protocol telephony in these and other foreign countries or that we will be able to return to the level of service we had in each of these countries prior to any interruptions. New regulations could increase our costs of doing business and prevent us from delivering our products and services over the Internet, which could adversely affect our customer base and our revenue. The growth of the Internet may also be significantly slowed. In addition to new regulations being adopted, existing laws may be applied to the Internet. See "Business -- Government Regulation." We Must Recruit And Retain Key Management And Technical Personnel To Be Competitive Our success depends to a significant extent on the continued contributions, experience and knowledge of our senior management team and key technical and marketing personnel. In particular, we must retain and recruit new senior management personnel who are familiar with Internet telephony and Internet Protocol and Asynchronous Transfer Mode technology. Additionally, our Econet strategy is highly dependent upon the management and financial skills of our President and Chief Executive Officer, Barrett Wissman. We do not 22 23 have an employment agreement with Mr. Wissman. Our success also depends upon our ability to identify, attract, hire, train, retain and motivate highly skilled technical, managerial, sales and marketing personnel both at the holding company and for our subsidiaries. Competition for these types of personnel is intense. No assurance can be given that we will be able to successfully attract, assimilate or retain a sufficient number of qualified personnel. If we cannot attract and retain these key personnel, we may not be able to effectively operate our business or oversee our investments, which could impair our ability to create value for our stockholders and other investors. We Must Successfully Adapt To Evolving Technology Trends And Industry Standards Our success depends upon our ability to develop and provide new services that meet our customers' changing requirements. The Internet service industry has been characterized by significant technological changes, frequent new system and product enhancements, evolving industry standards and changes in customer needs that have had and will continue to have a significant impact on the industry and industry participants. While the communications industry has moved at a relatively moderate pace, we believe that most carriers are adopting new technologies and that the communications industry will take on characteristics similar to the Internet service industry in the near future. New technologies and standards could render our existing systems obsolete and ultimately result in lost revenues. If we fail to anticipate and adapt to technological changes and evolving industry standards, we will not be able to grow our share of the market for Internet communications services, including Internet Protocol telephony, and our revenues will fall. Our future success will depend, in part, on our ability to effectively use leading technologies, continue to develop our Internet Protocol and Asynchronous Transfer Mode technology, expertise, enhance our current and planned services, develop and implement new services that meet changing customer needs, anticipate changes and influence and respond to emerging industry standards and other technological changes on a timely and cost effective basis. We Must Successfully Counter Strong Competition From Anticipated And Unforeseen Competitors We believe that the primary competitive factors in providing communication products and services via the Internet include name recognition, variety of value-added products and services, ease of use, pricing, quality of service, availability of customer support, reliability, technical expertise and experience. Our failure to compete successfully could have a material adverse effect on our business, results of operations and financial condition. Many of our potential competitors in the Internet and communication businesses have longer operating histories, significantly greater financial, technical and marketing resources, greater name recognition and larger existing customer bases than we do. Our competitors fall into three major categories: - Relatively new Internet-focused companies which are establishing Econets, such as CMGI, Inc. Internet Capital Group, Rare Medium Group, idealab, eCompanies and Divine Interventures; - More traditional telecommunications companies and long-distance providers, such as British Telecom, Deutsche Telecom, MCI Worldcom, Level 3 and Qwest Communications; and - Internet Telephony Service Providers, such as AT&T Clearinghouse, GRIC Communications, IXC Communications, Net2Phone, deltathree.com and PhoneFree.com. These competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements and devote greater resources to the development, promotion and sale of their products or services. Additionally, since our Econet strategy envisions acquisitions and investments as an ongoing component, competition for acquisition and investment opportunities presents a substantial risk. We cannot be certain that enough attractive companies exist, that if they exist they will come to our attention, or that, if they come to our attention, one of our competitors will not seize the opportunity and prevent us from completing a transaction. If we cannot effectively compete in the market for acquisitions and venture capital investments we may not be able to execute our Econet strategy. 23 24 Our International Operations Expose Us To Fluctuations In Foreign Currencies And Political Instability We intend to build on our current relationships in Syria, Mexico, India, Sri Lanka and other countries and to expand our existing operations outside of the United States. International operations are subject to inherent risks, including: - potentially weaker protection of intellectual property rights; - political instability - unexpected changes in regulations and tariffs - varying tax consequences; and - fluctuations in exchange rates. In particular, because our agreements with our Mexican suppliers are denominated in Mexican pesos, we may be exposed to fluctuations in the Mexican peso, as well as to downturns in the Mexican economy, all of which may adversely affect our profitability. We Are Subject To Downward Pricing Pressures And A Continuing Need To Renegotiate Overseas Rates Which Could Delay Or Prevent Our Profitability As a result of numerous factors, including increased competition and global deregulation of telecommunications services, prices for international long distance calls have been decreasing. This downward trend of prices to end-users has caused us to lower the prices we charge communications service providers for call completion on our network. If this downward pricing pressure continues, we cannot assure you that we will be able to offer Internet Protocol telephony services at costs that are lower than the costs of traditional voice network services with which we compete. Moreover, in order for us to lower our prices, we have to renegotiate rates with our overseas local service providers who complete calls for us. We may not be able to renegotiate these terms favorably enough, or fast enough, to allow us to continue to offer services in a particular country would have a material adverse effect on our ability to operate our network and business profitably. If The Internet Does Not Continue To Grow As A Medium For Communications, Our Business Will Suffer The technology that allows communications over the Internet is still in its early stages of development. Historically, the sound quality of Internet calls was poor. However, as the industry has grown, sound quality has improved, but the technology requires continual refinement. Additionally, the Internet's capacity constraints may impede the acceptance of Internet Protocol telephony. Callers could experience delays, errors in transmissions or other interruptions in service. Placing telephone calls over the Internet must also be accepted as an alternative to traditional telephone service. Since the Internet Protocol telephony market is new and evolving, predicting the size of this market and its growth rate is difficult. If our market fails to develop, then we will be unable to grow our customer base and our opportunity for profitability will be harmed. Our Computer Systems And Operations May Be Vulnerable To Security Breaches Our computer infrastructure is potentially vulnerable to physical or electronic computer viruses, break-ins and similar disruptive problems and security breaches which could cause interruptions, delays or loss of services to our users. We believe that the secure transmission of confidential information over the Internet, such as credit card numbers, is essential in maintaining user confidence in our services. We rely on licensed encryption and authentication technology to effect secure transmission of confidential information, including credit card numbers. It is possible that advances in computer capabilities, new technologies or other developments could result in a compromise or breach of the technology we use to protect user transaction data. A party that is able to circumvent our security systems could misappropriate proprietary information or cause interruptions in our operations. Security breaches also could damage our reputation and expose us to a risk of loss or litigation and possible liability. As of this date, we have not experienced security breaches of 24 25 which we are aware. However, we cannot guarantee you that our security measures will prevent security breaches in the future. Our Network May Not Be Able To Accommodate Our Capacity Needs We expect the volume of traffic we carry over our network to increase significantly as we expand our operations and service offerings. Our network may not be able to accommodate this additional volume. In order to ensure that we are able to handle additional traffic, we may have to enter into long-term agreements for leased capacity. To the extent that we overestimate our capacity needs, we may be obligated to pay for more transmission capacity than we actually use, resulting in costs without corresponding revenues. Conversely, if we underestimate our capacity needs, we may be required to obtain additional transmission capacity from more expensive sources. If we are unable to maintain sufficient capacity to meet the needs of our users, our reputation could be damaged and we could lose users. We Face A Risk Of Failure Of Computer And Communications Systems Used In Our Business Our business depends on the efficient and uninterrupted operation of our computer and communications systems as well as those that connect to our network. We maintain communications systems in Jersey City, New Jersey, Kansas City, Kansas, Miami, Florida and Mexico City, Mexico. Our systems and those that connect to our network are subject to disruption from natural disasters or other sources of power loss, communications failure, hardware or software malfunction, network failures and other events both within and beyond our control. Any system interruptions that cause our services to be unavailable, including significant or lengthy telephone network failures or difficulties for users in communicating through our network or portal, could damage our reputation and result in a loss of users. RISK FACTORS RELATED TO OUR COMMON STOCK Our Common Stock Has A Limited Trading History And An Illiquid Market There has only been a limited public market for our common stock. We cannot predict the extent to which an active trading market will develop or how liquid that market might become. Due to these potential issues, it may be difficult for you to resell your stock at or above the price at which you purchased it. The Infinity Entities Own A Majority Of Our Common Stock And May Have Plans For The Company That May Be Different From Those Of Other Holders Of Our Stock The Infinity Entities own a majority of our shares of capital stock. The Infinity Entities, therefore, may exercise significant control over our business, policies and affairs and, in general, determine the outcome of any corporate transaction or other matters submitted to the stockholders for approval, all in a manner that could conflict with the interests of other shareholders. Shares Of Our Common Stock Eligible For Future Sale May Decrease The Price Of Our Common Stock As of March 7, 2000, we had a total of 50,152,910 shares of common stock eligible for future sale, consisting of: - 45,799,832 shares of common stock outstanding; - 507,246 shares of common stock issuable upon conversion of our Series B convertible preferred stock; - 869,832 shares of common stock issuable upon conversion of our Series C convertible preferred stock; and - 2,976,000 shares of common stock issuable upon the exercise of stock options. Out of these shares, 1,633,645 are freely tradeable. Of the remaining 48,519,265 shares of common stock and shares issuable upon conversion of our preferred stock or exercise of our stock options, which are not freely tradeable, 44,154,002 shares are subject to a lock-up agreement under our registration rights agreement dated 25 26 September 22, 1999 that expires on September 23, 2001. The resale restrictions governing the remaining 4,365,263 shares expire at various times between November, 2000 and February, 2001. If our shareholders sell substantial amounts of their common stock in the public market, including shares issued upon the conversion of convertible preferred stock or the exercise of outstanding options, then the market price of our common stock could fall. The holders of shares received in the reorganization and the September 1999 private placement of our common and preferred stock have agreed not to sell in the public market any of our shares for two years after the reorganization without the prior written consent of our principal stockholders. These principal stockholders may, in their discretion, release all or any portion of the securities subject to the lock-up agreements. Our Right To Issue Preferred Stock And Anti-Takeover Provisions Under Delaware Law Could Make A Third Party Acquisition Of Us Difficult Our certificate of incorporation provides that our board of directors may issue preferred stock without shareholder approval. The issuance of preferred stock could make it more difficult for a third-party to acquire us without the approval of its board. Additionally, Delaware corporate law imposes certain restrictions on corporate control transactions that could make it more difficult for a third-party to acquire us without the approval of our board. Our Stock Price Is Highly Volatile The market price for our common stock has been highly volatile and is likely to continue to be highly volatile. The trading prices of many technology and Internet-related company stocks, including ours, have experienced significant price and volume fluctuations in recent months. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. Any negative change in the public's perception of the prospects of Internet or communications companies could depress our stock price regardless of our results. In the past, companies in our industry have been the subject of class action litigation by investors following periods of volatility in the price of their publicly traded securities. We will incur substantial legal costs if the market value of our common stock experiences adverse fluctuations and we become the subject of similar litigation which may further affect the price of our common stock. AVAILABLE INFORMATION We are subject to the information reporting requirements of the Securities Exchange Act of 1934, as amended and in accordance therewith files reports and other information with the Securities and Exchange Commission, as amended. Such filings can be inspected and copied at the Public Reference Section of the commission located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549 and at regional public reference facilities maintained by the Commission located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the Commission at prescribed rates. Such material may also be accessed electronically by means of the commission's home page on the Internet (http://www.sec.gov). 26 27 ITEM 2. FINANCIAL INFORMATION SELECTED FINANCIAL DATA eVentures Group, Inc. ("eVentures" or the "Company") was incorporated in the state of Delaware on June 24, 1987 and had no material operations prior to the transactions consummated on September 22, 1999, which are described below. The Company was formerly known as Adina, Inc. On September 22, 1999, the Company acquired all of the outstanding shares of AxisTel, approximately 66.7% of the outstanding shares of e.Volve, approximately 17% of the outstanding shares of PhoneFree.com (collectively the "Acquired Entities"), and $8.5 million of notes receivable from e.Volve including accrued interest held by certain of the Infinity Entities. All the acquisitions and the purchase of the notes were settled through issuance of our common stock. As a result of this portion of the reorganization, approximately 77% of our common stock outstanding after the September 22, 1999 transaction was owned by the Infinity Entities. In October 1999, we acquired the remaining 33.3% of e.Volve. As of June 30, 1999, the end of our last fiscal year, the Infinity Entities had directly and indirectly held interests in the Acquired Entities, as follows: 66.7% of e.Volve, 21% of PhoneFree.com, and 0.7% of AxisTel plus options to purchase a further 49.3% of AxisTel. In August of 1999, the interest in PhoneFree.com held by the Infinity Entities was diluted to 17%. Immediately after exercising the options in AxisTel, these interests, along with the Infinity Entities' notes receivable from e.Volve, were directly and indirectly transferred to eVentures in exchange for the our common stock. The remaining 50% of AxisTel was then purchased from AxisTel's founding shareholders. As part of the September 22, 1999 transaction, eVentures acquired the remaining 33.3% of e.Volve on October 19, 1999. This purchase was settled through an issuance of 5,831,253 shares of eVentures' Common Stock. The historical financial statements presented are those of e.Volve. The interests in PhoneFree and AxisTel contributed by the Infinity Entities have been included from the date of investment by the Infinity Entities. The financial statements as of and for the six months ended December 31, 1999 reflect the consummation of the reorganization, and therefore are consolidated financial statements of eVentures and subsidiaries as of December 31, 1999 and for the period from September 22, 1999 through December 31, 1999. Since eVentures had no material operations prior to the September 22, 1999 transaction, the acquisitions of the Infinity Entities' interests in AxisTel and PhoneFree were accounted for as a recapitalization of e.Volve. The acquisitions of the remaining 50% of AxisTel and 33.3% of e.Volve were treated as purchases for accounting purposes. 27 28 "Pro Forma" results are unaudited and reflect the results of the Company for the year ended June 30, 1999 and the six months ended December 31, 1999, as though the acquisition of AxisTel, the acquisition of the remaining 33.3% of e.Volve, and the purchase of 100% of iGlobal as if each had occurred on July 1, 1998. The unaudited pro forma results are not necessarily indicative of future results, or actual results of operations that would have occurred had the acquisitions been made on July 1, 1998.
PRO FORMA --------------------------- 6 MONTHS 6 MONTHS 6 MONTHS YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED ENDED JUNE 30, JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31, 1997 1998 1999 1998 1999 1999 1999 ---------- ----------- ----------- ------------ ------------ ------------ ------------ CONSOLIDATED STATEMENTS OF OPERATIONS DATA Revenues................. $ 921,599 $1,713,403 $27,248,273 $13,013,700 $22,661,838 $ 36,661,823 $ 29,157,249 Direct costs............. 578,944 1,944,073 23,311,584 9,745,604 21,759,782 31,624,140 28,922,194 --------- ----------- ----------- ----------- ------------ ------------ ------------ Gross profit............. 342,655 (230,670) 3,936,689 3,268,096 902,056 5,037,683 235,055 Selling, general and administrative expenses............... 718,362 4,505,798 7,209,696 3,271,630 10,184,092 31,026,441 22,210,542 --------- ----------- ----------- ----------- ------------ ------------ ------------ Loss from operations before other (income) expense and provision for taxes.............. (375,707) (4,736,468) (3,273,007) (3,534) (9,282,036) (25,988,758) (21,975,487) --------- ----------- ----------- ----------- ------------ ------------ ------------ Other (income) expenses Interest expense, net.................... -- 105,099 1,704,459 735,878 598,062 473,675 396,460 Write off of unamortized debt discount............. -- -- -- -- 917,615 2,000,000 -- Equity in loss of affiliate............ -- -- 33,776 -- 31,819 33,776 31,819 Foreign currency (gain) loss................. -- -- 126,575 8,631 (2,032) 126,575 (2,032) Other.................. 12,604 (16,930) (17,851) 1,074 73,627 1,074 --------- ----------- ----------- ----------- ------------ ------------ ------------ -- 117,703 1,847,880 726,658 1,546,538 2,707,653 427,921 --------- ----------- ----------- ----------- ------------ ------------ ------------ Net loss................. $(375,707) $(4,854,171) $(5,120,887) $ (730,192) $(10,828,574) $(28,696,411) $(22,402,808) ========= =========== =========== =========== ============ ============ ============ Imputed preferred dividend............... -- -- -- -- (1,115,943) -- (1,115,943) --------- ----------- ----------- ----------- ------------ ------------ ------------ Net Income (loss) available to common shareholders........... $(375,707) $(4,854,171) $(5,120,887) $ (730,192) $(11,944,517) $(28,595,411) $(23,518,751) ========= =========== =========== =========== ============ ============ ============ Net loss per share -- (basic and diluted)............... $ (0.03) $ (0.42) $ (0.45) $ (0.06) $ (0.39) $ (0.63) $ (0.50) Weighted average shares outstanding -- (basic and diluted)........... 11,365,614 11,365,614 11,365,614 11,365,614 30,428,396 45,338,950 46,923,396
AS OF AS OF JUNE 30, DECEMBER 31, AS OF JUNE 30, 1998 1999 1999 ------------------- ----------- ------------ CONSOLIDATED BALANCE SHEET DATA Cash and cash equivalents................................... $ 2,417,216 $ 39,379 $ 6,269,893 Working (deficit) capital................................... (715,832) (6,590,569) 609,233 Total assets................................................ 4,305,175 12,588,409 55,133,526 Capital lease obligations, net of current portion........... 487,665 2,031,513 5,250,370 Long term debt.............................................. 5,410,000 6,828,948 -- Total stockholders' (deficit) equity........................ (5,121,478) (5,932,221) 40,063,277
28 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and the notes thereto. OVERVIEW The financial information and other statistical data set out below represent the financial condition and results of operations of the accounting acquirer pursuant to a series of reorganization transactions completed on September 22, 1999 and October 19, 1999 (the "Reorganization") described herein. As a result, throughout this Form 10/A, our financial statements for any period ending on or prior to September 30, 1999 reflect the financial condition and results of operations of e.Volve as if we had acquired the interest of the Infinity Entities in e.Volve on July 1, 1996, except that (a) our balance sheet as of June 30, 1999 reflects the acquisition of our minority interest in PhoneFree.com and (b) our balance sheet as of September 30, 1999 reflects the acquisition of Axistel. Revenues. We derive our operating revenues from our network. Historically, 100% of our operating revenues were derived from our network businesses. We anticipate that this trend will continue unless we acquire significant equity stakes in businesses that generate revenues from the sale or licensing of enabling technologies or the operation of network user interfaces. We do not anticipate deriving substantial operating revenues from support service businesses, incubators or accelerators. Revenues are generated through the sale of international and domestic Internet Protocol telephony minutes on a wholesale basis to other U.S. long-distance providers and to distributors of prepaid calling cards. In addition, we sell data bandwidth to other carriers and corporate customers. Our agreements with our wholesale customers are short term in duration and the rates are subject to change from time to time. Due to increasing competition, management expects these rates to decline, which could result in lower revenues and increased losses. Our three largest customers accounted for 79.3% of our net revenues during the six months ended December 31, 1999. Management anticipates that our dependence on these three customers will decline as our wholly owned subsidiaries broaden their sales and marketing initiatives to include additional potential customers and expand their product and service offerings of prepaid calling cards, colocation services and Internet access. Additionally, we anticipate making further acquisitions of businesses, such as our acquisition of iGlobal, which will allow us to further diversify the customers and services from which we derive revenue. Direct Costs. We incur direct costs from the provision of services over the network. Historically, 100% of our direct costs were incurred by our network businesses. We anticipate that this trend will continue unless we acquire significant equity stakes in businesses that incur direct costs through the sale or licensing of enabling technologies or the operation of network user interfaces. We do not anticipate incurring direct costs from support service businesses, incubators or accelerators. Direct costs include per minute termination charges and lease payments and fees for fiber optic cable. Historically, the call termination expense component of these direct costs has declined as measured on a cost per minute basis. The direct costs incurred for leasing communications network capacity has also declined. However, the agreements we enter into for leasing such capacity are generally at fixed rates for periods of more than one year. We anticipate that our aggregate direct costs, as measured on a cost per minute basis, will continue to decline. Prior to September 1999, we provided international telecommunication services only from the United States to Mexico. The majority of our termination fees and certain fiber optic lease payments were payable in Mexican pesos. As a result, we were exposed to exchange rate risk due to the fluctuation of the Mexican peso compared to the U.S. dollar. Continued fluctuation in the exchange rate may make it cheaper or more expensive for us to purchase pesos to meet our peso denominated expenses. Two vendors in Mexico provide substantially all of our terminating capabilities in Mexico. If either of these vendor relationships were terminated, our ability to conduct operations in Mexico would be limited. 29 30 Selling, General and Administrative Expenses. We incur selling, general and administrative expenses in connection with the operation of our network and as corporate overhead required to build our Econet. Historically, all of our material selling, general and administrative expenses were incurred by our network businesses. We expect this trend to continue unless we acquire significant equity interests in businesses that incur selling, general and administrative costs through the sale or licensing of enabling technologies or the operation of network user interfaces. Additionally, as we build our Econet and add personnel to implement our strategy, we anticipate that corporate overhead costs associated with our Econet will constitute an increasing portion of our consolidated selling, general and administrative expenses. Selling, general and administrative expenses include general corporate expenses, management salaries, depreciation and amortization expenses, professional fees, sales and marketing expenses, travel and development expenses, benefits, occupancy costs, and administrative expenses. We maintain a corporate office and several switch facilities. Due to the international nature of our business, travel and development costs have been significant and could continue to increase as we seeks to expand our network. Additionally, we are rapidly expanding the size of our corporate office and anticipate the related overhead costs to significantly increase. We also expect depreciation and amortization costs to increase as a result of our recent acquisitions and our continued investment in our wholly-owned subsidiaries' communications networks. SUMMARY OF OPERATING RESULTS The table below summarizes our operating results:
FISCAL YEAR ENDED JUNE 30, ---------------------------------------------------------------- 1997 % 1998 % 1999 % --------- ----- ----------- ------ ----------- ----- Revenues................. $ 921,599 100.0% $ 1,713,403 100.0% $27,248,273 100.0% Direct costs............. 578,944 62.8% 1,944,073 113.5% 23,311,584 85.6% --------- ----- ----------- ------ ----------- ----- Gross profit (loss)...... 342,655 37.2% (230,670) (13.5)% 3,936,689 14.4% Selling, general and administrative expenses................ 718,362 77.9% 4,505,798 263.0% 7,209,696 26.5% --------- ----- ----------- ------ ----------- ----- Loss from operations..... (375,707) (40.7)% (4,736,468) (276.5)% (3,273,007) (12.0)% --------- ----- ----------- ------ ----------- ----- Other (income) expenses Interest expense, net... -- 0.0% 105,099 6.1% 1,704,459 6.3% Write off of unamortized debt discount............ -- 0.0% -- 0.0% -- 0.0% Equity in loss of affiliate........... -- 0.0% -- 0.0% 33,776 0.1% Foreign currency loss................ -- 0.0% -- 0.0% 126,575 0.5% Other................. -- 0.0% 12,604 0.7% (16,930) (0.1)% --------- ----- ----------- ------ ----------- ----- -- 0.0% 117,703 6.8% 1,847,880 6.8% --------- ----- ----------- ------ ----------- ----- Net loss................. $(375,707) (40.7)% $(4,854,171) (283.3)% $(5,120,887) (18.8)% ========= ===== =========== ====== =========== ===== Imputed preferred dividend................ -- -- -- --------- ----------- ----------- Net loss available to common shareholders..... $(375,707) $(4,854,171) $(5,120,887) ========= =========== =========== Net loss per share -- (basic and diluted)................ $ (0.03) $ (0.42) $ (0.45) Weighted average shares outstanding -- (basic and diluted)............ 11,365,614 11,365,614 11,365,614 SIX MONTHS ENDED DECEMBER 31, ------------------------------------------- 1998 % 1999 % ----------- ----- ------------ ----- Revenues................. $13,013,700 100.0% $ 22,661,838 100.0% Direct costs............. 9,745,604 74.9% 21,759,782 96.0% ----------- ----- ------------ ----- Gross profit (loss)...... 3,268,096 25.1% 902,056 4.0% Selling, general and administrative expenses................ 3,271,630 25.1% 10,184,092 44.9% ----------- ----- ------------ ----- Loss from operations..... (3,534) (0.0)% (9,282,036) (41.0)% ----------- ----- ------------ ----- Other (income) expenses Interest expense, net... 735,878 5.7% 598,062 2.6% Write off of unamortized debt discount............ -- 0.0% 917,615 4.0% Equity in loss of affiliate........... -- 0.0% 31,819 0.1% Foreign currency loss................ 8,631 0.1% (2,032) (0.0)% Other................. (17,851) (0.1)% 1,074 0.0% ----------- ----- ------------ ----- 726,658 5.6% 1,546,538 6.8% ----------- ----- ------------ ----- Net loss................. $ (730,192) (5.6)% $(10,828,574) (47.8)% =========== ===== ============ ===== Imputed preferred dividend................ -- (1,115,943) ----------- ------------ Net loss available to common shareholders..... $ (730,192) $(11,944,517) =========== ============ Net loss per share -- (basic and diluted)................ $ (0.06) $ (0.39) Weighted average shares outstanding -- (basic and diluted)............ 11,365,614 30,428,396
Six Months Ended December 31, 1999 Compared To Six Months Ended December 31, 1998 Revenues. Revenues increased to $22.7 million during the six months ended December 31, 1999 from $13.0 million during the six months ended December 31, 1998, an increase of 74.6%. The increase during the six months ended December 31, 1999 primarily resulted from the acquisition of AxisTel in September 1999 30 31 which increased revenues by $5.6 million. In addition, an increase in traffic contributed to the remainder of the increase in revenues, offset by a decrease in the average price per minute that we charged. During the six months ended December 31, 1999 we transmitted 218.3 million minutes versus 64.4 million minutes during the six months ended December 31, 1998, an increase of 239.0%. Excluding the 47.3 million minutes added as a result of the acquisition of AxisTel, we increased minutes during the six months ended December 31, 1999, as compared to the comparable period in 1998, by 106.6 million minutes, an increase of 165.5%. The average price per minute we charged for these minutes decreased to $0.10 during the six months ended December 31, 1999 from $0.20 during the comparable period in 1998. Direct Costs. Direct costs increased to $21.8 million during the six months ended December 31, 1999 from $9.7 million during the six months ended December 31, 1998, an increase of 123.3%. The increase in direct costs during the six months ended December 31, 1999 resulted from a $5.2 million increase in direct costs attributable to the operations of AxisTel during our second quarter of 1999. In addition, direct costs increased during the six months ended December 31, 1999 by $6.8 million, as a result of the increased traffic volumes discussed above, offset by lower per minute termination costs. The average cost per minute to terminate calls decreased to $0.09 during the six months ended December 31, 1999, from $0.12 during the comparable periods in 1998. Direct costs also increased during the six months ended December 31, 1999 by approximately $300,000 as a result of fixed circuit cost increases to add capacity. As a percentage of revenues, direct costs during the six months ended December 31, 1999 increased to 96.0% from 74.9% during the six months ended December 31, 1998. The increase in direct costs as a percentage of revenues results primarily because the average price per minute decreased faster than the cost per minute for termination. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $10.2 million during the six months ended December 31, 1999 from $3.3 million during the six months ended December 31, 1998, an increase of 211.3%. These increases in selling, general and administrative expenses during the six months ended December 31, 1999 resulted primarily from (i) expenses related to termination of a marketing agreement of $1.7 million, (ii) the incurrence of severance costs of $0.3 million, (iii) an increase in goodwill expense related to the purchase of AxisTel and 33.3% of e.Volve of $0.7 million, (iv) an increase in professional and printing fees related to the auditing of our Company for three years and legal work related to the Reorganization and purchase of 33.3% of e.Volve of $0.8 million, (v) an increase in depreciation expense of $0.5 million, (vi) an increase in payroll of $0.2 million, (vii) the recording of a compensation charge of $1.2 million related to the issuance of options below the market value of our stock and (viii) $0.6 million of charges related to consulting and professional fees in Mexico. In addition, the acquisition of AxisTel increased expenses by $1.4 million in our second quarter and corporate overhead added an additional $0.2 million. These increases in expenses were offset by a decrease of $0.4 million in travel and other consulting expenses during the six months ended December 31, 1999. Interest Expense, Net. Interest expense, net decreased to $0.6 million during the six months ended December 31, 1999 from $735,878 during the six months ended December 31, 1998. This decrease was a result of the elimination of $8.0 million of debentures as a result of our acquisition of e.Volve's outstanding debentures on September 22, 1999 and the resulting consolidation of accounts, and due to interest income on higher cash balances maintained out of proceeds of private placements completed during our second quarter, offset by higher charges related to capital leases for equipment leased after December 31, 1998. Write Off Of Unamortized Debt Discount and Recognition of Imputed Preferred Stock Dividend. The $0.9 million write off of unamortized debt discount during the six months ended December 31, 1999 resulted from our purchase of e.Volve's outstanding debentures and the subsequent elimination of these debentures in our consolidated balance sheet. We reported an imputed dividend during the six months ended December 31, 1999 of $1.1 million as a result of the difference between the closing prices for our common stock on the dates on which we issued convertible preferred stock during the six months ended December 31, 1999 and the price per share at which such preferred stock is convertible into common shares. 31 32 Fiscal Year Ended June 30, 1999 Compared To Fiscal Year Ended June 30, 1998 Revenues. Revenues increased to $27.2 million during the year ended June 30, 1999 from $1.7 million during the year ended June 30, 1998, an increase of 1,490.3%. This primarily resulted from a successful launch in July 1998 of our enhanced communications services and an increase in the traffic transmitted, primarily to Mexico. During the year ended June 30, 1999, we transmitted over 165.0 million minutes, compared with approximately 8.5 million minutes during the year ended June 30, 1998. Direct Costs. Direct costs increased to $23.3 million during the year ended June 30, 1999 from $1.9 million during the year ended June 30, 1998, an increase of 1,099.1%. This increase in direct costs resulted from an increase in termination fees associated with the increase in traffic transmitted of $18.2 million and an increase in the fees for the fiber optic connections between our Points of Presence of $3.1 million. As a percentage of revenues, direct costs during the year-ended June 30, 1999 decreased to 85.6% from 113.5% during the year-ended June 30, 1998. Selling, General And Administrative. Selling, general and administrative expenses increased to $7.2 million during the year ended June 30, 1999 from $4.5 million during the year ended June 30, 1998, an increase of 60.0%. This increase resulted primarily from an increase in general professional and consulting fees of $1.4 million and an increase in depreciation and amortization costs of $1.3 million. Interest Expense, Net. Interest expense, net increased to $1.7 million during the year ended June 30, 1999 from $105,099 during the year ended June 30, 1998, a increase of 1,521.8%. This increase was a result of higher charges related to new equipment capital leases and interest on the debentures. Equity In Loss Of Subsidiaries. Equity in loss of subsidiaries was $33,776 during the year ended June 30, 1999. These losses occurred at Innovative Calling Technologies. Foreign Currency Loss. Foreign currency loss during the year ended June 30, 1999 was a loss of $126,575. Other. Other income was $16,930 during the year ended June 30, 1999 compared with an expense of $12,604 during the year ended June 30, 1998. Fiscal Year Ended June 30, 1998 Compared To Fiscal Year Ended June 30, 1997 Revenues. Revenues increased to $1.7 million during the year ended June 30, 1998 from $0.9 million during the year ended June 30, 1997, an increase of 85.9%. This primarily resulted from an increase in the minutes transmitted. Direct Costs. Direct costs increased to $1.9 million during the year ended June 30, 1998 from $0.6 million during the year ended June 30, 1997, an increase of 235.8%. This increase in direct costs resulted from an increase in the total minutes transmitted. As a percentage of revenues, direct costs during the year- ended June 30, 1998 increased to 113.5% from 62.8% during the year-ended June 30, 1997. Selling, General And Administrative Expenses. Selling, general and administrative expenses increased to $4.5 million during the year ended June 30, 1998 from $0.7 million during the year ended June 30, 1997, an increase of 527.2%. This increase resulted primarily from an increase in the operating staff and general operating activities, and an increase in depreciation costs. Interest Expense, Net. Interest expense, net was $0.1 million during the year ended June 30, 1998. This expense was a result of charges related to capital leases of new equipment. Other. Other expense was $12,604 during the year ended June 30, 1998. 32 33 LIQUIDITY AND CAPITAL RESOURCES General Our strategy of creating a communications Econet will continue to require a substantial amount of capital. As part of this strategy we continue to make strategic acquisitions and investments. Such strategic investments and acquisitions, if realized, could require expenditure of a material portion of our financial resources and would accelerate the need for raising additional capital. Sources of funding for our financing requirements may include vendor financing, bank loans and public offerings or private placements of equity and/or debt securities. There can be no assurance that additional financing will be available or, if available, that financing can be obtained on a timely basis and on acceptable terms. The failure to obtain such financing on acceptable terms could significantly reduce our ability to fund our expenses, development, acquisitions and operations. Since July 1, 1999, we have funded our operations primarily through the proceeds from private placements of common stock, preferred stock and warrants to purchase common stock and from capital leases. During the six months ended December 31, 1999, we raised a total $12.9 million through private placements of common stock and preferred stock, $0.3 million from the exercise of options and $5.2 million through capital leases to finance operations and to fund capital expenditures. Since December 31, 1999, we have raised approximately $15.6 million of additional funds through private placements of preferred stock. We have used, or plan to use the proceeds of $28.6 million from stock offerings as follows: - approximately $14.5 million for investments, including future commitments of $3.5 million; - approximately $5 million to fund operating losses and working capital; and - the balance of proceeds for general corporate purposes and capital expenditures. Our principal uses of cash are to fund (i) the expansion of the operations of our subsidiaries and affiliates; (ii) working capital requirements; (iii) capital expenditures, primarily for our network; (iv) operating losses; and (v) acquisitions. As of December 31, 1999, we had capital commitments of $13.8 million, consisting of ($'s in millions): Capital Lease Payments (payable over terms ranging from 29 to 60 months)............................................. $10.3 Investments................................................. $ 3.5
We also expect to make approximately $2.7 million of capital expenditures during the next twelve months. As of December 31, 1999, we had current assets of $10.4 million, including cash, cash equivalents and short-term investments of $6.2 million, and a working capital surplus of $0.6 million. Current assets included a tax refund receivable of $1.8 million. Our cash and short-term investments are expected to provide sufficient liquidity to meet our capital requirements for approximately the next twelve months. Qwest IRU On September 30, 1999 e.Volve and Qwest Communications Corporation entered into an Indefeasible Right of Use ("IRU") agreement in which Qwest granted e.Volve an indefeasible right of use to a fiber optic circuit operated by Qwest between New York, New York and Los Angeles, California for a period of twenty years. In consideration for this indefeasible right of use, e.Volve agreed to pay Qwest a total of $15.0 million in four installments between October 1, 1999 and September 30, 2001. In addition, e.Volve has been required to pay Qwest a monthly operation and maintenance charge of $25,000 per month since January 1, 2000. Pursuant to the IRU agreement, e.Volve must separately arrange for a colocation space in the Qwest terminal facilities or obtain from a local telecommunications distributor the telecommunications transmission facilities required in order to extend each route from a cross-connect panel at Qwest's terminal facility to a location outside of the Qwest terminal facility. As of March 7, 2000, we have not utilized our right to use the 33 34 fiber optic circuit. However, e.Volve has not entered into any colocation agreement with Qwest or any other local telecommunications distributor as required under the IRU agreement and has not obtained the telecommunications transmission necessary to extend each route to a location outside of the Qwest terminal facility. On December 23, 1999, Qwest made a demand for payment of the first installment of $3.75 million. Thereafter, Qwest has sent invoices to e.Volve requesting payment of the full $15.0 million. e.Volve has not made this payment and e.Volve, eVentures and Qwest have commenced negotiations for a restructuring of the terms of the IRU agreement. As of March 7, 2000, e.Volve and Qwest have not reached an agreement regarding this dispute. Our financial statements do not include any adjustment or provision related to the above transaction. India Joint Venture On August 31, 1999, e.Volve entered into a an agreement with Uni-Tel, Inc., a Texas corporation that operates in the United States and India and provides international telecommunications services. The purpose of the agreement is to form a strategic alliance in which Uni-Tel would manage telecommunications equipment and software owned by e.Volve in the United States and India and deliver telecommunications traffic carried by e.Volve from the United States terminating in India. Under the terms of the agreement, e.Volve paid Uni-Tel $800,000 for the purchase of five systems of telecommunications equipment and software and has been invoiced for an additional $450,000, payable in shares of our common stock, to complete the payment for these systems. In addition, we agreed to pay $250,000 for the purchase of each of up to seven additional telecommunications termination systems. The $250,000 to be paid by e.Volve for each new termination system is to be paid in two installments. The first $100,000 of each installment is due upon seven days notice of the proposed installation of a new termination system, and the remaining $150,000 is payable in shares of our common stock and is due upon the completion of two weeks' testing and acceptance of the termination system by e.Volve. In addition to the purchase of the termination systems, within a month of commencing operations, e.Volve is to supply a minimum of 300,000 minutes of usage per location per month and within ninety days of commencing operations is to increase such usage to a monthly minimum of 450,000 minutes per location. In exchange for Uni-Tel's termination of the traffic supplied to India, e.Volve pays Uni-Tel a termination fee of $0.14 per minute to cover operating costs in India. In addition, Uni-Tel, at its sole expense, is responsible for the overall daily management of the system sites in Dallas and in India, whereas e.Volve pays Uni-Tel for managing systems located in sites other than Dallas and India. All adjusted gross profits of the business arrangements contemplated in the agreement are shared equally between e.Volve and Uni-Tel. e.Volve believes that Uni-Tel has breached its agreements by failing to adequately manage its network and pay its expenses related to operations in India, and has stopped making certain payments to Uni-Tel. e.Volve and Uni-Tel are negotiating a settlement agreement in order to resolve this dispute. Cash Flows From Operating Activities Our operating activities generated cash of $26,000 during the period between inception and June 30, 1997 and used cash of $1.8 million during the year ended June 30, 1998, $1.4 million during the year ended June 30, 1999, and $2.5 million during the six months ended December 31, 1999. During the period between inception and June 30, 1997 cash flows from operating activities primarily resulted from a combination of increases in accounts payable, non-cash expenses, and increases in other accrued expenses, offset by net losses and increases in accounts receivable and other receivables. During the year ended June 30, 1998 cash used in operating activities primarily resulted from a net loss, offset by non-cash expenses, increases in accounts payable and customer deposits. During the year ended June 30, 1999 cash used in operating activities primarily resulted from a net loss, an increase in tax refund receivable and the securing of two letters of credit with restricted cash, offset by increases in accounts payable and customer deposits, and depreciation and amortization. During the six months ended December 31, 1999 cash flow used by operating activities primarily resulted from net losses, the reduction of customer deposits, and an increase in accounts receivable, offset by 34 35 depreciation and amortization charges, a decrease in restricted cash, and a decrease in accounts payable (funded through the issuance of our common stock to vendors of $5.4 million) and an increase in other accrued liabilities. Cash Flows From Investing Activities Our cash flow used by investing activities was $13,363 during the period between inception and June 30, 1997, $1.8 million during the year ended June 30, 1998, $1.3 million during the year ended June 30, 1999, and cash flow used by investing activities totaled $2.8 million during the six months ended December 31, 1999. During the period between inception and June 30, 1997 cash used by investing activities primarily resulted from deposits. During the year ended June 30, 1998 cash used by investing activities primarily resulted from investments in affiliates, purchases of fixed assets and the purchase of securities. During the year ended June 30, 1999 cash used by investing activities primarily resulted from purchases of fixed assets and deposits, offset by proceeds from the sale of securities. During the six months ended December 31, 1999 cash used by investing activities primarily consisted of cash used to purchase equipment ($1.7 million), fund affiliates, and make other long term investments, off-set by net cash acquired in our reorganization. Cash Flows From Financing Activities Our cash flow from financing activities was $100 between the period between inception and June 30, 1997, $6.0 million during the year ended June 30, 1998, $322,408 during the year ended June 30, 1999, and $11.6 million during the six months ended December 31, 1999. During the period between inception and June 30, 1997 cash provided by financing activities was immaterial. During the year ended June 30, 1998 cash provided by financing activities was generated primarily through the issuance of $6.0 million of debentures. During the year ended June 30, 1999 cash provided by financing activities was generated through the issuance of $2.0 million of debentures, offset by capital lease payments. During the six months ended December 31, 1999 cash provided by financing activities was attributable to the issuance of common stock and preferred stock ($13.2 million), offset by the repayment of a bridge loan and capital lease payments. Private Placements On September 28, 1999, we completed a private placement of 2,470,000 shares of common stock and 1,000 shares of Series A Convertible Preferred Stock with aggregate proceeds of approximately $5.9 million. Proceeds from these issuances were used for general corporate purposes and for use as capital for new investments and projects. All of the outstanding shares of Series A Convertible Preferred Stock were converted into an aggregate of 200,000 shares of our common stock on December 21, 1999. On November 19 and 26, 1999, we completed two private placements of 2,500 shares and 3,725 shares of our Series B Convertible Preferred Stock, respectively, with aggregate proceeds of approximately $6.2 million. Proceeds from these issuances are for general corporate purposes and for use as capital for new investments and projects. Shares of our Series B Convertible Preferred Stock is convertible into shares of our common stock under certain conditions. For a description of the terms of the Series B Convertible Preferred Stock, please see the discussion in Item 11 below under the caption "Authorized Capital Stock -- Preferred Stock -- Series B Convertible Preferred Stock." On December 15, 1999, we completed a private placement of 775 shares of our Series B Convertible Preferred Stock with aggregate proceeds of approximately $775,000. Proceeds from this issuance are for general corporate purposes and for use as capital for new investments and projects. The Shares of our Series B Convertible Preferred Stock are convertible into shares of our common stock under certain conditions. For a description of the terms of the Series B Convertible Preferred Stock, please see the discussion in Item 11 below under the caption "Authorized Capital Stock -- Preferred Stock -- Series B Convertible Preferred Stock." The Series B Convertible Preferred Stock was issued at a discount to the market value of our common stock on the date that investors committed to purchase shares of Series B Convertible Preferred Stocks. The 35 36 market value of our common stock at the time of the commitment was $16.00 per share. We have recognized this discount by accounting for it as an imputed preferred stock dividend of $1.1 million in our second quarter. Since December 31, 1999, we have raised additional funds through subsequent private placements of preferred stock. In a series of transactions between January 6 and February 10, 2000, we completed a private placement of 15,570 shares of our Series C Convertible Preferred Stock to eight accredited investors, with aggregate proceeds of approximately $15.6 million. Proceeds from this issuance are for general corporate purposes and for use as capital for new investments and projects. The shares of Series C Convertible Preferred Stock are convertible into shares of our common stock at a price of $17.90 per share, subject to certain anti-dilution adjustments. The conversion price was determined using the average of the closing bid prices per share of our common stock for the 20 trading days ended December 10, 1999. Proceeds of the offering were used to fund operating losses and working capital, make investments and for general corporate purposes. The effect of the favorable conversion rate will be recorded as an imputed preferred stock dividend in our third fiscal quarter. For a description of the terms of the Series C Convertible Preferred Stock, please see the discussion in Item 11 below under the caption "Authorized Capital Stock -- Preferred Stock -- Series C Convertible Preferred Stock." Equipment Leasing and Financing We have leased equipment manufactured by various equipment manufacturers including Siemens A.G., Network Equipment Technologies, Inc. and Harris Corporation. As of December 31, 1999, we have entered into an aggregate of approximately $10.3 million of capital leases with (i) Telecommunications Finance Group, a subsidiary of Siemens A.G., (ii) BA Capital Corp., (iii) Ascend Credit Corporation, a subsidiary of Lucent Corporation and (iv) Arrendadora BankAmerica, S.A. RECENT EVENTS On January 28, 2000, we acquired for $10 million 100,000 Series A Preferred Units of Launch Center 39, representing approximately 2.1% of the equity and voting interests of Launch Center 39. On January 31, 2000, pursuant to an option granted in connection with our initial investment in Fonbox, we purchased 1,000,000 newly issued shares of Series A preferred stock of Fonbox for $1.0 million cash. In addition, in connection with our exercise of this option, we acquired 350,000 shares of common stock of Fonbox from each of Spydre Zeta L.L.C. and NetProvide Ltd. in exchange for an aggregate of 27,860 shares of our common stock. As of February 29, 2000, the Company owns approximately 31% of the capital stock of Fonbox. On February 11, 2000, we acquired 750,000 shares of Series A-1 convertible preferred stock of Callrewards, for $750,000 which represents 30% of the outstanding capital stock of Callrewards on a fully-diluted basis. Under our agreement with Callrewards, we are obligated to purchase shares of Series A-2 convertible preferred stock of Callrewards, which on the date of purchase will be convertible into 20% of the ownership interest in Callrewards on a fully-diluted basis, for $1.0 million when Callrewards has at least 100,000 active users. We are obligated to purchase shares of Series A-3 convertible preferred stock of Callrewards, which on the date of purchase will be convertible into 20% of Callrewards on a fully-diluted basis, for $2.5 million when Callrewards has at least 250,000 active users. On March 3, 2000, we loaned $3.0 million to PhoneFree.com under a promissory note dated March 2, 2000. The promissory note is due on September 1, 2000 and bears interest at 7%. PhoneFree.com may repay this promissory note at any time, subject to our right to convert it into PhoneFree.com common stock. We can convert the promissory note into PhoneFree.com common stock: (i) if PhoneFree.com raises equity capital from other investors on or before August 31, 2000, in which case our conversion price will be equal to 95% of the per share subscription or conversion price in such equity capital raise; or 36 37 (ii) if PhoneFree.com does not raise equity capital from other investors on or before August 31, 2000, we can convert the promissory note on or after September 1, 2000, at a per share conversion price that values all the common and preferred stock of PhoneFree.com at $50.0 million. In connection with the loans made under the promissory note, we also received a four-year warrant to purchase 240,000 shares of PhoneFree.com at a price equal to 110% of the conversion price of the promissory note. The warrant may not be called by PhoneFree. If we include this warrant, but not the promissory note, we would beneficially own approximately 18% of the outstanding shares of common stock of PhoneFree.com. On March 7, 2000, we entered into an agreement to acquire all of the outstanding shares of stock of iGlobal in exchange for approximately 2,588,000 shares of our common stock. This transaction remains subject to customary closing conditions and we expect to close this transaction during our third quarter. RECENTLY ADOPTED ACCOUNTING STANDARDS See Note 3 to the Consolidated Financial Statements. IMPACT OF THE YEAR 2000 The "year 2000 issue" generally describes the various problems that may result from the improper processing of dates and date-sensitive calculations by computers and other equipment as a result of computer hardware and software using two digits to identify the year in a date. If a computer program or other piece of equipment fails to properly process dates including and after the year 2000, date-sensitive calculations may be inaccurate as a result of those computers and software failing to distinguish dates in the 2000's from dates in the 1900's. The failure to process dates could result in system failures or miscalculations causing disruptions in operations including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. State Of Readiness. We reviewed two areas: (i) internal issues, including our information technology ("IT") assets and non-IT systems and (ii) external issues (including third-party manufactured products sold by us, and issues with customers, vendors and suppliers). We contacted manufacturers and suppliers of IT and non-IT assets used internally by us for services such as customer billing, customer service and financial reporting, including manufacturers and suppliers of computer equipment, software programs, telephone systems, data systems, systems comprising our enterprise networks and equipment used to provide services to customers. These contacts helped us to determine the extent to which these systems could cause a material adverse effect on our operations in the event that the systems failed to properly process date-sensitive calculations following the year 2000. We also tried to identify potential external issues that could have had an impact on our operations. These included issues with (i) significant customer systems, including customer-owned and operated systems and systems that are connected to our networks and (ii) vendors and suppliers such as credit facility providers, third-party service providers such as local and long distance wholesale providers and interconnection providers, and employee benefit plan providers such as 401(k) plan administrators. As of March 7, 2000, we have not had any material year 2000 issues. We may in the future identify a significant internal or external year 2000 issue which, if not remediated in a timely manner, could have a material adverse effect on our business, financial condition and results of operations. Costs. Other than time spent by our personnel which could be spent on other matters, we have not incurred any significant costs in identifying year 2000 issues. We do not anticipate any significant further costs. Because no material year 2000 issues have occurred or been identified, we cannot reasonably estimate further costs relating to remediation of any year 2000 issues at this time, or costs of contingency plans. There can be no assurance that as additional year 2000 issues are addressed, our costs to correct such issues will be consistent with historical costs. Risks Of Year 2000 Issues. Because no material year 2000 issues have occurred or been identified, we cannot reasonably ascertain the extent of the risks involved in the event that any one system fails to process 37 38 date-sensitive calculations accurately. Potential risks include the inability to process customer billing accurately or in a timely manner, the inability to provide accurate financial reporting to management, auditors, investors and others, litigation costs associated with potential suits from customers and investors, delays in implementing other IT projects as a result of work by internal personnel on year 2000 issues, and delays in receiving payment or equipment from customers or suppliers as a result of their systems' failure. Any one of these risks, if they materialize, could individually have a material adverse effect on our business, financial condition or results of operations. As almost all of our IT and non-IT systems and products relating to our internal and external issues are manufactured or supplied by third parties which are outside of our control, there can be no assurance that all of those third parties' systems will continue to operate free of year 2000 problems. If some or all of our internal and external systems fail, or if any critical IT or non-IT systems are overlooked or are not year 2000 ready, there could be a material adverse effect on our business, financial condition or results of operations. Contingency Plans. Because no material year 2000 issues have occurred or been identified, we have not made any contingency plans. EFFECTS OF INFLATION Management does not believe that its business is impacted by inflation to a significantly different extent than is the general economy. However, there can be no assurances that inflation will not have a material effect on the Company's operations in the future. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to the impact of political instability, foreign currency, and other risks. Political Instability Risks. We have relationships with foreign suppliers in Syria, Mexico, India, Sri Lanka and other countries. We have not experienced any negative economic consequences as a result of relationships with foreign suppliers in these countries, but may be negatively affected should political instability in any of these countries develop. Foreign Currency Risks. Since the agreements we have entered into with foreign suppliers in Syria, India, Sri Lanka and other countries are denominated in U.S. dollars, we are not exposed to risks associated with fluctuations in these foreign currencies. However, because our agreements with Mexican suppliers are denominated in Mexican pesos, we may be exposed to fluctuations in the Mexican peso, as well as to downturns in the Mexican economy, all of which may affect profitability. During the six months ended December 31, 1999, $13.7 million of our direct costs were denominated in Mexican pesos. Other Market Risks. We are also exposed to potential risks in dealing with foreign suppliers in foreign countries associated with potentially weaker protection of intellectual property rights, unexpected changes in regulations and tariffs, and varying tax consequences. 38 39 ITEM 3. PROPERTIES Our headquarters are located at One Evertrust Plaza in Jersey City, NJ. We also utilize office space occupied by HW Partners for certain of our executive officers and maintain facilities as described in the following chart. We believe that our existing facilities are adequate for our current needs and that suitable additional or alternative space will be available in the future on commercially reasonable terms.
SQUARE MONTHLY LOCATION FEET RENT DESCRIPTION OF USE LEASE EXPIRATION - -------- ------ ------- ------------------ ---------------- Jersey City, New Jersey...... 10,800 $23,400 Switch and network operations March 2009 center Executive and administrative offices Mexico City, Mexico.......... 2,324 4,949 Switch and network operations November 2002 center Kansas City, Kansas.......... 3,573 4,761 Switch and network operations January 2005 center Miami, Florida............... 4,959 8,885 Switch and network operations January 2013 center
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information with respect to the beneficial ownership of our outstanding common stock as of March 7, 2000 by: - each person who is the beneficial owner of more than 5% of our capital stock; - each of our directors; - each of our named executive officers; and - all of our named executive officers and directors as a group. All of the shares indicated in the table are shares of common stock.
PERCENTAGE NUMBER OF SHARES BENEFICIALLY HOLDERS BENEFICIALLY OWNED OWNED(1) - ------- ------------------ ------------ IEO Investments, Limited(2)................................. 11,816,200 24.8% Infinity Emerging Subsidiary Limited(3)..................... 8,683,800 18.2 Infinity Investors Limited(4)............................... 8,500,000 17.9 Clark K. Hunt(5)............................................ 8,872,713 18.6 Barrett N. Wissman(6)....................................... 19,062,713 40.1 Fred A. Vierra(7)........................................... 125,000 * Mark Graham(8).............................................. 225,000 * Stuart Subotnik(9).......................................... 300,000 * Olaf Guerrand-Hermes(10).................................... 50,000 * David Leuschen(11).......................................... 250,000 * Jan Robert Horsfall(12)..................................... 50,000 * Stuart Chasanoff(13)........................................ 57,500 * John Stevens Robling, Jr.(14)............................... 120,000 * Samuel Litwin(15)........................................... 2,000,000 4.2 Mitchell Arthur(16)......................................... 2,000,000 4.2 Officers and Directors as a Group (11 Persons).............. 25,667,713 53.9
- --------------- * Represents less than one percent. 39 40 (1) Percentage of beneficial ownership is based on 45,799,832 shares of common stock outstanding at March 7, 2000, 507,246 shares of common stock issuable upon conversion of 7,000 outstanding shares of our Series B Convertible Preferred Stock and 869,832 shares of common stock issuable upon conversion of 15,570 outstanding shares of our Series C Convertible Preferred Stock and 400,000 shares of common stock issuable upon stock options that have vested. If all of such shares had been issued, we would have had 47,576,910 shares of common stock outstanding. All percentage calculations include shares of common stock issuable upon the exercise of vested stock options and assume that all shares of our Series B Convertible Preferred Stock and Series C Convertible Preferred Stock have been converted into shares of our common stock. (2) The address of IEO Investments Limited is Hunkins Waterfront Plaza, Main Street P.O. Box 556, Charlestown, Nevis, West Indies. (3) The address of Infinity Emerging Subsidiary Limited is Hunkins Waterfront Plaza, Main Street P.O. Box 556, Charlestown, Nevis, West Indies. (4) The address of Infinity Investors Limited is Hunkins Waterfront Plaza, Main Street P.O. Box 556, Charlestown, Nevis, West Indies. (5) Represents 8,683,800 shares of common stock owned by Infinity Emerging Subsidiary Limited, 103,913 shares of common stock owned by HW Capital and 35,000 shares of common stock owned by Mr. Hunt and options to purchase 50,000 shares of common stock that vested on September 22, 1999. Mr. Hunt disclaims beneficial ownership of the shares of common stock held by IEO Investments, Limited and Infinity Emerging Subsidiary Limited. Mr. Hunt's address is 4000 Thanksgiving Tower, 1601 Elm Street, Dallas, Texas 75201. (6) Represents 8,683,800 shares of common stock owned by Infinity Emerging Subsidiary Limited, 8,500,000 shares of common stock owned by Infinity Investors Limited, 103,913 shares of common stock owned by HW Capital, 200,000 shares of common stock owned by the Sienna Trust, 1,500,000 shares of common stock issuable upon exercise of an option granted to Sienna Trust by IEO Investments Limited on September 22, 1999, 25,000 shares of common stock owned by Mr. Wissman and options to purchase 50,000 shares of common stock that vested on September 22, 1999. Mr. Wissman disclaims beneficial ownership of the shares of common stock held by Infinity Emerging Subsidiary Limited and Infinity Investors Limited. Mr. Wissman's address is 4000 Thanksgiving Tower, 1601 Elm Street, Dallas, Texas 75201. (7) Represents 25,000 shares of common stock owned by Mr. Vierra and his wife as joint tenants and options to purchase 100,000 shares of common stock that vested on September 22, 1999. Mr. Vierra's address is 6400 W. Fiddler's Green Circle, Suite 710, Englewood, Colorado 80111. (8) Represents 125,000 shares of common stock owned by Pinnacle Investments, Ltd., 50,000 shares of common stock owned by Mr. Graham and options to purchase 50,000 shares of common stock that vested on September 22, 1999. Mr. Graham's address is 700 S. Henderson Rd., Suite 300, King of Prussia, Pennsylvania 19406. (9) Includes options to purchase 50,000 shares of common stock that vested on October 14, 1999. Mr. Subotnik's address is 215 East 67th Street, 7th Floor, New York, New York 10021. (10) Includes options to purchase 50,000 shares of common stock that vested in October 14, 2000. Mr. Guerrand-Hermes' address is 509 Madison Avenue, Suite 602, New York, NY 10022. (11) Includes options to purchase 50,000 shares of common stock that vested on February 4, 2000. Mr. Leuschen's address is 237 Park Avenue, Suite 2124, New York, NY 10017. (12) Includes options to purchase 50,000 shares of common stock that vested on October 14, 1999. Mr. Horsfall's address is 200 Church Street, Suite 401, New York, NY 10013. (13) Mr. Chasanoff's address is 4000 Thanksgiving Tower, 1601 Elm Street, Dallas, Texas 75201. (14) Mr. Robling's address is 1 Evertrust Plaza, 8th Floor, Jersey City, NJ 07302. (15) Mr. Litwin's address is 1 Evertrust Plaza, 8th Floor, Jersey City, NJ 07302. (16) Mr. Arthur's address is 1 Evertrust Plaza, 8th Floor, Jersey City, NJ 07302. 40 41 ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS The following persons are our directors and executive officers:
NAME AGE POSITION - ---- --- -------- Fred A. Vierra......................... 68 Chairman of the Board Barrett N. Wissman..................... 37 President and Chief Executive Officer, Director Clark K. Hunt.......................... 35 Director Mark R. Graham......................... 41 Director Olaf Guerrand-Hermes................... 36 Director Stuart Subotnick....................... 58 Director Jan Robert Horsfall.................... 39 Chief Internet Strategist, Director David Leuschen......................... 48 Director Stuart Chasanoff....................... 34 Vice President of Business Development, General Counsel and Secretary John Stevens Robling, Jr. ............. 49 Vice President, Chief Financial Officer, Treasurer and Assistant Secretary Samuel Litwin.......................... 44 Managing Director of Communications Holdings Mitchell Arthur........................ 32 Managing Director of Communications Holdings
DIRECTORS Fred A. Vierra, 68, has been our Chairman of the Board and one of our directors since September 22, 1999. He was Chief Executive Officer of Tele-Communications International, Inc., the international arm of Tele-Communications, Inc., from 1994 to 1997. He was also Vice Chairman of the Board of Directors until November 1998. Prior to joining Tele-Communications, Mr. Vierra was President and Chief Operating Officer of United Artists Entertainment Company, where he was in charge of all day-to-day operations and ongoing strategies for the corporation. In this position, Mr. Vierra also directed the activities of both United Artists' cable television and theater division presidents. He also served as President of United Cable Television Corporation, which was merged into United Artists in 1989. Mr. Vierra began his career in the cable industry as Executive Vice President, Investment Banking, for Daniels & Associates, the leading financial services company for the cable industry. Mr. Vierra has served on the Boards of Turner Broadcasting, Discovery Channel, Princes Holdings Ltd., Australas Media Ltd., Torneos y Competencias S.A., Tele-Communications International, Inc., and Telewest plc. Currently, Mr. Vierra is Chairman of the Board of VeloCom Inc., and a Board member of Flextech plc, Formus Communications, Inc., and Jones International Networks, Ltd. Barrett N. Wissman, 37, has been our President and Chief Executive Officer and one of our directors since September 22, 1999. He has been the sole manager of HW Partners, a Co-Manager of HW Capital and a manager of related investment advisory companies which he co-founded in 1993. From October, 1987 to September, 1993, Mr. Wissman served as Chief Executive Officer of Athena Products Corporation, a manufacturer and marketer of chemicals, fertilizers and household consumer products and its subsidiaries and affiliates. He oversaw all aspects of Athena's operations, including administration, finance, marketing and production. Mr. Wissman ultimately orchestrated the sale of Athena's assets, including the licensing of several of Athena's manufacturing processes and trademarks. From 1985 to 1987, Mr. Wissman was an analyst at Lazard Freres & Co., L.L.C. in the areas of international mergers and acquisitions and international project finance. Mr. Wissman holds Bachelor of Arts degrees, cum laude, in economics and political science from Yale University and a Master of Arts degree in music from Southern Methodist University. Clark K. Hunt, 35, has been one of our directors since September 22, 1999. He is President of Hunt Financial Group, L.L.C., a Dallas, Texas based financial service firm, and is a Co-Manager of HW Capital and related investment advisory companies which he co-founded in 1991. From June of 1987 to August of 1989 Mr. Hunt was an analyst at Goldman, Sachs & Co. in New York and Los Angeles. At Goldman Sachs, 41 42 he participated in mergers, acquisitions, initial public offerings, cross-currency swaps and leveraged buy-outs. Mr. Hunt is also involved with several family controlled enterprises including venture capital investor Hunt Capital Group, real estate and mining conglomerate, Hunt Midwest Enterprises, and Hunt Sports Group. Hunt Sports Group is the management company responsible for overseeing the Hunt family's investments in the Kansas City Chiefs of the National Football League, the Chicago Bulls of the National Basketball Association and two franchises in the newly launched Major League Soccer. Mr. Hunt serves as a director of United Petroleum Corporation and Granite Golf Corporation. Mr. Hunt attended Southern Methodist University, where he graduated first in his class with a Bachelor of Business Administration and was a two- time recipient of the University's highest academic award, the Provost Award for Outstanding Scholar. Mark R. Graham, 41, has been one of our directors since September 22, 1999. Mr. Graham has been a principal of Catalyst Asset Management, since December of 1999. He was a private investor based in Philadelphia, Pennsylvania from 1997 until forming Catalyst. Mr. Graham co-founded Drake Goodwin & Graham, a private equity investment firm, in 1992 and served as a director until 1997. Prior to co-founding Drake Goodwin & Graham, Mr. Graham was employed with Morgan Stanley in its Mergers & Acquisitions department, serving as an associate and thereafter as a Vice President from 1987 to 1992. Mr. Graham served as an associate with E.F. Hutton LBO Inc., the leveraged buyout group of E.F. Hutton & Co. from 1984 to 1987. From 1983 to 1984, Mr. Graham was an associate attorney with Bracewell & Patterson, Houston, Texas. Mr. Graham received a Bachelor of Arts in History, cum laude, from the University of Michigan and a Juris Doctor degree from Georgetown University Law Center. Olaf Guerrand-Hermes, 36, has been one of our directors since September 22, 1999. He has been investing privately in Europe and in the United States since the early 1990s. He is a Managing Partner at Blue Growth Capital, LLC, an investment partnership. Prior to organizing Blue Growth Capital, Mr. Guerrand- Hermes was Managing Director of International Equities at The Athena Group, a private international investment management company. At The Athena Group, Mr. Guerrand-Hermes was primarily responsible for international projects as well as raising equity capital for proposed investments. Prior to joining The Athena Group, Mr. Guerrand-Hermes was Vice President at Nomura Securities International, Inc., specializing in structured finance products such as commercial mortgage backed securities. In addition to his experience in the field of finance, Mr. Guerrand-Hermes was an associate with Sullivan & Cromwell, a New York law firm, where he was involved in a variety of international transactions, including public offerings and private placements in the United States by European and other foreign companies and governments. Mr. Guerrand- Hermes is a member of the New York bar, a graduate of New York University School of Law and holds two masters from the University of Pantheon-Assas (Paris II) in Paris, France. Mr. Guerrand-Hermes is a member of the board of directors of Hermes-Sellier. Stuart Subotnik, 58, has been one of our directors since January 1, 2000. Mr. Subotnik has been retained as a consultant to eVentures for the period prior to his joining our board as of the special meeting held by the Board of Directors dated October 14, 1999. He is a general partner and an owner of Metromedia Company. He is also Chief Executive Officer of Metromedia International Group, Chairman of Big City Radio, Inc. and a director of Carnival Cruise Lines, Inc. and Metromedia Fiber Network, Inc., a provider of high bandwidth, fiber optic transmission capacity. Since 1981, Mr. Subotnick has operated investments in businesses such as long distance providers, motion picture companies, restaurant chains, hotels, a diesel pump manufacturer, medical equipment research groups, software developers, Internet providers, laser disc distributors and Major League Soccer. Jan Robert Horsfall, 39, has been one of our directors since January 1, 2000. Mr. Horsfall is also our Chief Internet Strategist as of the special meeting held by the Board of Directors dated October 14, 1999. Mr. Horsfall is Chief Executive Officer and President of PhoneFree.com. Prior to his position with PhoneFree.com and eVentures and between 1996 and 1999, Mr. Horsfall was Vice President of Marketing for Lycos Inc., where he was responsible for all marketing, public relations, database marketing, product management, advertising and promotion. Prior to joining Lycos, Mr. Horsfall was Vice President of Consumer Brands at The Valvoline Company, a division of Ashland, Inc. Mr. Horsfall has a Bachelor of Science degree from Colorado State University. 42 43 David Leuschen, 48, has been one of our directors since February 4, 2000. From 1977 to the present, Mr. Leuschen has been employed by Goldman, Sachs & Co. in various capacities. From 1986 to 1999, he was a partner of Goldman, Sachs in charge of the firm's Energy and Power Department within Investment Banking, which is responsible for the firm's activities (both agency- and principal-based) related to oil and gas, pipeline and electric utility, and other power companies worldwide. He is also a member of the Energy Investment Committee, which oversees direct investment activity in the energy and power arenas. David joined the Goldman Sachs in 1977 and became head of the predecessor Oil and Gas Group in 1985. He has been a Director of Cambridge Energy Research Associates; a leading energy consulting firm headquartered in Cambridge, Massachusetts and the Cross Timbers Oil Company of Ft. Worth, Texas. He is also owner and President of Switchback Ranch Company of Cody, Wyoming and Roscoe, Montana. He is currently a Director of J. Aron Resources Company of Calgary, Alberta; a Director of Beartooth Energy Partners of Ft. Worth, Texas; and a Director of Keystone Energy Group, a national energy policy-making organization based in Washington, D.C. He received his M.B.A. and A.B. degrees from Dartmouth College in 1977 and 1974, respectively. EXECUTIVE OFFICERS THAT ARE NOT DIRECTORS Stuart Chasanoff, 34, has been our Vice President of Business Development, General Counsel and Secretary as of September 22, 1999. Prior to joining eVentures, Mr. Chasanoff was Senior Vice President and General Counsel to HW Partners, a Texas limited partnership that manages pooled investment vehicles for high net worth and institutional investors. At HW Partners, Mr. Chasanoff assisted the principals of HW Partners in developing investments in a portfolio of publicly held microcap companies and privately held start up companies in a variety of fields, including telecommunications, high technology manufacturing, entertainment and retailing. Mr. Chasanoff also oversaw the development of various investment vehicles and was involved in HW Partners' day to day operations. Between 1990 and 1994, and again in 1996, Mr. Chasanoff was an associate corporate attorney with the New York office of White & Case, LLP specializing in mergers and acquisitions, capital markets, corporate reorganizations and financial services. Additionally, he served as in-house counsel at PepsiCo., Inc. from 1994 to 1995, practicing in the areas mergers and acquisitions, capital markets, international joint ventures and derivative transactions. Mr. Chasanoff has been a director of United Petroleum Corporation, a Florida based chain of convenience stores, since November 1999, a director of Granite Golf Group, Inc., a Scottsdale, Arizona based golf course management company, since November 1998 and a director of Tamboril Cigar Company, a Miami based manufacturer of cigars, since December 1998. Mr. Chasanoff is a member of the New York bar, a 1990 cum laude graduate of the Fordham University School of Law and a 1987 graduate of the University of Virginia with a Bachelor of Arts degree in Political and Social Thought. John Stevens Robling, Jr., 49 has been our Vice President, Chief Financial Officer, Treasurer and Assistant Secretary since September 22, 1999. Mr. Robling is also currently serving as Chief Financial Officer of PhoneFree.com. Prior to his appointment in these positions, Mr. Robling was Chief Financial Officer of Axistel, and he continues to hold this position. Before joining Axistel in 1998, Mr. Robling was an independent financial advisor and specialized in offering private equity investment services to various clients. From 1992 to 1997, Mr. Robling was a principal, board member, and member of the investment committee of Hamilton Lane Advisors, Inc. Hamilton Lane is a private equity consulting firm headquartered in Philadelphia, Pennsylvania. Prior to joining Hamilton Lane, Mr. Robling was a Vice President at Lazard Freres & Co. in its International and Mergers and Acquisitions departments. In these capacities, he assisted clients in 18 financial advisory or capital markets assignments which had an overall transaction value in excess of $3 billion dollars. He was also a member of the Country Advisory Group, an informal partnership among Lazard Freres & Co., S.G. Warburg and Lehman Brothers which advised the sovereign governments of developing countries. In connection with these engagements, Mr. Robling provided financial advisory services to national telecommunications authorities and multi-national telecommunications companies. Mr. Robling received an MBA from the University of Chicago and graduated with distinction from Georgetown University, where he majored in economics. 43 44 Samuel Litwin, 44, has been our Managing Director of Communications Holdings since September 22, 1999. He is also Chief Executive Officer of AxisTel. Prior to his appointment, Mr. Litwin was a Senior Account Manager for multi-national accounts at LDDS Worldcom. He held various management positions from 1986 to 1993 at Bell Atlantic, including Senior Account Manager. Mr. Litwin received a BS in Business Administration from Brooklyn College. Mitchell Arthur, 32, has been our Managing Director of Communications Holdings since September 22, 1999. He is also President and Chief Operating Officer of AxisTel. From 1994 to 1998, Mr. Arthur was Global Account Manager for U.S. and international accounts at MFS Communications, where he was involved in the development of MFS's New York/New Jersey fiber-optic network. From 1991 to 1994, Mr. Arthur was a Major Account Manager at Worldcom, where he was responsible for large commercial accounts. Mr. Arthur received an BS in Business Administration and Marketing from Dominican College. COMMITTEES OF THE BOARD OF DIRECTORS Our Board of Directors has established an audit committee consisting of Messrs. Vierra, Guerrand-Hermes and Subotnick, a compensation committee consisting of Messrs. Hunt, Wissman, Guerrand-Hermes, Leuschen and Graham, and an option subcommittee of the compensation committee consisting of Messrs. Leuschen and Graham. ITEM 6. EXECUTIVE COMPENSATION COMPENSATION FOR FISCAL YEAR 1999 AND FISCAL YEAR 2000 UNTIL SEPTEMBER 22, 1999 In connection with our reorganization, the end of our fiscal year was changed from April 30 to June 30 in order to align our fiscal year with the fiscal year of e.Volve, one of the wholly owned subsidiaries that was acquired in our reorganization. Consequently, the information presented below with respect to fiscal year 1999 is with respect to the fiscal year of eVentures ended April 30, 1999 and the information with respect to fiscal year 2000 is with respect to the fiscal year of eVentures ending June 30, 2000. During fiscal year 1999, the transition period between April 30, 1999, and prior to September 22, 1999 in fiscal year 2000, Daniel L. Wettriech served as our President, and we did not have any other employees or officers. During each of these periods, Daniel L. Wettriech did not receive any salary, bonuses, stock awards, options or other compensation from us. Daniel L. Wettriech resigned as our President on September 22, 1999. 44 45 Summary Compensation Table for Fiscal Year 2000 The following table identifies the officers who we believe will be our most highly compensated executive officers during fiscal year 2000. All of the named executive officers listed below have served as executive officers of eVentures since September 22, 1999. In addition, all of the named executive officers listed below are being compensated by eVentures during fiscal 2000, except for Barrett N. Wissman who receives a salary of $120,000 from HW Partners. We are obligated to reimburse HW Partners for Mr. Wissman's salary pursuant to the Management Services Agreement, dated as of September 22, 1999, between eVentures and HW Partners. For a description of the other services provided to us by HW Partners under the management services agreement, see Item 7. "Certain Relationships and Related Transactions."
LONG TERM COMPENSATION ------------------------------------- SECURITIES ANNUAL COMPENSATION RESTRICTED UNDERLYING LTIP ALL OTHER FISCAL ------------------------- STOCK OPTIONS/SARS PAYOUTS COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARD(S)($) (#) ($) ($) - --------------------------- ------ --------- ------------- ----------- ------------ ------- ------------ Barrett N. Wissman........ 2000 $120,000 None None 100,000 None None President and Chief Executive Officer Stuart Chasanoff.......... 2000 $160,000 discretionary None 500,000 None None Vice President of Business Development, General Counsel and Secretary John Stevens Robling Jr. .................... 2000 $180,000 discretionary None 425,000 None None Vice President, Chief Financial Officer, Treasurer and Assistant Secretary Samuel Litwin............. 2000 $180,000 discretionary None 425,000 None None Managing Director of Communications Holdings Mitchell Arthur........... 2000 $180,000 discretionary None 425,000 None None Managing Director of Communications Holdings
45 46 Option Grants During Fiscal Year 2000 Prior to September 22, 1999, we did not grant any stock options. We have never granted any stock appreciation rights ("SARs"). The following table describes the options to acquire shares of our common stock granted to the individuals named above during fiscal year 2000 to date. All of the named executive officers listed below have served as our executive officers since September 22, 1999:
POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF % OF TOTAL ANNUAL RATES OF SECURITIES OPTIONS/SARS STOCK PRICE UNDERLYING GRANTED TO APPRECIATION FOR EVENTURES EMPLOYEES EXERCISE OF OPTION TERM(1) OPTIONS/SARS IN FISCAL YEAR BASE PRICE EXPIRATION ----------------------- NAME GRANTED(#) (%)(2) ($/SH) DATE 5%($) 10%($) - ---- ------------ -------------- ----------- ---------- ---------- ---------- Barrett N. Wissman......... 100,000 3.36% $ 10 9/22/2009 $ 0 $ 136,000 President and Chief Executive Officer Stuart Chasanoff........... 500,000 16.80% $2.50 9/22/2009 $1,067,000 $3,180,000 Vice President of $5.00 Business Development $7.50 General Counsel and Secretary John Stevens Robling Jr. ..................... 425,000 14.28% $ 10 9/22/2009 $ 0 $ 578,000 Vice President, Chief Financial Officer, Treasurer and Assistant Secretary Samuel Litwin.............. 425,000 14.28% $ 10 9/22/2009 $ 0 $ 578,000 Managing Director of Communications Holdings Mitchell Arthur............ 425,000 14.28% $ 10 9/22/2009 $ 0 $ 578,000 Managing Director of Communications Holdings
- --------------- (1) Assumes that the fair market value of our common stock on the date of each grant was $4.38 per share, which was the average of the closing bid and asked price of the common stock on that date. (2) Percentage of total options granted to employees in fiscal year 2000 is based on 2,976,000 options: - 800,000 granted to our directors; - 150,000 options received by Jan Robert Horsfall as part of the consideration for his employment as our Chief Internet Strategist and 100,000 options as consideration for his agreement to serve as one of our directors; - 1,350,000 granted to certain of our employees in accordance with employment agreements entered into in connection with our reorganization; - 425,000 granted to our Chief Financial Officer in connection with our reorganization; - 75,000 granted to certain employees of AxisTel in connection with our reorganization in replacement of outstanding options of AxisTel; and - 76,000 granted to certain of our non-executive employees. 46 47 Aggregated Option Exercises and Year-End Option Values in Fiscal Year 2000 During fiscal year 2000, we granted options to each of the executive officers named in the Summary Compensation Table above. The following table describes the value of our options exercised by our executive officers during fiscal year 2000 and the value of unexercised options held by our officers at March 7, 2000. The table covers the period between September 22, 1999 and March 7, 2000, which is the period during which these persons were officers. None of the individuals named in the Summary Compensation Table for fiscal year 2000 were granted options to purchase our shares prior to September 22, 1999.
NUMBER OF SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED ACQUIRED ON VALUE UNDERLYING UNEXERCISED OPTION IN-THE-MONEY OPTIONS AT NAME EXERCISE(#) REALIZED($) AT MARCH 7, 2000(#) MARCH 7, 2000 - ---- ---------------- ----------- ----------------------------- ------------------------- EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE ----------------------------- ------------------------- Barrett N. Wissman......... -- -- 50,000/50,000 $1,125,000/$1,125,000 President and Chief Executive Officer Stuart Chasanoff........... -- -- 0/500,000 0/$13,750,000 Vice President of Business Development General Counsel and Secretary John Stevens Robling Jr. ..................... -- -- 0/425,000 0/$9,562,500 Vice President, Chief Financial Officer, Treasurer and Assistant Secretary Samuel Litwin.............. -- -- 0/425,000 0/$9,562,500 Managing Director of Communications Holdings Mitchell Arthur............ -- -- 0/425,000 0/$9,562,500 Managing Director of Communications Holdings
COMPENSATION OF DIRECTORS On September 22, 1999, pursuant to our 1999 Omnibus Securities Plan described below, we granted a total of 600,000 options to purchase shares of our common stock to our newly appointed directors. On October 14, 1999, we granted 100,000 options to purchase shares of our common stock to each of Jan Robert Horsfall and Stuart Subotnik, respectively, in connection with their agreements to serve as our directors. On February 4, 2000, we granted 100,000 options to purchase shares of our common stock to David Leuschen in connection with his agreement to serve as our director. Other than as provided by our 1999 Omnibus Securities Plan described below and the reimbursement of reasonable expenses incurred with attending board and committee meetings, we have not yet adopted specific policies on directors' compensation and benefits as of the date of this filing. EMPLOYMENT AGREEMENTS Barrett N. Wissman provides services and receives compensation as our President and Chief Executive Officer from HW Partners pursuant to a Management Services Agreement between eVentures and HW Partners. We are obligated to reimburse HW Partners for Mr. Wissman's salary of $120,000. For a description of the other services provided to us by HW Partners under the management services agreement, see Item 7 -- "Item 7. Certain Relationships and Related Transactions." Stuart Chasanoff, our Vice President of Business Development, General Counsel and Secretary, is employed pursuant to an employment agreement that was entered into on September 22, 1999. The agreement commenced on September 22, 1999 and will expire on September 21, 2002, and will automatically be extended for additional terms of successive one year periods unless either we or Mr. Chasanoff notifies the 47 48 other in writing at least sixty days prior to the expiration of the then current term that the extension will not take effect. Mr. Chasanoff will receive the following annual base salary: - $160,000 for the period October 1, 1999 through September 21, 2000; - $172,800 for the period September 22, 2000 through September 21, 2001; and - $186,624 for the period September 22, 2001 through September 21, 2002. Mr. Chasanoff's employment agreement provides him with the eligibility to receive discretionary bonuses payable by us on such terms and conditions as determined by the board of directors or the compensation committee of such board. In addition, Mr. Chasanoff's employment agreement also grants him an option to purchase 500,000 shares of our common stock, pursuant to our 1999 Omnibus Securities Plan described below. These options have an exercise price and shall vest as follows: - $2.50 per share for 166,666 shares which shall vest on September 21, 2000; - $5.00 per share for $166,667 shares which shall vest on September 21, 2001; and - $7.50 per share for 166,667 shares which shall vest on September 21, 2002. In addition, these options will vest immediately if we terminate Mr. Chasanoff's employment without cause, if Mr. Chasanoff terminates his employment for good reason or the options are accelerated upon a change of control of our company. Mr. Chasanoff's employment may be terminated for cause, without cause, by voluntary resignation, death or disability. If at least thirty days prior to the expiration of the employment term we have failed to offer to extend the term for a period of at least one year on substantially identical terms as set forth in the agreement, then Mr. Chasanoff shall be entitled to receive payments of an amount equal to his then monthly rate of base salary for a period of six months following the date of termination. Mitchell Arthur, one of our Managing Directors of Communications Holdings and President and Chief Operating Officer of AxisTel, is employed by AxisTel pursuant to an employment agreement that was entered into on October 28, 1998 and amended and restated on September 22, 1999. The amended and restated employment agreement commenced on September 22, 1999 and shall continue for twenty-four months, expiring on September 21, 2001. Upon the end of this initial term, AxisTel has agreed to offer to extend the term of employment for one additional year ending September 21, 2002 on substantially identical terms and base salary applicable at the time of expiration of the initial term of employment, but without the requirement for the issuance of any additional stock options. In addition, the employment agreement may be renewed by mutual agreement of the parties at the end of each term for additional one year periods. Under the amended and restated employment agreement, Mr. Arthur will receive an annual base salary of $180,000 during each fiscal year of the term of employment. This compensation shall be reviewed at least annually by our board of directors, and any appropriate increases to this base salary may be made at the sole discretion of our board. Mr. Arthur's employment agreement provides him with the eligibility to receive discretionary bonuses payable by us on such terms and conditions as determined by our board of directors or the compensation committee of such board. In addition, Mr. Arthur's employment agreement also grants him an option to purchase 425,000 shares of our common stock, pursuant to our 1999 Omnibus Securities Plan described below. These options have an exercise price of $10 per share and shall vest as follows: - 141,166 shares (1/3) shall vest on September 21, 2000; - 141,167 shares (1/3) shall vest on September 21, 2001; and - 141,167 shares (1/3) which shall vest on September 21, 2002. These options will vest immediately if we terminate Mr. Arthur's employment without cause, if we fail to extend, as agreed, Mr. Arthur's term of employment for an additional year after the expiration of the initial term or if the options are accelerated upon a change of control of our company. Mr. Arthur's employment may be terminated for cause, without cause, by voluntary resignation, death or disability. If AxisTel terminates Mr. Arthur's employment during the term of the agreement without cause, then Mr. Arthur shall be entitled 48 49 to receive his base salary then in effect for the remainder of the term and the contractual restriction on Mr. Arthur's ability to sell any shares of our common stock set forth in the registration rights agreement executed on September 22, 1999 shall terminate and cease to apply to Mr. Arthur. Mr. Samuel Litwin, one of our Managing Directors of Communications Holdings and Chief Executive Officer of AxisTel, is employed by AxisTel pursuant to an employment agreement that was entered into on October 28, 1998 and amended and restated on September 22, 1999. The amended and restated employment agreement commenced on September 22, 1999 and shall continue for twenty-four months, expiring on September 21, 2001. Upon the end of this initial term, AxisTel has agreed to offer to extend the term of employment for one additional year ending September 21, 2002 on substantially identical terms and base salary applicable at the time of expiration of the initial term of employment, but without the requirement for the issuance of any additional stock options. In addition, the employment agreement may be renewed by mutual agreement of the parties at the end of each term for additional one year periods. Under the amended and restated employment agreement, Mr. Litwin will receive an annual base salary of $180,000 during each fiscal year of the term of employment. This compensation shall be reviewed at least annually by our board of directors, and any appropriate increases to this base salary may be made at the sole discretion of our board. Mr. Litwin's employment agreement provides him with the eligibility to receive discretionary bonuses payable by us on such terms and conditions as determined by our board of directors or the compensation committee of such board. In addition, Mr. Litwin's employment agreement also grants him a stock option to purchase 425,000 shares of our common stock, pursuant to our 1999 Omnibus Securities Plan described below. These options have an exercise price of $10 per share and shall vest as follows: - 141,166 shares (1/3) shall vest on September 21, 2000; - 141,167 shares (1/3) shall vest on September 21, 2001; and - 141,167 shares (1/3) which shall vest on September 21, 2002. These options will vest immediately if we terminate Mr. Litwin's employment without cause, if we fail to extend, as agreed, Mr. Litwin's term of employment for an additional year after the expiration of the initial term or if the options are accelerated upon a change of control of our company. Mr. Litwin's employment may be terminated for cause, without cause, by voluntary resignation, death or disability. If AxisTel terminates Mr. Litwin's employment during the term of the agreement without cause, then Mr. Litwin shall be entitled to receive his base salary then in effect for the remainder of the term and the contractual restriction on Mr. Litwin's ability to sell any shares of our common stock set forth in the registration rights agreement executed on September 22, 1999 shall terminate and cease to apply to Mr. Litwin. At present, none of the other named executive officers or key employees is party to an employment agreement with us. 1999 OMNIBUS SECURITIES PLAN The Board of Directors and our stockholders adopted and approved our 1999 Omnibus Securities Plan (the "Omnibus Plan") as of September 22, 1999. Under the Omnibus Plan, our officers, directors, key employees and consultants, together with those of our subsidiaries, are eligible to receive stock options, restricted and unrestricted stock awards, dividend equivalent rights, interest equivalents, stock appreciation rights, and performance stock awards. No person can be granted in any calendar year awards under the Omnibus Plan covering more than 500,000 shares of our common stock. We have authorized and reserved 15 percent of our issued and outstanding shares of common stock, at any time, for delivery upon the exercise of stock options, or under other awards, granted pursuant to the Omnibus Plan, as that number of shares is determined in calculating our fully diluted earnings per share for our fiscal year immediately preceding such time; however, we may not deliver more than a total of 4,000,000 shares of our common stock upon the exercise of "incentive stock options." The shares of our common stock that may be issued under the Omnibus Plan may be either authorized and unissued shares or previously issued shares held as treasury shares. 49 50 Options to purchase 2,450,000 shares of our common stock were granted on September 22, 1999 in connection with our reorganization, and options to purchase 425,000, 1,000 and 100,000 shares were granted to eligible individuals on October 14, 1999, January 24, 2000 and February 4, 2000, respectively. All options granted in connection with our reorganization, except for the options granted to Annette Dickson and William Carroll, were granted to eligible individuals who were appointed as either executive officers or directors of our Company. Annette Dickson and William Carroll are AxisTel employees who held AxisTel options prior to our reorganization and who, in connection with our reorganization, received eVentures options in exchange for the AxisTel options they held. See Item 1 -- "The Reorganization Transaction." As of March 7, 2000, no options granted under the Omnibus Plan have been exercised, and no types of awards other than options have been granted under the Omnibus Plan. These options granted under the Omnibus Plan have a weighted average exercise price of $9.56 per share. The following table summarizes, for each option granted and outstanding under the Omnibus Plan as of March 7, 2000, the date of grant, recipient, vesting schedule, exercise price and total number of shares covered by such option.
VESTING SCHEDULE ----------------------------------------------- TOTAL NUMBER NUMBER OF SHARES OF SHARES GRANT DATE NAME GRANTED VESTING VESTING DATE EXERCISE PRICE - ---------- ---- ------------ --------- ------------------ -------------- September 22, 1999 Stuart Chasanoff 500,000 166,666 September 22, 2000 $ 2.50 166,667 September 22, 2001 $ 5.00 166,667 September 22, 2002 $ 7.50 September 22, 1999 Samuel L. Litwin 425,000 141,166 September 22, 2000 $10.00 141,167 September 22, 2001 $10.00 141,167 September 22, 2002 $10.00 September 22, 1999 Mitchell Arthur 425,000 141,166 September 22, 2000 $10.00 141,167 September 22, 2001 $10.00 141,167 September 22, 2002 $10.00 September 22, 1999 John Stevens Robling, 425,000 141,166 September 22, 2000 $10.00 Jr. 141,167 September 22, 2001 $10.00 141,167 September 22, 2002 $10.00 September 22, 1999 Annette Dickson 15,000 5,000 September 22, 2000 $ 2.50 5,000 September 22, 2001 $ 2.50 5,000 September 22, 2002 $ 2.50 September 22, 1999 William Carroll 60,000 20,000 September 22, 2000 $ 2.50 20,000 September 22, 2001 $ 2.50 20,000 September 22, 2002 $ 2.50 September 22, 1999 Fred Vierra 200,000 100,000 September 22, 1999 $10.00 100,000 September 22, 2000 $10.00 September 22, 1999 Clark Hunt 100,000 50,000 September 22, 1999 $10.00 50,000 September 22, 2000 $10.00 September 22, 1999 Barrett N. Wissman 100,000 50,000 September 22, 1999 $10.00 50,000 September 22, 2000 $10.00 September 22, 1999 Mark Graham 100,000 50,000 September 22, 1999 $10.00 50,000 September 22, 2000 $10.00 September 22, 1999 Olaf Guerrand-Hermes 100,000 50,000 September 22, 1999 $10.00 50,000 September 22, 2000 $10.00 October 14, 1999 Jan Robert Horsfall 100,000 50,000 October 14, 1999 $10.00 50,000 October 14, 2000 $10.00 150,000 50,000 October 14, 2000 $10.00 50,000 October 14, 2001 $10.00 50,000 October 14, 2002 $10.00 October 14, 1999 Stuart Subotnik 100,000 50,000 October 14, 1999 $10.00 50,000 October 14, 2000 $10.00
50 51
VESTING SCHEDULE ----------------------------------------------- TOTAL NUMBER NUMBER OF SHARES OF SHARES GRANT DATE NAME GRANTED VESTING VESTING DATE EXERCISE PRICE - ---------- ---- ------------ --------- ------------------ -------------- October 14, 1999 John Logan 60,000 20,000 October 14, 2000 $15.00 20,000 October 14, 2001 $15.00 20,000 October 14, 2002 $15.00 October 14, 1999 John Reyes 10,000 3,333 October 14, 2000 $15.00 3,333 October 14, 2001 $15.00 3,334 October 14, 2002 $15.00 October 14, 1999 Jorge Sesma 5,000 1,666 October 14, 2000 $15.00 1,667 October 14, 2001 $15.00 1,667 October 14, 2002 $15.00 January 24, 2000 Leanne Redding 1,000 333 January 24, 2001 $25.00 333 January 24, 2002 $25.00 334 January 24, 2003 $25.00 February 4, 2000 David Leuschen 100,000 50,000 February 4, 2000 $23.50 50,000 February 4, 2001 $23.50
The Omnibus Plan is administered by the Board of Directors. Subject to the provisions of the Omnibus Plan, the Board of Directors has the authority to determine the type of award, when and to whom awards will be granted, the number of shares covered by each award and the terms and conditions of each such award. The Board of Directors interprets the Omnibus Plan and may at any time adopt the rules and regulations for the Omnibus Plan as it deems advisable. The Board of Directors may accelerate the vesting or right to exercise a previously granted award, in accordance with the terms of the Omnibus Plan. The Omnibus Plan grants the Board of Directors the authority to appoint a stock plan committee, comprised of at least two members of the Board of Directors, and delegate to such committee the administration of the Omnibus Plan, subject to the right of the Board of Directors to exercise duties and responsibilities delegated to the stock plan committee under the Omnibus Plan. At the discretion of the Board of Directors, this stock plan committee may be the same as the compensation committee of the Board of Directors. Stock Options. Stock options may be granted and will become exercisable under the terms and conditions determined by the Board of Directors in accordance with the Omnibus Plan. Options granted under the Omnibus Plan may be "incentive stock options," within the meaning of Section 422 of the Internal Revenue Code, or "non-qualified stock options," which are not intended to receive the special income tax treatment accorded incentive stock options under the Internal Revenue Code. The Board of Directors may impose such restrictions on the ownership and transferability of the shares purchasable upon the exercise of an option as it deems appropriate. Options granted under the Omnibus Plan have an exercise price per share at least equal to the fair market value of a share of our common stock on the date of grant. However, the Board of Directors may, subject to certain limitations in the Omnibus Plan, amend the exercise price of an outstanding option to be not less than the fair market value of our common stock on the date of such amendment. Once vested, options granted under the Omnibus Plan may be exercised for a period of up to ten years from the date of grant. Options (and other awards requiring payment by the holder) under the Omnibus Plan may be paid by the recipient in cash or any other consideration permitted by law and authorized by the Board of Directors (including, without limitation, using shares of our capital stock previously purchased by the recipient or a broker-assisted or similar exercise procedure). Furthermore, the Board of Directors may authorize loans to individuals to finance their exercise of vested options. Restricted Stock Awards. The Board of Directors has the authority to grant restricted stock awards entitling the recipient to acquire shares of our common stock at par value or such other purchase price, and subject to such restrictions and conditions, as the Board of Directors may determine at the time of grant. Upon delivery of the shares of restricted stock, a recipient shall have all the rights of a stockholder with respect to such shares, subject to the restrictions established by the Board of Directors at the time of grant, as described below. All shares of restricted stock shall be subject to such restrictions as the Board of Directors shall provide 51 52 and may include restrictions concerning voting rights and transferability and restrictions based on duration of employment or engagement with us or our affiliates. The Board of Directors may also impose such restrictions and conditions on shares of restricted stock granted under the Omnibus Plan as it deems appropriate, which may be based on continuing employment or other business relationships with us or one of our affiliates or the achievement of pre-established, objective performance goals that are determined over a measurement period established by the Board of Directors and relate to one or more performance criteria described in the Omnibus Plan. Restricted stock awarded under the Omnibus Plan may not be sold, transferred, assigned or encumbered and may not be disposed of, except by will or the laws of descent and distribution, for a period of time determined by the Board of Directors until all restrictions lapse. If the recipient of a restricted stock award under the Omnibus Plan fails to satisfy applicable conditions established by the Board of Directors in the award, the restricted stock may be forfeited and revert back to us or we may repurchase such shares of restricted stock at a cash price per share equal to the price paid by the recipient for such shares. Restricted stock shall vest and become free of restrictions on the date, and/or by satisfaction of conditions, specified by the Board of Directors on the date of grant. Unrestricted Stock Awards. The Board of Directors also has the authority to grant or sell an unrestricted stock award to any eligible person, pursuant to which such person may receive shares of our common stock free of any vesting restrictions under the Omnibus Plan. Unrestricted stock awards may be granted or sold as a bonus in respect to past services or other valid consideration or in lieu of any cash compensation to such an eligible person. Performance Stock Awards. The Board of Directors may grant performance stock awards to eligible individuals under the Omnibus Plan. Performance stock awards entitle the recipient to acquire shares of our common stock upon the attainment of objective performance goals, established in advance by the Board of Directors, based on performance criteria set forth in the Omnibus Plan. Dividend Equivalent Rights and Interest Equivalents. The Board of Directors may grant to eligible individuals dividend equivalent rights with other awards under the Omnibus Plan or independent of any other awards. Dividend equivalent rights entitle the recipient to receive cash or additional shares of our common stock based on cash dividends that would be paid on a specified number of shares of our common stock. Settlement of certain awards may, if permitted by the Board of Directors, be deferred under the Omnibus Plan, and, during the period of such deferral, such awards may be credited with interest equivalents as specified in the award agreement. Stock Appreciation Rights. The Omnibus Plan also permits the Board of Directors to grant stock appreciation rights with respect to all or any portion of the shares of common stock covered by options granted under the Omnibus Plan, or, independent of options, with respect to a specified number of shares of common stock. A stock appreciation right may be exercised only when the related option is exercisable (or, in the case of an independent stock appreciation right, as specified in the applicable award agreement). Upon exercise of a stock appreciation right, the recipient will receive for each share for which such stock appreciation right is exercised, an amount, in cash or common stock, as determined by the Board of Directors, equal to the excess of the fair market value of a share of common stock on the date the stock appreciation right is exercised over the exercise price per share of the option to which the stock appreciation right relates (or, in the case of an independent stock appreciation right, the exercise price stated in the applicable award agreement). Other Provisions of the Plan. Except in the event of his or her death, the recipient of an award under the Omnibus Plan may not transfer such award until shares of our common stock have been issued to such recipient and all restrictions applicable to such shares have lapsed, unless such transfer is approved by the Board of Directors in accordance with the terms of the Omnibus Plan. Incentive stock options granted under the Omnibus Plan may not be transferred if such transfer would disqualify the option from "incentive stock option" treatment under the Internal Revenue Code. The Board of Directors will make appropriate adjustments in the maximum number and kind of shares available for issuance under the Omnibus Plan, the maximum number of shares that can be covered by awards granted to an individual in any one year under the Omnibus Plan, and the number and kind of shares, and 52 53 price per share, subject to awards outstanding under the Omnibus Plan in the event of certain changes in our capital, such as a stock dividend, merger, recapitalization, spin-off, or extraordinary dividend. The Omnibus Plan and awards granted, whether or not vested, will automatically terminate in the event that there is a reorganization or a transaction involving a "change in control" of our company (as defined in the Omnibus Plan), unless a provision is made in writing for the continuance of the Omnibus Plan and for the assumption or substitution of such awards in connection with such transaction, or the Board of Directors provides for the acceleration of vesting or exercisability of outstanding awards and/or conversion of such awards into a right to receive cash or other consideration that could be received in such change in control with respect to the shares of common stock underlying such award (net of any exercise price). If the Omnibus Plan and any outstanding awards granted thereunder shall terminate by reason of such a change in control without provision for assumption or substitution, or acceleration, or conversion of outstanding awards, then any holder of an outstanding award shall have the immediate right, as the Board of Directors may designate, to exercise, claim or convert his or her award to the full extent not theretofore exercised, claimed or converted. In the event we consummate any merger, consolidation or other reorganization not involving such a "change in control," outstanding awards under the Omnibus Plan may thereafter be exercised or claimed only for the kind and amount of securities, cash and/or other consideration that could have been received in such transaction by a holder of the number of shares of common stock covered by such award. The Board of Directors may amend or terminate the Omnibus Plan and may amend any award previously granted under the Omnibus Plan. However, if required by any law, regulation or stock exchange rule, no such change in the Omnibus Plan shall be effective without the approval of our stockholders. In addition, no such change may materially impair an award previously granted, except with the written consent of the recipient of such award. No awards may be granted under the Omnibus Plan after September 22, 2009; however, awards granted prior to such date will remain in effect thereafter, until they are exercised or terminate or expire in accordance with their terms. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION We did not have a compensation committee during the fiscal year ended June 30, 1999. On December 15, 1999, our Board of Directors created a compensation committee composed of Messrs. Hunt, Wissman and Graham. On February 4, 2000, Mr. Guerrand-Hermes and Mr. Leuschen were appointed members of the compensation committee. The compensation committee reviews, recommends and approves compensation arrangements for executive officers, key employees and other senior personnel, and administers certain and compensation plans and arrangements. As of March 7, 2000, our compensation committee has not adopted formal guidelines to consider when making these determinations. Prior to December 15, 1999, compensation decisions relating to our executive officers, key employees and other senior personnel were primarily made by our Board of Directors. ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSACTIONS WITH e.VOLVE. Investment by Infinity Entities On June 11, 1998, e.Volve entered into a securities purchase agreement with Infinity Investors Limited pursuant to which: - e.Volve agreed to issue debentures to Infinity Investors Limited in an amount up to $6.0 million. Approximately $2.7 million aggregate principal amount of the e.Volve debentures were issued in exchange for debentures that Infinity Investors had purchased from Touch Tone America, Inc. Touch Tone had agreed to merge with e.Volve in August of 1997, but the merger agreement had been terminated in May of 1998. Infinity Investors Limited agreed to allow e.Volve to assume the Touch 53 54 Tone debentures because Touch Tone had previously advanced funds to e.Volve and Infinity decided to provide funding to e.Volve to construct its network and operations. The balance of the debentures were purchased by Infinity Investors Limited for cash. - e.Volve pledged all of its assets to Infinity Investors Limited to secure the e.Volve debentures. - e.Volve issued and sold 2,400 shares of its common stock, representing two-thirds of the outstanding capital stock of e.Volve, to Infinity Investors Limited for $0.01 per share. - Infinity Investors Limited sold a 12.1% interest in the debentures and shares of e.Volve common stock to IEO Holdings Limited for approximately $750,000. As a result of these transactions, Infinity Investors Limited acquired control of e.Volve. Prior to those transactions, Kerry Rogers was the Chief Executive Officer of e.Volve. Following this transaction, Steven Loglisci was appointed President of e.Volve, and Kerry Rogers was appointed Chief Technology Officer, which was not an executive officer position at e.Volve. Interest on the e.Volve debentures was payable monthly and e.Volve was required to make monthly installments of principal, beginning on January 31, 1999 in an amount equal to $50,000 plus any available cash flow of e.Volve. Any amounts of principal not paid were to be due on June 11, 2000. No payments of principal were paid on the e.Volve debentures. The proceeds of this financing were used to purchase equipment and for making capital and general corporate expenses. e.Volve decided to issue debt and equity as a result of arms-length negotiations with representatives of Infinity Investors. On August 19, 1998, pursuant to the terms of a letter agreement between e.Volve and Infinity Investors Limited, e.Volve issued debentures in the principal amount of $850,000 to Infinity Investors Limited and amended the June 11 securities purchase agreement and the related security documents to provide the benefits of those agreements to Infinity Investors Limited with respect to the August 19 debentures. Interest on the August 19 debentures was 8% per annum, payable monthly, and e.Volve was required to make monthly installments of principal, beginning on August 31, 1998 in an amount equal to $50,000 plus any available cash flow of e.Volve. Any amounts of principal not paid were to be due on June 11, 2000. No payments of principal were paid on the August 19 debenture. The proceeds of the August 19 debentures were used to fund a cash deposit securing a letter of credit supporting contractual arrangements between e.Volve and Avantel, S.A. Under the letter agreement, the August 19 debentures became convertible into 340 shares of e.Volve common stock because the principal of the August 19 debentures was not repaid in full on or prior to November 19, 1998. e.Volve decided to issue debt and equity as a result of arms-length negotiations with representatives of Infinity Investors and because other financing alternatives would have created an undue strain on its cash flow. On December 9, 1998, IEO Holdings Limited purchased 909 shares of e.Volve common stock from Infinity Investors Limited. After the sale, Infinity Investors Limited and IEO Holdings Limited each owned 33.3% of the outstanding common stock of e.Volve. On February 9, 1999, pursuant to the terms of a letter agreement between e.Volve and Infinity Investors Limited, e.Volve issued debentures in the principal amount of $390,000 to Infinity Investors Limited and amended the June 11 securities purchase agreement and the related security documents to provide the benefits of those agreements to Infinity Investors Limited with respect to the February 9 debentures. Interest at 8% per annum and principal on the February 9 debentures was due on February 17, 1999. No payment of principal has been paid on the February 9 debenture. The proceeds of the February 9 debentures were used to fund working capital needs of e.Volve. e.Volve decided to issue debt and equity as a result of arms-length negotiations with representatives of Infinity Investors and because other financing alternatives would have created an undue strain on its cash flow. 54 55 On April 15, 1999, pursuant to the terms of a letter agreement between e.Volve, Infinity Investors Limited and IEO Holdings Limited: - e.Volve issued amended and restated debentures in the principal amount of $7,050,000 to Infinity Investors Limited in exchange for the June 11 debentures, the August 19 debentures and the April 15 debentures; - e.Volve and Infinity Investors Limited amended the February 9 debentures: - to extend its maturity date to the earlier to occur of an event of default and June 30, 1999, - to provide that interest on the February 9 debentures would be payable at the same time as interest on the amended and restated debentures, and - to provide that the February 9 debentures would be convertible into shares of e.Volve common stock, at a conversion price of $2,778 per share, if the principal of the amended and restated debentures was not repaid in full on or prior to maturity date of the February 9 debenture; - e.Volve agreed to pay all outstanding interest on the amended and restated debentures and the February 9 debentures on April 30, 1999; - e.Volve issued warrants expiring on April 15, 2004 to purchase 170 shares of e.Volve common stock at a purchase price of $2,778 per share to each of Infinity Investors Limited and IEO Holdings Limited; and - amended the June 11 securities purchase agreement and the related security documents to provide the benefits of those agreements to Infinity Investors Limited with respect to the amended and restated debentures. Interest on the amended and restated debentures was 8% per annum, payable monthly, and e.Volve was required to make monthly installments of principal, beginning on April 30, 1999 in escalating amounts beginning at $50,000 on April 30, 1999 and increasing to $250,000 on December 31, 1999 and thereafter until repaid in full, plus any available cash flow of e.Volve. No payments of principal have been paid on the amended and restated debentures. Any amounts of principal not paid were to be due on June 30, 2000. The debenture was not converted. e.Volve decided to issue debt and equity as a result of arms-length negotiations with representatives of Infinity Investors and because other financing alternatives would have created an undue strain on its cash flow. On April 29, 1999, pursuant to the terms of a letter agreement between e.Volve, Infinity Investors Limited and IEO Holdings Limited, e.Volve issued debentures in the aggregate principal amount of $500,000 to Infinity Investors Limited and amended the June 11 securities purchase agreement and the related security documents to provide the benefits of those agreements to Infinity Investors Limited with respect to the April 29 debentures. IEO Holdings Limited participated in the April 29 debentures pursuant to the terms of the participation agreement. Interest on the April 29 debentures was payable monthly beginning on May 31, 1999 and e.Volve was required to make monthly installments of principal, beginning on May 31, 1999, in an amount equal to any available cash flow of e.Volve plus any amounts received by e.Volve or its subsidiaries with respect to any tax refunds, including an anticipated refund on previously paid Mexican value added taxes. No payments of principal have been paid on the April 29 debentures. Any amounts of principal not paid were to be due on August 27, 1999. The proceeds of this loan were used to fund working capital. e.Volve decided to issue debt and equity as a result of arms-length negotiations with representatives of Infinity Investors and because other financing alternatives would have created an undue strain on its cash flow. On April 30, 1999, pursuant to the terms of a letter agreement between e.Volve, Infinity Investors Limited and IEO Holdings Limited, e.Volve issued debentures in the aggregate principal amount of $100,000 to Infinity Investors Limited and amended the June 11 securities purchase agreement and the related security documents to provide the benefits of those agreements to Infinity Investors Limited with respect to the 55 56 April 30 debentures. IEO Holdings Limited participated in the April 30 debentures pursuant to the terms of the participation agreement. Interest on the April 30, debentures was payable monthly beginning on May 31, 1999 and e.Volve was required to make monthly installments of principal, beginning on May 31, 1999, in an amount equal to any available cash flow of e.Volve plus any amounts received by e.Volve or its subsidiaries with respect to any tax refunds, including an anticipated refund on previously paid Mexican value added taxes. No payments of principal have been paid on the April 30 debentures Any amounts of principal not paid were to be due on August 28, 1999. The proceeds of this loan were used to fund working capital. e.Volve decided to issue debt and equity as a result of arms-length negotiations with representatives of Infinity Investors and because other financing alternatives would have created an undue strain on its cash flow. On May 1, 1999, Infinity Investors Limited and IEO Holdings Limited executed an assignment agreement. Pursuant to the assignment agreement, IEO Holdings Limited acquired a 50% interest in the amended and restated debentures and the warrants. The warrants were subsequently canceled in connection with our reorganization. Because the principal amount of the February 9 debenture was not paid on or prior to June 30, 1999, the February 9 debenture became convertible into shares of e.Volve common stock at the option of the holders, at a conversion price of $2,778 per share, which was the deemed fair value of shares at the issue date. Infinity Investors Limited and IEO Holdings Limited have never taken action to enforce their rights under these debentures. On September 22, 1999, in connection with our reorganization, eVentures acquired the e.Volve common stock and e.Volve debentures held by Infinity Investors Limited in exchange for 5,682,807 shares of eVentures common stock and acquired IEO Holdings Limited, the holder of, among other assets, the 1,200 shares of e.Volve common stock and the remaining debentures, for 14,562,193 shares of eVentures common stock. Following our reorganization the debentures were restructured into a single debenture with a maturity date of December 31, 1999. On December 31, 1999, the debentures were restructured as an intercompany loan. Transactions with Mr. Rogers Prior to and during fiscal year 1999, e.Volve made advances to Mr. Rogers, the former majority shareholder of e.Volve. The advances were non-interest bearing and were due on demand. As of June 30, 1998 and 1999, advances due from Mr. Rogers totaled $60,920 and $0, respectively. During fiscal years 1998 and 1999, e.Volve shared office space, payroll and certain other administrative expenses with Orix Systems, which during those periods was controlled by Mr. Rogers, the former majority shareholder of e.Volve. During such periods, e.Volve paid Orix Systems $676,227 and $156,597, respectively, with respect to such expenses. On April 15, 1999, e.Volve entered into a consulting agreement with Mr. Rogers that replaced all previous employment agreements made between them. The term of the consulting agreement commenced on April 15, 1999 and was to terminate on June 11, 2000. Under the terms of the consulting agreement, e.Volve engaged Mr. Rogers to perform such general consulting and related duties and services associated with e.Volve's ongoing and future business operations as would be determined by the president or chief executive officer of e.Volve. In consideration for these duties and services, e.Volve was obligated to pay Mr. Rogers an honorarium of $140,000 for his services in each fiscal year of the term and an additional fee of $10,000 for each fiscal year of the term for performing his obligations under the covenant not to compete, the non- solicitation clause, and the confidentiality provision found in the consulting agreement. In addition to the honorarium and additional fee, Mr. Rogers was also entitled to earn a bonus payment which depended on the gross revenue generated by e.Volve and its subsidiaries on a consolidated basis. In addition to the compensation and benefits received by Kerry Rogers under the consulting agreement, Kerry Rogers was entitled to severance payments in the case that the consulting agreement was terminated without "cause." 56 57 On February 24, 2000, e.Volve terminated the consulting agreement pursuant to a letter agreement with Mr. Rogers. Under this letter agreement, e.Volve paid Kerry Rogers a lump sum of $105,000, and agreed to pay $31,000 to Nextlink, Inc. in settlement of a disputed amount among e.Volve, Mr. Rogers and Nextlink. Kerry Rogers is no longer a consultant of e.Volve and has no link to us other than as a shareholder of eVentures. TRANSACTIONS WITH AXISTEL Infinity Entities Investments On October 28, 1998, AxisTel issued notes to IEO Holdings Limited in an aggregate principal amount of $2.0 million pursuant to a note agreement. The note bears interest at 8% per annum, payable monthly. The notes were due on October 28, 2000. The notes were secured by all assets and equity interests of AxisTel. In connection with the note agreement, AxisTel issued one share of Class B common stock of AxisTel to IEO Holdings Limited at a purchase price of $1.00. Such share of Class B common stock carries voting rights entitling IEO Holdings Limited to vote 50% of all issued and outstanding shares of the common stock of AxisTel. In connection with the note agreement, AxisTel issued warrants to purchase 1,499 shares of Class B common stock, par value $.01 per share, of AxisTel at an exercise price of $2,333.33 per share to IEO Holdings Limited. The warrants were valued at approximately $274,000 using the Black-Scholes model and AxisTel recorded the amount as a debt discount, with a related credit to additional paid-in capital. The debt discount is being amortized over the life of the loan. We calculated the value of the warrants utilizing publicly available software capable of performing the Black-Scholes model. The Black-Scholes valuation model was developed for use in estimating the fair value of traded options and warrants, which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes valuation model requires the input of highly subjective assumptions including the expected stock price volatility. Because the AxisTel warrants have characteristics significantly different from those of traded options and warrants, and because changes in the subjective input assumptions can materially affect the fair value estimate, the Black-Scholes model does not necessarily provide a reliable single measure of the fair value of these warrants. Pursuant to the note agreement, AxisTel issued additional notes to IEO Holdings Limited in the amounts of $500,000 and $1.0 million on March 10, 1999 and April 19, 1999, respectively. As of December 31, 1998, AxisTel had not met, but was subsequently granted waivers with respect to, certain reporting requirements under such notes. On September 22, 1999, IEO Holdings Limited exercised its warrants to purchase 1,499 Class B shares of AxisTel. The notes were surrendered as payment of the purchase price for such shares. Such shares, in addition the share of Class B common stock owned by IEO Holdings Limited, represent 50% of the outstanding shares of AxisTel. IEO Holdings Limited exchanged its shares in AxisTel for 6,000,000 shares of eVentures. On August 20, 1999, Infinity Energing Holdings Subsidiary Limited issued a note in the aggregate principal amount of $750,000 to AxisTel. The note bears interest at the rate of 10% per annum, payable monthly. The note matured on December 30, 1999. AxisTel repaid this note with part of the proceeds of our private placement of preferred and common stock on September 28, 1999. Transactions with Other Stockholders AxisTel had notes payable to Samuel Litwin aggregating $10,000 at December 31, 1997 and Samuel Litwin and Mitchell Arthur aggregating $25,000 at December 31, 1998. Interest is calculated at 5% per annum. The outstanding principal balance and any unpaid interest was due and payable on October 28, 1999, and the notes were therefore classified as short term. Such notes were outstanding as of December 31, 1999 and were forgiven and cancelled effective January 1, 2000. 57 58 Revenues for AxisTel included revenues for the year ended December 31, 1998 from Debit Card Technologies, Inc. totaling approximately $264,000. Debit Card Technologies is wholly owned by an employee's spouse. All revenues for the period August 28, 1997 (inception) to December 31, 1997 were received from Debit Card. TRANSACTIONS WITH eVENTURES Transactions with Affiliates of Infinity Entities On September 27, 1999, we entered into a Management Services Agreement with HW Partners. Barrett Wissman, our President and Chief Executive Officer, is sole manager of HW Partners, which has investment discretion over Infinity Investors Limited, one of the Infinity Entities. Under the management services agreement, HW Partners has agreed to perform various management, operational and administrative services for eVentures. Whenever eVentures wishes to engage HW Partners to perform services with respect to a particular project, eVentures and HW Partners negotiate the terms and conditions of a work order with respect to that particular project, specifying, among other things, the management services to be rendered and the fee arrangements for that specific project. Each work order must be approved by a majority of the directors of eVentures who are not employees, directors or affiliates of HW Partners. As of March 7, 2000, the board of directors of eVentures had approved work orders in the aggregate monthly amount of approximately $19,500 for services to be performed by employees of HW Partners under the management services agreement. On September 22, 1999, we entered into a space sharing agreement with Unity Hunt, Inc., an affiliate of Clark Hunt. Under this agreement, Unity Hunt has agreed to allow us to use office space located at 1600 Elm Street, Suite 4000, Dallas, Texas. In addition to the use of these premises, we may request Unity Hunt to provide various services that are incidental to the use of the office space, such as accounting and/or administrative services. However, Unity Hunt does not provide services related to employees or employee costs. The fees paid to Unity Hunt pursuant to this agreement must be approved by a majority of the directors of eVentures who are not employees, directors or affiliates of Unity Hunt, and the fees do not, and will not, exceed $60,000 per year. Transactions with Employees During the six month period ended December 31, 1999 we granted options to Stuart Chasanoff, Jan Robert Horsfall and Stuart Subotnick that caused us to record deferred compensation of $3.3 million. The amount of the deferred compensation was based upon the intrinsic value of options granted to those directors and employees and which had an exercise price lower than the market price of the underlying stock on the date of the grant. The deferred compensation will be amortized over the vesting period of the related options and recorded as compensation expense in the statement of operations. Transactions with Portfolio Companies On March 3, 2000, we loaned $3.0 million to PhoneFree.com under a promissory note dated March 2, 2000. The promissory note is due on September 1, 2000 and bears interest at 7%. PhoneFree.com may repay this promissory note at any time, subject to our right to convert it into PhoneFree.com common stock. We can convert the promissory note into PhoneFree.com common stock: (i) if PhoneFree.com raises equity capital from other investors on or before August 31, 2000, in which case our conversion price will be equal to 95% of the per share subscription or conversion price in such equity capital raise; or (ii) if PhoneFree.com does not raise equity capital from other investors on or before August 31, 2000, we can convert the promissory note on or after September 1, 2000, at a per share conversion price that values all the common and preferred stock of PhoneFree.com at $50.0 million. 58 59 In connection with the loans made under the promissory note, we also received a four-year warrant to purchase 240,000 shares of PhoneFree.com at a price equal to 110% of the conversion price of the promissory note. The warrant may not be called by PhoneFree. If we include this warrant, but not the promissory note, we would beneficially own approximately 18% of the outstanding shares of common stock of PhoneFree.com. ITEM 8. LEGAL PROCEEDINGS In March 1998, e.Volve filed a lawsuit against Eltrax, Inc. in Clark County District Court for the State of Nevada for breach of contract and other related claims, alleging that Eltrax failed to deliver equipment and services pursuant to an agreement between the parties. Eltrax counterclaimed for breach of contract and damages of $381,802. The matter is currently before the United States District Court for the District of Nevada for pre-trial motions. In November 1999, IXC Communications, Inc. threatened to filed a lawsuit against e.Volve alleging a breach of contract and damages in the amount of $330,153.50 if payment or payment arrangements for said amount are not made within thirty (30) days. No lawsuit has yet been filed. In November 1998, representatives of Mexico's Federal Telecommunications Commission, commonly referred to as COFETEL, entered the premises of the Company's wholly owned subsidiary, e.Volve Technology Group de Mexico, and attempted to confiscate e.Volve Technology Group de Mexico's equipment pursuant to a visitation order under a verification administrative proceeding (procedimiento administrativo de verificacion). e.Volve Technology Group de Mexico filed a Federal constitutional court action known as juicio de amparo against COFETEL in a Mexican Federal district court (juzgado de distrito), principally alleging that the visitation order failed to comply with Mexican constitutional requirements and that the search and seizure were illegal under Mexican law. A juicio de amparo has two stages: the suspension of the acts of authority complained of and a constitutional review. The former stage has two phases: temporary restraining order (suspension provisional) and a final restraining order (suspension definitiva). The purpose of the constitutional review is to determine whether the acts of authority complained of are constitutional. Should the court determine that the acts of authority complained of are unconstitutional, a final judgment (sentencia final) is rendered, the principal effect of which is the granting of the protection of the Federal courts against such acts. On November 24, 1998, e.Volve Technology Group de Mexico obtained a temporary restraining order which preserved the status quo of the e.Volve Technology Group de Mexico equipment and suspended the administrative proceeding, therefore prohibiting COFETEL from re-entering e.Volve Technology Group de Mexico's premises. On December 21, 1998, e.Volve Technology Group de Mexico obtained a final restraining order (suspension definitiva). On May 24, 1999, a final judgment was rendered by the district court in favor of e.Volve Technology Group de Mexico, which judgment declared COFETEL's acts unconstitutional and, as a consequence, granted e.Volve Technology Group de Mexico the protection of the Federal courts. On July 7, 1999, COFETEL appealed, through a recurso de revision, to a higher court (tribunal colegiado de circuito) seeking the review of the district court judgment. It is anticipated that a ruling with respect to such appeal would be rendered sometime in late January 2000. As of February 29, 2000, no ruling had been issued. It may not be possible to ascertain the definitive outcome of this matter but e.Volve Technology Group de Mexico continues to defend itself in Mexican courts. The loss of e.Volve Technology Group de Mexico's equipment might have an adverse effect on the Company's financial condition. The cost of litigation, regardless of the outcome, may have an adverse effect on the Company's financial condition. In September 1999, Yurie Systems Inc. filed a lawsuit in the United States District Court of Maryland against e.Volve, claiming e.Volve owed Yurie Systems approximately $283,497 arising from a previous sale of telecommunications equipment from Yurie Systems to e.Volve in June and July of 1997. e.Volve denies the claim because it never agreed to accept the equipment. The equipment has failed field testing and did not meet either e.Volve's or Yurie Systems' standards. e.Volve filed a counterclaim for lost business opportunities and lost profits in an amount to be determined at trial. On February 3, 2000, we reached an agreement with Yurie Systems to settle this litigation in exchange for a payment by us of $140,000. On February 7, 2000, Star Telecommunications, Inc. filed a lawsuit against AxisTel International, Inc., a subsidiary of AxisTel. Star's complaint alleges that AxisTel International failed to pay for amounts allegedly 59 60 owed by AxisTel International to Star as a result of Star's acquisition of PT-1 Communications, and under an August 9, 1999 carrier services agreement between Star and AxisTel International. Star is alleging damages in the amount of $416,590.36, plus late fees and interests. AxisTel International has not responded to this complaint, but believes that it has valid defenses to a portion of Star's claims. AxisTel has established a reserve of approximately $330,000 against the claim. ITEM 9.MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the NASDAQ OTC Bulletin Board under the symbol EVNT. Prior to August 25, 1999, our common stock traded on the OTC Bulletin Board under the symbol ADII and our former name, Adina, Inc. Until recently, the market for the stock has been relatively inactive. The range of high and low bid quotations for the quarters since April, 1997 are taken from the "pink sheets" of the National Quotation Bureau. They reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.
BID PRICE ------------------ QUARTER ENDING LOW HIGH - -------------- -------- ------- December 31, 1999........................................... 12.00 32.75 September 30, 1999.......................................... 1.38 12.50 June 30, 1999(1)............................................ 1.50 1.50 April 30, 1999.............................................. 0.02734 0.625 January 31, 1999............................................ 0.02734 0.02734 October 31, 1998............................................ 0.02734 0.02734 July 31, 1998............................................... 0.02734 0.02734 April 30, 1998.............................................. 0.015625 0.25 January 31, 1998............................................ 0.015625 0.25 October 31, 1997............................................ 0.015625 0.25 July 31, 1997............................................... 0.015625 0.25
- --------------- (1) Represents the transition period between April 30, 1999 and June 30, 1999. The last sale price reported for the common stock on the OTCBB on March 7, 2000 was $32.50. As of March 7, 2000, there were approximately 890 shareholders of record of our common stock. DIVIDEND POLICY The holders of our common stock are entitled to receive dividends at such time and in such amounts as may be determined by our Board of Directors. However, we have not paid any dividends in the past and do not intend to pay cash dividends on our capital stock for the foreseeable future. Instead, we intend to retain all earnings for use in the operation and expansion of our business. ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES In the past three years, eVentures has issued and sold unregistered securities in the transactions described below. On May 15, 1997, we issued 42,450,000 shares of common stock to Daniel L. Wettreich, then the President of eVentures, in exchange for a majority of the outstanding common shares of Alexander Mark Investments (USA), Inc. in a transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act. Pursuant to a series of subsequent transactions, we no longer own the common shares of Alexander Mark Investments. 60 61 On September 22, 1999, in connection with our reorganization, we issued and sold: (i) an aggregate of 14,562,193 shares of common stock to IEO Investments, Limited and Infinity Emerging Subsidiary Limited as merger consideration for all of the equity interests in IEO Holdings Limited; (ii) an aggregate of 6,381,000 shares of common stock to certain shareholders of AxisTel in exchange for the outstanding shares of capital stock of AxisTel not owned by IEO Holdings Limited; and (iii) 5,682,807 shares of common stock to Infinity Investors Limited in exchange for shares of capital stock of e.Volve representing approximately one-third of the outstanding capital stock of e.Volve. The issuance of such shares was exempt from the registration requirements of the Securities Act pursuant to Rule 506 of Regulation D promulgated pursuant to the Securities Act. No general solicitations were made in connection with this transaction, and three accredited, eight non-accredited and three foreign investors participated in this transaction. All non-accredited investors were represented in connection with this transaction by purchaser representatives. On September 28, 1999, we issued and sold 1,000 shares of Series A Convertible Preferred stock to an accredited investor for $1.0 million in a transaction exempt from the registration requirements of the Securities Act pursuant to Rule 506 of Regulation D promulgated pursuant to the Securities Act. No general solicitations were made in connection with this transaction. On September 28, 1999, we issued and sold an aggregate of 2,470,000 shares of common stock to 25 investors for $4.9 million in a transaction exempt from the registration requirements of the Securities Act pursuant to Rule 506 of Regulation D promulgated pursuant to the Securities Act. No general solicitations were made in connection with this transaction, and only accredited investors participated in this transaction. On October 14, 1999, we issued 239,229 shares of our common stock to Avantel S.A. to settle accounts payable due to Avantel in the amount of $3.2 million in a transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act. These shares were issued for consideration of $13.125 per share, which was 75% of the closing price of our common stock on the date of issuance, and which represented the fair market value of our common stock. The price per share was determined following negotiations with Avantel. On October 19, 1999, in connection with our reorganization, we issued and sold an aggregate of 5,831,253 shares to 27 shareholders of e.Volve in exchange for the outstanding shares of capital stock of e.Volve not owned by eVentures in a transaction exempt from the registration requirements of the Securities Act pursuant to Rule 506 of Regulation D under the Securities Act. No general solicitations were made in connection with this transaction, and 22 accredited and 5 non-accredited investors participated in this transaction. All non-accredited investors were represented in connection with this transaction by purchaser representatives. On November 19, 1999, we issued and sold 2,500 shares of our Series B preferred stock to an accredited investor for $2.5 million in a transaction exempt from the registration requirements of the Securities Act pursuant to Rule 506 of Regulation D under the Securities Act. No general solicitations were made in connection with this transaction. On November 26, 1999, we issued and sold 3,725 shares of our Series B preferred stock to an accredited investor for $3.7 million in a transaction exempt from the registration requirements of the Securities Act pursuant to Rule 506 of Regulation D under the Securities Act. No general solicitations were made in connection with this transaction. On November 30, 1999, we issued 137,500 shares of our common stock to Corpovision, S.A. to settle a note payable due to Corpovision in the amount of $1.1 million in a transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act. These shares were issued for consideration of $8.00 per share, which was below the market price of our common stock on the date of 61 62 issuance. We took a charge of $1.1 million during our second fiscal quarter in connection with this transaction. The price per share was determined following negotiations with Corpovision. On December 15, 1999, we issued and sold 775 shares of our Series B preferred stock to an aggregate of 14 accredited investors for $775,000 in a transaction exempt from the registration requirements of the Securities Act pursuant to Rule 506 of Regulation D promulgated pursuant to the Securities Act. No general solicitations were made in connection with this transaction. On December 21, 1999, we issued 200,000 shares of our common stock upon conversion of 1,000 shares of our Series A preferred stock in a transaction exempt from the registration requirements of the Securities Act pursuant to Section 3(a)(9) of the Securities Act. In a series of transactions closed between January 6 and February 10, 2000, we issued 15,570 shares of our Series C Convertible Preferred Stock, par value $0.00002 per share, to eight accredited investors, at a price of $1,000 per share in a transaction exempt from the registration requirements of the Securities Act pursuant to Rule 506 of Regulation D under the Securities Act. No general solicitations were made in connection with this transaction. On January 31, 2000, we issued and sold an aggregate of 27,860 shares to two shareholders of Fonbox in exchange for 700,000 shares of Fonbox common stock in a transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act. ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED AUTHORIZED CAPITAL STOCK The Certificate of Incorporation authorizes 80,000,000 shares of capital stock consisting of: - 75,000,000 shares of common stock, $0.00002 par value; and - 5,000,000 shares of preferred stock, $0.00002 par value, of which: - 1,200 shares have been designated as Series A Convertible Preferred Stock; - 25,000 shares have been designated as Series B Convertible Preferred Stock; and - 30,000 shares have been designated Series C Convertible Preferred Stock. Common Stock General. As of March 7, 2000, there were 45,799,863 shares of common stock outstanding. An additional 507,246 and 869,832 shares of common stock are issuable upon conversion of our outstanding Series B Convertible Preferred Stock and Series C Convertible Preferred Stock, respectively. Voting Rights. The holders of common stock are entitled to one vote per share. Stockholders are not entitled to vote cumulatively for the election of directors, and no other class of outstanding capital stock is entitled to vote in any election of directors. The Infinity Entities hold 61.4% of our common stock and have effective control of us through the voting power of their shares of our outstanding capital stock. Therefore, the Infinity Entities have the ability to elect all of our directors and to effect or prevent certain corporate transactions which require majority approval of the common stock, including mergers and other business combinations. Dividends and Liquidation. Holders of common stock have an equal right to receive dividends when and if declared by the board of directors out of legally available funds after payment of all preferential dividends on our preferred stock. In the event of a liquidation, dissolution or winding up, holders of the shares of common stock are entitled to share equally, share-for-share, in the assets available for distribution after payment of all creditors and the liquidation preferences of our preferred stock. Other Provisions. Holders of common stock have no preemptive rights to subscribe to any additional securities of any class which we may issue and there are no redemption provisions or sinking fund provisions 62 63 applicable to the common stock, nor is the common stock subject to calls or assessments by us. The rights, preferences, and privileges of the holders of common stock are subject to and may be adversely affected by, the rights of the holders of any series of preferred stock. Preferred Stock General. The Certificate of Incorporation provides that eVentures may issue up to 5,000,000 shares of preferred stock in one or more series as may be determined by the board of directors of eVentures who may establish the number of shares to be included in each such series, fix the designation, powers, preferences and relative rights of the shares of each such series and any qualifications, limitations, or restrictions thereof, and increase or decrease the number of shares of any such series without any further vote or action by the stockholders. The board of directors may authorize, without stockholder approval, the issuance of preferred stock with voting and conversion rights that could adversely affect the voting power and other rights of holders of common stock. Preferred stock could be issued quickly with terms designated to delay or prevent a change in control of eVentures or to make the removal of management more difficult. This could have the effect of decreasing the market price of the common stock. Series A Convertible Preferred Stock. The holders of our Series A Convertible Preferred Stock are not entitled to vote, except as provided by law. Holders of our Series A Convertible Preferred Stock are not entitled to receive any dividends. In the event that we liquidate, dissolve or wind up, holders of the shares of our Series A Convertible Preferred Stock are entitled to receive $1,000 per share out of the assets available for distribution to our stockholders. The shares of our Series A Convertible Preferred Stock are redeemable at any time at a redemption price equal to $1,000 per share. Each share of our Series A Convertible Preferred Stock is convertible into 200 shares of our common stock by us at any time that the price of our common stock has exceeded $10 per share for five consecutive trading days. In addition, each outstanding share of our Series A Convertible Preferred Stock will mandatorily convert into 200 shares of our common stock on June 30, 2001 and is convertible into 200 shares of our common stock by its holder at any time prior to the date on which such share is redeemed or converted into common stock by us or according to its terms. None of the shares of Series A Convertible Preferred Stock that are redeemed or converted may be reissued. Holders of our Series A Convertible Preferred Stock have no preemptive rights to subscribe to any additional securities of any class which we may issue and there are no redemption provisions or sinking fund provisions applicable to our Series A Convertible Preferred Stock, nor is our Series A Convertible Preferred Stock subject to calls or assessments by us. The rights, preferences, and privileges of the holders of our Series A Convertible Preferred Stock are subject to and may be adversely affected by, the rights of the holders of other series of preferred stock that we issue, including, our Series B Convertible Preferred Stock and our Series C Convertible Preferred Stock. We issued 1,000 shares of our Series A Convertible Preferred Stock on September 28, 1999 all of which were converted into shares of our common stock on December 21, 1999. Series B Convertible Preferred Stock. The holders of our Series B Convertible Preferred Stock are not entitled to vote, except as provided by law. Holders of our Series B Convertible Preferred Stock are not entitled to receive any dividends. In the event that we liquidate, dissolve or wind up, holders of the shares of our Series B Convertible Preferred Stock are entitled to receive $1,000 per share out of the assets available for distribution to our stockholders pari passu with the holders of any outstanding shares of Series A Convertible Preferred Stock. The shares of our Series B Convertible Preferred Stock are redeemable at any time at a redemption price equal to $1,000 per share. Each share of our Series B Convertible Preferred Stock is convertible into 72.46377 shares of our common stock by us at any time that the trading volume of our common stock has equaled or exceeded 700,000 shares per month for three consecutive calendar months and the price of our common stock has equaled or exceeded $34.50 for five consecutive trading days. In addition, each outstanding share of our Series B Convertible Preferred Stock will mandatorily convert into 72.46377 shares of our common stock upon completion by us of an underwritten offering with proceeds of no less than $50 million at a price per share of no less than $27.60 and the trading volume of our common stock has equaled or exceeded 63 64 700,000 shares per month for three consecutive calendar months. Each outstanding share of our Series B Convertible Preferred Stock is also convertible into 72.46377 shares of our common stock by its holder at any time prior to the date on which such share is redeemed or converted into common stock by us or according to its terms. None of the shares of Series B Convertible Preferred Stock that are redeemed or converted may be reissued. Holders of our Series B Convertible Preferred Stock have no preemptive rights to subscribe to any additional securities of any class which we may issue and there are no redemption provisions or sinking fund provisions applicable to our Series B Convertible Preferred Stock, nor is our Series B Convertible Preferred Stock subject to calls or assessments by us. The rights, preferences, and privileges of the holders of our Series B Convertible Preferred Stock are subject to and may be adversely affected by, the rights of the holders of other series of preferred stock that we issue, including, our Series C Convertible Preferred Stock. We issued a total of 7,000 shares of our Series B Convertible Preferred Stock in a series of private placements on November 19, 1999, November 26, 1999 and December 15, 1999, all of which remain outstanding as of February 29, 1999. Series C Convertible Preferred Stock. The holders of our Series C Convertible Preferred Stock are not entitled to vote, except as provided by law. Holders of our Series C Convertible Preferred Stock are not entitled to receive any dividends. In the event of that we liquidate, dissolve or wind up, holders of the shares of our Series C Convertible Preferred Stock are entitled to receive $1,000 per share out of the assets available for distribution to our stockholders pari passu with the holders of any outstanding shares of Series B Convertible Preferred Stock. The shares of our Series C Convertible Preferred Stock are redeemable at any time at a redemption price equal to $1,000 per share. Each share of our Series C Convertible Preferred Stock is convertible into 55.865922 shares of our common stock by us at any time that the trading volume of our common stock has equaled or exceeded 700,000 shares per month for three consecutive calendar months and the price of our common stock has equaled or exceeded $44.75 for 10 consecutive trading days. In addition, each outstanding share of our Series C Convertible Preferred Stock will mandatorily convert into 55.865922 shares of our common stock upon completion by us of an underwritten offering with proceeds of no less than $50 million at a price per share of no less than $35.80 and the trading volume of our common stock has equaled or exceeded 700,000 shares per month for three consecutive calendar months. Each outstanding share of our Series B Convertible Preferred Stock is also convertible into 55.865922 shares of our common stock by its holder at any time prior to the date on which such share is redeemed or converted into common stock by us or according to its terms. None of the shares of Series C Convertible Preferred Stock that are redeemed or converted may be reissued. Holders of our Series C Convertible Preferred Stock have no preemptive rights to subscribe to any additional securities of any class which we may issue and there are no redemption provisions or sinking fund provisions applicable to our Series C Convertible Preferred Stock, nor is our Series C Convertible Preferred Stock subject to calls or assessments by us. The rights, preferences, and privileges of the holders of our Series C Convertible Preferred Stock are subject to and may be adversely affected by, the rights of the holders of other series of preferred stock that we issue. We issued 15,750 shares of our Series C Convertible Preferred Stock in a series of private placements between January 6 and February 10, 2000, all of which remain outstanding as of March 7, 2000. FUTURE ISSUANCES OF PREFERRED STOCK We believe that the ability of the board to issue one or more series of preferred stock will provide us with flexibility in structuring possible future financings and acquisitions, and in meeting other corporate needs that might arise. The authorized shares of preferred stock, as well as shares of common stock, will be available for issuance without further action by our stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. Although the board has no intention at the present time of doing so, it could issue a series of preferred stock that could, depending on the terms of such series, impede the completion of a merger, tender offer or 64 65 other takeover attempt. The board will make any determination to issue such shares based on its judgment as to our best interests and the best interests of our stockholders. The board could issue preferred stock having terms that could discourage an acquisition attempt through which an acquirer may be able to change the composition of the board, including a tender offer or other transaction that some, or a majority, of our stockholders might believe to be in their best interests or in which stockholders might receive a premium for their stock over the then current market price. REGISTRATION RIGHTS General As of March 7, 2000, the holders of approximately 44.1 million shares of common stock will have the right, subject to certain conditions, to require us to register their shares with the Securities and Exchange Commission so that those shares may be publicly resold or to include their shares in certain registration statements we file. In addition, the holders of the 7,000 shares of Series B Preferred Convertible Stock and the 15,750 shares of Series C Preferred Convertible Stock will have the right, subject to certain conditions, to require us to include their shares in certain registration statements we file. We granted such rights under the terms of the agreements outlined below to the investors that participated in the transactions set forth below: - Registration Rights Agreement, dated as of September 22, 1999, to the stockholders of AxisTel and e.Volve who participated in and acquired shares of common stock of eVentures Group under the Agreement and Plan of Reorganization, dated September 22, 1999. - Addendum, dated October 19, 1999, to the Registration Rights Agreement dated September 22, 1999, to investors that participated in the first private placement of our common stock and to the stockholders of e.Volve who participated in and acquired shares of our common stock under the Plan of Exchange, dated October 19, 1999. - Registration Rights Agreement, dated November 24, 1999, to investors that participated in the private placement of our Series B Convertible Preferred Stock. - Letter Agreement, dated December 15, 1999, to investors that acquired shares of our common stock from various of our stockholders. - Registration Rights Agreement, dated December 31, 1999, to investors that participated in our private placement of Series C Convertible Preferred Stock. Common Stock Under the Registration Rights Agreement, dated September 22, 1999, the Addendum, dated October 19, 1999, to the Registration Rights Agreement dated September 22, 1999, and the Letter Agreement, dated December 15, 1999, the signatories to each of these agreements received the following rights with respect to the shares of our common stock held by them. Right to Demand Registration. At any time three months after the date of the Registration Rights Agreement, these stockholders, subject to the thresholds described below, can request that we file a registration statement under the Securities Act of 1933, as amended, so they can publicly sell their shares. However, we have the right to limit the number of shares to be included in that registration statement if the managing underwriter of any such public offering believes the number of securities to be included in such registration exceeds the number which can be sold in an orderly manner within a price range acceptable to the majority of the holders requesting registration. Who May Make a Demand. Holders owning at least thirty-five percent of the aggregate number of registrable shares may request a registration of their shares in an offering having an anticipated net aggregate price of at least $5 million. In addition, holders owning at least fifty percent of the aggregate number of registrable shares may request a registration of their shares in an offering having an anticipated net aggregate price that is less than $5 million. However, if the reasonably anticipated net aggregate price of the offering is at 65 66 least $1.5 million, holders of at least 35% of the aggregate number of registrable shares can require that we file a registration statement on a Form S-3. Number of Times Holders Can Make Demands. We can be required to effect up to three registration statements. In addition, we can be required to effect up to two registration statements on Form S-3. Postponement. We are not obligated to effect any registration within ninety days after the effective date of a previous registration statement in which the holders of the registrable shares participated or were given an opportunity to participate and declined to do so. In addition, we can postpone the filing or the effectiveness of a registration statement for up to 90 days on any two occasions in a twelve-month period if our board of directors determines that the filing might have an adverse effect on any of our proposals or plans, such as a plan or proposal to engage in any acquisition, merger, consolidation, tender offer, or similar transaction, or if any other material, nonpublic development or transaction is pending and the filing of such registration would require disclosure of such development or transaction at a time when we would not otherwise have a duty to disclose. Piggyback Registration Rights. If we register any securities for public sale (other than pursuant to a demand registration, a registration solely in connection with an employee benefit or stock ownership plan on a Form S-8, a registration solely in connection with an acquisition consummated in a manner which would permit registration of such securities to the public on Form S-4, or a "shelf" or similar registration for use solely in connection with future acquisitions), any holder of shares of our common stock with the registration rights described above will have the right to include all or any portion of their shares in the registration statement. However, we have the right to limit the number of shares to be included in that registration statement if the managing underwriter of any such public offering believes the number of securities to be included in such registration exceeds the number which can be sold in an orderly manner within a price range acceptable, in the case of a primary registration, to us, or in the case of a secondary registration, to the majority of the holders requesting registration. Expenses of Registration. We will pay for the expenses relating to any demand registration, any and all registrations on Form S-3, and any and all piggyback registrations. Expiration of Registration Rights. The registration rights described above will expire on September 22, 2003, the fourth anniversary of the date of the Registration Rights Agreement. Preferred Stock Under the Registration Rights Agreements, dated November 24, 1999 and December 31, 1999, the signatories to each of these agreements received the following rights with respect to the shares of our Series B or our Series C Convertible Preferred Stock held by them. Piggyback Registration Rights. If we register any securities for public sale (other than pursuant to a demand registration, a registration solely in connection with an employee benefit or stock ownership plan on a Form S-8, a registration solely in connection with an acquisition consummated in a manner which would permit registration of such securities to the public on Form S-4, or a "shelf" or similar registration for use solely in connection with future acquisitions), any holder of shares of our Series B or our Series C Convertible Preferred Stock who are signatories to the registration rights agreements described directly above will have the right to include all or any portion of their shares in the registration statement. However, we have the right to limit the number of shares to be included in that registration statement if the managing underwriter of any such public offering believes the number of securities to be included in such registration exceeds the number which can be sold in an orderly manner within a price range acceptable, in the case of a primary registration, to us, or in the case of a secondary registration, to the majority of the holders requesting registration. Expenses of Registration. We will pay for the expenses relating to any and all piggyback registrations. CERTAIN ANTI-TAKEOVER EFFECTS Certain provisions of the certificate of incorporation and bylaws, summarized in the following paragraphs, may be considered to have an anti-takeover effect and may delay, deter or prevent a tender offer, proxy contest 66 67 or other takeover attempt that a stockholder might consider to be in such stockholder's best interest, including such an attempt that might result in payment of a premium over the market price for shares held by stockholders. The Amended and Restated Bylaws provide that a special meeting of stockholders may be called by the Chief Executive Officer or the Board of Directors. In addition, a special meeting of stockholders must be called by the Chief Executive Officer or Secretary at the written request of the stockholders owning ten percent (10%) of our capital stock issued and outstanding and entitled to vote. Section 203 of the Delaware General Corporation Law provides that, subject to certain exceptions specified therein, an "interested stockholder" of a Delaware corporation shall not engage in any business combinations, including mergers or consolidations or acquisitions of additional shares of the corporation, with the corporation for a three-year period following the date that such stockholder becomes an interested stockholder unless: prior to such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; upon consummation of the transaction that resulted in the stockholder becoming an "interested stockholder," the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding certain shares); or on or subsequent to such date, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66.67% of the outstanding voting stock that is not owned by the interested stockholder. Except as otherwise specified in Section 203 of the Delaware General Corporation Law, an interested stockholder is defined to include (x) any person that owns (or, within the prior three years, did own) 15% or more of the outstanding voting stock of the corporation, or is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within three years immediately prior to the date of determination and (y) the affiliates and associates of any such person. Under certain circumstances, Section 203 of the Delaware General Corporation Law makes it more difficult for a person who would be an interested stockholder to effect various business combinations with a corporation for a three-year period. We have not elected to be exempt from the restrictions imposed under Section 203 of the Delaware General Corporation Law. The provisions of Section 203 of the Delaware General Corporation Law may encourage persons interested in acquiring us to negotiate in advance with the board, since the stockholder approval requirement would be avoided if a majority of the directors then in office approves either the business combination or the transaction which results in any such person becoming an interested stockholder. Such provisions also may have the effect of preventing changes in our management. It is possible that such provisions could make it more difficult to accomplish transactions that our stockholders may otherwise deem to be in their best interests. TRANSFER AGENT AND REGISTRAR The Stock Transfer Company of America, Inc., an affiliate of Daniel L. Wettreich, is the transfer agent and registrar for our common stock. The address of The Stock Transfer Company of America, Inc. is 6959 Arapaho Road, Suite 122, Dallas, Texas 75248. On February 15, 2000, we notified our stock transfer agent and registrar that its services were being terminated as of the close of business on March 31, 2000. Following that date, our stock transfer agent and registrar will be American Stock Transfer & Trust Company. The address of American Stock Transfer & Trust Company is 40 Wall Street, New York, New York 10005. 67 68 ITEM 12. LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Certificate of Incorporation contains a provision that is designed to limit directors' liability to the extent permitted by the Delaware General Corporation Law. Specifically, directors will not be held liable to eVentures or its stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability as a result of: any breach of the duty of loyalty to eVentures or eVentures stockholders; actions or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; payment of an improper dividend or improper repurchase of eVentures stock under Section 174 of the Delaware General Corporation Law; or actions or omissions pursuant to which the director received an improper personal benefit. Section 102 of the Delaware General Corporation Law, as amended, allows a corporation to eliminate the personal liability of directors of a corporation to the corporation or its stockholders for monetary damages for a breach of fiduciary duty as a director, except where the director breached his duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware corporate law or obtained an improper personal benefit. The principal effect of the limitation of liability provision is that a stockholder is unable to prosecute an action for monetary damages against a director of eVentures unless the stockholder can demonstrate one of the specified bases for liability. The provision, however, does not eliminate or limit director liability arising in connection with causes of action brought under the federal securities laws. The Certificate of Incorporation does not eliminate a director's duty of care. The inclusion of this provision in the Certificate of Incorporation may discourage or deter stockholders or management from bringing a lawsuit against directors for a breach of their fiduciary duties, even though such an action, if successful, might otherwise have benefited eVentures and its stockholders. This provision should not affect the availability of equitable remedies such as injunction or rescission based upon a director's breach of the duty of care. Also, Section 174 of the Delaware General Corporation Law provides, among other things, that a director, who willfully or negligently approves of an unlawful payment of dividends or an unlawful stock purchase or redemption, may be held liable for such actions. A director who was either absent when the unlawful actions were approved or dissented at the time, may avoid liability by causing his or her dissent to such actions be entered in the books containing the minutes of the meetings of the board of directors at the time such action occurred or immediately after such absent director receives notice of the unlawful acts. In addition, the Certificate of Incorporation and the Amended and Restated By-Laws also provide that eVentures will indemnify its directors and officers, and may indemnify any of its employees and agents, to the fullest extent permitted by Delaware law. eVentures is generally required to indemnify its directors and officers for all judgments, fines, penalties, settlements, legal fees and other expenses incurred in connection with pending, threatened or completed legal proceedings because of the director's or officer's position with eVentures or another entity that the director or officer serves at eVentures's request, subject to certain conditions, and to advance funds to its directors and officers to enable them to defend against such proceedings. Section 145 of the Delaware General Corporation Law after payment of all preferential dividends on our preferred stock provides, among other things, that the Company may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than an action by or in the right of the Company) by reason of the fact that the person is or was a director, officer, agent or employee of the Company or is or was serving at the Company's request as a director, officer, agent or employee of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgment, fines and amounts paid in settlement actually and reasonably 68 69 incurred by the person in connection with such action, suit or proceeding. The power to indemnify applies (a) if such person is successful on the merits or otherwise in defense of any action, suit or proceeding, or (b) if such person acted in good faith and in a manner he reasonably believed to be in the best interest, or not opposed to the best interest, of the Company, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The power to indemnify applies to actions brought by or in the right of the Company as well but only to the extent of defense expenses (including attorneys' fees but excluding amounts paid in settlement) actually and reasonably incurred and not to any satisfaction of judgment or settlement of the claim itself, and with the further limitation that in such actions no indemnification shall be made in the event of any adjudication of negligence or misconduct in the performance of his duties of the Company, unless the court believes that in light of all the circumstances indemnification should apply. At present, there is no pending or threatened litigation or proceeding involving any director or officer, employee or agent of eVentures where such indemnification will be required or permitted. ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See pages F-1 to F-50 and P-1 to P-5 of this Form 10. ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements. The following financial statements are Exhibits to Amendment No. 1 to the Form 10: (i) Consolidated Financial Statements of eVentures Group, Inc. as of June 30, 1998 and 1999 and as of December 31, 1999 and for the years ended June 30, 1997, 1998 and 1999 and for the six months ended December 31, 1998 and 1999; (ii) Audited Financial Statements of AxisTel Communications, Inc. as of December 31, 1997 and 1998 and for the period from August 28, 1997 (inception) to December 31, 1997 and the year ended December 31, 1998, and unaudited Financial Statements as of June 30, 1999 and for the six months ended June 30, 1998 and 1999; (iii) Audited Financial Statements of Internet Global Services, Inc. as of June 30, 1998 and 1999 and for the fiscal years then ended, and unaudited Financial Statements as of December 31, 1998 and 1999 and for the six months ended December 31, 1998 and 1999; (iv) Unaudited Pro Forma Consolidated Balance Sheet of eVentures Group, Inc. as of December 31, 1999; and (v) Unaudited Pro Forma Consolidated Statements of Operations of eVentures Group, Inc. for the year ended June 30, 1999 and for the six months ended December 31, 1999. 69 70 (b) Exhibits 2.1 -- Agreement and Plan of Reorganization, dated as of September 22, 1999, among the Registrant, eVentures Holdings, L.L.C., IEO Holdings Limited, Infinity Investors Limited, Mick Y. Wettreich, the purchasers listed on Schedule 1-A thereto and the Contributing Persons listed on Schedule 1-B thereto (incorporated by reference to Exhibit 2.1 to the report filed on Form 8-K on October 7, 1999). 2.2 -- Agreement and Plan of Exchange, dated as of October 19, 1999, among eVentures Group, Inc., and the persons set forth on Schedule 1 thereto (incorporated by reference to Exhibit 2.1 to the report filed on Form 8-K on November 3, 1999). 2.3 -- Share Exchange Agreement, dated as of February 22, 2000, among eVentures Group, Inc., IGS Acquisition Corporation and the stockholders of Internet Global Services, Inc. parties thereto.** 3.1 -- Certificate of Incorporation of eVentures, dated November 19, 1987.* 3.2 -- Certificate of Amendment, dated April 27, 1994, to the Certificate of Incorporation.* 3.3 -- Certificate of Amendment, dated as of October 20, 1997, to the Certificate of Incorporation.* 3.4 -- Certificate of Renewal dated August 19, 1999 for eVentures Group, Inc.* 3.5 -- Certificate of Amendment, dated September 17, 1999, to the Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to the report filed on Form 8-K on October 7, 1999). 3.6 -- Amended and Restated Certificate of Designation of Rights, Preferences and Privileges of Series A Convertible Preferred Stock, dated October 14, 1999.* 3.7 -- Certificate of Designation of Rights, Preferences and Privileges of Series B Convertible Preferred Stock, dated as of November 10, 1999.* 3.8 -- Certificate of Amendment, dated as of December 15, 1999, to the Certificate of Designation of Rights, Preferences and Privileges of Series B Convertible Preferred Stock.* 3.9 -- Certificate of Designation, Preferences and Rights of Series C Convertible Preferred Stock, dated as of February 22, 2000.** 3.10 -- Amended and Restated By-Laws of eVentures Group, Inc. (incorporated by reference to Exhibit 3.1 to the report filed on Form 8-K on October 7, 1999). 4.1 -- Registration Rights Agreement, dated as of September 22, 1999, among the Registrant and the persons and entities set forth on Schedule 1 thereto (the "First Registration Rights Agreement") (incorporated by reference to Exhibit 4.1 to the report filed on Form 8-K on October 7, 1999). 4.2 -- Addendum to the First Registration Rights Agreement, dated as of October 19, 1999, among eVentures Group, Inc., the persons set forth on Schedule 1 thereto and the other parties to the First Registration Rights Agreement.** 4.3 -- Registration Rights Agreement, dated as of November 24, 1999, between eVentures Group, Inc. and the person and entities signatories thereto, as holders of shares of Series B Convertible Preferred Stock.** 4.4 -- Letter Agreement, dated December 15, 1999, to the parties to the Registration Rights Agreement dated as of September 27, 1999.** 4.5 -- Registration Rights Agreement, dated as of December 31, 1999, between eVentures Group, Inc. and the persons and entities signatories thereto, as holders of shares of Series C Convertible Preferred Stock.**
70 71 10.1 -- Securities Purchase Agreement, dated as of June 11, 1998, among Orix Global Communications, Inc., certain of its shareholders and the purchasers named thereunder and Exhibits thereto.** 10.2 -- Debenture, dated as of June 11, 1998.* 10.3 -- Letter Agreement, dated as of August 19, 1998 between Orix Global Communications and Infinity Investors Limited.* 10.4 -- Debenture, dated as of August 19, 1998.* 10.5 -- Letter Agreement, dated as of February 9, 1999 between Orix Global Communications and Infinity Investors Limited.* 10.6 -- Debenture, dated as of February 9, 1999.* 10.7 -- Letter Agreement, dated as of April 15, 1999 among Orix Global Communications, Inc., Infinity Investors Limited and the Founders (as defined therein).* 10.8 -- Amended and Restated Debenture, dated as of April 15, 1999.* 10.9 -- Letter Agreement, dated as of April 29, 1999 between Orix Global Communications and Infinity Investors Limited.* 10.10 -- Debenture, dated as of April 29, 1999.* 10.11 -- Letter Agreement, dated as of April 30, 1999, between Orix Global Communications, Inc. and Infinity Investors Limited.* 10.12 -- Debenture, dated as of April 30, 1999.* 10.13 -- Note, dated as of August 20, 1999.** 10.14 -- Promissory Note, dated as of March 2, 2000.** 10.15 -- Warrant Agreement, dated as of March 2, 2000, between i2v2.com Inc. and eVentures Group, Inc.** 10.16 -- Lease Agreement, dated December, 1998, between AxisTel International, Inc. and Evergreen America Corporation.* 10.17 -- Lease Agreement, dated November 24, 1997, between Orix Global Communications, Inc. and Trust F/3959 of Banco del Atlantico.* 10.18 -- Assignment Agreement, dated April 1, 1998, among Orix Global Communications, Inc., Latin Gate de Mexico S.A. de C.V. and Trust F/3959 of Banco del Atlantico.* 10.19 -- Office Lease, dated January 23, 1998, between Orix Global Communications, Inc. and 2526 Investment Co.* 10.20 -- Sublease Agreement, dated January 31, 2000, between Totaltel Florida, Inc. and AxisTel Global Network Services, Inc.** 10.21 -- Guaranty Agreement by eVentures Group, Inc. as inducement to Telecommunications Finance Group to provide a lease to AxisTel Communications, Inc., dated as of October 13, 1999.* 10.22 -- Management Services Agreement, dated as of September 22, 1999, between eVentures Group, Inc. and HW Partners, L.P.* 10.23 -- Amended and Restated 1999 Omnibus Securities Plan, dated as of September 22, 1999.** 10.24 -- Employment Agreement, dated as of September 22, 1999, between eVentures Group, Inc. and Stuart J. Chasanoff.*
71 72 10.25 -- Amended and Restated Employment and Noncompetition Agreement, dated as of September 21, 1999, between AxisTel Communications, Inc. and Samuel L. Litwin.* 10.26 -- Amended and Restated Employment and Noncompetition Agreement, dated as of September 22, 1999, between AxisTel Communications, Inc. and Mitchell Arthur.* 21.1 -- Subsidiaries of eVentures Group, Inc.** 27.1 -- Financial Data Schedule**
- --------------- * Previously filed as an exhibit to the Registration Statement on Form 10 filed by the registrant on December 20, 1999. ** Previously filed as an exhibit to Amendment No. 1 to the Registration Statement on Form 10 filed by the registrant on March 8, 2000. 72 73 Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to its registration statement on Form 10/A to be signed on its behalf by the undersigned, thereunto duly authorized. eVentures Group, Inc. By /s/ JOHN STEVENS ROBLING, JR. ---------------------------------- Name: John Stevens Robling, Jr. Title: Chief Financial Officer July 11, 2000 73 74 eVENTURES GROUP, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Certified Public Accountants.......... F-2 Consolidated Balance Sheets as of June 30, 1998 and 1999 and December 31, 1999 (Unaudited)............................. F-3 Consolidated Statements of Operations for the years ended June 30, 1997, 1998 and 1999 and for the six months ended December 31, 1998 and 1999 (Unaudited).................... F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended June 30, 1997, 1998 and 1999 and for the six months ended December 31, 1998 and 1999 (Unaudited)............................................... F-5 Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1998 and 1999 and for the six months ended December 31, 1998 and 1999 (Unaudited).................... F-6 Notes to Consolidated Financial Statements.................. F-8 Report of Independent Certified Public Accountants (AxisTel)................................................. F-27 AxisTel Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999 (Unaudited)................................. F-28 AxisTel Statements of Operations for the period from August 28, 1997 (inception) to December 31, 1997 ("the 1997 Period"), the year ended December 31, 1998 and for the six months ended June 30, 1998 and 1999 (Unaudited)........... F-29 AxisTel Statements of Stockholders' equity (deficit) for the 1997 Period, the year ended December 31, 1998 and the six months ended June 30, 1999 (Unaudited).................... F-30 AxisTel Statements of Cash Flows for the 1997 Period, the year ended December 31, 1998 and for the six months ended June 30, 1998 and 1999 (Unaudited)........................ F-31 AxisTel Notes to Financial Statements....................... F-34 Report of Independent Certified Public Accountants (iGlobal)................................................. F-37 iGlobal Balance Sheets as of June 30, 1998 and 1999 and December 31, 1999 (Unaudited)............................. F-38 iGlobal Statements of Loss for the years ended June 30, 1998 and 1999 and for the six months ended December 31, 1998 and 1999 (Unaudited)...................................... F-39 iGlobal Statements of Stockholders' equity (deficit) for the years ended June 30, 1998 and 1999 and for the six months ended December 31, 1999 (Unaudited)....................... F-40 iGlobal Statements of Cash Flows for the years ended June 30, 1998 and 1999 and for the six months ended December 31, 1998 and 1999 (Unaudited)............................. F-41 iGlobal Notes to Financial Statements....................... F-42 Unaudited Pro Forma Consolidated Balance Sheet.............. P-1 Unaudited Pro Forma Consolidated Statements of Operations... P-3
F-1 75 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Stockholders eVentures Group, Inc. Jersey City, NJ We have audited the accompanying balance sheets of eVentures Group, Inc. (the "Company"), see Note 1, as of June 30, 1999 and 1998 and the related statements of operations, shareholders' equity (deficit) and cash flows for each of the three years in the period ended June 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in all material respects, the financial position of the Company at June 30, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1999, in conformity with generally accepted accounting principles. BDO Seidman, LLP New York, New York November 30, 1999 F-2 76 eVENTURES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
AS OF AS OF JUNE 30, AS OF JUNE 30, DECEMBER 31, 1998 1999 1999 -------------- -------------- ------------ (UNAUDITED) CURRENT ASSETS Cash and cash equivalents................................. $ 2,417,216 $ 39,379 $ 6,269,893 Accounts receivable....................................... 104,422 6,129 1,574,165 Other receivables......................................... 5,821 11,164 63,124 Prepaid expenses and other................................ -- 13,250 136,814 Deposits.................................................. 35,141 242,310 603,752 VAT tax receivable........................................ -- 2,757,368 1,781,354 Available-for-sale securities............................. 250,556 -- -- ----------- ------------ ------------ 2,813,156 3,069,600 10,429,102 ----------- ------------ ------------ LONG-TERM ASSETS Restricted cash........................................... -- 1,107,437 750,000 Property and equipment, net............................... 1,447,244 6,219,874 12,880,498 VAT receivable............................................ 44,775 -- -- Investments............................................... -- 2,191,498 2,758,531 Goodwill, net............................................. -- -- 27,793,595 Other..................................................... -- -- 521,800 ----------- ------------ ------------ 1,492,019 9,518,809 44,704,424 ----------- ------------ ------------ $ 4,305,175 $ 12,588,409 $ 55,133,526 =========== ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable.......................................... $ 1,831,863 $ 4,609,806 $ 4,228,708 Accrued other............................................. 525,297 1,477,757 1,423,101 Accrued interest payable.................................. 13,412 383,163 569,042 Advances from shareholder................................. 60,920 -- -- Customer deposits and deferred revenues................... 200,000 1,272,682 634,532 Notes payable............................................. -- -- 26,875 Debentures, current portion............................... 590,000 -- -- Capital leases, current portion........................... 307,496 1,916,761 2,937,621 ----------- ------------ ------------ 3,528,988 9,660,169 9,819,879 ----------- ------------ ------------ LONG-TERM LIABILITIES Debentures, net of current portion........................ 5,410,000 6,828,948 -- Capital leases, net of current portion.................... 487,665 2,031,513 5,250,370 ----------- ------------ ------------ 5,897,665 8,860,461 5,250,370 ----------- ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT) Common stock.............................................. 36 36 917 Preferred stock........................................... -- -- -- Additional paid-in capital................................ 108,364 4,418,508 64,447,371 Accumulated deficit....................................... (5,229,878) (10,350,765) (22,295,282) Deferred compensation..................................... -- -- (2,089,729) ----------- ------------ ------------ (5,121,478) (5,932,221) 40,063,277 ----------- ------------ ------------ $ 4,305,175 $ 12,588,409 $ 55,133,526 =========== ============ ============
See accompanying notes to the consolidated financial statements. F-3 77 eVENTURES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS SIX MONTHS YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED JUNE 30, JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, 1997 1998 1999 1998 1999 ---------- ----------- ----------- ------------ ------------ (UNAUDITED) Revenues..................... $ 921,599 $ 1,713,403 $27,248,273 $13,013,700 $ 22,661,838 Direct costs................. 578,944 1,944,073 23,311,584 9,745,604 21,759,782 ---------- ----------- ----------- ----------- ------------ Gross profit (loss).......... 342,655 (230,670) 3,936,689 3,268,096 902,056 Selling, general, and administrative expenses.... 718,362 4,505,798 7,209,696 3,271,630 10,184,092 ---------- ----------- ----------- ----------- ------------ Loss from operations, before other (income) expense..... (375,707) (4,736,468) (3,273,007) (3,534) (9,282,036) ---------- ----------- ----------- ----------- ------------ Other (income) expense Interest expense, net...... -- 105,099 1,704,459 735,878 598,062 Write off of unamortized debt discount........... -- -- -- -- 917,615 Equity in loss of affiliate............... -- -- 33,776 -- 31,819 Foreign currency (gain) loss.................... -- -- 126,575 8,631 (2,032) Other...................... -- 12,604 (16,930) (17,851) 1,074 ---------- ----------- ----------- ----------- ------------ -- 117,703 1,847,880 726,658 1,546,538 ---------- ----------- ----------- ----------- ------------ Net loss..................... (375,707) (4,854,171) (5,120,887) (730,192) (10,828,574) Imputed preferred dividend... -- -- -- -- (1,115,943) ---------- ----------- ----------- ----------- ------------ Net loss available to common shareholders............... $ (375,707) $(4,854,171) $(5,120,887) $ (730,192) $(11,944,517) ========== =========== =========== =========== ============ Net loss per share (basic and diluted)................... $ (0.03) $ (0.42) $ (0.45) $ (0.06) $ (0.39) ========== =========== =========== =========== ============ Weighted average number of shares outstanding......... 11,365,614 11,365,614 11,365,614 11,365,614 30,428,396 ========== =========== =========== =========== ============
See accompanying notes to the consolidated financial statements. F-4 78 eVENTURES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL --------------- ------------------- PAID-IN ACCUMULATED DEFERRED STOCKHOLDERS' SHARES AMOUNT SHARES(1) AMOUNT CAPITAL DEFICIT COMPENSATION EQUITY/(DEFICIT) ------ ------ ---------- ------ ----------- ------------ ------------ ---------------- Balance July 1, 1996....... -- $ -- 7,171 $ -- $ 100 $ -- $ -- $ 100 Issuance of shares for fixed assets, at book value.................... -- -- 1,792,829 36 24,954 -- -- 25,000 Net loss................... -- -- -- -- -- (375,707) -- (375,707) ------ ----- ---------- ---- ----------- ------------ ----------- ------------ Balance, June 30, 1997..... -- -- 1,800,000 36 25,054 (375,707) -- (350,607) Gift of stock to employees................ -- -- -- -- 83,300 -- -- 83,300 Net loss................... -- -- -- -- -- (4,854,171) -- (4,854,171) ------ ----- ---------- ---- ----------- ------------ ----------- ------------ Balance, June 30, 1998..... -- $ -- 1,800,000 $ 36 $ 108,364 $ (5,229,878) $ -- $ (5,121,478) Fair value of shares issued in connection with debentures............... -- -- -- -- 2,000,000 -- -- 2,000,000 Fair value of warrants granted in connection with debentures.......... -- -- -- -- 210,000 -- -- 210,000 Cost investment in i2v2.... -- -- -- -- 2,100,144 -- -- 2,100,144 Net loss................... -- -- -- -- -- (5,120,887) -- (5,120,887) ------ ----- ---------- ---- ----------- ------------ ----------- ------------ Balance, June 30, 1999..... -- -- 1,800,000 36 4,418,508 (10,350,765) -- (5,932,221) Period ended December 31, 1999 is Unaudited: Acquisition of AxisTel..... -- -- 12,381,000 248 17,110,929 -- -- 17,111,177 Acquisition of eVentures... -- -- 10,330,610 207 (2,980) -- -- (2,773) Acquisition of 66.67% of e.Volve.................. -- -- 9,565,614 190 8,540,159 -- -- 8,540,349 Contribution of i2v2 cost investment from Major Shareholders............. -- -- 2,879,386 58 -- -- -- 58 Issuance of Series A Preferred Stock.................... 1,000 -- -- -- 1,000,000 -- -- 1,000,000 Issuance of Common Stock... -- -- 2,470,000 49 4,939,951 -- -- 4,940,000 Conversion of Series A Preferred Stock.......... (1,000) -- 200,000 4 -- -- -- 4 Intrinsic value of stock options.................. -- -- -- -- 3,265,500 -- (3,265,500) -- Amortization of deferred compensation............. -- -- -- -- -- -- 1,175,771 1,175,771 Net effect of the purchase of remaining 1/3 of e.Volve.................. -- -- 5,831,253 117 11,662,389 -- -- 11,662,506 Issuance of preferred stock.................... 7,000 -- -- -- 6,997,500 -- -- 6,997,500 Imputed preferred dividend................. -- -- -- -- 1,115,943 (1,115,943) -- -- Issuance of common stock as payment for accounts payable.................. -- -- 376,799 8 5,399,472 -- -- 5,399,480 Net loss................... -- -- -- -- -- (10,828,574) -- (10,828,574) ------ ----- ---------- ---- ----------- ------------ ----------- ------------ Balance, December 31, 1999 (Unaudited).............. 7,000 $ -- 45,834,662 $917 $64,447,371 $(22,295,282) $(2,089,729) $ 40,063,277 ====== ===== ========== ==== =========== ============ =========== ============
- --------------- (1) The change in the par value of the shares which occurred on September 22, 1999 has been retroactively applied to all periods. See accompanying notes to the consolidated financial statements. F-5 79 eVENTURES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS SIX MONTHS YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED JUNE 30, JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, 1997 1998 1999 1998 1999 ---------- ----------- ----------- ------------ ------------ (UNAUDITED) CASH FLOW FROM OPERATING ACTIVITIES: Net loss............................ $(375,707) $(4,854,171) $(5,120,887) $ (730,192) $(10,828,574) Adjustments to reconcile net income to net cash (used in) provided by net operating activities: Depreciation and amortization..... -- 105,544 1,942,070 712,165 3,016,323 Other expenses.................... 148,381 171,259 932,509 370,689 852,204 Write-off accounts receivable -- Touchtone....................... -- 615,232 -- -- -- Write-off certain intangible assets.......................... -- 420,000 -- -- -- Bad debt.......................... -- -- -- -- 23,895 Foreign currency (gain) loss...... -- -- 126,575 11,162 (2,032) Equity in loss of unconsolidated affiliate....................... -- -- 33,776 -- 31,819 Change in operating assets and liabilities: Accounts receivable............. (73,587) (30,835) 98,293 (488,189) (582,920) Other receivables............... (47,200) 41,379 (5,343) (89,318) (51,960) Prepaid expenses and other...... -- -- (13,250) (26,315) (30,257) VAT receivable.................. -- (44,775) (2,611,318) (1,347,608) 976,014 Restricted cash................. -- -- (1,107,437) (1,080,806) 1,107,437 Accounts payable................ 306,113 1,525,750 2,550,093 1,124,102 3,760,810 Accrued other................... 68,000 75,495 301,695 (450) 220,647 Accrued interest payable........ -- 13,412 369,751 33,063 185,879 Customer deposits............... -- 200,000 1,072,682 (200,000) (1,214,650) --------- ----------- ----------- ----------- ------------ Net cash (used in) provided by operating activities................ 26,000 (1,761,710) (1,430,791) (1,711,697) (2,535,365) --------- ----------- ----------- ----------- ------------ CASH FLOWS USED IN INVESTING ACTIVITIES: Deposits............................ (13,000) (22,141) (207,169) 4,728 (361,442) Proceeds from sale of available-for-sale securities..... -- 26,000 246,580 246,580 -- Purchase of available-for-sale securities........................ -- (277,057) -- -- -- Purchases of property and equipment......................... (363) (518,944) (1,183,735) (993,394) (1,667,894) Net cash acquired in acquisitions... -- -- -- -- 299,687 Long term investments............... -- -- -- -- (475,000) Investment in affiliates............ -- (1,035,232) (125,130) (25,000) (598,852) --------- ----------- ----------- ----------- ------------ Net cash (used in) provided by investing activities................ (13,363) (1,827,374) (1,269,454) (767,086) (2,803,501) --------- ----------- ----------- ----------- ------------
F-6 80 eVENTURES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
SIX MONTHS SIX MONTHS YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED JUNE 30, JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, 1997 1998 1999 1998 1999 ---------- ----------- ----------- ------------ ------------ (UNAUDITED) CASH FLOWS FROM FINANCING ACTIVITIES: Advances -- shareholders............ -- 60,920 (60,920) (60,920) (246,560) Issuance of common stock and preferred stock................... 100 -- -- -- 13,224,850 Proceeds from issuance of debenture......................... -- 6,000,000 2,040,000 850,000 -- Repayment of loan................... -- -- -- -- (823,278) Payments on capital leases.......... -- (67,357) (1,656,672) (240,993) (585,632) --------- ----------- ----------- ----------- ------------ Net cash provided by financing activities.......................... 100 5,993,563 322,408 548,087 11,569,380 --------- ----------- ----------- ----------- ------------ NET CHANGE IN CASH.................... 12,737 2,404,479 (2,377,837) (1,930,696) $ 6,230,514 CASH AND CASH EQUIVALENTS, beginning of year............................. -- 12,737 2,417,216 2,417,216 39,379 --------- ----------- ----------- ----------- ------------ CASH AND CASH EQUIVALENTS, end of year................................ $ 12,737 $ 2,417,216 $ 39,379 $ 486,520 $ 6,269,893 ========= =========== =========== =========== ============ Supplemental disclosure of cash flows information: Cash paid for: Interest.......................... $ -- $ 98,000 $ 376,000 $ 192,000 $ 258,000 ========= =========== =========== =========== ============ Taxes............................. $ -- $ -- $ -- $ -- $ -- ========= =========== =========== =========== ============ Supplemental schedule of non-cash investing and financing activities Issuance of common stock for property and equipment............ $ 25,000 $ -- $ -- $ -- $ -- ========= =========== =========== =========== ============ Non cash purchases of equipment..... $ 170,462 $ -- $ -- $ -- $ -- ========= =========== =========== =========== ============ Purchases of equipment under capital leases............................ $ -- $ 862,518 $ 4,809,785 $ 1,808,683 $ 5,206,790 ========= =========== =========== =========== ============ Fair value of original issue discount on warrants granted pursuant to certain of the debentures........................ $ -- $ -- $ 210,000 $ -- $ -- ========= =========== =========== =========== ============ Fair value of original issue discount on shares issued in connection with debt on July 1, 1998.............................. $ -- $ -- $ 2,000,000 $ 2,000,000 $ -- ========= =========== =========== =========== ============ Goodwill arising from acquisitions settled through the issuance of stock............................. $ -- $ -- $ -- $ -- $ 28,824,974 ========= =========== =========== =========== ============ Net assets of subsidiaries acquired through an issue of stock......... $ -- $ -- $ -- $ -- $ 196,169 ========= =========== =========== =========== ============ Stock issued for settlement of accounts payable.................. $ -- $ -- $ -- $ -- $ 5,399,480 ========= =========== =========== =========== ============
See accompanying notes to financial statements. F-7 81 eVENTURES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1999 IS UNAUDITED) 1. ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION Organization eVentures Group, Inc., ("eVentures" or the "Company") was incorporated in the state of Delaware on June 24, 1987 and was a public Company with no material operations prior to the transactions consummated on September 22, 1999, which are described below. The Company was formerly known as Adina, Inc. On September 22, 1999, the Company acquired all of the outstanding shares of AxisTel Communications, Inc., ("AxisTel"), approximately 66.67% of the outstanding shares of e.Volve Technology Group, Inc., ("e.Volve"), and approximately 17% of the outstanding shares of i2v2.com, Inc. ("i2v2.com"), (collectively the "Acquired Entities") and $8,540,159 Notes Receivable including accrued interest ("Notes") from e.Volve held by Major Shareholders as defined below. All the acquisitions and the purchase of the Notes were settled through issuance of stock of eVentures. (the "Transaction"). As a result of the Transaction, approximately 77% of the Common Stock of the Company was owned by three shareholders that are affiliated with each other (the "Major Shareholders"). Prior to the Transaction, the Major Shareholders had directly and indirectly held interests in the Acquired Entities, as follows: 66.67% of e.Volve, 21% of i2v2.com, and 0.7% of AxisTel plus options to purchase a further 49.3% of AxisTel. In August of 1999, the interest in i2v2.com held by the Major Shareholders was diluted to 17%. Immediately after exercising the options in AxisTel, these interests, along with the Major Shareholders' Notes receivable from e.Volve, were directly and indirectly transferred to eVentures in exchange for the Company's stock. The remaining 50% of the common shares of AxisTel were then purchased from AxisTel's founding shareholders. On October 19, 1999, eVentures acquired the remaining 33.3% of e.Volve, through an extension of its original offer at the time of the Transaction. This purchase was settled through an issuance of 5,831,253 shares of eVentures' Common Stock. Allocation of consideration given during the six months ended December 31, 1999 to the acquired assets is as follows: Conversion of the Major shareholders options in AxisTel on September 22, 1999 Cost of investment........................................ $ 3,497,662 Net liabilities acquired.................................. (1,002,338) ----------- Excess attributed to Goodwill............................. $ 4,500,000 =========== Purchase of 50% of AxisTel from AxisTel's founding shareholders on September 22, 1999 Cost of investment........................................ $12,762,000 Net assets acquired....................................... 99,532 ----------- Excess attributed to Goodwill............................. $12,662,468 =========== Purchase of 1/3 of e.Volve on October 19, 1999 Cost of investment........................................ $11,662,506 Net assets acquired....................................... -- ----------- Excess attributed to Goodwill............................. $11,662,506 ===========
The above represent the final purchase price allocations. Consideration given was recorded at the fair value of eVentures common stock. F-8 82 eVENTURES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Basis of Presentation The historical financial statements presented are those of e.Volve. The interests in PhoneFree and AxisTel contributed by Infinity have been included from the date of Infinity's investment therein. The financial statements as of and for the six months ended December 31, 1999 reflect the consummation of the reorganization, and therefore are consolidated financial statements of eVentures and subsidiaries as of December 31, 1999 and for the period from September 22, 1999 through December 31, 1999. Since eVentures had no material operations prior to the September 22, 1999 transaction, the acquisitions of the Infinity Entities' interest in e.Volve, AxisTel and PhoneFree were accounted for as a recapitalization of e.Volve. The acquisitions of the remaining 50% of AxisTel and 33.3% of e.Volve were treated as purchases for accounting purposes. Business The Company operates a private communications network which consists of digital switching, routing and signal management equipment, as well as digital fiber optic cable lines. The network incorporates software, programming and switching technology which was originally developed for or in relation to the Internet. During the three years ended June 30, 1999, the Company's operations were primarily those of e.Volve and its wholly owned subsidiary, e.Volve Technology Group de Mexico, S.A. de C.V. (f/k/a Latin Gate de Mexico, S.A. de C.V.). e.Volve was incorporated on June 26, 1996 as Orix Global Communications, Inc. Through June 30, 1999, its services included the provision of international voice and data applications over its fiber optic network, primarily to Mexico. The network is scalable, built around digital packet switching equipment and incorporates Asynchronous Transfer Mode and Internet Protocol technologies. As part of the Transaction, the Company acquired AxisTel. AxisTel is developing international and domestic voice and data applications similar to those of e.Volve. AxisTel has the additional business of retail communications services, including prepaid telephony. During the year ended June 30, 1999, the Company acquired a minority interest in i2v2.com (doing business as PhoneFree.com). The Company also entered into a joint venture to form Innovative Calling Technologies, LLC ("ICT") -- See Note 3. The degree of involvement of the Company in management varies for each strategic investment. During the six months ended December 31, 1999, the Company acquired a minority interest in Fonbox, Inc ("Fonbox"). 2. RISKS AND UNCERTAINTIES Concentrations of Credit Risks The Company has concentrations of credit risk related to cash, customers and vendors, as follows: Cash Concentrations The Company places its cash with high credit quality institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. From time to time, the Company maintains cash balances in excess of the FDIC limit. F-9 83 eVENTURES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Customer Concentrations During the year ended June 30, 1997, e.Volve received a significant portion of its business from Star Communication, Inc. ("Star") and Total Communications, Inc. ("Total"). During the year ended June 30, 1997, sales to these customers totaled 87% and 10% of e.Volve's revenues, respectively. During Fiscal 1998, e.Volve received a significant portion of its business from Star and Total. During Fiscal 1998, sales to these customers totaled 65% and 25% of e.Volve's revenues, respectively. As of June 30, 1998, amounts due from Star and Total totaled 96% and 0% of e.Volve's accounts receivables, respectively. During Fiscal 1999, e.Volve received a significant portion of its business from Qwest Communications, Inc. ("Qwest"), RSL Communications, Inc. ("RSL") and Star. During Fiscal 1999, sales to these customers totaled 65%, 18% and 16% of e.Volve's revenues, respectively. As of June 30, 1999, there were no significant amounts due from these customers. As of June 30, 1999, deposits from Qwest totaled 100% of e.Volve's customer deposits. If the relationship between the Company and these customers were altered, the future results of operations and financial condition could be adversely affected. Vendor Concentrations During the year ended June 30, 1997, e.Volve purchased a significant portion of its carrier and termination costs ("Direct Costs") from four major vendors. During the year ended June 30, 1997, purchases from these four vendors totaled 45%, 22%, 12% and 10% of e.Volve's Direct Costs, respectively. During Fiscal 1998 and 1999, e.Volve purchased a significant portion of its Direct Costs from one vendor. During Fiscal 1998 and 1999, purchases from this vendor totaled 75% and 92% of Direct Costs, respectively. As of June 30, 1998 and 1999, amounts due to this vendor totaled 54% and 62% of e.Volve's accounts payable, respectively. If the relationship between the Company and these vendors was altered, the future results of operations and financial condition could be adversely affected. Geographic Concentration The Company provides data transport and conversion services from the United States to Mexico over the e.Volve Network. Although the Company plans to further expand data transport and conversion services to other destination countries, the Company's operations may remain concentrated between the United States and Mexico. The data transport and conversion market for Mexico is highly competitive and is occupied by industry participants which are much larger than the Company and have greater financial resources and may have lower costs than the Company. There can be no assurance that the Company will be able to compete effectively against such larger and better-capitalized industry participants or that the Company will be successful in pursuing other destination countries with existing and potential customers. Regulatory Environment The Company provides "enhanced" or "value-added" services to its international customers and therefore is not subject to regulation by the Federal Communications Commission or other international telecommunication regulatory bodies within its target markets. However, the use of the Internet protocols to provide telephone services is a recent market development. Currently, the Federal Communications Commission is considering whether or not to impose surcharges or additional regulations upon certain providers of Internet Protocol telephony. On April 10, 1998, the Federal Communications Commission issued its Report to Congress concerning its implementation of the universal service provisions of the Telecommunications Act. F-10 84 eVENTURES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In the Report, the Federal Communications Commission indicated that it would examine the question of whether certain forms of "phone-to-phone" Internet telephony are information services or telecommunications services. It noted that the Federal Communications Commission did not have, as of the date of the Report, an adequate record on which to make any definitive pronouncements, but that the record before it suggested that certain forms of phone-to-phone Internet Protocol telephony appear to have the same functionality as non-Internet Protocol telecommunications services and lack the characteristics that would render them information services. If the Federal Communications Commission were to determine that certain services are subject to Federal Communications Commission regulations as telecommunications services, the Federal Communications Commission noted that it may find it reasonable to require Internet Service Providers to make universal service contributions, pay access charges or to be subject to traditional common carrier regulation. To the Company's knowledge, there are currently no domestic and few foreign laws or regulations that prohibit voice communications over the Internet. Several efforts have been made to enact federal legislation that would either regulate or exempt from regulation services provided over the Internet. State public utility commissions may also retain jurisdiction to regulate the provision of intrastate Internet Protocol telephony services, and could initiate proceedings to do so. A number of countries that currently prohibit competition in the provision of voice telephony have also prohibited Internet telephony. Other countries permit but regulate Internet Protocol telephony. If Congress, the Federal Communications Commission, state regulatory agencies or foreign governments begin to regulate Internet Protocol telephony, there can be no assurances that any such regulations will not materially adversely affect the Company's business, financial conditions or results of operations. Telecommunications Market and Industry Competition Currently, the Company competes with (a) long distance resellers and providers, including large carriers such as AT&T, MCI/WorldCom, Qwest, and Sprint; (b) foreign PTTs (Post Telephone and Telegraph administrations); (c) other providers of international long distance services such as STAR Telecommunications, Inc., Pacific Gateway Exchange, Inc., RSL Communications Ltd. and Telegroup, Inc.; (d) alliances that provide wholesale carrier services, such as "Global One" (Sprint, Deutsche Telekom AG, and France Telecom S.A.) and Uniworld (AT&T, Unisource-Telecom Netherlands, Telia AB, Swiss Telecom PTT and Telefonica de Espana S.A.); (e) new entrants to the domestic long distance market such as RBOCs (Regional Bell Operating Companies) in the U.S., who have entered or have announced plans to enter the U.S. interstate long distance market pursuant to recent legislation authorizing such entry, and utilities such as RWE Aktiengesellschaft in Germany; and (f) small long distance resellers. Many of the Company's competitors are significantly larger and have substantially greater market presence, as well as greater financial, technical, operational, marketing, and other resources and experience than the Company. The Company competes for customers in the telecommunications markets primarily based on price and, to a lesser extent, the type and quality of service offered. Increased competition could force the Company to reduce its prices and profit margins if its competitors are able to procure rates or enter into service agreements that are comparable to or better than those the Company obtains, or are able to offer other incentives to existing and potential customers. Similarly, the Company has no control over the prices set by its competitors in the long distance resale carrier-to-carrier market. The Company could also face significant pricing pressure if it experiences a decrease in the volume of minutes that it carries on its network, as the Company's ability to obtain favorable rates and tariffs from its carrier suppliers depends, to a significant extent, on the Company's total volume of international long distance call traffic. There is no guarantee that the Company will be able to maintain the volume of international and domestic long distance traffic necessary to obtain favorable rates and tariffs. Although the Company has no reason to believe that its competitors will adopt aggressive pricing policies that could adversely affect the F-11 85 eVENTURES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company, there can be no assurance that such price competition will not occur or that the Company will be able to compete successfully in the future. In addition, the Company is aware that its ability to market its long distance resale services depends upon the existence of spreads between the rates offered by the Company and those offered by the IXC's with which it competes, as well as those from which it obtains service. A decrease in such spreads could have a material adverse effect on the Company's business, financial condition or results of operations. Foreign Currency The Company currently provides data transport and conversion services to certain foreign countries and regions, primarily to Mexico and India. The direct costs, profit margins and competitive position of the Company are consequently affected by the strength of the currencies in countries where it provides services relative to the strength of the currencies in the countries where its services are performed. The Company's results of operations and financial condition may be adversely affected by fluctuations in foreign currencies and by translations of the financial statement of the Latin Gate from local currencies into U.S. dollars. Further, the Company's international operations are generally subject to various risks that are not present in domestic operations, including restrictions on dividends and repatriation of funds. Accounts Receivable The Company sells its data transport and conversion services to customers throughout the United States and in some foreign countries. The Company performs periodic credit evaluations of its customers and does not obtain collateral with which to secure its accounts receivables. The Company maintains reserves for potential credit losses based upon the Company's historical experience related to credit losses. Although the Company expects to collect amounts due, actual collections may differ. As of June 30, 1998 and 1999, the Company has not recorded a reserve for potential credit losses, since accounts receivable for such periods were insignificant. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and all wholly owned and majority-owned subsidiaries. Investments in companies in which (i) ownership interests range from 20 to 50 percent and (ii) the Company exercises significant influence over operating and financial policies are accounted for using the equity method. Other investments are accounted for using the cost method. All significant intercompany accounts and transactions have been eliminated. Unaudited Interim Consolidated Financial Statements The consolidated financial statements as of December 31, 1999 and for the six months ended December 31, 1998 and 1999 are unaudited, and have been prepared on the same basis as the audited financial statements included herein. In the opinion of management, such unaudited financial statements include all adjustments consisting of normal recurring accruals necessary to present fairly the information set forth therein. Results for interim periods are not necessarily indicative of results to be expected for an entire year. Deposits Deposits represent security deposits for facility leases, advance payments to vendors for the purchases of property and equipment and Direct Costs. F-12 86 eVENTURES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Available-For-Sale Securities The Company accounts for its available-for-sale securities in accordance with Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity Securities." SFAS 115 addresses the accounting and reporting for investments in equity securities which have readily determinable fair values and all investments in debt securities. The Company's marketable equity securities are classified as available-for-sale under SFAS 115 and are reported at fair value, with changes in the unrealized holding gain or loss included in shareholders' deficit. As of June 30, 1998, available-for-sale securities consisted of a 5% Treasury Bill, in the amount of $250,556. During Fiscal 1999, the Company sold the Treasury Bill and recognized a loss of $3,420. There were no unrealized gains or loss on available-for-sale securities during any period presented. Property and Equipment Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the related assets, ranging from five to seven years. Maintenance and repairs are charged to expense as incurred. Significant renewals and betterments are capitalized. As of the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations. The Company assesses the recoverability of property and equipment by determining whether the depreciation and amortization of property and equipment over its remaining life can be recovered through projected undiscounted future cash flows. The amount of property and equipment impairment, if any, is measured based on fair value and is charged to operations in the period in which property and equipment impairment is determined by management. During the years ended June 30, 1997 and 1998, the Company recorded impairment losses on certain property and equipment totaling $25,000 and $278,324, respectively. The amount of the impairment was the book value of assets which were taken out of use during the related periods. The impairment is recorded as a component of selling, general and administrative expenses. Goodwill Goodwill arising from certain elements of the Transaction (see Note 1) is amortized on a straight-line basis over a ten-year life. The Company assesses the recoverability of goodwill by determining whether the amortization over its remaining life can be recovered through projected undiscounted future cash flows. The amount of impairment, if any, is measured based on fair value and is charged to operations in the period in which impairment is determined by management. As of June 30, 1999 and December 31, 1999, the Company's management has not identified any material impairment of goodwill. Revenue Recognition and Customer Deposits Revenues from Voice, Data, Fax, E-mail and Video transmission services are recognized upon rendering of services to customers. Internet access subscription service revenues are recognized over the period that services are provided. Server Co-location service revenues are recognized ratably over the contractual period. Deposits received from customers are deferred as customer deposits and are recorded as current liabilities. The related revenue is recognized when the related services are rendered. Prepaid phone card revenues are earned when the cards are used. Revenues related to unused cards are recorded as deferred revenue. F-13 87 eVENTURES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Foreign Currency Gain or Loss The financial statements of the Latin Gate are remeasured into the U.S. dollar functional currency for consolidation and reporting purposes. Current rates of exchange are used to remeasure monetary assets and liabilities and historical rate of exchange are used for nonmonetary assets and related elements of expense. Revenue and other expense elements are remeasured at rates which approximate the rates in effect on the transaction dates. Gains and losses resulting from this remeasurement process are recognized currently in the consolidated statement of operations. During fiscal 1998 and 1999, there were no significant gains or losses with respect to this remeasurement process. Mexican-based vendors invoice e.Volve in Mexican pesos. Certain of these transactions are remeasured at the time in which the services are rendered to the Company and are settled in US dollars at the time of payment for such services, which results in foreign currency gain or loss. During fiscal 1998 and 1999, foreign currency gains and losses totaled $0 and $126,575, respectively. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for significant deferred tax assets when it is more likely than not that such assets will not be recovered. Stock Based Compensation The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS#123"), "Accounting for Stock Based Compensation," which defines a fair value based method of accounting for stock-based compensation. However, SFAS#123 allows an entity to continue to measure compensation cost related to stock and stock options issued to employees using the intrinsic method of accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB#25"), "Accounting for Stock Issued to Employees". Entities electing to remain with the accounting method of APB#25 must make pro forma disclosures of net income and earnings per share, as if the fair value method of accounting defined in SFAS#123 had been applied. The Company has elected to account for its stock-based compensation to employees under APB#25. Earnings Per Share The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS#128"), Earnings Per Share ("EPS"). SFAS#128 requires dual presentation of basic EPS and diluted EPS on the face of all income statements issued after December 15, 1997 for all entities with complex capital structures. Basic EPS is computed as net income divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants and convertible debentures. Diluted EPS has not been presented for the effects of stock options, warrants and convertible debentures as the effect would be antidilutive. Accordingly, basic and diluted EPS did not differ for any period presented. For purposes of computation of EPS, the shares issued for the acquisition of 67% of e.Volve (11,365,614 shares) are deemed to have been in existence for the entire period. F-14 88 eVENTURES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Comprehensive Income (Loss) The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS#130"), "Reporting Comprehensive Income." This statement establishes standards for reporting the components of comprehensive income and requires that all items that are required to be recognized under accounting standards as components of comprehensive income(loss) be included in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income includes net income(loss) as well as certain items that are reported directly within a separate component of stockholders' deficit and bypass net loss. The Company adopted the provisions of this statement in Fiscal 1998. These disclosure requirements had no impact on the Company's financial statements. Accounting 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 financial statements, and the reported amounts of revenues and expenses during the reported periods. Actual results could materially differ from those estimates. Fair Value of Financial Instruments The carrying value of financial instruments approximated fair value as of June 30, 1998 and 1999 due to either short maturity or terms similar to those available to similar companies in the open market. Segment Information The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" for fiscal 1999. The statement requires disclosure of certain financial information related to operating segments. The Company has determined that it operates in one reportable segment (see Note 1). Effect of New Accounting Pronouncements The American Institute of Certified Public Accountants has issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up Activities." This SOP defines start-up activities as those one-time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new class of customers, initiating a new process in an existing facility, or commencing some new operation. SOP 98-5 requires that these start-up costs be expensed as incurred. This SOP is effective for financial statements for fiscal years beginning after December 15, 1998, and therefore was adopted on July 1, 1999 for the Company. The adoption of SOP 98-5 has not materially impacted the results of operations, financial position, and financial statement disclosures, and is not expected to have a significant impact on future financial statements. In June 1998, the Financial Accounting Standards Board, issued Statement of Financial Accounting Standards No. 133 ("SFAS#133"); "Accounting for Derivative Instruments and Hedging Activities," SFAS#133 requires companies to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS#133 is effective for fiscal years beginning after June 15, 2000. The Company does not presently enter into any transactions involving derivative financial instruments and, accordingly, does not anticipate the new standard will have any effect on its financial statements for the foreseeable future. F-15 89 eVENTURES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. RESTRICTED CASH As of June 30, 1999, restricted cash consists of two certificates of deposits (including accrued interest) that serve as collateral on a certain letter of credit totaling $1,061,000. As of June 30, 1999, no amounts were drawn down on such letter of credit. The full amount of the letter of credit was drawn down on October 5, 1999 and repaid by December 31, 1999. As of December 31, 1999, restricted cash consists of one certificate of deposit that serves as collateral on a certain letter of credit totaling $750,000. As of December 31, 1999, no amounts were drawn down on such letter of credit. 5. INVESTMENTS The Company has made investments in the following companies:
INVESTMENT INVESTMENT BALANCE @ BALANCE @ JUNE 30, DECEMBER 31, ACCOUNTING COMPANY NAME % OWNERSHIP METHOD 1999 1999 - ----------------------- ----------- ------------ ---------- ------------ Innovative Calling Technologies, LLC............................... 50.0% equity basis $ 91,354 $ 158,387 i2v2.com (d/b/a PhoneFree.com)...... 16.0% cost basis 2,100,144 2,100,144 FonBox, Inc. ....................... 8.0% cost basis -- 500,000
On April 19, 1999, the Company entered into a joint venture with Dataten Technologies to form Innovative Calling Technologies, LLC ("ICT") with each party owning 50% of ICT. The Company does not exercise control of the joint venture and thus accounts for its investments pursuant to the equity method. During Fiscal 1999, the Company recorded an investment of $125,130, reduced by equity in loss of unconsolidated subsidiary of $33,776. 6. PROPERTY AND EQUIPMENT Property and equipment consist of the following as of:
JUNE 30, DECEMBER 31, ----------------------- ------------ 1998 1999 1999 ---------- ---------- ------------ Leasehold Improvements.......................... $ 182,308 $ 257,217 $ 334,559 Network equipment under capital leases.......... 862,518 5,985,121 11,146,106 Other equipment................................. 497,375 751,512 3,047,440 Furniture and fixtures.......................... 10,086 10,552 27,862 ---------- ---------- ----------- 1,552,287 7,004,402 14,555,967 Accumulated depreciation and amortization..... (105,043) (784,528) (1,675,469) ---------- ---------- ----------- $1,447,244 $6,219,874 $12,880,498 ========== ========== ===========
During the years ended June 30, 1997, 1998 and 1999, depreciation and amortization expense totaled $0, $105,043 and $957,966, respectively. During the six months ended December 31, 1998 and 1999, depreciation and amortization expense totaled $374,619 and $775,016, respectfully. Property and equipment included assets under capital leases at December 31, 1999, June 30, 1999 and 1998 with a cost of $11,146,106, $5,985,121 and $862,518, respectively, and accumulated amortization of $1,141,131, $664,905, and $35,642, respectively. F-16 90 eVENTURES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. VAT RECEIVABLE VAT is a tax similar in nature to a sale and/or use tax. VAT is assessed by vendors operating in foreign countries, specifically Mexico. The tax is paid by e.Volve directly to the assessing vendor who remits the tax to the Mexican taxing authority ("MTA"). Based on an injunction received from the MTA, e.Volve is exempt from incurring this tax. As of June 30, 1998 and 1999, VAT receivable consists of amounts due and payable to e.Volve by either the assessing vendor or MTA (as applicable). Subsequent to year-end, all such amounts due at year-end have been refunded to e.Volve. 8. DEBENTURES During Fiscal 1998 and 1999, the Company issued debentures aggregating $8,040,000 to the Major Stockholders. The debentures bear interest at 8% per annum, and generally mature within a two year period. The debenture agreement was amended with each additional issue, in some instances resulting in extended maturity dates. The issues (as amended) were as follows:
ISSUANCE DATE MATURITY DATE AMOUNT - ------------- --------------- ---------- June 11, 1998 June 30, 2000 $6,000,000 August 19, 1998 June 30, 2000 850,000 April 15, 1999 June 30, 2000 200,000 ---------- April 15, 1999 June 30, 2000 7,050,000 February 9, 1999 June 30, 1999 390,000 April 29, 1999 August 27, 1999 500,000 April 30, 1999 August 28, 1999 100,000 ---------- $8,040,000 ==========
In connection with the June 11, 1998 debenture, the Company issued a total of 2400 common shares to one of the Major Stockholders or predecessors in interest, which gave such Major Stockholder a 66.7% interest in the common shares of the Company. (See Note 1). The value of the shares issued was recorded at estimated fair value, and a debt discount of $2,000,000 was recorded, with an offsetting credit to Additional Paid In Capital. The debt discount is amortized over the contractual period of the related debentures as a component of interest expense. The June 11, 1998, August 19, 1998 and April 15, 1999 debentures are repayable monthly with accrued interest at various amounts, with all unpaid principal and interest due upon maturity. At June 30, 1999 the Company was in default of its payment obligations in connection with these debentures. The Major Stockholders or predecessors in interest that owned such debenture waived its right to demand immediate repayment of these debentures and subsequently sold its Notes Receivable (see below). The February 9, 1999 debenture is payable in full (including interest) on the maturity date. In the event the amount is not paid in full by that date, the balance is convertible into common stock of e.Volve at the option of the lender, at a conversion price of $2,778 per share, which was the deemed fair value of shares at the issue date. The April 29 and 30, 1999 debentures are repayable on the maturity date. On September 22, 1999, as part of the Transaction (see Note 1), the Major Stockholders or predecessors in interest that owned such debentures sold their related notes receivable from e.Volve to eVentures and, as a result, debentures are reflected as long term liabilities on the June 30, 1998 and 1999 balance sheets. At the time of the Transaction, the unamortized debt discount of $917,615 on June 11, 1998 debenture was written off. In addition, as part of this transaction, the debentures were restructured into a single debenture with a F-17 91 eVENTURES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) maturity date of December 31, 1999. At December 31, 1999, e.Volve's debentures and eVentures' notes receivable eliminate on consolidation. 9. OBLIGATIONS UNDER CAPITAL LEASES The Company is a lessee under certain noncancelable capital leases, which are secured by certain property and equipment (see Note 5). Terms of the leases call for monthly payments ranging from $1,601 to $32,711, including implicit rates ranging from 10.0% to 13.6% per annum. Future minimum lease payments under these capital leases are as follows:
1999 ----------- FOR THE YEAR ENDED JUNE 30, 2000........................................................ $ 2,140,641 2001........................................................ 1,313,304 2002........................................................ 937,570 ----------- 4,391,515 Amount representing interest................................ (443,241) ----------- Present value............................................... 3,948,274 Current portion............................................. (1,916,761) ----------- $ 2,031,513 ===========
Subsequent to June 30, 1999, the Company had entered into two additional noncancelable capital leases for a total of $4,825,349, which are secured by certain property and equipment. Terms of these leases call for 39 and 60 monthly payments of $45,365 and $84,162, including implicit interest rates of 15.4% and 11.5%, respectively. 10. STOCKHOLDERS' EQUITY (DEFICIT) Common Stock Common stock consisted of the following: December 31, 1999 Common Stock ($.00002 par value, 75,000,000 shares authorized, 45,834,662 issued and outstanding) June 30, 1999 Common Stock ($.01 par value, 3,600 shares authorized, issued and outstanding) June 30, 1998 Common Stock ($.1 par value, 3,600 shares authorized, issued and outstanding) Preferred Stock Preferred Stock consisted of the following: December 31, 1999 Series A Convertible Preferred Stock ($.00002 par value, 5,000 shares authorized, 0 shares issued and outstanding) Series B Convertible Preferred Stock ($.00002 par value, 25,000 shares authorized, 7,000 shares issued and outstanding) F-18 92 eVENTURES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7,000 shares of Series B convertible Preferred Stock with a par value of $.00002 per share were issued on November 19, 1999, November 26, 1999 and December 15, 1999 at a price of $1,000 per share. The shares are convertible into common shares at a price of $13.80 per share, subject to certain anti-dilution adjustments. As a result of the beneficial conversion rates applied to the above securities, a preferred dividend of $1,115,943 has been recorded during the six months ended December 31, 1999. Stock Options e.Volve had a non-formalized stock option plan (the "Plan"), whereby incentive stock options could be granted to certain employees, directors, officers and others to purchase shares of e.Volve's common stock. Options granted pursuant to the Plan vested at various percentages within two years of the date of grant and expired within five years from the date of grant or upon termination of employment (as defined). During Fiscal 1999, the Company granted 90 stock options to an officer of the Company with an exercise price of $2,778, of which 45 options vested immediately and the remaining 45 options will become fully vested on December 31, 1999. During Fiscal 1999, pursuant to an employment agreement (see Note 12), the Company granted 90 stock options to an Officer of the Company with an exercise price of $7,077 (the deemed fair value of the stock), of which 45 options vested on March 8, 1999 and the remaining 45 options became fully vested on March 23, 1999. During Fiscal 1999, the Company granted 600 stock options to certain officers and employees of the Company with an exercise prices of $2,778, of which 301 options vested on April 30, 1999 and the remaining 299 options becoming fully vested on April 1, 2000. As of June 30, 1999, 436 of such options were exercisable. In accordance with APB#25, no compensation expense was recorded in relation to the above options. However, pro forma information regarding net income (loss) is required by SFAS 123, and has been determined as if the Company had accounted for its 780 stock options granted during Fiscal 1999 under the fair value method. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: stock price of $2,778 per share; risk-free interest rates ranging from 5.1% to 5.4% (depending on the expected term of the option and the date of grant); dividend yield of 0.0%; volatility factor of the expected market price of the Company's common stock of 0.0% (due to no significant market for trading of the Company's common stock, volatility has been assessed at 0.0%; the result of excluding volatility in estimating an option's value is an amount commonly termed minimum value); and expected terms of 5 years. The Black-Scholes valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. F-19 93 eVENTURES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information relative to e.Volve's option plan is as follows:
FISCAL 1999 ----------- PRO FORMA NET LOSS: Net loss as reported........................................ $(5,120,887) Additional compensation expense under SFAS#123.............. $ (453,000) ----------- $ 5,573,887 ===========
During the years ended June 30, 1997 and 1998, no options were granted and therefore pro forma information has only been presented for fiscal 1999. On September 22, 1999, the Company terminated the share option plans of e.Volve and AxisTel and adopted a new share option plan (the "Plan") for its employees, officers, directors and consultants (whether or not employees) as part of the Agreement and Plan of Reorganization entered into in connection with the Transaction (see Note 1). The Plan provides for the grant of incentive stock options and non-qualified stock options. The terms of the options are set by the Company's board of directors, with the ability to accelerate vesting at its discretion at any time. The options expire no later than ten years after the date the stock option is granted. On October 14, 1999, the Company granted an additional 425,000 options to directors and employees. These options vest over various periods, as noted in chart below. The number of shares authorized for grants under the Share Option Plan is 15% of outstanding, provided that no more than 4 million options can be "incentive" stock options. As of December 31, 1999, no options had been exercised. The following options were granted during the six months ended December 31, 1999:
VESTING PERIOD EXERCISE FROM DATE DATE OF ISSUE OPTIONS PRICE OF ISSUE - ------------- --------- -------- -------------- September 22, 1999 300,000 $10.00 At Issuance October 14, 1999 100,000 $10.00 September 22, 1999 191,666 $ 2.50 One Year September 22, 1999 724,998 $10.00 October 14, 1999 150,000 $10.00 October 14, 1999 24,999 $15.00 September 22, 1999 25,000 $ 2.50 Two Years September 22, 1999 166,667 $ 5.00 September 22, 1999 425,001 $10.00 October 14, 1999 50,000 $10.00 October 14, 1999 25,000 $15.00 September 22, 1999 25,000 $ 2.50 Three Years September 22, 1999 166,667 $ 7.50 September 22, 1999 425,001 $10.00 October 14, 1999 50,000 $10.00 October 14, 1999 25,001 $15.00 --------- 2,875,000 =========
F-20 94 eVENTURES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As a result of the above, the Company recorded deferred compensation of $453,000 on September 22, 1999 and $2,812,500 on October 14, 1999 with related credits to additional paid in capital. The amount of the deferred compensation was based upon the intrinsic value of options granted to employees which had an exercise price lower than the market price of the underlying stock on the day of the grant. The deferred compensation will be amortized over the related vesting periods and recorded as compensation expense in the statement of operations. Warrants In connection with the issuance of the Amended and Restated Debenture Agreement dated April 15, 1999 (see Note 7), the Company issued common stock purchase warrants (the "Warrants") to the Debenture Holder granting the right to acquire 340 shares of Common Stock. The Warrants have an exercise price of $2,778 per share and expire within five years of the date of grant (as defined). As of June 30, 1999, none of the Warrants have been exercised. The Company has accounted for its 340 common stock debenture warrants granted during Fiscal 1999 at fair value. The Company has estimated the fair value of the Warrants, original issue discount ("OID"), at $210,000. The OID has been reflected as an increase in additional paid-in capital and as a reduction of the February Debenture and is being amortized to interest expense utilizing the effective interest method over the term of the Note. During Fiscal 1999, amortization of OID on the February Debentures totaled $40,281. The fair value for these warrants was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: stock price of $2,778 per share; risk-free interest rate of 5.0% (based on the expected term of the option and the date of grant); dividend yield of 0.0%; volatility factor of the expected market price of the Company's common stock of 0.0% (due to no significant market for trading of the Company's common stock, volatility has been assessed at 0.0%; the result of excluding volatility in estimating an option's value is an amount commonly termed minimum value); and expected terms of 5 years. 11. INCOME TAXES There is no provision for income tax expense since the Company incurred net losses for all periods presented. Deferred tax assets of approximately $1,015,000 and $2,226,000 as at June 30, 1998 and 1999 result primarily from Net Operating Losses ("NOL's") and have been fully offset by valuation allowances due to the lack of certainty as to the ultimate realization of any benefits resulting from such NOLs. As at June 30, 1999, e.Volve had NOLs of approximately $6,547,000. Due to restrictions on use of NOLs following a change in ownership, these NOLs may not be used by the Company prior to their expiration, which is in various years through 2018. 12. RELATED PARTY TRANSACTIONS Administrative Expenses During the years ended June 30, 1997, 1998 and 1999, the Company shared office space, payroll and certain other administrative expenses with a related party ("Orix Systems"). The Company paid Orix Systems $408,734, $676,227 and $156,597, for the years ended June 30, 1997, 1998, and 1999 respectively, with respect to such expenses. Advances From Shareholder Advances due from shareholder relate to advances made by the majority shareholder of e.Volve prior to Infinity's investment therein. The advances are non-interest bearing and are due on demand. As of June 30, 1998 and 1999, advances due from shareholder totaled $60,920 and $0, respectively. F-21 95 eVENTURES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Sales to Affiliates Sales to PhoneFree.com and ICT totaled $44,100 and $37,500, respectively, for the six months ended December 31, 1999. 13. COMMITMENTS AND CONTINGENCIES Operating Leases The Company is a lessee under certain noncancelable operating leases. Terms of the leases call for monthly payments ranging from $400 to $168,000. Future minimum lease payments under these noncancelable operating leases are as follows:
1999 -------- FOR THE YEAR ENDED JUNE 30, 2000........................................................ $249,920 2001........................................................ 165,358 2002........................................................ 147,168 2003........................................................ 114,137 2004........................................................ 66,101 Thereafter.................................................. 38,556 -------- $781,240 ========
During the years ended June 30, 1997, 1998 and 1999, the Company incurred rent expense of $73,211, $1,346,968 and $4,555,513 respectively. (see Note 11) During the six months ended December 31, 1999, the Company entered into a three year noncancelable operating lease for a fiber optic cable calling for monthly payments of $94,972. Litigation The Company is a defendant in two lawsuits arising out of the ordinary course of business. In each case the plaintiff is seeking damages against the Company primarily for breach of contract. As of June 30, 1998 and 1999, the Company has expensed and accrued a total of $381,802 and $665,299, respectively, pursuant to these claims, which is expected to be the Company's total exposure. The related costs are included as a component of selling, general and administrative expenses. In November 1998, representatives of Mexico's Federal Telecommunications Commission ("COFETEL") entered the premises of the Company's wholly owned subsidiary, Latin Gate, and attempted to confiscate Latin Gate's equipment pursuant to a visitation order under a verification administrative proceeding (procedimiento administrativo de verificacion). Latin Gate filed a Federal constitutional court action known as juicio de amparo against COFETEL in a Mexican Federal district court (juzgado de distrito), principally alleging that the visitation order failed to comply with Mexican constitutional requirements and that the search and seizure were illegal under Mexican law. A juicio de amparo has two stages: the suspension of the acts of authority complained of and a constitutional review. The former stage has two phases: temporary restraining order (suspension provisional) and a final restraining order (suspension definitiva). The purpose of the constitutional review is to determine whether the acts of authority complained of are constitutional. Should the court determine that the acts of authority complained of are unconstitutional, a final judgment (sentencia final) is rendered, the principal effect of which is the granting of the protection of the Federal courts against such acts. On November 24, 1998, Latin Gate obtained a temporary restraining order which preserved the status quo of the Latin Gate equipment and suspended the administrative proceeding, therefore prohibiting COFETEL from re-entering Latin Gate's premises. On December 21, 1998, Latin Gate F-22 96 eVENTURES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) obtained a final restraining order (suspension definitiva). On May 24, 1999, a final judgment was rendered by the district court in favor of Latin Gate, which judgment declared COFETEL's acts unconstitutional and, as a consequence, granted Latin Gate the protection of the Federal courts. On July 7, 1999, COFETEL appealed, through a recurso de revision, to a higher court (tribunal colegiado de circuito) seeking a review of the district court judgment. As of March 7, 2000, the appeal is still pending. It may not be possible to ascertain the definitive outcome of this matter but Latin Gate continues to defend itself in Mexican courts. The loss of Latin Gate's equipment might have an adverse effect on the Company's financial condition. The cost of litigation, regardless of the outcome, may have an adverse effect on the Company's financial condition. As of June 30, 1999, no amounts have been accrued for this matter. The Company is involved in other litigation arising out of the ordinary course of business. Management believes, based in part on the advice of outside counsel, that these matters will not have a material adverse effect on the accompanying consolidated financial statements. Employment Agreements The Company has entered into multi-year employment agreements or management contracts with six of its senior executives. These agreements mature at various times beginning in June 2000 and ending in September 2002. These agreements provide for annual salaries ranging between $100,000 and $200,000. In addition, certain of these employees were granted options to purchase common stock under the Company's Share Option Plan. These options, if exercised, would represent the right to purchase 1,850,000 shares of common stock at various exercise prices ranging from $2.50 to $10.00 per option (See Note 9). Marketing Agreements On January 1, 1999, the Company entered into an agreement with Corpovision S.A. de C.V. ("Corpovision") to provide marketing services to locate and develop clients for telecommunications services. As long as e.Volve conducts business with the clients listed in the agreement, the Company must pay a minimum compensation amount of $100,000 per month in any month sales are made, within thirty days after the end of each period. The payment must be in the form of cash or a subordinated, non-recourse promissory note to be paid with any available cash flow. The term of the agreement is for thirty years. As of June 30, 1999, the Company had paid compensation amounting to $200,000 and had a note outstanding for the remaining months of $300,000. During Fiscal 1999, the Company incurred compensation expense related to such agreement totaling $500,000. On November 30, this agreement was terminated. The Company settled its liability to Corpovision and terminated the agreement through an issue of 137,500 shares of eVentures. As a result, the Company recorded a charge in the statement of operations of approximately $1,600,000 during the six months ended December 31, 1999 for the difference between the value of the shares issued and the book value of the note payable to Corpovision. Agreements with Vendors On October 9, 1996, the Company entered into an agreement with a vendor to provide sundry telecom services which expired on October 9, 1999. On April 29, 1998, the Company entered into an agreement with Qwest for telecommunication services. The agreement can be terminated at any time by either party upon a thirty-day notice and can be automatically renewed for successive one-year periods. Rates for services disclosed in the agreement are subject to change at any time. On September 30, 1999, e.Volve and Qwest Communications Corporation entered into an Indefeasible Right of Use ("IRU") agreement in which Qwest granted e.Volve an indefeasible right of use to a fiber optic circuit operated by Qwest between New York, New York and Los Angeles, California for a period of twenty F-23 97 eVENTURES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) years. In consideration for this indefeasible right of use, e.Volve agreed to pay Qwest a total of $15.0 million in four installments between October 1, 1999 and September 30, 2001. In addition, e.Volve has been required to pay Qwest a monthly operation and maintenance charge of $25,000 per month since January 1, 2000. Pursuant to the IRU agreement, e.Volve must separately arrange for a collocation space in the Qwest terminal facilities or obtain from a local telecommunications distributor the telecommunications transmission facilities required in order to extend each route from a cross-connect panel at Qwest's terminal facility to a location outside of the Qwest terminal facility. As of March 7, 2000, e.Volve had not utilized its right to use the fiber optic circuit. However, e.Volve has not entered into any collocation agreement with Qwest or any other local telecommunications distributor as required under the IRU agreement and has not obtained the telecommunications transmission necessary to extend each route to a location outside of the Qwest terminal facility. Consequently, the route from New York to Los Angeles lies inactive and has not received any traffic from e.Volve. On December 23, 1999, Qwest made a demand for payment of the first installment of $3.75 million. Thereafter, Quest has sent invoices to e.Volve requesting payment of the full $15.0 million. e.Volve has not made this payment and e.Volve, eVentures and Qwest have commenced negotiations for a restructuring of the terms of the IRU agreement. As of March 7, 2000, e.Volve and Qwest have not reached an agreement regarding this dispute. The accompanying financial statements do not include any adjustments which may be necessary related to the above transaction. On August 31, 1999, the Company entered into a joint venture agreement with Uni-Tel, Inc., a Texas corporation that operates in the United States and India and provides international telecommunications services. The agreement formed a strategic alliance in which Uni-Tel would manage telecommunications equipment and software owned by the Company, which was located in the United States and India and deliver telecommunications traffic carried by the Company from the United States terminating in India. Under the terms of the agreement, the Company paid Uni-Tel $800,000 for the purchase of five systems of telecommunications equipment and software and has been invoiced for an additional $450,000, payable in shares of eVentures' common stock, to complete the payment for these systems. In addition, the Company agreed to pay $250,000 for the purchase of each of up to seven additional telecommunications termination systems. The $250,000 to be paid by the Company for each new termination system is to be paid in two installments. The first $100,000 of each installment is due upon seven days notice of the proposed installation of a new termination system, and the remaining $150,000 is payable in shares of the Company's common stock and is due upon the completion of two weeks' testing and acceptance of the termination system by the Company. In addition to the purchase of the termination systems, within a month of commencing operations, the Company is to supply a minimum of 300,000 minutes of usage per location per month and within ninety days of commencing operations increase such usage to a monthly minimum of 450,000 minutes per location. In exchange for Uni-Tel's termination of the traffic supplied to India, the Company pays Uni-Tel a termination fee of $0.14 per minute to cover operating costs in India. In addition, Uni-Tel, at its sole expense, is responsible for the overall daily management of the system sites in Dallas and in India, whereas the Company pays Uni-Tel for managing systems located in sites other than Dallas and India. All adjusted gross profits of the business arrangements contemplated in the agreement are shared equally between the Company and Uni-Tel. The Company believes that Uni-Tel has breached its agreements by failing to adequately manage its network, and pay its expenses related to operations in India and has stopped making certain payments to Uni-Tel. The Company and Uni-Tel are negotiating a settlement agreement in order to resolve this dispute. F-24 98 eVENTURES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. PRO FORMA FINANCIAL DATA (UNAUDITED) On September 22, 1999, the Company acquired all of the outstanding shares of AxisTel, approximately 66.67% of the outstanding shares of e.Volve, and approximately 17% of the outstanding shares of i2v2.com. All of the acquisitions were settled through the issuance of stock of eVentures. Set forth below is the Company's unaudited pro forma condensed statement of operations for the year ended June 30, 1999 and the six months ended December 31, 1999 as though the Transaction and the acquisition of the remaining 33.3% of e.Volve on October 19, 1999 (see Note 1) had occurred on July 1, 1998, after adjustments related to goodwill, amortization of intangible assets and debt discount and interest expense relating to the e.Volve debentures. The unaudited pro forma results are not necessarily indicative of either actual results of operations that would have occurred had the Transaction occurred on July 1, 1998, respectively, or of future results.
YEAR ENDED SIX MONTHS ENDED JUNE 30, 1999 DECEMBER 31, 1999 ------------- ----------------- Revenues............................................... $ 35,215,916 $ 28,403,640 Net loss............................................... $(10,159,679) $(11,651,186) Net loss per share..................................... $ (0.24) $ (0.30)
15. GOODWILL Goodwill of $17,162,468 arose upon the acquisition of AxisTel on September 22, 1999 as part of the Transaction (see Note 1). Goodwill of $11,662,506 arose upon the acquisition of 33.3% of e.volve on October 19, 1999 (See Note 1). Accumulated amortization as of December 31, 1999 was $1,543,506. 16. SUBSEQUENT EVENTS In a series of transactions closed between January 6 and February 4, 2000, the Company issued 15,570 shares of Series C Convertible Preferred Stock, par value $0.00002 per share, to eight accredited investors, at a price of $1,000 per share. The shares are convertible into shares of eVentures' common stock at a price of $17.90 per share, subject to certain anti-dilution adjustments. The conversion price was determined using the average of the closing bid prices per share of eVentures' common stock for the 20 trading days ended December 10, 1999. The effect of the favorable conversion rate will be recorded as an imputed preferred dividend in the third quarter of fiscal 2000. On January 31, 2000, pursuant to an option granted in connection with the Company's initial investment in Fonbox, the Company purchased 1,000,000 newly issued shares of Series A preferred stock of Fonbox for $1.0 million cash. In addition, in connection with the exercise of this option, the Company acquired 350,000 shares of common stock of Fonbox from each of Spydre Zeta L.L.C. and NetProvide Ltd. in exchange for an aggregate of 27,860 shares of eVentures' common stock. As of March 7, 2000, the Company owns approximately 31% of the capital stock of Fonbox. Accordingly, the investment in Fonbox will be accounted for on the equity basis after January 31, 2000. On January 28, 2000, the Company acquired 100,000 Series A Preferred Units of LC39 Venture Group LLC ("LC39"), representing less than 5% of the equity and voting interests of LC39, for $1.0 million. LC39 is the legal name of Launch Center 39. On February 11, 2000, the Company acquired 750,000 shares of Series A-1 convertible preferred stock of Televant, Inc. ("Televant"), a Texas Corporation (d/b/a Callrewards), for $750,000 which represents 30% of the outstanding capital stock of Televant on a fully-diluted basis. Under the agreement with Televant, the Company is obligated to purchase shares of Series A-2 convertible preferred stock of Televant, which on the date of purchase will be convertible into 20% of the ownership interest in Televant on a fully-diluted basis, for F-25 99 eVENTURES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $1,000,000 when Televant has at least 100,000 active users. In addition the Company is obligated to purchase shares of Series A-3 convertible preferred stock of Televant, which on the date of purchase will be convertible into 20% of Televant on a fully-diluted basis, for $2,500,000 when Televant has at least 250,000 active users. On March 3, 2000, the Company loaned $3.0 million to PhoneFree.com under a promissory note dated March 2, 2000. The promissory note is due on September 1, 2000 and bears interest at 7%. PhoneFree.com may repay this promissory note at any time, subject to the Company's right to convert it into common stock of PhoneFree.com. The Company can convert the promissory note into common stock of PhoneFree.com: (i) if PhoneFree.com raises equity capital from other investors on or before August 31, 2000, in which case the Company's conversion price will be equal to 95% of the per share subscription or conversion price in such equity capital raise; or (ii) if PhoneFree.com does not raise equity capital from other investors on or before August 31, 2000, the Company can convert the promissory note on or after September 1, 2000, at a per share conversion price that values all the common and preferred stock of PhoneFree.com at $50.0 million. In connection with the loans made under the promissory note, the Company also received a four-year warrant to purchase 240,000 shares of PhoneFree.com at a price equal to 110% of the conversion price of the promissory note. The warrant may not be called by PhoneFree. If the Company included this warrant, but not the promissory note, the Company would beneficially own approximately 18% of the outstanding shares of common stock of PhoneFree.com. On March 7, 2000, the Company entered into an agreement to acquire approximately 5,970,000 shares of Internet Global Services, Inc.("IGS"), representing approximately 92.6% of the issued and outstanding equity interests of IGS, in exchange for approximately 2,588,000 shares of eVentures' common stock. Under this agreement, following the Company's purchase of the IGS shares, IGS will merge with and into the Company's wholly-owned subsidiary IGS Acquisition Corporation, with IGS being the surviving corporation. The per share consideration under the merger will be substantially the same as the consideration paid under the agreement. This transaction remains subject to customary closing conditions and the Company expects to close this transaction during the third quarter of fiscal 2000. F-26 100 INDEPENDENT AUDITORS' REPORT To the Stockholders AxisTel Communications, Inc. Jersey City, New Jersey We have audited the accompanying balance sheets of AxisTel Communications, Inc. as of December 31, 1997 and 1998, and the related statements of operations, stockholders' equity (deficit) and cash flows for the period from August 28, 1997 (inception) to December 31, 1997 and the year ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements 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 financial statements referred to above present fairly, in all material respects, the financial position of AxisTel Communications, Inc. at December 31, 1997 and 1998, and the results of its operations and its cash flows for the period from August 28, 1997 (inception) to December 31, 1997 and the year ended December 31, 1998, in conformity with generally accepted accounting principles. BDO SEIDMAN, LLP New York, New York October 29, 1999 F-27 101 AXISTEL COMMUNICATIONS, INC. BALANCE SHEETS ASSETS
DECEMBER 31, DECEMBER 31, JUNE 30, 1997 1998 1999 ------------ ------------ ----------- (UNAUDITED) CURRENT: Cash................................................. $31,712 $1,418,070 $ 630,571 Accounts receivable -- net of allowances for doubtful accounts of $-0-, $25,000 and $75,000, respectively...................................... 38,250 302,100 1,054,563 Prepaid expenses and other current assets............ 2,443 35,898 217,300 ------- ---------- ----------- TOTAL CURRENT ASSETS......................... 72,405 1,756,068 1,902,434 RESTRICTED CASH........................................ -- -- 750,000 PROPERTY, EQUIPMENT, AND CERTAIN INTANGIBLES AT COST, NET OF ACCUMULATED DEPRECIATION...................... -- 1,693,055 394,583 LOAN ORIGINATION COSTS -- NET OF ACCUMULATED AMORTIZATION OF $5,000 AND $55,000, RESPECTIVELY..... -- 55,000 -- OTHER ASSETS........................................... -- 46,800 46,800 ------- ---------- ----------- $72,405 $3,550,923 $ 3,093,817 ======= ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current portion of notes payable -- Eraatel Corp..... $ -- $ 427,600 $ -- Notes payable -- stockholders........................ 10,000 25,000 25,625 Accounts payable and accrued expenses................ 47,204 369,604 1,203,760 Deferred revenue..................................... -- 110,000 176,230 ------- ---------- ----------- TOTAL CURRENT LIABILITIES.................... 57,204 932,204 1,405,615 NOTES PAYABLE: Eraatel Corp......................................... -- 1,072,400 -- Stockholder.......................................... -- 1,748,925 3,317,425 ------- ---------- ----------- TOTAL LIABILITIES............................ 57,204 3,753,529 4,723,040 ------- ---------- ----------- COMMITMENTS AND CONTINGENCY STOCKHOLDERS' EQUITY (DEFICIT): Common stock......................................... 15 15 15 Additional paid-in capital........................... 985 312,395 312,395 Retained earnings (deficit).......................... 14,201 (515,016) (1,941,633) ------- ---------- ----------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT)......... 15,201 (202,606) (1,629,223) ------- ---------- ----------- $72,405 $3,550,923 $ 3,093,817 ======= ========== ===========
See accompanying summary of accounting policies and notes to financial statements. F-28 102 AXISTEL COMMUNICATIONS, INC. STATEMENTS OF OPERATIONS
PERIOD FROM AUGUST 28, 1997 (INCEPTION) TO YEAR ENDED SIX MONTHS ENDED JUNE 30, DECEMBER 31, DECEMBER 31, ------------------------- 1997 1998 1998 1999 --------------- ------------ --------- ----------- (UNAUDITED) NET REVENUES.......................... $69,250 $2,304,887 $ 529,241 $ 6,191,997 CARRIER CHARGES....................... 49,042 1,853,873 659,709 5,187,071 --------- ----------- 20,208 451,014 (130,468) 1,004,926 ------- ---------- --------- ----------- OTHER OPERATING EXPENSES: Selling, general and administrative................... 5,707 648,943 56,431 1,615,783 Line charges........................ -- 199,977 44,149 460,070 Cellular phones..................... -- 47,463 -- -- Printing............................ -- 38,780 -- -- ------- ---------- --------- ----------- TOTAL OTHER OPERATING EXPENSES.................. 5,707 935,163 100,580 2,075,853 ------- ---------- --------- ----------- OPERATING INCOME (LOSS)..... 14,501 (484,149) (231,048) (1,070,927) OTHER EXPENSES: Interest expense, net............... -- 44,768 -- 255,690 Other expense....................... -- -- -- 100,000 ------- ---------- --------- ----------- INCOME (LOSS) BEFORE TAXES ON INCOME................. 14,501 (528,917) (231,048) (1,426,617) TAXES ON INCOME....................... 300 300 -- -- ------- ---------- --------- ----------- NET INCOME (LOSS)..................... $14,201 $ (529,217) $(231,048) $(1,426,617) ======= ========== ========= ===========
See accompanying summary of accounting policies and notes to financial statements. F-29 103 AXISTEL COMMUNICATIONS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) PERIOD FROM AUGUST 28, 1997 (INCEPTION) TO DECEMBER 31, 1997, YEAR ENDED DECEMBER 31, 1998 AND SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
COMMON STOCK, COMMON STOCK, CLASS A CLASS B ADDITIONAL RETAINED ------------------ ------------------ PAID-IN EARNINGS STOCKHOLDERS' SHARES PAR VALUE SHARES PAR VALUE CAPITAL (DEFICIT) EQUITY (DEFICIT) ------ --------- ------ --------- ---------- ----------- ---------------- BALANCE, AUGUST 28, 1997................ -- $-- -- $ -- $ -- $ -- $ -- Issuance of common stock.............. 1,500 15 -- -- 985 -- 1,000 Net income............................ -- -- -- -- -- 14,201 14,201 ----- --- -- ----- -------- ----------- ----------- BALANCE, DECEMBER 31, 1997.............. 1,500 15 -- -- 985 14,201 15,201 Issuance of common stock.............. -- -- 1 -- -- -- -- Officer's salary-imputed.............. -- -- -- -- 12,000 -- 12,000 Options granted....................... -- -- -- -- 25,510 -- 25,510 Warrants granted...................... -- -- -- -- 273,900 -- 273,900 Net loss.............................. -- -- -- -- -- (529,217) (529,217) ----- --- -- ----- -------- ----------- ----------- BALANCE, DECEMBER 31, 1998.............. 1,500 15 1 -- 312,395 (515,016) (202,606) Net loss (Unaudited).................. -- -- -- -- -- (1,426,617) (1,426,617) ----- --- -- ----- -------- ----------- ----------- BALANCE, JUNE 30, 1999 (UNAUDITED)...... 1,500 $15 1 $ -- $312,395 $(1,941,633) $(1,629,223) ===== === == ===== ======== =========== ===========
See accompanying summary of accounting policies and notes to financial statements. F-30 104 AXISTEL COMMUNICATIONS, INC. STATEMENTS OF CASH FLOWS (NOTE 9)
PERIOD FROM AUGUST 28, 1997 (INCEPTION) TO YEAR ENDED SIX MONTHS ENDED JUNE 30, DECEMBER 31, DECEMBER 31, -------------------------- 1997 1998 1998 1999 ------------ ------------ ---------- ------------ (UNAUDITED) Cash flows from operating activities: Net income (loss)............................... $ 14,201 $ (529,217) $(231,048) $(1,426,617) -------- ---------- --------- ----------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization................ -- 15,564 -- 20,627 Amortization of loan origination costs....... -- 27,825 -- 123,500 Other expense................................ -- -- -- 100,000 Stock options issued in lieu of payment for services................................... -- 25,510 -- -- Officer's salary -- imputed.................. -- 12,000 -- -- Decrease (increase) in: Accounts receivable........................ (38,250) (278,100) 30,992 (752,463) Prepaid expenses and other assets.......... (2,443) (72,697) (4,492) (181,402) Restricted cash............................ -- -- -- (750,000) Increase in: Accounts payable and accrued expenses...... 47,204 329,092 174,419 834,156 Deferred revenue........................... -- 110,000 25,000 66,230 -------- ---------- --------- ----------- Total adjustments....................... 6,511 169,194 225,919 (539,352) -------- ---------- --------- ----------- Net cash provided by (used in) operating activities............................ 20,712 (360,023) (5,129) (1,965,969) -------- ---------- --------- ----------- Cash flows from investing activities: Capital expenditures............................ -- (208,619) -- (322,155) -------- ---------- --------- ----------- Cash flows from financing activities: Proceeds from: Issuance of common stock..................... 1,000 -- -- -- Notes payable, net of loan origination costs...................................... -- 1,940,000 -- 1,500,000 Loans from stockholders...................... 10,000 15,000 25,000 625 -------- ---------- --------- ----------- Net cash provided by financing activities............................ 11,000 1,955,000 25,000 1,500,625 -------- ---------- --------- ----------- Net increase (decrease) in cash................... 31,712 1,386,358 19,871 (787,499) Cash, beginning of period......................... -- 31,712 31,712 1,418,070 -------- ---------- --------- ----------- Cash, end of period............................... $ 31,712 $1,418,070 $ 51,583 $ 630,571 ======== ========== ========= ===========
See accompanying summary of accounting policies and notes to financial statements. F-31 105 AXISTEL COMMUNICATIONS, INC. SUMMARY OF ACCOUNTING POLICIES (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) DESCRIPTION OF BUSINESS AxisTel Communications, Inc. (the "Company") was incorporated in the State of Delaware on August 28, 1997. Its services include the provision of international and domestic voice and data applications over Company leased and third party fiber optic networks and retail communication services, including prepaid telephony. UNAUDITED INTERIM FINANCIAL STATEMENTS The financial statements as of June 30, 1999 and for the six months ended June 30, 1998 and 1999 are unaudited, and have been prepared on the same basis as the audited financial statements included herein. In the opinion of management, such unaudited financial statements include all adjustments consisting of normal recurring accruals necessary to present fairly the information set forth therein. Results for interim periods are not necessarily indicative of results to be expected for an entire year. PROPERTY, EQUIPMENT AND CERTAIN INTANGIBLES Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives. LOAN ORIGINATION COSTS Loan origination costs are amortized based on the interest method over the contractual period of the loan (see Note 5). INCOME TAXES Income taxes are calculated using the liability method specified by Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS No. 109 requires a company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in a company's financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent realization is uncertain. REVENUE RECOGNITION Prepaid phone card revenues are earned when the prepaid phone cards are used. Deferred revenues of $-0- and $110,000 at December 31, 1997 and 1998, respectively, represent unused prepaid phone cards. 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-32 106 AXISTEL COMMUNICATIONS, INC. SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED) LONG-LIVED ASSETS Long-lived assets, such as property and equipment, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use and sale of these assets. When any such impairment exists, the related assets will be written down to fair value. No impairment losses have been recognized through June 30, 1999. F-33 107 AXISTEL COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) 1. TRANSACTIONS WITH RELATED PARTIES Included in revenues for the year ended December 31, 1998 were revenues from Debit Card Technologies Inc. totaling approximately $264,000. Debit Card Technologies Inc. is wholly owned by an employee's spouse. All revenues for the period August 28, 1997 (inception) to December 31, 1997 were received from Debit Card Technologies, Inc. 2. PROPERTY AND EQUIPMENT AND CERTAIN INTANGIBLES Major classes of property and equipment and certain intangibles are as follows:
DECEMBER 31, ----------------------- ESTIMATED 1997 1998 USEFUL LIVES ---------- ---------- ------------ Indefeasible Right of Use of phone line........... $ -- $1,600,000 25 years Equipment......................................... -- 108,619 3-4 years ---------- ---------- -- 1,708,619 Less: Accumulated depreciation.................... -- (15,564) ---------- ---------- $ -- $1,693,055 ========== ==========
3. NOTES PAYABLE -- ERAATEL CORP. On December 3, 1998, the Company entered into an Indefeasible Right of Use ("IRU") agreement with Eraatel Corporation which provides for the use of a phone line for 25 years. The Company leased the phone line between New York City, New York and Miami, Florida for a one-time IRU fee of $1,600,000. The Company paid $100,000 upon the execution of the agreement. The balance due of $1,500,000 is payable in equal monthly installments over a term of 36 months with interest accruing at 15%. As of December 31, 1998, $427,600 was classified as current and $1,072,400 was classified as long-term debt. In April 1999, the Company was notified that Eraatel Corporation had misled the Company and, in fact, only had rights to the IRU for four months. As a result, the above agreement was terminated and the related asset and notes payable were written off. The $100,000 payment has been recorded as other expense. 4. MAJOR CUSTOMERS Two customers accounted for approximately 40% of accounts receivable at December 31, 1998. Revenues from these customers accounted for approximately 6% of revenues for the year ended December 31, 1998. 5. NOTES PAYABLE -- STOCKHOLDERS On October 28, 1998, the Company issued notes to Infinity Emerging Opportunities Limited ("IEOL") in an aggregate amount of $2,000,000. As of December 31, 1998, the aggregate principal balance due was $2,000,000. The note agreement provides for a further $1,500,000, of which $500,000 was received on March 10, 1999 and $1,000,000 was received on April 19, 1999, and is subject to certain conditions as set forth in the agreement. Interest is calculated at 8% per annum and is payable monthly. The outstanding principal balance and any unpaid interest shall be due and payable on October 28, 2000. The notes are secured by all assets and equity interests of the Company. As of December 31, 1998, the Company had not met, but was subsequently granted waivers with respect to, certain reporting requirements under the above notes. In connection with the notes, the Company issued warrants to purchase 1,499 shares of Class B common stock, par value $.01 per share, of the Company at an exercise price of $2,333.33 per share. The warrants were F-34 108 AXISTEL COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) valued at approximately $274,000 using the Black-Scholes model and the Company recorded the amount as a debt discount, with a related credit to additional paid-in capital. The debt discount is being amortized over the life of the loan. As of December 31, 1998, the balance of the debt discount, net of amortization, was $251,075. As additional consideration for the notes payable, the Company issued one share of Class B common stock of the Company to IEOL at a purchase price of $1 (approximate fair value), with voting rights as set forth in the Certificate of Incorporation of the Company entitling the purchasers to vote 50% of all issued and outstanding shares of the common stock of the Company. The Company had notes payable to one of its stockholders aggregating $10,000 at December 31, 1997. The Company had notes payable to two of its stockholders aggregating $25,000 at December 31, 1998. Interest is calculated at 5% per annum. The outstanding principal balance and any unpaid interest was due and payable on October 28, 1999 and the notes were therefore classified as short term. 6. COMMON STOCK Common stock is comprised of the following:
DECEMBER 31, ------------ 1997 1998 ---- ---- Class A shares; par value $.01, 45,000 shares authorized, 1,500 shares issued and outstanding....................... $15 $15 Class B shares; par value $.01, 45,000 shares authorized, 1 share issued and outstanding.............................. -- -- Class C shares; nonvoting par value $.01, 10,000 shares authorized, none issued and outstanding................... -- -- --- --- $15 $15 === ===
7. STOCK OPTIONS On November 18, 1998, IEOL retained a consultant to perform services for the Company. The consultant was granted stock options to purchase 30 shares of Class C, nonvoting common stock, par value $.01, of the Company at an exercise price of $2,333.33 per share. The stock options vest on May 18, 1999. The options were valued at $25,510 using the Black-Scholes model and the Company recorded the amount as compensation expense with a related credit to additional paid-in capital. 8. COMMITMENTS Leases Minimum annual commitments under all noncancellable operating leases with terms in excess of one year approximate:
YEAR ENDED DECEMBER 31, - ----------------------- 1999........................................................ $ 210,600 2000........................................................ 280,800 2001........................................................ 280,800 2002........................................................ 280,800 2003........................................................ 280,800 Thereafter.................................................. 1,582,200 ---------- Total minimum lease payments................................ $2,916,000 ==========
F-35 109 AXISTEL COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Rent expense for the period from August 28, 1997 (inception) to December 31, 1997 and the year ended December 31, 1998 was approximately $1,000 and $12,000, respectively. 9. STATEMENTS OF CASH FLOW
PERIOD FROM AUGUST 28, 1997 SIX MONTHS ENDED (INCEPTION) TO YEAR ENDED JUNE 30, DECEMBER 31, DECEMBER 31, ---------------- 1997 1998 1998 1999 -------------- ------------ ----- -------- Supplemental disclosure of cash flow information: Cash paid during the period for: Interest...................................... $ -- $ 13,333 $ -- $90,000 Taxes......................................... -- -- -- 1,100 Noncash investing and financing activities: Capital leases entered into during the period.... -- 1,500,000 -- -- Warrants and options issued during the period.... -- 299,410 -- --
10. INCOME TAXES The Company has a deferred tax asset amounting to approximately $197,000 at December 31, 1998, principally relating to net operating loss carryforwards and a basis difference in the carrying amount of trade accounts receivable for financial reporting purposes and the amount used for income tax purposes. The Company recorded a valuation allowance amounting to the entire deferred tax asset balance due to the Company's financial condition and its lack of a history of consistent earnings, giving rise to uncertainty as to whether the deferred tax asset is realizable. No amount of deferred Federal or state income tax is therefore presented. Deferred income taxes are not material for the period ended December 31, 1997. As of December 31, 1998, the Company had net operating loss income tax carryforwards of approximately $529,000, which expire in the years 1999 through 2018. 11. SUBSEQUENT EVENTS On September 22, 1999, the following significant transactions occurred: IEOL exercised its warrants to purchase 1,499 Class A shares of the Company, which gave it 50% of the total outstanding shares of the Company. IEOL exchanged its shares in the Company for shares of eVentures Group, Inc. ("eVentures"). eVentures acquired the other 50% of the Company's Class A shares from the founding shareholders of the Company, settled through an issue of shares of eVentures. These transactions consummated the acquisition of all of the outstanding shares of the Company by eVentures. F-36 110 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Shareholders of Internet Global Services, Inc. Dallas, Texas We have audited the accompanying balance sheets of Internet Global Services, Inc. at June 30, 1998 and 1999 and the related statements of loss, stockholders' equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance 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 financial statements referred to above present fairly, in all material respects, the financial position of Internet Global Services, Inc. at June 30, 1998 and 1999 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. BDO Seidman, LLP Dallas, Texas April 21, 2000 F-37 111 INTERNET GLOBAL SERVICES, INC. BALANCE SHEETS ASSETS (NOTE 4)
JUNE 30, ------------------------- DECEMBER 31, 1998 1999 1999 ----------- ----------- ------------ (UNAUDITED) Current Assets Cash and cash equivalents........................... $ 12,277 $ 390,821 $ 142,386 Accounts receivable, net of allowance of $65,000, $23,000 and $95,638 (unaudited).................. 35,756 24,840 78,815 Prepaid expenses.................................... 1,477 106,996 149,079 ----------- ----------- ----------- Total Current Assets........................ 49,510 522,657 370,280 ----------- ----------- ----------- Property, plant and equipment, net (Note 3)........... 392,290 2,073,072 1,910,379 ----------- ----------- ----------- Intangible assets, net (Note 1)....................... 22,275 19,733 18,838 Funds in escrow (Note 11)............................. -- 281,928 281,928 Deposits.............................................. 2,150 5,000 5,000 ----------- ----------- ----------- Total Other Assets.......................... 24,425 306,661 305,766 ----------- ----------- ----------- TOTAL ASSETS................................ $ 466,225 $ 2,902,390 $ 2,586,425 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities Convertible notes payable (Note 6).................. $ 150,000 $ -- $ -- Notes payable -- related (Note 4)................... -- 66,500 316,704 Accounts payable.................................... 97,507 153,856 1,178,292 Accrued liabilities................................. 37,300 311,401 370,261 Deferred revenue.................................... 83,525 94,588 71,852 Current maturities of long-term debt (Note 4)....... -- 203,556 664,785 Current maturities of capital lease obligations (Note 7)......................................... 24,375 1,055,850 1,448,391 ----------- ----------- ----------- Total Current Liabilities................... 392,707 1,885,751 4,050,285 Long-term debt, less current maturities (Note 4)...... -- 296,444 255,662 Capital lease obligations, less current maturities (Note 7)............................................ 49,573 1,589,452 1,096,997 ----------- ----------- ----------- Total Liabilities........................... 442,280 3,771,647 5,402,944 ----------- ----------- ----------- Commitments (Note 7) Stockholders' Equity (Deficit) Preferred stock (Note 8)............................ -- 165,000 -- Common stock (Note 8)............................... 2,568 2,666 2,794 Additional paid-in capital.......................... 1,702,364 3,207,675 4,190,347 Deficit............................................. (1,680,987) (4,244,598) (7,009,660) ----------- ----------- ----------- Total Stockholders' Equity (Deficit)........ 23,945 (869,257) (2,816,519) ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)................................. $ 466,225 $ 2,902,390 $ 2,586,425 =========== =========== ===========
See accompanying notes to financial statements. F-38 112 INTERNET GLOBAL SERVICES, INC. STATEMENTS OF LOSS
YEARS ENDED JUNE 30, SIX MONTHS ENDED DECEMBER 31, ------------------------- ----------------------------- 1998 1999 1998 1999 ----------- ----------- ------------- ------------- (UNAUDITED) Revenues................................. $ 1,282,744 $ 1,445,907 $ 715,454 $ 753,610 Direct Costs............................. 626,044 1,315,423 488,636 1,262,128 ----------- ----------- ----------- ----------- Gross Profit............................. 656,700 130,484 226,818 (508,518) Selling, General and Administrative...... 1,762,251 2,703,838 802,472 2,142,062 ----------- ----------- ----------- ----------- Net operating loss............. (1,105,551) (2,573,354) (575,654) (2,650,580) Other income (Note 12)................... 8,887 443,632 -- -- Other expenses (Note 11)................. (10,051) (433,889) (441,767) (114,482) ----------- ----------- ----------- ----------- Loss before taxes.............. (1,106,715) (2,563,611) (1,017,421) (2,765,062) Income taxes (Note 5).................... -- -- -- -- ----------- ----------- ----------- ----------- Net loss....................... $(1,106,715) $(2,563,611) $(1,017,421) $(2,765,062) =========== =========== =========== ===========
See accompanying notes to financial statements. F-39 113 INTERNET GLOBAL SERVICES, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK COMMON STOCK ADDITIONAL ------------------- ------------------ PAID-IN SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL ------- --------- --------- ------ ---------- ----------- ----------- JULY 1, 1997................... -- $ -- 3,437,934 $1,718 $1,032,213 $ (574,272) $ 459,659 Net loss..................... -- -- -- -- -- (1,106,715) (1,106,715) Shares issued for cash....... -- -- 1,484,832 742 245,259 -- 246,001 Shares issued for services... -- -- 212,500 108 424,892 -- 425,000 ------- --------- --------- ------ ---------- ----------- ----------- JUNE 30, 1998.................. -- -- 5,135,266 2,568 1,702,364 (1,680,987) 23,945 Net loss..................... -- -- -- -- -- (2,563,611) (2,563,611) Preferred shares issued...... 33,000 165,000 -- -- -- -- 165,000 Shares issued for cash....... -- -- 635,470 318 1,075,246 -- 1,075,564 Options and warrants issued for services............... -- -- -- -- 431,739 -- 431,739 Shares redeemed.............. -- -- (439,184) (220) (1,674) -- (1,894) ------- --------- --------- ------ ---------- ----------- ----------- JUNE 30, 1999.................. 33,000 165,000 5,331,552 2,666 3,207,675 (4,244,598) (869,257) Net loss (unaudited)......... -- -- -- -- -- (2,765,062) (2,765,062) Shares issued for cash (unaudited)................ -- -- 184,444 92 487,708 -- 487,800 Preferred shares converted (unaudited)................ (33,000) (165,000) 72,600 36 164,964 -- -- Options issued for services (unaudited)................ -- -- -- -- 330,000 -- 330,000 ------- --------- --------- ------ ---------- ----------- ----------- DECEMBER 31, 1999 (UNAUDITED)................ -- $ -- 5,588,596 $2,794 $4,190,347 $(7,009,660) $(2,816,519) ======= ========= ========= ====== ========== =========== ===========
See accompanying notes to financial statements. F-40 114 INTERNET GLOBAL SERVICES, INC. STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, SIX MONTHS ENDED DECEMBER 31, ------------------------- ----------------------------- 1998 1999 1998 1999 ----------- ----------- ------------- ------------- (UNAUDITED) Cash Flows from operating activities: Net loss............................... $(1,106,715) $(2,563,611) $(1,017,421) $(2,765,062) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization....... 210,122 551,448 119,178 536,064 Amortization on intangibles......... 1,863 2,543 1,648 895 Provision for doubtful accounts..... 45,356 -- -- -- Issuance of common stock and options for services...................... 425,000 431,739 240,399 330,000 Loss on disposal of assets.......... 6,852 -- -- -- Loss from theft of assets (Note 11)............................... -- 432,572 432,572 -- Changes in assets and liabilities: Accounts receivable............... (60,280) 10,916 8,187 (53,975) Prepaid expenses.................. -- (105,519) (111,374) (42,083) Accounts payable and accrued liabilities.................... 67,819 345,450 (33,428) 1,083,296 Deferred revenue.................. 36,611 11,064 4,875 (22,737) ----------- ----------- ----------- ----------- Net cash used in operating activities................... (373,372) (883,398) (355,364) (933,602) ----------- ----------- ----------- ----------- Cash flows from investing activities: Purchase of equipment.................. (286,956) (332,260) (6,621) (50,003) Other.................................. 1,834 (2,851) 2,563 -- ----------- ----------- ----------- ----------- Net cash used in investing activities................... (285,122) (335,111) (4,058) (50,003) ----------- ----------- ----------- ----------- Cash flows from financing activities: Proceeds from issuance of common stock............................... 245,929 1,073,670 103,675 487,800 Proceeds from note payable -- related party............................... -- 66,500 72,360 250,204 Proceeds from convertible notes payable............................. 150,000 -- -- -- Proceeds from long-term debt........... -- 500,000 250,000 420,448 Payments on capital lease obligations......................... (22,756) (43,117) (14,560) (423,282) ----------- ----------- ----------- ----------- Net cash provided by financing activities................... 373,173 1,597,053 411,475 735,170 ----------- ----------- ----------- ----------- Increase (Decrease) in cash.............. (285,321) 378,544 52,053 (248,435) Cash, beginning of year.................. 297,598 12,277 12,277 390,821 ----------- ----------- ----------- ----------- Cash, end of year........................ $ 12,277 $ 390,821 $ 64,330 $ 142,386 =========== =========== =========== ===========
See accompanying notes to financial statements. F-41 115 INTERNET GLOBAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1999 IS UNAUDITED) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business Internet Global Services, Inc. (the "Company") was incorporated in the state of Texas in 1996. The Company, based in Dallas, Texas aggregates communications technologies that utilize and integrate voice, data, and video. In 1998, the Company created Telares, the country's largest revenue-sharing consortium of independent ISPs, providing a broad range of communication services to independent ISPs including DSL, long distance, virtual ISP services, video streaming, unified messaging, prepaid calling cards and other value-added services. During March 2000, the Company completed a series of equity transactions thereby becoming a wholly owned subsidiary of eVentures Group, Inc. (see Note 13). Unaudited Interim Consolidated Financial Statements The consolidated financial statements as of December 31, 1999 and for the six months ended December 31, 1998 and 1999 are unaudited, and have been prepared on the same basis as the audited financial statements included herein. In the opinion of management, such unaudited financial statements include all adjustments consisting of normal recurring accruals necessary to present fairly the information set forth therein. Results for interim periods are not indicative of results to be expected for an entire year. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair market value. Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method based upon the estimated useful lives of the assets as follows: Office equipment and software............................... 3 years Computer equipment under capital lease...................... 2 to 3 years Leasehold improvements...................................... 3 to 5 years Furniture and fixtures...................................... 5 years Vehicles.................................................... 5 years
The Company periodically reviews the carrying value of property and equipment for possible impairment. In management's opinion, there is no impairment of such assets at June 30, 1999. Intangible Assets Intangible assets, primarily goodwill, relate to purchase transactions and are amortized on a straight-line basis over 15 years. As of June 30, 1998 and 1999, accumulated amortization was $3,344 and $5,887, respectively. On a periodic basis, the Company estimates the future undiscounted cash flows of the business to which goodwill relates in order to ensure that the carrying value of goodwill has not been impaired. In management's opinion, there is no impairment of such assets at June 30, 1998 and 1999. F-42 116 INTERNET GLOBAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Revenue Recognition Revenue Recognition -- Revenues from subscription services as an internet service provider are recognized over the period that the service is provided. Other revenues, which consist of web design and hosting services are recognized as the services are performed. Deferred revenue consists primarily of prepaid subscription fees billed in advance. Advertising The Company expenses all costs of advertising as incurred. Included in selling, general and administrative expense are advertising expenses of approximately $27,000 and $32,000 for the years ended June 30, 1998 and 1999, respectively. Income Taxes Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of assets and liabilities for financial and income tax reporting. The net deferred tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Comprehensive Income The Company has adopted the accounting treatment prescribed in Financial Accounting Statement No. 130, "Comprehensive Income." The adoption of the statement had no impact on the Company's financial statements for the periods presented, as net loss equals comprehensive loss. Segment Disclosures In fiscal 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) 131, "Disclosures about Segments of an Enterprise and Related Information". The adoption of SFAS 131 did not affect results of operations, financial position or disclosure of segment information as management believes they are one operating segment, as defined by SFAS 131. Stock-Options The Company has elected to account for stock-based compensation to employees using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. See Note 9 regarding the pro forma net loss information as required by the alternative fair value accounting provided for under Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). Management's Estimates and Assumptions 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 financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. The Company reviews all significant estimates affecting the financial statements on a recurring basis and records the effect of any necessary adjustments prior to their issuance. F-43 117 INTERNET GLOBAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Financial Instruments and Credit Risk Concentration The Company's financial instruments, consisting of cash, accounts receivable, accounts payable, and long term debt, are reflected at their respective carrying values, which approximates fair values. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency and credit risks arising from these financial instruments. The Company maintains its cash in bank deposit and money market accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risks on cash. All of the sales of the Company are to customers located in North America. The Company experienced no significant exchange restrictions related to consolidated foreign subsidiaries. New Accounting Standards In July 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Management does not believe this will have a material effect on the operations. Implementation of this standard has recently been delayed by the FASB for a 12-month period through the issuance of SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- deferral of the effective date of FASB Statement No. 133". The Company will adopt SFAS 133 as required for its first quarterly filing of fiscal year 2001. SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions" was issued in December 1998 and addresses software revenue recognition as it applies to certain multiple-element arrangements. SOP 98-9 also amends SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2", to extend the deferral of application of certain passages of SOP 97-2 through fiscal years beginning on or before March 15, 1999. All other provisions of SOP 98-9 are effective for transactions entered into in fiscal years beginning after March 15, 1999. Complying with the requirements of this SOP has not had a material effect on the Company's revenues and earnings. In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. It is effective for the first fiscal quarter beginning after December 15, 1999. The Company does not expect the adoption of SAB No. 101 to have a material effect on its results of operations or financial condition. NOTE 2 -- FINANCIAL CONDITION The Company has sustained substantial operating losses during 1998 and 1999. The Company's core business during those years was as an internet service provider. Early in fiscal 1998, the Company commenced development of a voice over Internet protocol strategy through the development of a national voice network to provide to customers of independent internet service providers various telecommunication services. During 1998 and 1999, this change in core strategy placed a significant strain on the Company's financial resources. During 1998 and 1999, the Company was able to raise private equity and senior debt to fund operating and development losses. In fiscal 2000, the Company has continued to raise private equity and was acquired on March 10, 2000 (see Note 13). F-44 118 INTERNET GLOBAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3 -- PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
YEARS ENDED JUNE 30, --------------------- 1998 1999 -------- ---------- Computer equipment under capital lease...................... $121,844 $2,021,814 Equipment and software...................................... 619,654 791,346 Leasehold improvements...................................... 2,132 82,422 Office furniture and fixtures............................... 6,856 44,509 Vehicles.................................................... -- 7,804 -------- ---------- 750,486 2,947,895 Less: Accumulated depreciation and amortization............. 358,196 874,823 -------- ---------- $392,290 $2,073,072 ======== ==========
The Company's depreciation and amortization expense for computer equipment under capital lease obligations for the years ended June 30, 1998 and 1999 totaled $31,753 and $351,576, respectively. NOTE 4 -- NOTES PAYABLE In December 1998, in connection with equipment leasing arrangements, the Company signed a $750,000 secured promissory note with a supplier of communications equipment. This note is collateralized by essentially all assets of the Company and bears interest at a rate of 9%. Initial advances under the note allow for two months of deferred payments, followed by six months of interest only payments. After the initial deferral periods the note is payable in 24 equal installments of principal and interest. At June 30, 1999, the principal amount outstanding under this note payable is $500,000. Amounts due under this promissory note were subsequently paid in full (see Note 12). In November 1998, the Company entered into an oral agreement with a shareholder to borrow $66,500. This unsecured borrowing bears interest at 6.5% interest annually. No repayment terms were specified in the agreement. Subsequent to June 30, 1999 the shareholder agreed to accept payment of principal and interest in the form of common shares of the Company. NOTE 5 -- INCOME TAXES The income tax benefit was as follows:
YEARS ENDED JUNE 30, --------------------- 1998 1999 --------- --------- Current tax benefit......................................... $ 217,000 $ 607,000 Deferred tax benefit........................................ 31,000 186,000 Valuation allowance......................................... (248,000) (793,000) --------- --------- Total tax benefit................................. $ -- $ -- ========= =========
Deferred taxes are determined based on temporary differences between the financial statement and income taxes bases of assets and liabilities as measured by the currently enacted tax rates. F-45 119 INTERNET GLOBAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Net deferred income tax asset (liability) consisted of the following:
JUNE 30, ----------------------- 1998 1999 --------- ----------- Net operating loss carryforwards............................ $ 375,000 $ 981,000 Accrued lease payments...................................... -- 28,000 Deferred compensation....................................... -- 40,000 Deferred rent............................................... -- 7,000 Allowance for doubtful accounts............................. 22,000 8,000 Capital lease liability..................................... 25,000 899,000 Deferred revenues........................................... 28,000 32,000 --------- ----------- Deferred tax asset.......................................... 450,000 1,995,000 Valuation allowance......................................... (433,000) (1,226,000) --------- ----------- Net deferred tax asset............................ 17,000 769,000 Deferred tax liability -- capital lease equipment........... (17,000) (769,000) --------- ----------- Net deferred income tax asset..................... $ -- $ -- ========= ===========
Utilization of the deferred tax asset is dependent on future taxable profits in excess of profits arising from existing taxable temporary differences. Because the Company sustained a substantial operating losses in the past and the Company changed ownership subsequent to year end, Management does not believe it is more likely than not that the deferred tax assets will be utilized in the foreseeable future, accordingly, the Company establish a 100% valuation allowance on their deferred tax asset. The income tax benefit differs from the amount of income tax benefit determined by applying the statutory income tax rate to pre-tax loss as follows:
YEARS ENDED JUNE 30, --------------------- 1998 1999 ------ ------ Statutory rate.............................................. $ 34% $ 34% Increase in valuation allowance............................. (32)% (33)% Other -- net................................................ (2)% (1)% ---- ---- $ -- $ -- ==== ====
As of June 30, 1999, the Company has net operating loss carryforwards of approximately $2,886,000, which expire in years through 2019. NOTE 6 -- CONVERTIBLE NOTES PAYABLE In April 1998, the Company issued Convertible Notes Payable in the amount of $150,000, bearing interest at 10% and maturing within one year. These notes, and accrued interest, were convertible into Class A 5% Preferred Shares at $5.00 per share, with the subsequent right to acquire additional preferred shares. During fiscal 1999 the Convertible Notes Payable were converted to preferred shares as specified (see Note 8). NOTE 7 -- COMMITMENTS Capital Leases The Company leases certain equipment under capital leases expiring in various years through June 30, 2002. The assets and liabilities under capital leases are recorded at the lower of the net present value of the future minimum lease payments or the fair value of the asset. The assets are amortized over the lower of their F-46 120 INTERNET GLOBAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) related lease terms or their estimated productive lives. Amortization of assets under capital leases is included in depreciation expense for 1999. Minimum future lease payments under capital lease as of June 30, 1999, and for each of the next five years and in the aggregate are:
AMOUNT ---------- 2000........................................................ $1,251,294 2001........................................................ 1,421,290 2002........................................................ 243,770 2003........................................................ 14,302 2004........................................................ 1,192 ---------- Total minimum lease payments................................ 2,931,848 Less amount representing interest........................... 286,546 ---------- Present value of net minimum lease payments................. 2,645,302 Less current maturities..................................... 1,055,850 ---------- Total long-term obligations under capital leases........................................... $1,589,452 ==========
Operating Leases The Company has various noncancellable operating leases, primarily for office space. Lease expense for years ended June 30, 1998 and 1999 was $37,000 and $68,000, respectively. Future minimum least payments are as follows:
AMOUNT -------- 2000........................................................ $ 91,579 2001........................................................ 131,807 2002........................................................ 125,829 2003........................................................ 131,280 2004........................................................ 128,358 Thereafter.................................................. 9,604 -------- Total............................................. $618,457 ========
NOTE 8 -- CAPITAL ACCOUNTS Preferred Stock -- During 1999 the Company issued 33,000 shares of Class A 5% Preferred Shares in connection with conversion of outstanding Convertible Notes Payable. Theses shares, redeemable at the discretion of the Company, were convertible into Common Stock of the Company at 110% of the number of preferred shares held. See Note 6. Additionally the preferred shareholders were awarded the right to purchase additional shares in the amount of 50% of the preferred shares converted, at a price of $10 per share. Subsequent to year-end the preferred shareholders converted the preferred shares to common shares and exercised their right to purchase the additional shares allotted. Capital Stock -- On May 28, 1999, by resolution of the shareholders, the Company effected a two-for-one stock split increasing the authorized common shares from 10,000,000 to 20,000,000 and decreasing the par value of common shares from $.001 to $.0005. At June 30, 1998 and 1999, the Company's $.0005 par value stock included 5,331,552 and 5,135,266 shares issued and outstanding, respectively, after retroactively reflecting the effect of the stock split. F-47 121 INTERNET GLOBAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) During 1998 the Company issued 1,484,832 shares of common stock for cash, including 657,416 shares issued for nominal value pursuant to a court order settling litigation among the co-founders of the Company regarding shares that were to have been issued at the inception of the Company. Also during 1998 the Company issued 212,500 shares valued at $425,000 to employees in exchange for services. During 1999 the Company issued 635,470 shares of common stock for cash and redeemed 439,184 shares of common stock pursuant to agreements with stockholders and former owners. NOTE 9 -- STOCK OPTIONS AND WARRANTS (a) Employee In June 1998, the Board of Directors adopted and approved the 1998 Equity Incentive Plan ("the Plan"). The Plan provides for the grant of incentive stock options to purchase shares. Under the Plan, the Company is authorized to grant 2,800,000 shares. The exercise price of stock options granted must not be less than 100% of fair market value of the common stock on the date of grant, as determined by the Board of Directors. Options generally expire 5 years from the date of grant and are vested and exercisable one year from the date of grant. Options available for grant at June 30, 1999 represented 1,458,000 shares. At June 30, 1999, 524,564 options outstanding were vested. A summary of the stock option activity for the years ended June 30, 1998 and 1999 is as follows:
1998 1999 ----------------- ----------------- WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE EXERCISE ----------------- ----------------- SHARES PRICE SHARES PRICE -------- ------ --------- ----- Outstanding at beginning of year......................... -- $ -- 524,564 $2.00 Granted.................................................. 524,564 2.00 817,350 2.00 Exercise................................................. -- -- -- -- Forfeited................................................ -- -- -- -- ------- ----- --------- ----- Outstanding at end of year............................... 524,564 $2.00 1,341,914 $2.00 ======= ===== ========= ===== Options exercisable at year end.......................... -- $ -- 524,564 $2.00 ======= ===== ========= ===== Weighted average fair value of options granted during the year................................................... $ .50 $ .50 ===== =====
The following table summarizes information about stock options outstanding as of June 30, 1999:
NUMBER OUTSTANDING WEIGHTED-AVERAGE EXERCISE PRICES AT 6/30/99 EXERCISE PRICE - --------------- ----------- ---------------- $2.00 1,341,914 $2.00
The Company applied APB Opinion 25 and related interpretations in accounting for the above plan. Accordingly, no compensation cost has been recognized for its plan during fiscal 1999. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: risk-free interest rate of 5.5%, expected life of five years; volatility of 0%; and dividend yield of 0%. Pro forma disclosures of the effects of the Plan on the years ended June 30, 1998 and 1999:
1998 1999 -------- ---------- Net income................................ As reported (735,000) (2,564,000) Pro forma (735,000) (3,019,000)
F-48 122 INTERNET GLOBAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Compensation expense of $127,500 was recorded during 1999 in connection with 85,000 options issued to a member of management under a separate employment agreement. (b) Non Employees During 1999 the Board of Directors authorized the issuance to outside Board members options to purchase common stock totaling 404,388. In December 1999, in connection with a secured promissory note with a supplier of communications equipment, the Company issued warrants to purchase 107,143 shares of common stock. In addition, the Company issued warrants to purchase 6,000 shares of common stock to a consulting group during 1999. As a result of the above, the Company recognized expense of $224,000 and recorded deferred financing costs of $80,000. NOTE 10 -- SUPPLEMENTAL CASH FLOW For the years ended June 30, 1998 and 1999, the Company paid interest totaling approximately $43,000 and $104,000, respectively. For the years ended June 30, 1998 and 1999, the Company acquired computer equipment under capital leases totaling $40,377 and $2,614,470, respectively. The Company exchanged notes payable and accrued interest of $150,000 and $15,000, respectively, for preferred stock totaling $165,000 during year ended June 30, 1999. NOTE 11 -- THEFT LOSS In or around November 1998, the Company entered into an equipment lease with a provider of communications equipment ("Lessor"), pursuant to which the Company received possession of approximately $2.5 million of communications equipment. On December 4, 1998, 90 items of this equipment, having a total value of $714,000, were stolen from one of the Company's network operating centers. The Company asserted a claim against its insurance carrier ("Insurer"), for the full amount of the loss. In April 1999, after an investigation involving a number of statements under oath by Company employees, Insurer denied the claim in part, and issued a check to the Company in the amount of $282,000 to cover the approved portion of the claim. That check was endorsed by both the Company and Lessor and deposited into a trust account held by the Company's attorney. Insurer's partial denial left an outstanding claim of $432,000. This amount is included in other expenses in the Statement of Loss. NOTE 12 -- OTHER INCOME During fiscal 1999, the Company was offered an incentive to move one of its network operating centers from a building owned by Southwestern Bell Telephone ("SWB"). Under an agreement with SWB the Company was paid $497,000 to relocate the network operating center. The relocation fee, net of relocation expenses, of $440,000 is included in other income in the Statement of Loss. NOTE 13 -- SUBSEQUENT EVENTS During July and September 1999, the Company leased equipment valued at approximately $320,000 from various suppliers under capital leases. During October 1999, the Company borrowed $75,000 from a third party. This amount was subsequently repaid. During November 1999, the Company signed a promissory note with the founder and chairman in exchange for financing of $245,000. F-49 123 INTERNET GLOBAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) During December 1999, the Company entered into a Bridge Loan Facility with eVentures, which allowed for financing up to $1,500,000. The Company subsequently made draws of $1,250,000 and repayments of $500,000 in connection with this financing. During February 2000, the Company entered into an agreement with a separate supplier of communications equipment to provide financing of up to $12,000,000. From this financing the Company made draws of approximately $1,780,000 for the purchase of communications equipment and $500,000 for working capital. Amounts owed to the previous equipment supplier were paid in full. Effective March 10, 2000, eVentures Group, Inc., in a series of transactions, exchanged 2,551,087 shares of its common stock for 100% of the issued and outstanding shares of the Company. As a result of these transactions, the Company became a wholly owned subsidiary of eVentures Group, Inc. F-50 124 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET The following unaudited pro forma consolidated balance sheet (the "Unaudited Pro Forma Consolidated Balance Sheet") has been derived from the application of pro forma adjustments to eVentures' consolidated historical balance sheet as of December 31, 1999 included elsewhere herein. The Unaudited Pro Forma Consolidated Balance Sheet gives effect to the purchase of 100% of Internet Global Services, Inc. ("iGlobal"), which occurred on March 10, 2000, as if the purchase occurred on December 31, 1999. The pro forma adjustments are described in the accompanying notes. There are no adjustments pertaining to the acquisitions of e.Volve, eVentures and AxisTel, since these events were already reflected in the historical balance sheet at December 31, 1999. The Unaudited Pro Forma Consolidated Balance sheet is presented for informational purposes only and does not purport to represent what eVentures' financial position would actually have been if the aforementioned event had occurred on the date specified or to project eVentures's financial position at any future date. The Unaudited Pro Forma Consolidated Balance sheet should be read in conjunction with eVentures' consolidated historical financial statements, and the notes thereto, included elsewhere herein. P-1 125 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999
MARCH 10, 2000 EVENT ------------------------ (1) HISTORICAL IGLOBAL ADJUSTMENTS PRO FORMA ----------- ---------- ----------- ------------ ASSETS Current Assets Cash and cash equivalents........................... $6,269,893 $ 142,386 $(239,000)(4) $ 7,524,279 -- -- 1,351,000(2) -- Accounts receivable................................. 1,574,165 78,815 -- 1,652,980 Other receivables................................... 63,124 -- -- 63,124 Prepaid expenses and other.......................... 136,814 149,079 -- 285,893 Deposits............................................ 603,752 -- -- 603,752 VAT receivable...................................... 1,781,354 -- -- 1,781,354 ----------- ---------- ----------- ------------ 10,429,102 370,280 1,112,000 11,911,382 ----------- ---------- ----------- ------------ Long-term Assets Restricted cash..................................... 750,000 281,928 -- 1,031,928 Property and equipment, net......................... 12,880,498 1,910,379 -- 14,790,877 Investments......................................... 2,758,531 -- -- 2,758,531 Goodwill, net....................................... 27,793,595 18,838 79,865,603(3) 107,917,036 239,000(4) Other............................................... 521,800 5,000 -- 526,800 ----------- ---------- ----------- ------------ 44,704,424 2,216,145 80,104,603 127,025,172 ----------- ---------- ----------- ------------ $55,133,526 $2,586,425 $81,216,603 $138,936,554 =========== ========== =========== ============ LIABILITIES & STOCKHOLDERS' EQUITY Current Liabilities Accounts payable.................................... $4,228,708 $1,178,292 $ -- $ 5,407,000 Accrued other....................................... 1,423,101 370,261 -- 1,793,362 Accrued interest payable............................ 569,042 -- -- 569,042 Customer deposits and deferred revenues............. 634,532 71,852 -- 706,384 Notes payable....................................... 26,875 981,489 -- 1,008,364 Capital leases, current portion..................... 2,937,621 1,448,391 -- 4,386,012 ----------- ---------- ----------- ------------ 9,819,879 4,050,285 -- 13,870,164 ----------- ---------- ----------- ------------ Long-term Liabilities Debentures.......................................... -- 255,662 -- 255,662 Capital leases, net of current portion.............. 5,250,370 1,096,997 -- 6,347,367 ----------- ---------- ----------- ------------ 5,250,370 1,352,659 -- 6,603,029 ----------- ---------- ----------- ------------ Stockholders' Equity Common stock........................................ 917 2,794 (2,743)(3) 968 Preferred stock..................................... -- -- -- -- Additional paid-in capital.......................... 64,447,371 4,190,347 2,400,000(2) 143,896,404 (2,400,000)(3) -- 79,449,033(3) -- (4,190,347)(3) -- Accumulated deficit................................. (22,295,282) (7,009,660) 7,009,660(3) (22,295,282) Deferred compensation............................... (2,089,729) -- -- (2,089,729) Notes Receivable from stockholders.................. -- -- (1,049,000)(2) (1,049,000) ----------- ---------- ----------- ------------ 40,063,277 (2,816,519) 81,216,603 118,463,361 ----------- ---------- ----------- ------------ $55,133,526 $2,586,425 $81,216,603 $138,936,554 =========== ========== =========== ============
- --------------- (1) Reflects the historical balance sheet of iGlobal as of December 31, 1999. (2) Reflects the exercise of employee stock options and purchase of iGlobal shares prior to the acquisition. (3) Represents the acquisition of 100% of iGlobal for 2,551,087 shares of the Company at $29.00 per share, which is the closing stock price on March 8, 2000, the first date the acquisition was announced plus a valuation of $5,467,561 for the stock options issued in consideration for the vested stock options of iGlobal. The acquisition was accounted for as a purchase and the allocation of the purchase price is final. (4) Reflects the Professional fees incurred in connection with the iGlobal acquisition. P-2 126 UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS The following unaudited pro forma consolidated statements of operations (the "Unaudited Pro Forma Consolidated Statements of Operations") have been derived from the application of pro forma adjustments to eVentures' consolidated historical audited statements of operations for the year ended June 30, 1999 and the unaudited historical statement of operations for the six months ended December 31, 1999 included elsewhere herein. The Unaudited Pro Forma Consolidated Statements of Operations give effect to the acquisition of AxisTel, the acquisition of the remaining 33.3% of e.Volve, and the purchase of 100% of iGlobal as if each had occurred on July 1, 1998. There is no adjustment to minority interest relative to the purchase of the remaining 33.3% of e.Volve since 100% of the losses were already recorded in the historical financial statements. The pro forma adjustments are described in the accompanying notes. The Unaudited Pro Forma Consolidated Statements of Operations are presented for informational purposes only and do not purport to represent what eVentures' results of operations would actually have been if the aforementioned events had occurred on the date specified or to project eVentures's results of operations for any future periods. The Unaudited Pro Forma Consolidated Statements of Operations should be read in conjunction with eVentures' consolidated historical financial statements, and the notes thereto, included elsewhere herein. P-3 127 UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED JUNE 30, 1999
SEPTEMBER 22, 1999 PURCHASE OF THE EVENTS REMAINING MARCH 10, 2000 EVENT ------------------------- 33.3% OF -------------------------- HISTORICAL (1) AXISTEL ADJUSTMENTS E.VOLVE (8) IGLOBAL ADJUSTMENTS ----------- ----------- ----------- --------------- ----------- ------------ Revenues........................ $27,248,273 $ 7,967,643 $ -- $ -- $ 1,445,907 $ -- Direct costs.................... 23,311,584 6,997,133 -- -- 1,315,423 -- ----------- ----------- ----------- ----------- ----------- ------------ Gross profit.................... 3,936,689 970,510 -- -- 130,484 -- Selling, general & administrative expenses....... 7,209,696 2,309,538 1,213,997(2) 1,166,251(7) 2,703,838 15,973,121(9) 450,000(3) ----------- ----------- ----------- ----------- ----------- ------------ Less from operations, before other (income) expense........ (3,273,007) (1,339,028) (1,663,997) (1,166,251) (2,573,354) (15,973,121) Other (income) expense Interest expense, net....... 1,704,459 285,457 (557,574)(4) -- -- -- (958,667)(5) Equity in loss of affiliate................. 33,776 -- -- -- -- -- Foreign currency (gain) loss...................... 126,575 -- -- -- -- -- Debt discount............... -- -- 2,000,000(6) -- -- -- Other....................... (16,930) 100,000 -- -- (9,743) -- ----------- ----------- ----------- ----------- ----------- ------------ 1,847,880 385,457 483,759 -- (9,743) -- ----------- ----------- ----------- ----------- ----------- ------------ Net loss before provision for taxes......................... (5,120,887) (1,724,485) (2,147,756) (1,166,251) (2,563,611) (15,973,121) Provision for taxes............. -- 300 -- -- -- -- ----------- ----------- ----------- ----------- ----------- ------------ Net loss........................ $(5,120,887) $(1,724,785) $(2,147,756) $(1,166,251) $(2,563,611) $(15,973,121) =========== =========== =========== =========== =========== ============ PRO FORMA ------------ Revenues........................ $ 36,661,823 Direct costs.................... 31,624,140 ------------ Gross profit.................... 5,037,683 Selling, general & administrative expenses....... 31,026,441 ------------ Less from operations, before other (income) expense........ (25,988,758) Other (income) expense Interest expense, net....... 473,675 Equity in loss of affiliate................. 33,776 Foreign currency (gain) loss...................... 126,575 Debt discount............... 2,000,000 Other....................... 73,327 ------------ 2,707,353 ------------ Net loss before provision for taxes......................... (28,696,111) Provision for taxes............. 300 ------------ Net loss........................ $(28,696,411) ============
- --------------- (1) Reflects the results of operations of AxisTel for the period July 1, 1998 to June 30, 1999. (2) Reflects the amortization of the goodwill arising from the purchase of 50% of AxisTel from the founding shareholders on September 22, 1999, over a period of 10 years. (3) Reflects the amortization of the goodwill arising from the conversion of the Major Shareholders' 1,499 options in AxisTel on September 22, 1999, over a period of 10 years. (4) Reflects the reversal of the interest expense relating to the e.Volve debentures for which the related Notes Receivable were exchanged for stock of eVentures by one of the Major Shareholders on September 22, 1999. (5) Reflects the reversal of amortization relating to the Original Issue Discount on the e.Volve debentures for which the related Notes Receivable were exchanged for stock of eVentures by one of the Major Shareholders on September 22, 1999. (6) Reflects the write off of the Original Issue Discount on the e.Volve debentures for which the related Notes Receivable were exchanged for stock of eVentures by one of the Major Shareholders on September 22, 1999. (7) Reflects the amortization of the goodwill arising from the purchase of the remaining 1/3 of e.Volve on October 19, 1999 over a period of 10 years. (8) Reflects the consolidation of the results of operations of iGlobal for the period July 1, 1998 to June 30, 1999. (9) Reflects the amortization of the goodwill arising from the purchase of 100% of the outstanding common stock of iGlobal on March 10, 2000, over a period of 5 years. P-4 128 UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS SIX MONTHS ENDED DECEMBER 31, 1999
SEPTEMBER 22, 1999 PURCHASE OF THE EVENTS REMAINING MARCH 10, 2000 EVENT ------------------------- 33.3% OF ------------------------- HISTORICAL (1) AXISTEL ADJUSTMENTS E.VOLVE (8) IGLOBAL ADJUSTMENTS ------------ ----------- ----------- --------------- ----------- ----------- Revenues....................... $ 22,661,838 $ 5,741,801 $ -- $ -- $ 753,610 $ -- Direct costs................... 21,759,782 5,900,284 -- -- 1,262,128 -- ------------ ----------- ----------- --------- ----------- ----------- Gross profit (loss)............ 902,056 (158,483) -- -- (508,518) -- Selling, general & administrative expenses...... 10,184,092 1,226,737 276,891(2) 291,563(7) 2,142,062 7,986,560(9) 102,637(3) ------------ ----------- ----------- --------- ----------- ----------- Loss from operations, before other (income) expense....... (9,282,036) (1,385,220) (379,528) (291,563) (2,650,580) (7,986,560) Other (income) expense Interest expense, net........ 598,062 138,153 (160,800)(4) -- 114,482 -- (293,437)(5) Write off of unamortized debt discount............ 917,615 -- (917,615)(6) -- -- -- Equity in loss of affiliate................ 31,819 -- -- -- -- -- Foreign currency (gain) loss..................... (2,032) -- -- -- -- -- Other...................... 1,074 -- -- -- -- -- ------------ ----------- ----------- --------- ----------- ----------- 1,546,538 138,153 (1,371,852) -- 114,482 -- ------------ ----------- ----------- --------- ----------- ----------- Net loss before provision for taxes........................ (10,828,574) (1,523,373) 992,324 (291,563) (2,765,062) (7,986,560) Provision for taxes............ -- -- -- -- -- -- ------------ ----------- ----------- --------- ----------- ----------- Net income (loss).............. $(10,828,574) $(1,523,373) $ 992,324 $(291,563) $(2,765,062) $(7,986,560) ============ =========== =========== ========= =========== =========== PRO FORMA ------------ Revenues....................... $ 29,157,249 Direct costs................... 28,922,194 ------------ Gross profit (loss)............ 235,055 Selling, general & administrative expenses...... 22,210,542 ------------ Loss from operations, before other (income) expense....... (21,975,487) Other (income) expense Interest expense, net........ 396,460 Write off of unamortized debt discount............ -- Equity in loss of affiliate................ 31,819 Foreign currency (gain) loss..................... (2,032) Other...................... 1,074 ------------ 427,321 ------------ Net loss before provision for taxes........................ (22,402,808) Provision for taxes............ -- ------------ Net income (loss).............. $(22,402,808) ============
- --------------- (1) Reflects the results of operations of AxisTel for the period July 1, 1999 to September 22, 1999. (2) Reflects the amortization of the goodwill arising from the purchase of 50% of AxistTel from the founding shareholders on September 22, 1999, over a period of 10 years. (3) Reflects the amortization of the goodwill arising from the conversion of the Major Shareholders' 1,499 options in AxisTel on September 22, 1999, over a period of 10 years. (4) Reflects the reversal of the interest expense relating to the e.Volve debentures for which the related Notes Receivable were exchanged for stock of eVentures by one of the Major Shareholders on September 22, 1999. (5) Reflects the reversal of amortization relating to the Original Issue Discount on the e.Volve debentures for which the related Notes Receivable were exchanged for stock of eVentures by one of the Major Shareholders on September 22, 1999. (6) Reflects the write off of the Original Issue Discount on the e.Volve debentures for which the related Notes Receivable were exchanged for stock of eVentures by one of the Major Shareholders on September 22, 1999. (7) Reflects the amortization of the goodwill arising from the purchase of the remaining 1/3 of e.Volve on October 19, 1999 over a period of 10 years. (8) Reflects the consolidation of the results of operations of iGlobal for the period July 1, 1999 to December 31, 1999. (9) Reflects the amortization of the goodwill arising from the purchase of 100% of the outstanding common stock of iGlobal on March 10, 2000, over a period of 5 years. P-5 129 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION -------------- ----------- 2.1 -- Agreement and Plan of Reorganization, dated as of September 22, 1999, among the Registrant, eVentures Holdings, L.L.C., IEO Holdings Limited, Infinity Investors Limited, Mick Y. Wettreich, the purchasers listed on Schedule 1-A thereto and the Contributing Persons listed on Schedule 1-B thereto (incorporated by reference to Exhibit 2.1 to the report filed on Form 8-K on October 7, 1999). 2.2 -- Agreement and Plan of Exchange, dated as of October 19, 1999, among eVentures Group, Inc., and the persons set forth on Schedule 1 thereto (incorporated by reference to Exhibit 2.1 to the report filed on Form 8-K on November 3, 1999). 2.3 -- Share Exchange Agreement, dated as of February 22, 2000, among eVentures Group, Inc., IGS Acquisition Corporation and the stockholders of Internet Global Services, Inc. parties thereto.** 3.1 -- Certificate of Incorporation of eVentures, dated November 19, 1987.* 3.2 -- Certificate of Amendment, dated April 27, 1994, to the Certificate of Incorporation.* 3.3 -- Certificate of Amendment, dated as of October 20, 1997, to the Certificate of Incorporation.* 3.4 -- Certificate of Renewal dated August 19, 1999 for eVentures Group, Inc.* 3.5 -- Certificate of Amendment, dated September 17, 1999, to the Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to the report filed on Form 8-K on October 7, 1999). 3.6 -- Amended and Restated Certificate of Designation of Rights, Preferences and Privileges of Series A Convertible Preferred Stock, dated October 14, 1999.* 3.7 -- Certificate of Designation of Rights, Preferences and Privileges of Series B Convertible Preferred Stock, dated as of November 10, 1999.* 3.8 -- Certificate of Amendment, dated as of December 15, 1999, to the Certificate of Designation of Rights, Preferences and Privileges of Series B Convertible Preferred Stock.* 3.9 -- Certificate of Designation, Preferences and Rights of Series C Convertible Preferred Stock, dated as of February 22, 2000.** 3.10 -- Amended and Restated By-Laws of eVentures Group, Inc. (incorporated by reference to Exhibit 3.1 to the report filed on Form 8-K on October 7, 1999). 4.1 -- Registration Rights Agreement, dated as of September 22, 1999, among the Registrant and the persons and entities set forth on Schedule 1 thereto (the "First Registration Rights Agreement") (incorporated by reference to Exhibit 4.1 to the report filed on Form 8-K on October 7, 1999). 4.2 -- Addendum to the First Registration Rights Agreement, dated as of October 19, 1999, among eVentures Group, Inc., the persons set forth on Schedule 1 thereto and the other parties to the First Registration Rights Agreement.** 4.3 -- Registration Rights Agreement, dated as of November 24, 1999, between eVentures Group, Inc. and the person and entities signatories thereto, as holders of shares of Series B Convertible Preferred Stock.** 4.4 -- Letter Agreement, dated December 15, 1999, to the parties to the Registration Rights Agreement dated as of September 27, 1999.**
130
EXHIBIT NUMBER DESCRIPTION -------------- ----------- 4.5 -- Registration Rights Agreement, dated as of December 31, 1999, between eVentures Group, Inc. and the persons and entities signatories thereto, as holders of shares of Series C Convertible Preferred Stock.** 10.1 -- Securities Purchase Agreement, dated as of June 11, 1998, among Orix Global Communications, Inc., certain of its shareholders and the purchasers named thereunder and Exhibits thereto.** 10.2 -- Debenture, dated as of June 11, 1998.* 10.3 -- Letter Agreement, dated as of August 19, 1998 between Orix Global Communications and Infinity Investors Limited.* 10.4 -- Debenture, dated as of August 19, 1998.* 10.5 -- Letter Agreement, dated as of February 9, 1999 between Orix Global Communications and Infinity Investors Limited.* 10.6 -- Debenture, dated as of February 9, 1999.* 10.7 -- Letter Agreement, dated as of April 15, 1999 among Orix Global Communications, Inc., Infinity Investors Limited and the Founders (as defined therein).* 10.8 -- Amended and Restated Debenture, dated as of April 15, 1999.* 10.9 -- Letter Agreement, dated as of April 29, 1999 between Orix Global Communications and Infinity Investors Limited.* 10.10 -- Debenture, dated as of April 29, 1999.* 10.11 -- Letter Agreement, dated as of April 30, 1999, between Orix Global Communications, Inc. and Infinity Investors Limited.* 10.12 -- Debenture, dated as of April 30, 1999.* 10.13 -- Note, dated as of August 20, 1999.** 10.14 -- Promissory Note, dated as of March 2, 2000.** 10.15 -- Warrant Agreement, dated as of March 2, 2000, between i2v2.com Inc. and eVentures Group, Inc.** 10.16 -- Lease Agreement, dated December, 1998, between AxisTel International, Inc. and Evergreen America Corporation.* 10.17 -- Lease Agreement, dated November 24, 1997, between Orix Global Communications, Inc. and Trust F/3959 of Banco del Atlantico.* 10.18 -- Assignment Agreement, dated April 1, 1998, among Orix Global Communications, Inc., Latin Gate de Mexico S.A. de C.V. and Trust F/3959 of Banco del Atlantico.* 10.19 -- Office Lease, dated January 23, 1998, between Orix Global Communications, Inc. and 2526 Investment Co.* 10.20 -- Sublease Agreement, dated January 31, 2000, between Totaltel Florida, Inc. and AxisTel Global Network Services, Inc.** 10.21 -- Guaranty Agreement by eVentures Group, Inc. as inducement to Telecommunications Finance Group to provide a lease to AxisTel Communications, Inc., dated as of October 13, 1999.* 10.22 -- Management Services Agreement, dated as of September 22, 1999, between eVentures Group, Inc. and HW Partners, L.P.* 10.23 -- Amended and Restated 1999 Omnibus Securities Plan, dated as of September 22, 1999.**
131
EXHIBIT NUMBER DESCRIPTION -------------- ----------- 10.24 -- Employment Agreement, dated as of September 22, 1999, between eVentures Group, Inc. and Stuart J. Chasanoff.* 10.25 -- Amended and Restated Employment and Noncompetition Agreement, dated as of September 21, 1999, between AxisTel Communications, Inc. and Samuel L. Litwin.* 10.26 -- Amended and Restated Employment and Noncompetition Agreement, dated as of September 22, 1999, between AxisTel Communications, Inc. and Mitchell Arthur.* 21.1 -- Subsidiaries of eVentures Group, Inc.** 27.1 -- Financial Data Schedule.**
- --------------- * Previously filed as an exhibit to the Registration Statement on Form 10 filed by the registrant on December 20, 1999. ** Previously filed as an exhibit to Amendment No. 1 to the Registration Statement on Form 10 filed by the registrant on March 8, 2000. -----END PRIVACY-ENHANCED MESSAGE-----