SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _________
Commission File Number: 1-10210
EXECUTIVE TELECARD, LTD.
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(Exact name of registrant as specified in its charter)
Delaware 13-3486421
(State or other jurisdiction of (I.R.S. employer Identification No.)
incorporation of organization)
8 Avenue C, Nanuet, New York 10954
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(Address of principal executive offices)
Registrant's telephone number, including area code: (914) 627-2060
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g) of the Act:
Common Stock $.001 Par Value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of
the registrant based on the closing sale price of such stock as of May 28,
1996 amounted to approximately $208,458,300.
The number of shares outstanding of each of the registrant's classes of
common stock as of May 31, 1996 was 14,408,626 shares, all of one class of
$.001 par value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement for the 1996 annual
meeting of stockholders are incorporated by reference into Part III of
this report.
(Balance of Page Left Blank Intentionally)
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EXECUTIVE TELECARD, LTD.
FORM 10-K
FISCAL YEAR ENDED MARCH 31, 1996
TABLE OF CONTENTS
Page
Part I Item 1 Business 4 - 16
Item 2 Properties 16
Item 3 Legal Proceedings 16 - 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Part II Item 5 Market for Registrant's Common Stock and Related
Stockholder Matters 20
Item 6 Selected Financial Data 21
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 21 - 26
Item 8 Consolidated Financial Statements and
Supplementary Data F-1 - F-39
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 27
Part III Item 10 Directors and Executive Officers of the Registrant 27
Item 11 Executive Compensation 27
Item 12 Security Ownership of Certain Beneficial Owners and
Management 27
Item 13 Certain Relationships and Related Transactions 27
Part IV Item 14 Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 27 - 28
Signatures 29
<PAGE>
EXECUTIVE TELECARD, LTD.
PART I
ITEM 1 - Business (General)
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A. The Company
Executive TeleCard, Ltd. ("the Company") provides various worldwide
telecommunications services, including intra/intercountry calling card
services, toll-free (800) services, turnkey calling card systems and, on a
limited basis, long distance services within the United States. The
Company's telephone calling services permit travelers to place calls
directly within and from a growing list of countries and territories
(presently 63) at competitive rates and to avoid the high surcharges
imposed by most hotel switchboards. Unlike most of its competitors, the
Company does not rely on redialing through the United States for calls
placed between foreign countries. Instead, customers dial a toll-free or
local number to access the Company's proprietary CAVIAR (Computer Assisted
Variable International Automatic Redialer) system, which routes calls
through local Postal, Telegraph and Telephone Authorities ("PTTs") over
the public voice network to virtually anywhere in the world. The Company
markets its services as subscription calling cards, prepaid calling cards,
turnkey calling systems (in countries that do not have telephone calling
cards), and as enhancements to charge cards, credit cards, and telephone
calling cards.
The Company was formed in 1987 as a wholly-owned subsidiary of
International 800 Telecom Corporation, a publicly traded corporation which
changed its name to Residual Corporation ("Residual") in February 1994.
The Company went public in March 1989 by way of a dividend in kind on
Residual's common stock. Effective March 31, 1995 the Company acquired
substantially all of the assets of Residual, which consisted primarily of
all of Residual's operating subsidiaries ("Residual Acquisition"). The
principal Residual subsidiary, Service 800 SA, has worked with PTTs since
1974, establishing relationships with over 60 foreign telecommunications
administrations. Building on the relationships established by Service
800, the Company began installing its proprietary CAVIAR system in or
close to the facilities of PTTs in 1989, and today callers can access the
Company's CAVIAR system from 63 countries and territories.
To access CAVIAR, callers simply dial a toll-free number from any
telephone in any of the 63 countries and territories. This first step
bypasses hotel switchboards for international calls made from hotel rooms,
and high hotel surcharges are thereby avoided. After entry of a card
number CAVIAR then voice prompts users in their own language from a broad
range of languages (currently 32) to enter a personal identification
number ("PIN") and a destination phone number. A validation process takes
place as the user enters the requested information. CAVIAR also allows
the Company to capture usage information and issue monthly bills in
numerous major currencies, with full call details, which are not available
to residents or businesses in most countries.
During fiscal 1994, the Company introduced "default to operator"
assistance for calls placed to the CAVIAR system from rotary and pulse-
tone telephones. Calls placed from such telephones are speed-dialed by
the CAVIAR system to an operator, which collects the caller's account
number, PIN and destination phone number and inputs the data back into the
CAVIAR located in the country from which the caller initiated the call.
The CAVIAR system then completes the call. With the default-to-operator
feature, the Company's CAVIAR system can be accessed from any telephone in
any country or territory in the Company's network; the Company's call
completion rate improved as a result. Prior to the introduction of the
"default to operator" feature, the CAVIAR system would only accept calls
placed from touch-tone telephones or from rotary and pulse-tone telephones
using a tone-dialer. Whenever special assistance is required in placing
calls, the Company's multilingual customer service center can be reached
via a toll-free number 24 hours a day, 365 days a year.
B. CAVIAR System
Connection to the Company's direct intra/intercountry calling system is
made primarily over a toll-free line via the local PTT. Connection to the
destination is made by the CAVIAR computer which redials through the PTT
over the public voice network to virtually anywhere in the world. The
Company has a policy of not bypassing the networks of the PTTs.
Therefore, the PTTs benefit by capturing all of the increased traffic.
The software in CAVIAR is designed to accept Executive TeleCard
International and World Direct Cards as well as other issuers' credit,
charge or calling cards.
CAVIAR uses various procedures to validate the credit, charge or calling
card, depending on the protocol of the card issuer. When authorization is
received, the local CAVIAR computer automatically redials the destination
number through the public network of the local PTT. When the call is
completed, billing information is recorded in the local CAVIAR computer.
On a daily basis, CAVIAR computers transmit batch files to the Company's
central processing center. These files are then transmitted to the
credit, charge or calling card billing centers for billing to their
customers. Card issuing companies, after deducting commissions or fees,
remit the balance to the Company.
C. Enhancement Arrangements
The Company has enhancement agreements with over 35 companies to provide
international calling service to their credit, charge and telephone
calling card customers. The card issuers are compensated for marketing
and administrative services rendered, including billing and collection
services in connection with usage of the Company's calling service by
their customers.
The enhancement agreements require credit, charge and calling card issuers
to promote the use of the Company's service through advertisements, direct
mail, newsletters and other marketing activities that the card issuers
deem suitable. In support of this process, the Company directs a stream
of marketing ideas, advertising materials and advice to its card issuing
customers.
The principal market for the Company's calling service consists of
business people, executives and professionals who travel frequently and
who are required to make international and/or intracountry phone calls
during their travels. The Company's list of enhancement customers
includes: MasterCard International (several regions of the world),
Worldcom Communications Corp., LCI International, Eurocard Danmark A/S,
Eurocard Iceland SA, Telstra (Australia), Telecom New Zealand, Tele
Danmark A/S, First Card AB (Sweden) and Lufthansa.
D. Revenue Sharing Arrangements (Applicable to Telephone Companies or
PTTs)
The Company supplies turnkey calling card systems, including a self-
contained customer maintenance center and billing system to PTT's that do
not have their own telephone calling card. The Company generally pays for
the cost of the CAVIAR system, including the cost of shipping and
installation. The Company trains the personnel of the PTT in the
operation of the system and makes its international network available to
the PTT's customers. The Company presently has revenue sharing
arrangements with the major international telephone carriers in Brunei,
Colombia, Iceland, Indonesia, Mexico, New Zealand, Norway, the
Philippines, Portugal, Russia, Singapore, South Africa, South Korea,
Sweden, Taiwan and Thailand.
The Company generally shares in the gross billings of all national and
outbound international calls made through the CAVIAR system by the PTT's
calling card customers. The PTT shares in the gross billings for all
calls placed through CAVIARs located outside of its jurisdiction by its
traveling calling card customers.
E. Propriety Calling Cards
1. Executive TeleCard International-TM- ("ETI") is a telephone charge
card that is available to foreign and domestic business executives,
professionals and others for use primarily in placing direct
intra/intercountry calls. ETI cardholders generally select a major credit
card to which their usage is billed by the Company. ETI cardholders are
charged an annual fee which is currently U.S. $50.00 for each individual
card. As of March 31, 1996 the Company had approximately 11,000 ETI
cardholders located throughout over 135 countries. All of the features
and benefits of the Company's direct and operator-assisted calling
services are available to ETI subscribers.
2. World Direct-TM- is a global prepaid calling card that is marketed
directly to travelers by PTTs, travel agents and issuers of travelers
checks. The cards are sold in bulk to marketers, at a discount from the
face value.
F. Features of Direct Calling Service
Customers of the Company's international direct calling service are
furnished with a list of toll-free and local telephone numbers for each
country in which the service is available. These toll-free telephone
numbers may be accessed from any telephone, and they permit entry through
PTT authorities to the Company's CAVIAR computer.
CAVIAR prompts a caller to enter his or her telephone or credit card
number, a PIN and the destination telephone number. CAVIARs are equipped
to prompt a caller in the language indicated by the caller's card number,
for example, First Card AB (Swedish); Worldcom (English); Telecom Denmark
(Danish). At present, 32 languages are available. When the
validation/authorization process is completed, the local CAVIAR dials the
caller's destination number through a PTT, and CAVIAR captures and records
the billing information.
The Direct Calling Service:
[ ] Allows callers to call from any telephone in 63 countries and
territories to virtually any other country in the world. It also
allows callers to place long-distance calls directly within most of
these countries, and access to the service is via toll-free or local
telephone numbers. Presently no other long distance carrier,
including AT&T, MCI, Sprint and British Telecom, provides similar
direct intra/intercountry calling service.
[ ] Allows callers to avoid the surcharges that hotels impose on long
distance and international calls. Hotel surcharges can increase the
cost of an international call by 300%-to-800%.
[ ] Overcomes hotel blocking of toll-free access to its calling system by
also providing callers with an alternative "local" access number.
[ ] Avoids language problems when users are in a foreign country. The
CAVIAR system's audio response software prompts callers in their
native language, preselected by either the customer or the card
issuing company.
[ ] Allows use of most pay telephones because toll-free access eliminates
the need to carry large quantities of coins; eliminates the need to
decipher foreign usage instructions; and eliminates the reliance on
foreign operators who may not be fluent in the language of the card
user.
[ ] Offers multi-lingual customer service which may be accessed via a
toll-free number, 24 hours a day, 365 days a year.
[ ] Allows use of the system to be billed directly to credit, charge or
calling cards.
[ ] Provides detailed invoices not available in most countries.
<TABLE>
<CAPTION>
Countries and Territories Covered by Direct Calling Service
<S> <C> <C> <C>
Andorra Gibraltar Madeira Scotland
Australia Greece Majorca Singapore
Austria Greenland Malaysia South Africa
Azores Guernsey Mexico South Korea
Bahrain Hong Kong Monaco Spain
Belgium Hungary Netherlands Sweden
Brunei Iceland New Zealand Switzerland
Canada Indonesia No. Ireland Taiwan
Canary Islands Ireland Norway Thailand
Chile Isle of Man Oman U.A.E.
Colombia Italy Philippines U.S. Virgin Is.
Denmark Japan Portugal United Kingdom
Faeroe Islands Jersey Puerto Rico United States
Finland Liechtenstein Qatar Vatican City
France Luxembourg Russia Wales
Germany Macau San Marino
</TABLE>
G. Features of Operator-Assist Service
Customers of the Company's international operator-assist calling system
are furnished with a list of toll-free telephone numbers to reach the
United States and Canada and connect with multilingual operators. The
system may be accessed from any telephone within the countries from which
the service is offered.
By using the Company's international calling system, callers can avoid
delays and language problems. The service is user friendly, and
connection back to the United States and Canada is rapid. The operator
requests the caller's card number and a PIN. The caller then gives the
operator the telephone number he/she wishes to call, and the call is
validated and connected.
The Operator-Assist Service:
[ ] Allows callers to access the service via a toll-free telephone number
from any telephone in 75 countries and territories and place calls to
the U.S. and Canada.
[ ] Allows callers to access the service from the U.S. via a toll-free
telephone number and place calls to virtually anywhere in the world.
[ ] Avoids the surcharges that hotels impose on international and long
distance calls. Hotel surcharges often increase an international
call by 300%-to-800%.
[ ] Avoids language problems because the toll-free access number connects
directly with an operator who speaks English and other languages.
[ ] Offers Customer Service accessed via a toll-free number, 24 hours a
day, 365 days a year.
[ ] Allows use of the system to be billed directly to a credit, charge or
calling card with detailed billing.
[ ] Allows access to all U.S. 800 numbers.
[ ] Offers facsimile services.
[ ] Provides language and document translation services.
[ ] Allows conference calling.
Countries and Territories Covered by Operator-Assist Service:
<TABLE>
<CAPTION>
EUROPE
<S> <C> <C> <C>
Andorra Germany Liechtenstein Portugal
Austria Gibraltar Luxembourg San Marino
Azores Greece Madeira Scotland
Belgium Guernsey Majorca Spain
Canary Islands Hungary Monaco Sweden
Cyprus Ireland Montserrat Switzerland
Denmark Isle of Man Netherlands United Kingdom
Finland Italy No. Ireland Vatican City
France Jersey Norway Wales
</TABLE>
<TABLE>
<CAPTION>
THE AMERICAS AND WEST INDIES
<S> <C> <C>
Anguilla Dominica St. Kitts/Nevis
Argentina Dominican Republic Turks & Caicos Is.
Bahamas Grenada United States
Canada Jamaica Uruguay
Chile Nicaragua U.S. Virgin Is.
Colombia Puerto Rico Venezuela
</TABLE>
<TABLE>
<CAPTION>
MIDDLE EAST AND AFRICA
<S> <C> <C>
Abu Dhabi Israel Saudi Arabia
Bahrain Oman South Africa
Dubai Qatar
</TABLE>
<TABLE>
<CAPTION>
FAR EAST & AUSTRALIA
<S> <C> <C>
Australia Japan Singapore
China Malaysia South Korea
Guam New Zealand Taiwan
Hong Kong Philippines Thailand
Indonesia
</TABLE>
H. Toll-Free Telephone Service (Service 800)
Toll-free telephone service permits a caller to make a long distance
telephone call without paying the applicable toll charges, which are
billed to the Service 800 subscriber who receives the call. The Company
arranges both "city-specific" and "nationwide" toll-free service. City-
specific telephone service permits the call to be made on a toll-free
basis to the caller only from a particular city or other limited
geographic area within the country of call origination specified by the
Service 800 subscriber. (The caller generally pays for the local call to
the toll-free number). While a city-specific telephone number may be
dialed from outside this limited area, any additional toll charges thereby
incurred are paid by the caller rather than the Service 800 subscriber.
With nationwide toll-free service, calls are toll-free to the caller when
dialed from any location within the country of call origination, and the
caller is generally not charged for a local call.
As of March 31, 1996 city-specific telephone numbers accounted for
approximately 65% of the Company's toll-free telephone numbers. Most of
the Company's city-specific telephone numbers permit toll-free calls to
locations outside the country of call origination. Until the introduction
of modern electronic equipment by telephone utilities, this was the only
type of toll-free service offered by the Company.
The introduction of modern electronic equipment by some telephone
utilities has enabled the Company to offer to its subscribers, in addition
to city-specific international toll-free service, the option of obtaining
a Service 800 telephone number which permits international calls to be
made toll-free from any location in the service area of the telephone
utility which has installed this equipment. The electronic equipment has
the capacity to automatically "translate" the Service 800 telephone number
into the telephone number of the recipient of the toll-free call, without
the need for a call diverter. The Company is presently offering
international nationwide toll-free service with respect to calls
originating in Australia, Austria, Canada, Denmark, France, Hong Kong,
Japan, the Netherlands, Switzerland, the United Kingdom, the United States
and West Germany, among others. As of March 31, 1996, nationwide toll-
free telephone numbers accounted for approximately 35% of the Company's
toll-free telephone numbers. The Company expects that an increasing
number of telephone utilities will install such modern equipment.
I. Organization and History of Operations
The Company was incorporated in 1987 as International 800 TeleCard, Inc.,
a wholly owned subsidiary of Residual, a publicly traded company that
provided toll-free (800) and related value-added telecommunications
services to businesses around the world. The Company changed its name to
Executive TeleCard, Ltd. by amendment to its certificate of incorporation
on October 18, 1988. The Company built on the relationships Residual
established with foreign telecommunications administrations, and in 1989
the Company began installing CAVIAR computers in or close to the
facilities of various PTTs. The Company went public that same year by way
of a dividend in kind on Residual's common stock, and effective March 31,
1995 entered into an Agreement of Sale and Purchase of Assets (the "Asset
Purchase Agreement") with Residual pursuant to which the Company acquired
substantially all of the subsidiaries of Residual and certain intellectual
property rights including trademarks and service marks relating to the
Residual subsidiaries. As a result, as of April 1, 1995, the Company,
through its subsidiaries, is responsible for all expenses previously
included under a service agreement in effect between Residual and the
Company whereby the Company had agreed to pay Residual 10% of its gross
revenues in exchange for general and administrative services, including
use of Residual's facilities and administrative personnel but excluding
costs for legal, accounting, marketing, advertising, promotion, and
stockholder relations. Under the terms of the Asset Purchase Agreement,
the Company transferred 697,828 shares of restricted stock of the Company
to Residual in accordance with a fairness opinion rendered by the firm of
Griffen Capital Management Corporation. In connection with the
transaction the Company has, through its acquisition of Service 800, S.A.,
also assumed an indebtedness in the approximate amount of $12,722,000,
which was incurred by Residual and Service 800, S.A. and due to the
Company as of March 31, 1995. The Asset Purchase Agreement also prohibits
Residual from competing with the Company for six years and from soliciting
the Company's employees for three years.
At the present time, the Company carries out most of its operations
through the following wholly owned subsidiaries:
1. Executive TeleCard SA, ("TeleCard, Turks & Caicos"). The Company
formed its primary operating subsidiary, on December 20, 1993. The
registered offices of TeleCard, Turks & Caicos are located at MacLaw
House, Duke Street, Grand Turk, Turks and Caicos Islands, British
West Indies, telephone number (809) 497 5056, and its operational
offices are located at Hanse Bank Building, Box 213, The Valley,
Anguilla, BWI, telephone number (809) 497 3800.
2. World Direct Anguilla. The Company conducts its worldwide prepaid
calling card business through World Direct Anguilla. The registered
and operations offices of World Direct, Anguilla, are located at
Hanse Bank Building, P.O. Box 213, The Valley, Anguilla, BWI,
telephone number (809) 497 3800.
3. Transworld Telecommunications A/S Denmark. The Company customizes
its software and constructs its CAVIAR computers through Transworld
Telecommunications A/S Denmark.
4. Executive TeleCard, Inc. (Colorado). The Company offers long
distance services to Colorado businesses and residents through
Executive TeleCard, Inc. Executive TeleCard, Inc. is considered a
facilities based reseller offering 1+, 1-800, international calling
card, debit card, and conference calling services.
5. World Direct Delaware. The Company plans to conduct its U.S. prepaid
calling card business through World Direct Delaware. World Direct
Delaware formerly provided long-distance international operator
assistance for World Direct-TM- long distance cardholders.
6. Service 800 SA (Turks & Caicos). The Company conducts its worldwide
toll-free (800) business through Service 800 SA (Turks & Caicos).
The Company's toll-free services allow callers to make long distance
telephone calls without paying applicable toll charges, which are
instead billed to the subscriber who receives the call.
7. Fintel Services, Inc. (Colorado). The Company employs all of its
U.S. employees (approximately 120) through Fintel Services, Inc. The
employees of Fintel Services, Inc. provide services to the Company's
other subsidiaries pursuant to various service agreements.
8. World Wide 800 Ltd. (Hong Kong). The Company employs two people to
conduct its Asia/Pacific Rim marketing activities through World Wide
800 Ltd. (Hong Kong). The Company plans to increase its business
presence in the Asia/Pacific Rim region in the future.
9. Service 800 SA (Belgium). The Company currently employs one person
on a part-time basis to provide sales and maintenance services in
Europe through Service 800 SA (Belgium).
10. World DirectNet Ltd. (Delaware). The Company is actively developing
a global end-user Internet access service, which it plans to develop
and market through World DirectNet Ltd. By extending the
capabilities of the Company's CAVIAR system, the Company plans to
provide subscribers with an easy to use, high performance internet
connection accessible through local or toll-free phone numbers from
major cities and countries around the world. In connection with
internet access, the Company also plans to offer electronic mail, fax
mail, voice mail, and an intelligent web site with easy access to
country-specific travel resource information and personalized news
reports.
J. The Telephone Calling Card Industry
Presently, telephone calling card services are available primarily to
those individuals or corporations that have residential or business
telephone numbers to which a telephone call may be charged. Accordingly,
the telephone calling card industry is dominated in the United States by
companies such as AT&T, MCI, Sprint and others, and abroad by PTT
authorities. Decreases in the cost of providing services, technological
innovation in the telephone industry, and the introduction of more
sophisticated value-added features have made it possible for other
telephone companies to compete with the PTTs. While a number of
telecommunications companies have entered the international telephone
services market by providing call reorigination services that reroute
calls through the United States, the Company is the only calling card
company that has built its business by entering into cooperative
agreements with an extensive number of PTTs around the world. By
developing relationships with numerous PTTs, the Company is able to offer
improved access to calls at competitive rates even while the PTTs benefit
from increased traffic within their local systems.
K. United States Federal Regulation
Pursuant to the Federal Communications Act, the Federal Communications
Commission ("FCC") is required to regulate the telephone communications
industry in the United States. Under current FCC policy,
telecommunications carriers reselling the domestic services of other
carriers and not owning telecommunications facilities of their own, are
considered to be non-dominant and, as a result, are subject to the least
rigorous regulation. Such carriers are not required to obtain
authorization for the provision of service.
Telecommunications carriers providing international service continue to be
required to obtain authorization from the FCC pursuant to Section 214 of
the Act even if they resell the services provided by another carrier and
construct no facilities of their own. Carriers providing international
service are also required to file a tariff with the FCC, setting forth the
terms and conditions for the provision of international service. The
extent of regulation of non-dominant international carriers, including the
Company, and the demonstration required of such carriers in support of
applications for Section 214 authorizations and tariffs, has been eased by
the FCC as a result of its "Report and Order in International Competitive
Carrier Policies". There can be no assurances, however, that the current
regulatory environment and the present level of FCC regulation will
continue, or that the Company will continue to be considered non-dominant.
At this point, it is contemplated that the Company will resell the
services of other carriers and will not construct its own facilities.
On January 4, 1989, the FCC released an order authorization and
certificate pursuant to Section 214 of the Act authorizing the Company to
(a) provide international switched voice services by the resale of the
international switched voice services set forth in AT&T tariffs FCC Nos. 1
and 2, MCI tariff FCC No. 1, Sprint tariffs FCC Nos. 1 and 2, between the
United States and the overseas points listed in such tariffs and (b)
provide international telex service by the resale of international telex
service set forth in ITT World Communications, Inc.'s tariff FCC No. 12
between the United States and the points listed in such tariff. On April
29, 1989, the FCC granted the tariff of the Company and as a result, the
Company is free to provide resold international service. The tariffs of
the Company are on file with the FCC. The underlying service being
resold could be provided to the Company pursuant to the tariffs filed with
the FCC by any U.S. international carrier.
L. Foreign Government Regulation
Telecommunications activities are subject to government regulation to
varying degrees in every country throughout the world. In most countries
where the Company operates, equipment cannot be connected to the telephone
network without regulatory approval; installation of the Company's
equipment necessary to provide certain services of the ETI card requires,
in most countries, such approval. In addition, with the exception of the
United States, Canada, Japan and the United Kingdom, among others, most
telephone utilities are government owned, controlled and/or operated.
The Company has numerous licenses, agreements, or equipment approvals in
Hong Kong, Canada, the United States, Denmark, Germany, Japan and
elsewhere in countries in which operations are conducted.
To date, the Company has not been required to comply with any material
international regulations in order to pursue its existing business
activities, or notified that it cannot comply with any such regulations.
There can be no assurances, however, that various governmental authorities
will not seek to assert jurisdiction over the Company's rates or other
aspects of its calling service. Governmental authorities could also enact
exchange controls or other legislation which might impede the payment of
the Company's receivables.
M. Carrier Arrangements
The Company utilizes existing long-distance telephone carrier services in
the United States to transmit telephone signals domestically and
internationally, and for this purpose, the Company has entered into
arrangements with such carriers, as AT&T, MCI and Worldcom, among others.
The Company applied for and has obtained from the FCC Section 214
authorization, which gives the Company the right to use the telecom-
munications network of a United States carrier to provide international
service at then prevailing tariffs and rates. The Company has entered into
agreements with telephone utilities in various foreign countries
including, among others, Mercury (UK), New Zealand Telecom, Singapore
Telecom, Hong Kong Telecom, CPRM (Portugal), Entel (Chile), Macau Telecom,
South Africa TeleKom, Telefonica (Spain) and AEROCOM (Russia). In
addition, the Company has licenses or approvals in those countries where
it operates and where equipment is installed and continues to seek
approval of various other foreign countries within which to provide
services.
The Company is entirely dependent upon the cooperation of the telephone
utilities with which it has made arrangements for its operational and
certain of its administrative requirements. The Company's arrangements
with these utilities are nonexclusive and take various forms. Although
some of such arrangements are embodied in formal contracts, any telephone
utility could cease to accommodate the Company's requirements at any time.
Depending upon the location of the telephone utility, such action could
have a material adverse effect on the Company's business and prospects.
In some cases, notably those countries which are members of the European
Economic Community and the United States, laws and regulations may purport
to assure that the arrangements necessary for the Company to conduct its
service may not be arbitrarily terminated. However, the time and cost of
enforcing the Company's rights may be such as to make legal remedies
impractical. The Company does not foresee any threat to its continued
amicable relations with the various utilities.
N. Sales Force
Until March 31, 1995, the Company utilized the existing sales personnel
and network of Residual to market and sell ETI cards. Since March 31,
1995 the Company has provided its own personnel and network. The Company
has also entered into agreements with independent sales agents to market
and sell ETI cards.
In addition, the Company joint ventures or franchises to corporations in
various nations the right to market and sell the Executive Tele-Card
International. The Company also has arrangements with various marketers
to distribute the World Direct prepaid calling card and with several
marketers to sell the Service 800 toll free services.
O. New Technology
Due to the highly competitive nature of the telecommunications industry
and correspondingly sophisticated technological research and development
capabilities of the various competitors, it is possible that equipment and
software similar to the CAVIAR system will be developed by or for a
competitor of the Company. The Company has no reason to believe that any
similar equipment and software have already been developed, patented or
are protected by another party. The Company may lease or sell its
equipment to unaffiliated parties in the telecommunications industry who
may or may not be competitors. The Company has made sales of such
equipment to Fintelcom, the long distance carrier of Finland, INDOSAT, the
Indonesian international carrier, and Tele2 of Sweden.
There can be no assurances that all of the PTTs from which the Company
plans to offer service will approve the use of the Company's CAVIAR, and
in such event, those nonapproving PTTs could either block service in their
country or require the Company to use the PTT's operator services or call
forwarding equipment.
P. Payment for ETI Services
Individual holders of the ETI card are required to maintain on file with
the Company an account with a recognized credit card for billing purposes
(i.e. MasterCard, American Express, Eurocard, Visa, and others). All ETI
calls by such customers are billed to such credit card accounts.
Corporate holders of the ETI card are billed directly by the Company.
Credit and calling card issuers that have their cards enhanced with the
telephone capabilities of the Company's system are expected to pay within
2 to 30 days from the receipt of a magnetic media billing information,
which is provided by the Company on a daily, weekly or monthly basis,
depending upon volume and the billing system of the issuer.
Q. Competition
The Company faces significant competition within the United States during
all phases of its operations from such international corporations as AT&T,
MCI, US Sprint and others. The Company also faces international
competition from various PTT authorities. While the Company believes that
no other enterprise presently offers international services of the type
and scope provided by the Company, its competitors may choose to do so.
In 1992, AT&T, MCI and Sprint introduced intra/intercountry calling
services. Those services require a call back to an operator (or automated
attendant) in the United States who collects the call information and then
places the call to its foreign destination. For example, a call from
Copenhagen, Denmark to Copenhagen would first be sent to the United States
and then back to Copenhagen at a rate substantially over that charged by
the Company, and a call from Copenhagen to Stockholm would also be made
via the United States operator at a rate that is also substantially over
that of the Company. Providing intra/intercountry calling in this manner
is referred to as "refiling" or "rerouting". Although AT&T, MCI and
Sprint have greater resources than those of the Company, it is
management's belief that the price advantage of the Company over AT&T, MCI
and Sprint will prevent any significant impact on its market share and
that the added exposure from competitive advertising will actually
increase the Company's call volume. By refiling calls and thus taking a
share of the market away from the PTTs, AT&T, MCI and Sprint may encounter
difficulties in obtaining approvals to offer their services in many
countries and may encounter difficulties with the tax authorities of many
countries.
Most of the Company's competitors are likely to have significantly larger
financial, management, personnel and other resources, greater
telecommunications experience, and vastly larger current customer bases.
Additionally, such competitors are likely to have greater industry and
governmental contacts than the Company, are better established and have
long-standing reputations for quality of service. There can be no
assurances that the Company will be able to compete successfully with such
entities should they choose to offer services that are similar, identical
and price competitive to the Company's calling services.
R. Employees
Pursuant to an administrative services agreement entered into with
Residual, as more fully described above, the Company utilized the
employees and administrative services of Residual. At March 31, 1996,
pursuant to the acquisition of Residual's subsidiaries, on March 31, 1995,
the Company now employs these personnel which number one hundred thirty-
one (131) full time employees, of which one hundred twenty-one (121) are
located in the United States at Denver, Colorado and Nanuet, New York, one
(1) is located in Nyon, Switzerland, six (6) are located in Silkeborg,
Denmark, two (2) are located in Hong Kong and one (1) is located in
Bromma, Sweden.
S. Properties
The Company owns the land and building at 8 Avenue C, Nanuet, New York and
4260 East Evans Avenue, Denver, Colorado. The properties originally
leased by Residual and now leased by the Company consist of premises
located in Paris, France; Brussels, Belgium; Hong Kong; Singapore;
Anguilla; Silkeborg, Denmark and Nyon, Switzerland. In November, 1995 the
Company leased office premises in Bromma, Sweden. Effective June, 1996
the Company leased additional office space in Denver, Colorado.
T. Foreign Currency Exposure
The Company's enhancement customers are permitted to choose the currency
in which they pay for calling services from among several different
currencies determined by the Company. Thus, the Company's earnings, which
are reported in U.S. Dollars, may be materially affected by movements in
the exchange rate between the U.S. Dollar and such other currencies. The
Company has been considering several strategies to reduce its foreign
currency exposure.
U. Intellectual Property Rights
The Company has registered certain marks, including WORLD DIRECT-TM-,
EXECUTIVE TELECARD INTERNATIONAL-TM-, and SERVICE 800-TM- with the U.S.
Patent and Trademark Office. Applications for registration of the
following marks with the U.S. Patent and Trademark Office are currently
pending: GLOBAL OFFICE-SM-, CAVIAR-TM-, WORLD DIRECTNET-TM-, EGLOBE-SM-,
ELECTRONIC GLOBE-SM-, and ITS A BIG WORLD WITHOUT US-SM-. The EXECUTIVE
TELECARD INTERNATIONAL-TM- and WORLD DIRECT-TM- marks have also been
registered in Belgium, Canada, Great Britain, Luxembourg, and the
Netherlands, and applications for registration of those marks are pending
in Australia, Denmark, France, West Germany, Hong Kong, Indonesia, Israel,
Italy, Japan, Korea, New Zealand, Spain, Sweden, Switzerland, Taiwan and
Thailand. If the Company's registration efforts are successful in those
countries, the Company will have a prima facie exclusive right to the use
of its EXECUTIVE TELECARD INTERNATIONAL-TM- and WORLD DIRECT-TM- marks.
In the event the Company fails to obtain a service mark or trademark in a
particular jurisdiction, the Company may be precluded from the use of the
EXECUTIVE TELECARD INTERNATIONAL-TM- or WORLD DIRECT-TM- marks in that
jurisdiction, and the Company would have to market its product under a
different name. Failure to obtain a registered trademark will not
preclude the Company from marketing its product in those jurisdictions
under a different name. The Company is also considering registration of
additional marks internationally.
The Company has filed a patent application relating to the digital CAVIAR-
TM- system with the U.S. Patent and Trademark Office, and the Company is
in the process of evaluating the possible application for patent of its
billing system. It is anticipated that a patent application for the
digital CAVIAR-TM- will also be filed internationally.
V. Segment Information and Major Customers
See Segment Information in Note 9 of the Notes to Consolidated
Financial Statements.
For the year ended March 31, 1996, one customer, Telstra, accounted for
approximately fifteen percent (15%) of total revenue. No other customer
accounted for more than ten percent (10%) of total revenue during the
year.
Management of the Company does not believe that its operations are
significantly impacted by the effects of inflation nor trends regarding a
seasonal nature of the business.
ITEM 2 - Properties
- --------------------------------------------------------------------------
The land and building used by the Company at 8 Avenue C, Nanuet, New York
was purchased in March 1992. The land and building used by the Company at
4260 East Evans Avenue, Denver, Colorado, consisting of approximately
14,000 square feet, was purchased in December 1992. The Company rents
office space in Paris, France; Brussels, Belgium; Nyon, Switzerland; Hong
Kong; Singapore; Silkeborg, Denmark; Bromma, Sweden and Anguilla.
Effective June, 1996 the Company leased an additional 10,000 sq feet of
office space in Denver, Colorado.
The Company believes that its facilities, including the new lease in
Denver, are adequate for operations for the coming year.
ITEM 3 - Legal Proceedings
- --------------------------------------------------------------------------
The following information sets forth information relating to material
legal proceedings involving the Company and certain of its executive
officers and directors. From time to time, the Company and its executive
officers and directors become subject to litigation which is incidental to
and arises in the ordinary course of business. Other than as set forth
herein, there are no material pending legal proceedings involving the
Company or its executive officers and directors.
A. Litigation Relating to the 1995 Proxy Contest.
1. Walter Krauth Litigation. (Krauth v. Executive TeleCard, Ltd.,
No. 95 Civ. 3967 (RWS), U.S.D.C, S.D.N.Y. and related cases.)
Commencing in October, 1994, a small group of dissident
stockholders of the Company, Walter K. Krauth, Jr., William
Miller and David Legere began a contest for control of the
Company. That struggle resulted in a proxy contest and a series
of related legal proceedings, including the above referenced
case.
In May 1996, Messrs. Krauth, Miller and Legere dismissed all of
their claims against the Company with prejudice. The Company
paid no money in consideration for the dismissal of these claims
but issued 10,000 restricted shares of the Company's common
stock, which amount will be increased if the Company's stock is
trading at a price less than $11.00 per share on May 28, 1998.
These shares were issued to resolve Mr. Krauth's claims arising
from a purported settlement agreement calling for, among other
things, the payment by the Company of approximately $730,000,
plus legal fees, to the dissidents. Messrs. Krauth, Miller and
Legere also released all claims they might have against the
Company under an April 1996 judgment for approximately $48,000
in interim attorneys' fees. Those claims are still being
pursued by their former lawyers and are the subject of a pending
appeal. Mr. Krauth has indemnified the Company for any amounts
which are ultimately paid by the Company under that judgment.
2. Theodore Mayer Litigation. (Mayer v. Executive TeleCard, Ltd.,
No. 95 Civ. 5403 (RWS), U.S.D.C., S.D.N.Y.; Mayer v. Executive
TeleCard, Ltd., No. 14459, Chancery Court of Delaware, New
Castle County; Executive TeleCard, Ltd. v. Mayer, No. 95 Civ.
9641 (LLS), U.S.D.C., S.D.N.Y.)
Theodore Mayer, a former officer of the Company, brought an
action in federal district court in New York for reimbursement
of attorneys fees, which he claims to be approximately $44,000,
expended in litigation between the Company and the dissident
shareholder group based upon the indemnification provisions of
the Company's bylaws. While an officer of the Company, Mayer
was the major instrumentality in promoting and provoking the
dissident challenge for control of the Company in 1994 by, among
other things, providing the dissidents with internal, sensitive
and confidential information of the Company. Mayer's actions
formed the basis for a counterclaim by the Company against Mayer
for, among other things, breach of fiduciary duty to the
Company.
Mr. Mayer also brought an action in Delaware Chancery Court for
reimbursement of $57,000 in attorney's fees pursuant to the
indemnification provisions of the Company's by-laws relating to
class action litigation brought against Mayer in the Northern
District of Illinois. Mayer has brought a motion for summary
judgment, claiming that, as a matter of law, he is entitled to
reimbursement, to which the Company has filed a response. The
motion is presently pending.
Finally, the Company has brought an action in federal district
court in New York pursuant to Section 16(b) of the Securities
Exchange Act against Mayer for short-swing trading while Mayer
was an executive officer of the Company. Mr. Mayer's liability
could exceed $300,000. Discovery in this case commenced the
third week of March 1996 and is ongoing.
3. Daryl Engelman Litigation. (Engelman v. Executive TeleCard,
Ltd., Claim No. 77 116 0137 95, American Arbitration
Association; Executive TeleCard, Ltd. v. Engelman, No. 96-B-46,
U.S.D.C., D. Colo.; Executive TeleCard, Ltd. v. Engelman ,et al.
, No. 95 Civ. 9505, U.S.D.C., S.D.N.Y.; Executive TeleCard, Ltd.
v. Engelman, No. 96 CV 1659, Colo. Dist. Ct. (Denver)).
In the late fall of 1995, Daryl Engelman, the former president
of the Company, initiated an arbitration proceeding against the
Company based upon his termination in the Spring of 1995,
alleging that the termination followed a change of control of
the Company. An arbitration award in excess of $195,000 was
granted to Engelman. An action to vacate this award, which the
Company believes was an arbitrary and capricious abuse of
discretion by the arbitrator, has been filed in the federal
district court in Colorado, and is currently pending.
While president of the Company, Mr. Engelman employed Dan Mell
as a vice president and financial officer of the Company without
board approval, which is required by the bylaws of the Company.
The Board of Directors refused to ratify Mell's employment. As
a consequence, Mell sued the Company and obtained a judgment of
approximately $35,000, based upon Engelman's execution of an
employment agreement with Mell. The Company has filed an action
against Engelman for the amount of the judgment obtained by
Mell.
During the proxy contest, Mr. Engelman, while president of the
Company, joined with the dissidents in their attempt to seize
control of the Company and took actions which the Company
believes were violative of his duties as an officer of the
Company and contrary to the Company's interests. John Nugent, a
nominee of the dissidents and a consultant to the Company, also
engaged in certain actions which the Company believes
constituted self-dealing and breach of his duty to the Company
as a consultant and interfered with the Company's business
relationship with at least one major potential customer.
The Company commenced litigation against Mr. Engelman and Mr.
Nugent, who both supported the dissident shareholders in 1994,
alleging that they conspired together to attempt to seize
control of the Company in breach of their fiduciary duties.
(Claims in that action previously asserted against Walter Krauth
were dropped in connection with the settlement referred to
above.) A motion by Mr. Nugent to dismiss on jurisdictional
grounds was recently denied.
The litigation was filed in federal district court in New York
and is at an initial stage. In a related action entitled
Executive TeleCard, Ltd. v. Carl Corcoran, defendant Corcoran is
also being sued by the Company for breach of his fiduciary duty
based upon actions taken by him as an officer and director of
the Company in attempting to assist the dissident shareholders
in seizing control of the Company.
4. Executive TeleCard, Ltd. v. Anderson, et al., Index No.
116002/95 IAS Part 9, Supreme Court of the State of New York,
County of New York.
The Company has filed an action against Peter J. Anderson and
his law firm based upon a letter transmitted by Mr. Anderson
which contained libelous statements against the Company. The
law firm has filed a motion to dismiss contending that,
regardless of the statements made, the firm has an absolute
privilege under law because the statements were made in
relationship to litigation between the Company and the dissident
shareholders, whom the law firm represented in both the proxy
contest and the Krauth litigation. That motion is still
pending.
B. Other Litigation.
In re Executive TeleCard, Ltd. Securities Litigation, Case No. 94
Civ. 7846 (CLB), U.S.D.C., S.D.N.Y.
The Company, its former auditors, certain of its present and former
directors and others are defendants in this consolidated securities
law class action, which alleges that certain public filings and
reports made by the Company, including its Form 10-K for the 1991,
1992, 1993 and 1994 fiscal years (i) did not present fairly the
financial condition of the Company and its earnings; and (ii) failed
to disclose the role of Richard Bertoli as a consultant to the
Company. Plaintiffs seek unspecified monetary damages. In January
1996, Judge Charles L. Brieant certified the named plaintiffs, except
Moise Katz, as adequate class representatives, and certified the
putative class to include all persons who purchased the Company's
common stock in the open market between October 28, 1991 and October
27, 1994. The Company is vigorously opposing this action, which is
in discovery.
Residual Litigation. Victor L. Wegard, et. al. v. International 800
Telecom Corp., et. al., No. 10747/94, Supreme Court of the State of
New York. The Company has been named as a defendant in this action,
which was brought by certain underwriters who represented Residual in
its initial public offering. The underwriters contend that Residual
breached its contract with the underwriters by allegedly failing to
register certain warrants held by the underwriters. The underwriters
also claim that the Company is liable for inducing Residual's refusal
to register the warrants. No trial has been set, and the action is
not being actively pursued by the underwriters at this time.
Morales v. Executive TeleCard, Ltd. and Network Data Systems, Ltd.,
95 Civ. 10202 (KW) U.S.D.C. S.D.N.Y.
Plaintiff, a small shareholder, has asserted claims against a large
corporate shareholder for alleged illegal short-swing profits in
violation of the federal securities laws. Because the plaintiff can
bring this type of action only for the benefit of the Company and for
the recovery of the plaintiff's attorneys fees, the Company has been
named as a party to ensure that all necessary parties are before the
Court.
C. Special Committee of Independent Directors
A special committee of independent directors of the Company (the
"Independent Committee") was established by the Board of Directors in
November 1994 in accordance with the Company's by-laws. The
Independent Committee was established for the purpose of
investigating the facts and circumstances giving rise to legal and
regulatory matters involving the Company and the Board raised in
connection with the proxy contest and the various class actions
brought against the Company during fiscal 1995. The Independent
Committee was empowered to recommend to the Board that the Company
undertake necessary and appropriate actions to investigate and
respond to legal and regulatory matters, including without
limitation, instituting, maintaining, defending or seeking dismissal
of legal actions, responding to regulatory inquiry and engaging the
services of professional advisors to assist the Independent Committee
in carrying out such responsibilities. Prior to March 15, 1995, the
Independent Committee consisted of Messrs. Corcoran and Gerrity.
From March 15, 1995 to June 30, 1995, the Independent Committee
consisted of Messrs. Gerrity and Sonnerberg.
The Independent Committee was disbanded on June 30, 1995 principally
as a result of the conclusion of the proxy contest, and a new
Independent Special Litigation Committee was formed. The Independent
Special Litigation Committee was formed to supervise and advise the
board with respect to the conduct of the consolidated class action
entitled In re Executive TeleCard, Ltd. Securities Litigation
presently pending in the United States District Court for the
Southern District of New York described herein. The Special
Litigation Committee is comprised of Messrs. Gerrity, Sonnerberg and
Abdul Aal.
ITEM 4 - Submission of Matters to a Vote of Security Holders
- --------------------------------------------------------------------------
No matters were submitted to a vote of the security holders during the
quarter ended March 31, 1996.
ITEM 5 - Market for Registrant's Common Stock and Related Stockholder
Matters
- --------------------------------------------------------------------------
D. Market Information
The Company's common stock has traded on the Nasdaq National Market under
the symbol (EXTL") since December 1, 1989.
The following table reflects the high and low prices reported on the
Nasdaq National Market for each quarter of the fiscal year ended March 31,
1996.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Quarter Ended June 30, 1995 $5-1/2 $3-3/8
Quarter Ended September 1995 9-1/8 4-1/8
Quarter Ended December 31, 1995 7-7/8 5-3/4
Quarter Ended March 31, 1996 9-3/8 5-3/4
</TABLE>
The following table reflects the high and low prices reported on the
Nasdaq National Market for each quarter of the fiscal year ended March 31,
1995.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Quarter Ended June 30, 1994 $10-1/8 $7
Quarter Ended September 30, 1994 9 6-7/8
Quarter Ended December 31, 1994 7-3/4 3-3/8
Quarter Ended March 31, 1995 7-5/8 3-7/8
</TABLE>
B. Holders
The approximate number of holders of the Company's common stock as of May
31, 1996 was 3,260 based upon the records of ADP and the Depository Trust
Corporation. Depository Trust Company has clearing 149 brokers holding
the common shares of the Company.
C. Dividends
The Company has not paid or declared any cash dividends on its common
stock since its inception and does not anticipate paying any cash
dividends on its common stock in the near future.
The Company declared a ten percent (10%) common stock split, effected in
the form of a stock dividend, on January 5, 1994 and distributed February
4, 1994 to shareholders of record on January 28, 1994. On June 30, 1995,
the Company declared another ten percent (10%) common stock split,
effected in the form of a stock dividend, distributed on August 25, 1995
to shareholders of record as of August 10, 1995. On May 21, 1996 the
Company announced the declaration of another ten percent (10%) stock
dividend, subject to shareholders approving an increase in the number of
authorized shares of common stock. Shareholders as of June 14, 1996 will
receive the dividend on August 5, 1996, if approved by the shareholders.
No fractional shares have been distributed and no cash dividends have been
paid in lieu of distributing fractional shares.
ITEM 6 - Selected Financial Information
- --------------------------------------------------------------------------
The following information is derived from the consolidated financial
statements included elsewhere herein. All information presented below
should be read in conjunction with the Consolidated Financial Statements
and Notes included elsewhere in this Form 10K.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
1996 1995 1994
---- ---- ----
Suc- Suc- Prede-
cessor(3) cessor(3) cessor(4)
----------- ----------- -----------
STATEMENT OF OPERATIONS:
<S> <C> <C> <C>
Net Revenue $30,298,228 $22,980,726 $12,736,882
Income (Loss)
from Operations 3,097,009 (292,307) 1,447,825
Other Income
(Expense) 69,843 (4,324,193) (55,034)
Net Income (Loss) 2,852,852 (4,616,500) 1,323,407
Net Income (Loss)
-Per Share (1)(2) 0.20 (0.33) 0.10
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
1993 1992
---- ----
Prede- Prede-
cessor(4) cessor(4)
----------- -----------
STATEMENT OF OPERATIONS:
<S> <C> <C>
Net Revenue $ 6,985,357 $3,234,055
Income (Loss)
from Operations 695,280 138,237
Other Income
(Expense) (9,198) 55,624
Net Income (Loss) 648,995 184,049
Net Income (Loss)
-Per Share (1)(2) 0.05 0.02
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
1996 1995 1994
---- ---- ----
BALANCE SHEET:
<S> <C> <C> <C>
Cash and Cash
Equivalents $ 950,483 $ 1,734,232 $ 1,347,532
Total Assets 16,732,074 12,943,044 16,645,307
Long-Term
Obligations 2,150,649 671,774 500,939
Total Liabilities 9,692,065 9,023,293 1,157,233
Total Stock-
holders' Equity 7,040,009 3,919,751 15,488,074
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
1993 1992
---- ----
BALANCE SHEET:
<S> <C> <C>
Cash and Cash
Equivalents $ 1,099,869 $ 471,196
Total Assets 11,517,028 8,333,020
Long-Term
Obligations 584,844 -
Total Liabilities 964,593 269,138
Total Stockholders' Equity 10,552,435 8,063,882
(1) Based on the weighted average number of shares outstanding during the
period.
(2) The weighted average number of shares outstanding during the periods
have been adjusted to reflect a 100% stock dividend distributed March
16, 1990, five ten percent (10%) stock splits, effected in the form
of stock dividends and distributed August 14, 1992, February 5, 1993,
August 27, 1993, February 4, 1994 and August 25, 1995.
(3) Includes the acquisition of the operating subsidiaries of Residual.
(See Note 1 - Business Combination in the Notes to Consolidated
Financial Statements.)
(4) Does not include the acquisition of the operating subsidiaries of
Residual. (See Note 1 - Business Combination in the Notes to
Consolidated Financial Statements.)
</TABLE>
ITEM 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1996
Net revenue increased 32% to $30,298,228 in fiscal 1996 compared to
$22,980,726 reported in fiscal 1995. The continuing growth in revenue
resulted primarily from increased volume usage of the Company's calling
card services by existing customers as well as the addition of customers
due to new agreements.
Cost of revenue for fiscal 1996 was $18,501,402 compared with $15,459,946
in fiscal 1995, an increase of 20%, resulting from the overall increase
in the Company's usage of domestic and foreign telephone carrier networks
to service its growing customer base. As a percentage of net revenue,
these costs decreased 6% from 67% during fiscal 1995 to 61% for fiscal
1996. This decrease reflects negotiated rate decreases and volume
discounts from domestic and foreign telephone carriers based upon the
Company's continued increase in volume of traffic generated over their
networks.
Selling, general and administrative expenses increased by $546,002 to
$7,135,382, in fiscal 1996, from $6,589,380 in fiscal 1995, an 8.3%
increase. This increase is primarily attributable to the addition of
personnel, a 59% increase to 131 employees at the end of fiscal 1996, and
related employee costs necessary to manage the increased business volume,
provide additional marketing and promotion for the Company's calling card
services, and maintain quality customer support and assistance. As a
percentage of net revenue, selling, general and administrative expenses
decreased from 29% in fiscal 1995 to 24% for fiscal 1996.
Depreciation and amortization increased by $340,728 to $1,564,435 compared
to $1,223,707 for fiscal 1995. This increase relates primarily to call
processor equipment placed in service during the past twelve months to
satisfy the requirements of new customers obtained and calling services
volume increases during the period.
Interest expense of $185,977 increased over last year's $82,054 due
primarily to increases in lease financed asset transactions and borrowings
during the year. Interest income decreased by $37,684 from fiscal year
1995 to $1,848 as funds were used to finance the growth of the Company's
business.
Foreign currency transaction loss decreased by $267,067 to $96,028 in
fiscal year 1996 and generally reflects the currency exchange rate
movements between foreign currencies billed to customers and paid to
suppliers against the United States Dollar.
During fiscal year 1995, the Company incurred $3,917,258 in proxy related
litigation expense as described in ITEM 3 - Legal Proceedings. No
additional expenses were incurred during fiscal year 1996.
Other income includes receipt of $350,000 in settlement of claims against
a corporate stockholder relating to purchases and sales of the Company's
stock. Under the settlement agreement, the corporate stockholder also
granted the Company an irrevocable proxy to vote all of the shares
beneficially owned or controlled by the stockholder in favor of the
director nominees proposed by the Board and agreed not to compete with the
Company nor solicit Company employees for a period of three years.
YEAR ENDED MARCH 31, 1995
Effective March 31, 1995 the Company acquired substantially all of the
assets of Residual, which consisted primarily of all of Residual's
operating subsidiaries. In connection with the acquisition, agreement was
reached to terminate the Service Agreement between Residual and the
Company. As a result of the termination of the Service Agreement and
considering the historical relationship between the Company and Residual,
the transaction was accounted for as an exchange between enterprises under
common control and therefore is presented at historical cost, as if the
acquisition took place at the beginning of fiscal 1995, in a manner
similar to that in pooling-of-interest accounting. The following pro
forma information for fiscal 1994 is presented as if the acquisition had
taken place April 1, 1993.
<TABLE>
<CAPTION>
Pro Forma
March 31, 1995 March 31, 1994
-------------- --------------
<S> <C> <C>
Net Revenue $22,980,726 $14,033,577
Gross Profit 7,520,780 3,777,429
Costs and Expenses (7,813,087) (5,860,012)
Loss from Operations (292,307) (2,082,583)
Proxy Contest Expense (3,917,258) -
Other Expense (406,935) (16,792)
Net Loss (4,616,500) (2,166,113)
Net Income (Loss) per Share (0.33) (0.18)
</TABLE>
Net revenue increased by 64% to $22,980,726 in fiscal 1995 as compared to
$14,033,577 for fiscal 1994. The continuing overall growth in revenue
results primarily from increases in usage of the Company's
intra/intercountry calling card services by existing customers as well as
reflecting additional new agreements signed during the year.
Cost of revenue, of $15,459,946, as a percentage of revenue decreased 6%,
from 73% in the prior year to 67% for the current year. This reduction in
costs reflects general rate decreases and volume discounts offered by the
domestic and foreign telephone carriers based upon the continued increase
in volume of traffic generated over their networks.
Selling, general and administrative expenses increased $1,634,209, an
increase of 33% over the prior year. This increase is primarily
attributable to merchant fees and commissions to enhancement customers,
which are directly related to usage of the Company's calling card services
and advertising, marketing and public relation expenses in which the
Company heretofore had minimal expenditures and increases in general and
administrative employee costs. As a percentage of revenues, however,
selling, general and administrative expenses decreased to 29% from 35% in
fiscal 1994.
Depreciation and amortization increased $318,866 from $904,841 in fiscal
1994 to $1,223,707 in the current year. The increase relates to new
equipment placed in service during the past twelve months.
Interest expense decreased $27,130 in the current year as compared to
fiscal 1994 primarily due to the Company's use of a new banking system to
transact its foreign payments. Interest income decreased $20,989 when
compared to the prior year, due to the reduced availability of funds for
investment in liquid deposits.
The Company incurred foreign currency losses of $363,095 in the current
fiscal year as compared to foreign currency gains of $27,159 in fiscal
1994. This loss is primarily due to the exchange rate movement between
the Swiss Franc and currencies billed to customers.
The Company incurred $3,917,258 in legal, professional fees and other
costs in fiscal 1995 in connection with the proxy contest and the legal
proceedings ancillary to the contest, as described in Item 3 - Legal
Proceedings and the Notes to the Financial Statements contained herein.
- --------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1994 (PREDECESSOR (1))
Net revenue increased by 82% to $12,736,882 (SF 17,989,947) in fiscal 1994
as compared to $6,985,357 (SF 10,410,369) reported for fiscal 1993. The
continuing overall growth resulted primarily from increases in usage of
the Company's intra/intercountry calling services, annual access fees and
calling card subscriptions.
Cost of revenue was $8,315,697 (SF 11,745,334) an increase of 89% over the
prior year's reported amount of $4,407,455 (SF 6,568,488). These costs
represent, primarily, Postal, Telegraph and Telephone Authority and
Telephone Company charges attributable to the increases in
intra/intercountry calling services.
Management fees increased proportionately in accordance with the agreement
between the Company and Residual, whereby ten percent (10%) of usage
revenue is paid to Residual in return for general and administrative
services.
Depreciation and amortization increased by $238,536 to $683,814 (SF
965,839) as compared to $445,278 (SF 663,603) in the prior year. The
increase primarily relates to equipment placed in service during the past
twelve months.
Selling, general and administrative expenses increased by 39% to
$1,161,673 (SF 1,640,781) during fiscal year 1994 versus $832,947 (SF
1,241,353) in fiscal 1993. This increase is primarily attributable to
merchant fees and commissions to enhancement customers, which are directly
related to usage of the Company's calling services.
Interest income of $36,763 (SF 51,925) increased over last year's $8,148
(SF 12,144) due primarily to the investment in liquid deposits of higher
average cash balances over the course of the year. Interest expense of
$56,674 (SF 80,048) represents an increase of 208% over last year's
$18,398 (SF 27,420) relating primarily to the financing of equipment under
capital leases for the full year. Foreign currency loss of $35,123 (SF
49,609) is primarily due to the exchange rate movement between the Swiss
Franc and currencies billed to customers. In the prior two years, the
Company reported foreign currency gains of $13,610 (SF 20,284) and $36,707
(SF 55,042).
(1) Does not include the acquisition of the operating subsidiaries of
Residual. (See Note 1- Business Combination in the Notes to
Consolidated Financial Statements.)
- --------------------------------------------------------------------------
Liquidity and Capital Resources
- -------------------------------
YEAR ENDED MARCH 31, 1996
During the year ended March 31, 1996, cash and cash equivalents decreased
from $1,734,232 to $950,483. The reduction in cash and cash equivalents
consisted of the following components: (i) net cash flows provided by
operating activities in the amount of $1,315,670 resulting primarily from
net income for the year of $2,852,852, increased by depreciation and
amortization expense of $1,564,435, offset by an increase in accounts
receivable of $2,850,592 and a decrease in accrued expenses of $1,712,818
which primarily relates to payment of proxy related litigation expenses,
(ii) net cash flow used in investing activities in the amount of
$3,404,118 related primarily to customization, modernization and expansion
of the Company's Caviar network which increases usage capacity and
facilitates transmission of non-voice data, (iii) cash flows provided by
financing activities of $1,382,391 primarily relating to proceeds from the
issuance of notes payable in the amount of $1,500,000, and (iv) the
negative effect of exchange rate changes on cash which decreased cash and
cash equivalents by $77,692.
In connection with the Company's continued expansion of its operations and
implementation of its business plan, the Company has considered material
commitments for capital expenditures and marketing. On February 28, 1996,
the Company obtained a loan of five hundred thousand dollars ($500,000)
from an individual stockholder which, under the terms of the Note executed
by the Company, is to be repaid on or before August 28, 1997. In
addition, on February 28, 1996, the Company renegotiated a one million
dollar ($1,000,000) loan due April 20, 1996 by extending the term of the
loan through September 28, 1997. These borrowings carry an interest rate
of twelve percent (12%) per annum, payable monthly. In conjunction with
these borrowings, the Company granted options to purchase 50,000 shares of
restricted common stock at a purchase price of $6.00 and 100,000 shares at
a purchase price of $6.00, respectively.
In March 1996, the Company engaged two investment banking firms,
Oppenheimer & Company and Hanifen Imhoff, Inc., to assist the Company with
respect to its future financing needs.
On June 3, 1996 the Company received a commitment from a financial
institution to provide a $6 million senior secured term loan for capital
expenditures, working capital and debt refinancing. Such loan agreement
will include interest, payable quarterly at the institution's base rate
plus 2 1/2% , with principal due one year after execution of a definitive
loan document. The loan will be subject to certain financial covenants
(as defined), will be secured by all of the assets of the Company and its
subsidiaries, individually guaranteed by each of the Company's
subsidiaries and include a pledge of the common stock of all of the
Company's subsidiaries. In connection with this commitment, the lender
will receive from the Company warrants to purchase 100,000 shares of the
Company's common stock at an exercise price equal to 120% of the average
stock price (as defined).
The Company's future plans to fund its working capital needs also consist
of the following: (i) an April, 1996 master lease agreement in the amount
of $500,000 for capital expenditures, (ii) issuance of additional shares
of common stock or preferred stock, (iii) the creation of a long term debt
facility, and (iv) cash flow generated from operations. There can be no
assurance that the Company will be successful in its efforts to raise such
additional capital.
Income Taxes
- ------------
The Company's effective tax rate is lower than the federal statutory rate
as discussed in Note 8 to the Consolidated Financial Statements. As of
March 31, 1996 the Company has recorded a net deferred tax asset of
$2,431,000 primarily as a result of the tax effect of net operating loss
carryforwards. As of March 31, 1996, a valuation allowance equal to the
net deferred tax asset recognized has been recorded, as management of the
Company has not been able to determine that it is more likely than not
that the deferred tax asset will be realized.
New Accounting Pronouncements
- -----------------------------
The Financial Accounting Standards Board recently issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets" and SFAS No. 123,
"Accounting for Stock Based Compensation." SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles be reported at the
lower of the carrying amount or their estimated recoverable amount. The
adoption of this statement by the Company is not expected to have a
material impact on the financial statements. SFAS No. 123 encourages the
accounting for stock-based employee compensation programs to be reported
within the financial statements on a fair value based method. If the fair
value based method is not adopted, then the statement requires proforma
disclosure of net income and earnings per share as if the fair value based
method had been adopted. The Company has not yet determined how SFAS No.
123 will be adopted nor its impact on the financial statements. Both
statements are effective for fiscal years beginning after December 15,
1995.
Next page is F-1 through F-39
(Balance of Page Left Blank Intentionally)
<PAGE>
EXECUTIVE TELECARD, LTD.
ITEM 8 - Financial Statements
Index to Consolidated Statements
- --------------------------------------------------------------------------
NOTE: The 1996 and 1995 consolidated financial statements presented
herein include the affects of the business combination discussed in Note 1
to such financial statements. The acquisition has been determined for the
year ended March 31, 1995, to be an acquisition between entities under
common control and accordingly has been recorded at historical cost in a
manner similar to that in pooling-of-interest accounting with the
financial statements presented as though the acquisition had occurred as
of April 1, 1994.
1996 AND 1995 CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants F-3
Balance Sheets as of March 31, 1996 and 1995 F-4 - F-5
Statements of Operations for the
Years Ended March 31, 1996 and 1995 F-6
Statements of Stockholders' Equity for
the Years Ended March 31, 1996 and 1995 F-7
Statements of Cash Flows for the
Years Ended March 31, 1996 and 1995 F-8
Summary of Accounting Policies F-9 - F-12
Notes to Consolidated Financial Statements F-13 - F-25
SCHEDULES -
II Valuation and Qualifying Accounts F-26
1994 CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report F-27
Statement of Operations for the Year
Ended March 31, 1994 F-28
Statement of Stockholders' Equity for the
Year Ended March 31, 1994 F-29
Statement of Cash Flows for the Year
Ended March 31, 1994 F-30
Notes to Consolidated Financial Statements F-31 - F-38
SCHEDULE -
II Valuation and Qualifying Accounts F-39
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or
notes thereto.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Executive TeleCard, Ltd.
Nanuet, New York
We have audited the accompanying consolidated balance sheets of Executive
TeleCard, Ltd. and subsidiaries as of March 31, 1996 and 1995 and the
related consolidated statements of operations, stockholders' equity, and
cash flows for each of the two years in the period ended March 31, 1996.
We have also audited the 1996 and 1995 schedules listed in the
accompanying index. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules 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 and
schedules are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements and schedules. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the financial statements
and schedules. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Executive TeleCard, Ltd. and subsidiaries at March 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the two
years in the period ended March 31, 1996, in conformity with generally
accepted accounting principles.
Also, in our opinion, the 1996 and 1995 schedules present fairly, in all
material respects, the information set forth therein.
/s/BDO Seidman, LLP
BDO SEIDMAN, LLP
June 3, 1996
Denver, Colorado
<PAGE>
EXECUTIVE TELECARD, LTD.
Consolidated Balance Sheets
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, 1996 1995
- --------------------------------------------------------------------------
Assets
<S> <C> <C>
Current:
Cash and cash equivalents $ 950,483 $ 1,734,232
Trade accounts receivable, less
allowance of $239,000 and $346,000
for doubtful accounts 5,850,345 3,403,921
Accounts receivable from related parties 732,794 505,576
Other current assets 123,482 211,824
- --------------------------------------------------------------------------
Total current assets 7,657,104 5,855,553
Property and equipment,
net of accumulated depreciation
and amortization 8,415,091 6,357,575
Other:
Intangible assets - net 222,265 314,506
Deposits 251,490 278,229
Other assets 186,124 28,049
Advances for equipment purchases - 109,132
- --------------------------------------------------------------------------
Total other assets 659,879 729,916
- --------------------------------------------------------------------------
$16,732,074 $12,943,044
- --------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
<PAGE>
EXECUTIVE TELECARD, LTD.
Consolidated Balance Sheets
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, 1996 1995
- --------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current:
<S> <C> <C>
Accounts payable $ 2,428,882 $ 1,095,249
Accounts payable to related parties 66,321 534,431
Accrued expenses 4,293,496 6,006,314
Customer deposits 302,205 349,385
Unearned income 288,262 220,103
Current maturities of long-term debt 162,250 146,037
- --------------------------------------------------------------------------
Total current liabilities 7,541,416 8,351,519
Long-term debt, less current maturities 2,150,649 671,774
- --------------------------------------------------------------------------
Total liabilities 9,692,065 9,023,293
- --------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Common stock - $.001 par value;
20,000,000 shares authorized,
14,408,626 and 14,279,962 outstanding 14,409 14,280
Additional paid-in capital 15,903,014 15,558,045
Accumulated deficit (8,960,196) (11,813,048)
Accumulated translation adjustment 82,782 160,474
- --------------------------------------------------------------------------
Total stockholders' equity 7,040,009 3,919,751
- --------------------------------------------------------------------------
$16,732,074 $12,943,044
- --------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
<PAGE>
EXECUTIVE TELECARD, LTD.
Consolidated Statements of Operations
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended March 31, 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Net revenue $30,298,228 $22,980,726
Cost of revenue 18,501,402 15,459,946
- --------------------------------------------------------------------------
Gross Profit 11,796,826 7,520,780
- --------------------------------------------------------------------------
Costs and expenses:
Selling, general and
administrative 7,135,382 6,589,380
Depreciation and amortization 1,564,435 1,223,707
- --------------------------------------------------------------------------
Total costs and expenses 8,699,817 7,813,087
- -------------------------------------------------------------------------
Income (loss) from operations 3,097,009 (292,307)
- -------------------------------------------------------------------------
Other income (expense):
Interest expense (185,977) (82,054)
Interest income 1,848 39,532
Foreign currency transaction loss (96,028) (363,095)
Proxy related litigation expense - (3,917,258)
Other income (expense) 350,000 (1,318)
- --------------------------------------------------------------------------
Total other income (expense) 69,843 (4,324,193)
- --------------------------------------------------------------------------
Income (loss) before taxes on income 3,166,852 (4,616,500)
Taxes on income 314,000 -
- --------------------------------------------------------------------------
Net income (loss) $ 2,852,852 $(4,616,500)
- --------------------------------------------------------------------------
Net income (loss) per share $ 0.20 $ (0.33)
- --------------------------------------------------------------------------
Weighted average number of shares
and share equivalents outstanding 14,367,589 14,018,550
- --------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
<PAGE>
EXECUTIVE TELECARD, LTD.
Consolidated Statements of Stockholders' Equity
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in
Years Ended March 31, 1996 and 1995 Shares Amount Capital
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, April 1, 1994 as
previously reported 13,216,151 $13,216 $13,841,114
Pooling of interests with
Residual operating
subsidiaries 697,828 699 487,970
- -------------------------------------------------------------------------
Balance, April 1, 1994 as restated 13,913,979 13,915 14,329,084
Stock issued in connection
with Private Placements
to affiliate 66,000 66 449,934
Stock issued in connection with
Private Placements 226,707 226 602,958
Exercise of stock options 73,276 73 176,069
Foreign currency translation
adjustment - - -
Net loss - - -
- --------------------------------------------------------------------------
Balance, March 31, 1995 14,279,962 14,280 15,558,045
Stock issued in lieu of
cash payments 113,366 114 309,885
Exercise of stock options 15,298 15 35,084
Foreign currency translation
adjustment - - -
Net income - - -
- --------------------------------------------------------------------------
Balance, March 31, 1996 14,408,626 $14,409 $15,903,014
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Accumulated Total
Accumulated Translation Stockholders'
Years Ended March 31, 1996 and 1995 Deficit Adjustment Equity
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, April 1, 1994 as
previously reported $ 1,672,605 $(38,861) $15,488,074
Pooling of interests with
Residual operating
subsidiaries (8,869,153) - (8,380,484)
- --------------------------------------------------------------------------
Balance, April 1, 1994 as restated (7,196,548) (38,861) 7,107,590
Stock issued in connection
with Private Placements
to affiliate - - 450,000
Stock issued in connection with
Private Placements - - 603,184
Exercise of stock options - - 176,142
Foreign currency translation
adjustment - 199,335 199,335
Net loss (4,616,500) (4,616,500)
- --------------------------------------------------------------------------
Balance, March 31, 1995 (11,813,048) 160,474 3,919,751
Stock issued in lieu of
cash payments - - 309,999
Exercise of stock options - - 35,099
Foreign currency translation
adjustment - (77,692) (77,692)
Net income 2,852,852 - 2,852,852
- --------------------------------------------------------------------------
Balance, March 31, 1996 $(8,960,196) $ 82,782 $ 7,040,009
- --------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
<PAGE>
EXECUTIVE TELECARD, LTD.
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) in Cash and Cash Equivalents
Years Ended March 31, 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Operating activities
Net income (loss) $ 2,852,852 $(4,616,500)
Adjustments to reconcile net income
(loss) to net cash flows provided by
operating activities:
Depreciation and amortization 1,564,435 1,223,707
Provision for bad debts 176,950 207,849
Stock issued in lieu of cash payments 309,999 -
Changes in operating assets
and liabilities:
Accounts receivable (2,850,592) (812,763)
Other assets 88,342 162,505
Accounts payable 865,523 (330)
Accrued expenses (1,712,818) 4,554,733
Other liabilities 20,979 123,961
- --------------------------------------------------------------------------
Cash provided by operating activities 1,315,670 843,162
- --------------------------------------------------------------------------
Investing activities:
Acquisitions of property and equipment (3,426,322) (1,905,477)
Other assets 22,204 31,621
- --------------------------------------------------------------------------
Cash used in investing activities (3,404,118) (1,873,856)
- --------------------------------------------------------------------------
Financing activities:
Proceeds from notes payable 1,500,000 -
Proceeds from issuance of common stock 35,099 1,229,326
Principal payments on long-term debt (152,708) (145,166)
- --------------------------------------------------------------------------
Cash provided by financing activities 1,382,391 1,084,160
- --------------------------------------------------------------------------
Effect of exchange rate changes on cash (77,692) 199,335
- -------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (783,749) 252,801
Cash and cash equivalents,
beginning of year 1,734,232 1,481,431
- --------------------------------------------------------------------------
Cash and cash equivalents,
end of year $ 950,483 $ 1,734,232
-------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
<PAGE>
EXECUTIVE TELECARD, LTD.
Summary of Accounting Policies
- --------------------------------------------------------------------------
Organization and
Business Executive TeleCard, Ltd. (the "Company") provides
various worldwide telecommunications services,
including intra/intercountry calling card services
which it markets as an enhancement to charge, credit
and telephone calling cards; toll-free (800) services;
a turnkey calling card system to countries that do not
have a telephone calling card; and company issued
stand-alone calling cards called "Executive TeleCard
International-TM-. The Company's telephone calling
services permit travelers to place calls directly
within and from presently 63 countries and territories
to virtually anywhere in the world.
Basis of
Presentation and
Consolidation The consolidated financial statements have been
prepared in accordance with United States generally
accepted accounting principles and include the
accounts of the Company and its wholly-owned
subsidiaries. All material intercompany transactions
and balances have been eliminated in consolidation.
As described in Note 1, effective March 31, 1995, the
Company acquired the operating subsidiaries of
Residual Corporation, an affiliated entity. The
acquisition was accounted for in a manner similar to a
pooling-of-interests and, accordingly, the Company's
financial statements have been presented to include
the results of the operating subsidiaries as though
the acquisition occurred as of April 1, 1994.
Foreign Currency
Translation The functional currency for the Company's foreign
operations is the applicable local currency. The
translation of the applicable foreign currency into
United States Dollars is computed for balance sheet
accounts using current exchange rates in effect at the
balance sheet date and for revenue and expense
accounts using a weighted average exchange rate during
the period. The gains and losses resulting from such
translation are included in stockholders' equity.
As a result of changes in the nature and activities of
the Company's consolidated operations, including among
other things, the Residual acquisition, effective
April 1, 1995, the Company changed its reporting
currency from Swiss Francs to United States Dollars.
Previously, the Company's reporting currency was Swiss
Francs. The information previously reported in Swiss
Francs has been converted to United States Dollars in
accordance with FASB 52 and restated for all periods
presented.
In connection with this change in the Company's
reporting currency, the Company also changed the
functional currency of its two Turks & Caicos
subsidiaries from Swiss Francs to United States
Dollars. The impact of this change was not material
to the Company's consolidated financial statements.
Use of
Estimates The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and
the reported amounts of revenues and expenses during
the reporting period. Actual results could differ
from those estimates. During the quarter ended March
31, 1996, based upon information then available, the
Company revised its estimates regarding the
collectability of certain foreign non-trade receivable
amounts. As a result, previously recorded allowances,
totaling approximately $400,000 were reversed.
Financial Instruments
and Concentrations
of Credit Risk Financial instruments which potentially subject the
Company to concentrations of credit risk consist
principally of cash and cash equivalents and trade
accounts receivable.
The Company places its cash and temporary cash
investments with quality financial institutions. At
times, such investments may be in excess of
Governmental insured limits.
Concentrations of credit risk with respect to trade
accounts receivable are limited due to the wide
variety of customers and markets which comprise the
Company's customer base, as well as their dispersion
across many different geographic areas. The Company
routinely assesses the financial strength of its
customers and, as a consequence, believes that its
trade accounts receivable credit risk exposure is
limited. Generally, the Company does not require
collateral or other security to support customer
receivables.
The Company's enhancement card customers are permitted
to choose the currency in which they pay for calling
services from among several different currencies
determined by the Company. Thus, the Company's
earnings may be materially affected by movements in
the exchange rate between the United States Dollar and
such other currencies. The Company has been
considering several strategies to reduce its foreign
currency exposure.
The carrying amounts of financial instruments
including cash and cash equivalents, trade accounts
receivable, accounts payable and accrued expenses
approximated fair value because of the immediate or
short-term maturity of these instruments. The
difference between the carrying amount and fair value
of the Company's long-term debt is not significant.
Property,
Equipment,
Depreciation and
Amortization Property and equipment are stated at cost. Additions,
installation costs and major improvements of property
and equipment are capitalized. Expenditures for
maintenance and repairs are expensed as incurred. The
cost of property and equipment retired or sold,
together with the related accumulated depreciation or
amortization, are removed from the appropriate
accounts and the resulting gain or loss is included in
the statement of operations.
Depreciation and amortization are computed using the
straight-line method over the estimated useful lives
of the related assets ranging from five to twenty
years.
Intangible Assets Intangible assets consist of licenses and trademarks,
organization costs, deferred installation charges and
a customer database which are stated at cost.
Amortization is provided on the straight-line method
over ten (10) years for licenses and trademarks and
over five (5) years for organization costs, deferred
installation charges and the customer database. The
carrying value of intangible assets is periodically
reviewed and impairments, if any, are recognized when
expected future benefit to be derived from individual
intangible assets is less than its carrying value.
Revenue
Recognition Telephone usage revenue is recognized as utilized by
subscribers. Billings to subscribers are based upon
established tariffs filed with the United States
Federal Communications Commission, or for usage
outside of the United States' tariff requirements, at
rates established by the Company.
Taxes on Income The Company accounts for income taxes under Statement
of Financial Accounting Standards No. 109 ("SFAS No.
109"). Under SFAS No. 109 temporary differences are
differences between the tax basis of assets and
liabilities and their reported amounts in the
financial statements that will result in taxable or
deductible amounts in future years.
Net Income (Loss)
Per Share Net income (loss) per share and common equivalent
share is computed using the weighted average number of
shares outstanding during each period. Warrants and
options outstanding to purchase common stock are
included as common stock equivalents when dilutive.
Cash Equivalents The Company considers cash and all highly liquid
investments purchased with an original maturity of
three months or less to be cash equivalents.
Recent Accounting
Pronouncements The Financial Accounting Standards Board recently
issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets" and SFAS No. 123, "Accounting for
Stock Based Compensation." SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles
be reported at the lower of the carrying amount or
their estimated recoverable amount. The adoption of
this statement by the Company is not expected to have
a material impact on the financial statements. SFAS
No. 123 encourages the accounting for stock-based
employee compensation programs to be reported within
the financial statements on a fair value based method.
If the fair value based method is not adopted, then
the statement requires proforma disclosure of net
income and earnings per share as if the fair value
based method had been adopted. The Company has not
yet determined how SFAS No. 123 will be adopted nor
its impact on the financial statements. Both
statements are effective for fiscal years beginning
after December 15, 1995.
Reclassifications Certain items included in the prior year's financial
statements have been reclassified to conform to the
current year's presentation.
(Balance of Page Left Blank Intentionally)
<PAGE>
EXECUTIVE TELECARD, LTD.
Notes to Consolidated Statements
- --------------------------------------------------------------------------
1. Business
Combination Effective March 31, 1995, the Company acquired
substantially all of the assets of Residual
Corporation ("Residual"). In connection with the
acquisition, the management agreement between the
Company and Residual, as described in Note 2,
resulted in a transfer of the agreement to a
wholly-owned subsidiary of the Company. As a
result, as of April 1, 1995, the Company, through
its subsidiaries, is responsible for all expenses
previously included under the agreement. In
consideration for the transaction, the Company
issued 697,828 (restated to reflect the effect of
a stock dividend as described in Note 7)
restricted shares of its common stock to Residual
and also discharged approximately $12,722,000 of
debt obligations payable by Residual to the
Company.
As a result of the transfer of the management
agreement and considering the historical
relationship between the Company and Residual,
the transaction is considered to be an exchange
between enterprises under common control and
accordingly, it has been accounted for at
historical cost in a manner similar to that in
pooling-of-interests accounting with the
accompanying financial statements presented to
include the accounts and operations of the
acquired companies as though the acquisition had
occurred as of April 1, 1994.
2. Related Party
Transactions During 1989, the Company entered into a ten year
management agreement with Residual. Under the
agreement Residual provided the Company with
general and administrative services including
facilities and administrative personnel but
excluded costs for legal, accounting, marketing,
advertising and promotion and stockholder
relations. In consideration for these services,
the Company paid Residual 10% of gross revenues,
as defined. As discussed in Note 1, as of March
31, 1995 the Company acquired substantially all
of the assets of Residual effectively terminating
the agreement.
Through March 30, 1995, the Company had advanced
Residual approximately $12,722,000 under a non-
interest bearing loan agreement secured by
substantially all of Residual's tangible and
intangible assets. In connection with the
acquisition by the Company of substantially all
of the assets of Residual as of March 31, 1995,
as discussed in Note 1, the outstanding loan
balance was discharged.
The Company has transactions with its corporate
stockholders primarily in the ordinary course of
business as customers or vendors. Such
transactions are not significant to the
operations of the Company and as of March 31,
1996 and 1995, $732,794 and $505,576 was due from
such stockholders and $66,321 and $534,431 was
payable to such stockholders.
During April 1995 an agreement between the
Company and a corporate stockholder was finalized
to resolve certain claims and potential claims
between the two parties. The claims arose out of
negotiated transactions whereby sales of the
Company's restricted common stock had occurred at
prices at or below the quoted market price.
Under the agreement, the corporate stockholder
granted the Company an irrevocable proxy to vote
all of the shares beneficially owned or
controlled by the stockholder in favor of the
director nominees proposed by the Board, agreed
not to compete with nor solicit Company employees
for a period of three years and paid to the
Company the sum of $350,000. Such amount has
been included as other income in the accompanying
1996 consolidated Statement of Operations.
3. Contingency
and Litigation
Costs During fiscal 1995, a number of legal actions
were commenced involving certain minority
stockholders and the Company, certain of its
directors and officers and affiliates. The
initial claims and counterclaims concerned the
filing of the Company's proxy statement for the
year ended March 31, 1994 and whether such proxy
statement was false and misleading in that it
failed to properly disclose certain information
and transactions. Additionally, the initial
claim initiated a fight for control of the Board
of Directors of the Company. Following the
initial motion filing, numerous claims,
counterclaims, and amendments thereof have been
filed in the United States District Court for the
Southern District of New York. On June 20, 1995,
the Court denied a June 1, 1995 action by the
minority stockholders to block the Company's
fiscal 1994 proxy efforts and this allowed the
scheduled June 30, 1995 annual stockholders
meeting for 1994 to be held. The vote of the
stockholders at the June 30, 1995 meeting
effectively ended the struggle for control of the
Company when the proposed slate of directors put
forth by the Company was elected.
In May 1996, the minority stockholders dismissed
all of their claims against the Company with
prejudice. The Company issued 10,000 restricted
shares of the Company's common stock, which will
be increased if the Company's stock is trading at
a price less than $11.00 per share on May 28,
1998. The shares were issued to resolve claims
arising from a purported settlement agreement
calling for payment by the Company of
approximately $730,000, plus legal fees, to the
dissident stockholders. Further, the dissident
stockholders released all claims against the
Company under an April 1996 judgment for
approximately $48,000 in interim attorney's fees
and indemnified the Company for any amounts
ultimately paid by the Company under that
judgment.
Largely, as a result of the minority
shareholders' legal actions, several class action
complaints were filed by minority shareholder
groups, involving the Company, its officers and
directors and certain affiliates which actions
were, by order dated January 18, 1995
consolidated into a single action. An amended
consolidated complaint was served on March 27,
1995 alleging that the Company's financial
statements for fiscal years 1991, 1992, 1993 and
1994 misrepresented and/or omitted material facts
regarding the Company's operations and/or
financial condition.
In January, 1996, the Court certified the
putative class to include all persons who
purchased the Company's stock in the open market
between October 28, 1991 and October 27, 1994.
This action is in discovery.
The ultimate disposition of the consolidated
class action cannot presently be determined and
management of the Company intends to vigorously
fight such action, however, in the event the
Company is unsuccessful in its efforts, such
outcome could have a material adverse impact on
the financial position and results of operations
of the Company. Since such outcome cannot
presently be determined, no amounts have been
provided for in the accompanying consolidated
financial statements.
As a result of the above actions and related
matters, the Company recorded $3,917,258 in costs
and expenses during the year ended March 31,
1995. See Note 5.
The Company and its subsidiaries are also parties
to various other legal actions and various claims
arising in the ordinary course of business.
Management of the Company believes that the
disposition of such other actions and claims will
not have a material effect on the financial
position of the Company.
4. Property and
Equipment Property and equipment at March 31, 1996 and 1995
consisted of the following:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------
<S> <C> <C>
Land $ 247,300 $ 247,300
Buildings and improvements 594,335 412,089
Call processor equipment 8,206,030 5,955,909
Furniture and equipment 4,377,076 3,335,287
Call diverters 1,396,246 1,396,246
Equipment under capital
leases 1,031,313 883,518
-------------------------------------------------
15,852,300 12,230,349
Less accumulated deprecia-
tion and amortization 7,437,209 5,872,774
-------------------------------------------------
$ 8,415,091 $ 6,357,575
-------------------------------------------------
</TABLE>
Depreciation and amortization expense for the
years ended March 31, 1996 and 1995 was
$1,564,435 and $1,223,707 respectively.
Property and equipment at March 31, 1996 and
1995, includes certain telephone and office
equipment under capital lease agreements with an
original cost of $1,031,313 and $883,518 and
accumulated depreciation of $447,224 and
$176,474.
5. Accrued
Expenses Accrued expenses at March 31, 1996 and 1995
consisted of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
-------------------------------------------------
Telephone services - Postal,
Telegraph and Telephone
Authorities $ 2,198,965 $ 2,604,101
Proxy expenses (Note 3) 664,003 1,941,957
Commissions 416,089 530,699
Income taxes payable 314,000 -
Legal and professional fees 219,619 459,540
Other 480,820 470,017
-------------------------------------------------
$ 4,293,496 $ 6,006,314
-------------------------------------------------
</TABLE>
During the quarter ended March 31, 1996, certain
accruals were reduced, including approximately
$100,000 in accrued compensation and $95,000 in
accrued line charges.
6. Long-Term
Debt At March 31, 1996 and 1995, long term debt
consisted of the following:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------
<S> <C> <C>
12% unsecured term note
payable to a foreign
corporation, interest
payable monthly,
principal due and
payable September 28,
1997 (1)
$ 1,000,000 $ -
12% unsecured term note
payable to a stock-
holder, interest
payable monthly,
principal due and
payable August 28,
1997 (2) 500,000 -
Capitalized lease
obligations 648,202 649,106
9% mortgage note, payable
$1,586 monthly,
including interest,
through November 1997,
with a December 1997
balloon payment, secured
by deed of trust on the
related land and
building 164,697 168,705
-------------------------------------------------
Total 2,312,899 817,811
Less current maturities 162,250 146,037
-------------------------------------------------
Total long term debt $ 2,150,649 $ 671,774
-------------------------------------------------
</TABLE>
(1) In connection with this transaction, the
Company issued options to purchase 100,000
shares of the Company's common stock at a
price of $6.00 per share, expiring February
28, 1999. At March 31, 1996, such options
have not been exercised (See Note 7).
(2) In connection with this transaction, the
Company issued options to purchase 50,000
shares of the Company's common stock at a
price of $6.00 per share, expiring February
28, 1999. At March 31, 1996, such options
have not been exercised (See Note 7).
The value assigned to such options when granted
in connection with the above note agreements is
being amortized over the term of the respective
notes.
Future maturities of long-term debt and future
minimum lease payments under capital lease
obligations at March 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year Long-term Capital
ended March 31, Debt Leases Total
-------------------------------------------------
<S> <C> <C> <C>
1997 $ 4,384 $224,782 $ 229,166
1998 1,660,313 223,215 1,883,528
1999 - 216,331 216,331
2000 - 139,371 139,371
2001 - 26,356 26,356
-------------------------------------------------
Total payments 1,664,697 830,055 2,494,752
Less amounts repre-
senting interest - 181,853 181,853
-------------------------------------------------
Principal payments 1,664,697 648,202 2,312,899
Less current matur-
ities 4,384 157,866 162,250
-------------------------------------------------
Total long-term
debt $1,660,313 $490,336 $2,150,649
-------------------------------------------------
</TABLE>
7. Stockholders'
Equity Common Stock
In connection with the Residual acquisition
discussed in Note 1, the Company issued 697,828
shares of its common stock as of March 31, 1995.
The acquisition has been accounted for in a
manner similar to a pooling-of-interests with the
accompanying financial statements presented to
include the accounts and operations as though the
acquisition occurred as of April 1, 1994.
On June 30, 1995, the Board of Directors
authorized a stock split, effected in the form of
a 10% stock dividend, payable to shareholders of
record on August 10, 1995. All references to
common share and per share amounts in the
accompanying financial statements have been
retroactively restated to reflect the effect of
this stock dividend (See Note 12).
Employee Stock Option and Appreciation Rights
Plan
On December 14, 1995 the Board of Directors
adopted the Employee Stock Option and
Appreciation Rights Plan (the "Employee Plan"),
expiring December 15, 2005, reserving for
issuance 1,000,000 shares of the Company's common
stock. The Employee Plan provides for grants to
key employees, advisors or consultants of or to
the Company at the discretion of the Stock Option
Committee of the Board of Directors, stock
options to purchase common stock of the
Company at a price equal to the fair market
value, as defined, on the date of grant. Any
options granted under the Employee Plan must be
exercised within ten years of the date they were
granted.
Under the Employee Plan stock appreciation rights
("SAR"s) may also be granted in connection with
the granting of an option and any SARs granted
will be alternative to the related option. A SAR
is exercisable at the same time or times that the
related option is exercisable. The Company will
pay the SAR in shares of common stock equal to
the excess of the fair market value, at the date
of exercise, of a share of common stock over the
exercise price of the related option. The
exercise of a SAR automatically results in the
cancellation of the related option on a share-
for-share basis.
During the fiscal year 1996, the Stock Option
Committee of the Board of Directors granted
options to purchase an aggregate of 557,200
restricted shares of common stock to its
employees under the Employee Plan at exercise
prices from $6.00 to $7.25 per share. The
employees were also granted Stock Appreciation
Rights in tandem with the options granted to
them.
Directors Stock Option and Appreciation Rights
Plan
On December 14, 1995 the Board of Directors
adopted the Directors Stock Option and
Appreciation Rights Plan (the "Director Plan"),
expiring December 15, 2005, reserving for
issuance 850,000 shares of the Company's common
stock. The Director Plan provides that each
person who is a member of the board of directors
in December of each year (as defined) shall be
granted, each year, a ten-year stock option to
purchase 10,000 shares of common stock of the
Company at a price equal to the fair market
value, as defined, on the date of grant, as well
as a corresponding stock appreciation right. An
SAR is exercisable at the same time or times that
the related option is exercisable. The Company
will pay the SAR in shares of common stock equal
to the excess of the fair market value, at the
date of exercise, of a share of common stock over
the exercise price of the related option. The
exercise of an SAR automatically results in the
cancellation of the related option on a share-
for-share basis.
On December 15, 1995, the Stock Option Committee
of the Board of Directors confirmed the automatic
grant of options to purchase 60,000 restricted
shares of common stock to its directors pursuant
to the Company's Director Plan at an exercise
price of $6.00 per share which was equal to the
fair market value of the shares on the date of
grant. The options are exercisable for a period
of ten (10) years so long as the director remains
with the Company. The directors were also
granted Stock Appreciation Rights in tandem with
options granted to them.
Other Stock Option Plans
The Company has several other stock option plans
for the benefit of officers, employees, directors
and consultants. The plans are administered by a
Stock Option Committee of the Board of Directors.
Options granted by the committee are at fair
market value of the common stock as of the date
of grant, are immediately exercisable and
depending upon the terms of the plan, expire
after three or five years unless the individual
is separated from the Company prior to the end of
that period.
Following is a summary of the changes in options
outstanding under all of the Company's option
arrangements during the years ended March 31,
1996 and 1995, after restatement for the 10%
stock dividend:
<TABLE>
<CAPTION>
Number of Option Price
Shares per Share
-------------------------------------------------
<C> <C> <C> <C>
Balance, April 1, 1994 578,974 $2.25 - 11.98
Options granted 98,230 6.82 - 8.98
Options expired (107,584) 2.25 - 6.82
Options exercised (73,277) 2.25 - 3.10
-------------------------------------------------
Balance, March 31, 1995 496,343 2.25 - 11.98
Options granted 767,200 6.00 - 7.25
Options expired (340,136) 2.25 - 8.98
Options exercised (14,277) 2.25 - 5.82
-------------------------------------------------
Balance, March 31, 1996 909,130 $5.26 - 11.98
-------------------------------------------------
</TABLE>
8. Taxes on
Income Taxes on income for the years ended March 31,
1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------
<S> <C> <C>
Current
Federal $ 230,000 $ -
Foreign 64,000 -
State 20,000 -
-------------------------------------------------
Total current 314,000 -
-------------------------------------------------
Deferred:
Federal (315,000) 1,699,000
State (28,000) -
-------------------------------------------------
(343,000) 1,699,000
Change in valuation
allowance 343,000 (1,699,000)
-------------------------------------------------
Total $ 314,000 $ -
-------------------------------------------------
</TABLE>
As of March 31, 1996 and 1995, the net deferred
tax asset recorded and its approximate tax effect
consisted of the following:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------
<S> <C> <C>
Net operating loss
carryforwards $ 2,085,000 $ 2,428,000
Nondeductible expense
accruals 314,000 315,000
Other 32,000 31,000
-------------------------------------------------
2,431,000 2,774,000
Valuation allowance (2,431,000) (2,774,000)
-------------------------------------------------
Net deferred tax asset $ - $ -
-------------------------------------------------
</TABLE>
As of March 31, 1996, a valuation allowance equal
to the net deferred tax asset recognized has been
recorded, as management of the Company has not
been able to determine that it is more likely
than not that the deferred tax asset will be
realized based in part on the foreign operations
and the operating loss carryforwards availability
only to offset U.S. tax provisions.
For the years ended March 31, 1996 and 1995 a
reconciliation of the United States federal
statutory rate to the effective rate is shown
below:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------
<S> <C> <C>
Federal tax (benefit) computed
at statutory rate 34.0% (34.0)%
State tax (benefit), net of
federal tax benefit 1.0 (3.0)
Effect of foreign operations (14.0) -
Net operating losses for which
no tax benefit is currently
available - 9.0
Change in valuation allowance (11.0) 28.0
-------------------------------------------------
Total 10.0% -%
-------------------------------------------------
</TABLE>
As of March 31, 1996, the Company has net
operating loss carryforwards available of
approximately $5,635,000, which can offset future
years U.S. taxable income. Such carryforwards
expire in various years through 2011 and are
subject to limitation under the Internal Revenue
Code of 1986, as amended.
9. Segment
Information The Company is engaged in one line of business -
Telecommunications. The following table presents
information about the Company by geographic area:
<TABLE>
<CAPTION>
Asia United States
Europe Pacific and Canada
-------------------------------------------------
<S> <C> <C> <C>
1996
Sales $8,600,644 $9,153,873 $8,636,057
-------------------------------------------------
Operating income
(loss) $1,386,829 $1,145,898 $ (68,332)
-------------------------------------------------
Identifiable
assets $5,225,110 $3,659,245 $6,578,431
-------------------------------------------------
1995
Sales $9,227,781 $6,775,895 $4,995,462
-------------------------------------------------
Operating income
(loss) $ 754,924 $ 566,779 $ (462,326)
-------------------------------------------------
Identifiable
assets $4,005,028 $2,821,095 $5,406,552
------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Other Totals
-------------------------------------------------
<S> <C> <C>
1996
Sales $ 3,907,654 $30,298,228
-------------------------------------------------
Operating income
(loss) $ 632,614 $ 3,097,009
-------------------------------------------------
Identifiable
assets $ 1,269,288 $16,732,074
-------------------------------------------------
1995
Sales $ 1,981,588 $22,980,726
-------------------------------------------------
Operating income
(loss) $(1,151,684) $ (292,307)
-------------------------------------------------
Identifiable
assets $ 710,369 $12,943,044
-------------------------------------------------
</TABLE>
For the years ended March 31, 1996 and 1995, one
customer accounted for approximately $4,469,000
or 15% and $2,827,000 or 12% of total revenue.
10. Commitments
and Contingency Employment Agreements
The Company and certain of its subsidiaries have
employment agreements with certain key employees
expiring at varying times over the next three
years. The Company's remaining aggregate
commitment at March 31, 1996 under such
agreements is approximately $319,000.
Carrier Arrangements
The Company has entered into agreements with
certain long-distance carriers in the United
States and with telephone utilities in various
foreign countries to transmit telephone signals
domestically and internationally. The Company is
entirely dependent upon the cooperation of the
telephone utilities with which it has made
arrangements for its operational and certain of
its administrative requirements. The Company's
arrangements are nonexclusive and take various
forms. Although some of such arrangements are
embodied in formal contracts, a telephone utility
could cease to accommodate the Company's
arrangements at any time. The Company does not
foresee any threat to existing arrangements with
these utilities, however, depending upon the
location of the telephone utility, such action
could have a material adverse affect on the
Company's financial position or operating
results.
Lease Agreements
The Company leases office space under various
operating leases. As of March 31, 1996,
remaining minimum annual rental commitments under
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
Year ended March 31, Total
--------------------------------------------
<S> <C>
1997 $ 290,000
1998 252,000
1999 204,000
2000 203,000
2001 207,000
Thereafter 236,000
--------------------------------------------
$1,392,000
--------------------------------------------
</TABLE>
Rent expense for the years ended March 31, 1996
and 1995 was approximately $197,000 and $203,000.
11. Government
Regulations The telephone calling card industry is highly
competitive and subject to extensive governmental
regulations, both in the United States and
abroad. Pursuant to the Federal Communications
Act, the Federal Communications Commission
("FCC") is required to regulate the telephone
communications industry in the United States.
Under current FCC policy, telecommunications
carriers, including the Company, who resell the
domestic services of other carriers and who do
not own telecommunications facilities of their
own, are considered to be non-dominant and, as a
result, are subject to the least rigorous
regulation. Telecommunications activities are
also subject to government regulation in every
country throughout the world. The Company has
numerous licenses, agreements, or equipment
approvals in Hong Kong, Canada, Denmark, Germany,
Japan and in other foreign countries where
operations are conducted. To date, the Company
has not been required to comply or been notified
that it cannot comply with any material
international regulations in order to pursue its
existing business activities. There can be no
assurances, however, that the current United
States regulatory environment, including the
present level of FCC regulation will continue to
be considered non-dominant and that various
foreign governmental authorities will not seek to
assert jurisdiction over the Company's rates or
other aspects of its calling services. Such
changes could have a material adverse affect on
the Company's financial condition or operating
results.
12. Subsequent
Events On May 14, 1996 the Board of Directors adopted
certain resolutions asking the Company's
stockholders to amend the Company's Restated
Certificate of Incorporation at the 1996 annual
meeting to increase the number of authorized
shares of common stock from 20,000,000 to
100,000,000 and to authorize the issuance of a
new class of 5,000,000 shares of preferred stock.
On May 14, 1996 the Board of Directors also
authorized a stock split, effected in the form of
a 10% stock dividend, payable to stockholders of
record on June 14, 1996. Such stock dividend
will only take effect if the stockholders approve
the increase in the number of authorized shares
of common stock and therefore is not reflected in
the accompanying financial statements.
Effective April 30, 1996 the Company entered into
a borrowing agreement with a bank which provides
a $500,000 capital lease commitment for equipment
acquisitions. As of June 3, 1996 approximately
$100,000 of equipment has been leased under this
agreement at a 9% annual interest rate.
On June 3, 1996 the Company received a commitment
from a financial institution to provide a $6
million senior secured term loan for capital
expenditures, working capital and debt
refinancing. Such loan agreement will include
interest, payable quarterly at the institution's
base rate plus 2 1/2% , with principal due one
year after execution of a definitive loan
document. The loan will be subject to certain
financial covenants (as defined), will be secured
by all of the assets of the Company and its
subsidiaries, individually guaranteed by each of
the Company's subsidiaries and include a pledge
of the common stock of all of the Company's
subsidiaries. In connection with this
commitment, the lender will receive from the
Company, warrants to purchase 100,000 shares of
the Company's common stock at an exercise price
equal to 120% of the average stock price (as
defined).
<TABLE>
<CAPTION>
<S> <C> <C>
13. Supplemental 1996 1995
Disclosures of -------------------------------------------------
Cash Flow Cash paid during the year for:
Information Interest $160,088 $ 63,713
-------------------------------------------------
Income taxes $ - $140,998
-------------------------------------------------
Noncash investing and
financing activities:
Equipment acquired under
capital lease obligations $147,794
$282,800
-------------------------------------------------
Stock issued in lieu of cash
payments $309,999 $ -
-------------------------------------------------
</TABLE>
<PAGE>
EXECUTIVE TELECARD, LTD.
Schedule II - Valuation and Qualifying Accounts
- -------------------------------------------------------------------------
Allowance for Doubtful Accounts
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Cost and at End
Description of Period Expenses Deductions of Period
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended March 31, 1996 $346,000 $349,747 $456,747 $239,000
- --------------------------------------------------------------------------
Year Ended March 31, 1995 $511,362 $314,905 $480,267 $346,000
- --------------------------------------------------------------------------
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Executive TeleCard, Ltd.
8 Avenue C
Nanuet, New York 10954
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows of Executive TeleCard, Ltd. for the
year ended March 31, 1994. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated 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 consolidated financial
statement presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the consolidated statements of income, stockholders'
equity, and cash flows referred to above present fairly, in all material
respects, the results of operations of Executive TeleCard, Ltd. and its
cash flows for the year ended March 31, 1994 in conformity with generally
accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The accompanying
schedule for 1994 is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule for 1994 has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein
in relation to the basic consolidated financial statements taken as a
whole.
/s/Goldstein, Karlewicz & Goldstein LLP
Certified Public Accountants
Chestnut Ridge, New York
May 20, 1994
<PAGE>
EXECUTIVE TELECARD, LTD.
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED MARCH 31, 1994
<TABLE>
<CAPTION>
Swiss Francs U.S. Dollars
------------ ------------
(unaudited)
<S> <C> <C>
Net Revenue SF 17,989,947 $ 12,736,882
------------- ------------
Cost of Revenue - Affiliated 11,662,189 8,256,830
Cost of Revenue - Unaffiliated 83,145 58,867
------------- ------------
Total Cost of Revenue 11,745,334 8,315,697
------------- ------------
Gross Profit 6,244,613 4,421,185
------------- ------------
Costs and Expenses:
- -------------------
Management Fees - Affiliated 1,593,041 1,127,873
Depreciation and Amortization 965,839 683,814
Selling, General and Administrative Expenses 1,640,781 1,161,673
------------- ------------
Total Costs and Expenses 4,199,661 2,973,360
------------- ------------
Income from Operations 2,044,952 1,447,825
------------- ------------
Other Income (Expense):
- -----------------------
Interest Income 51,925 36,763
Interest Expense (80,048) (56,674)
Foreign Currency Transaction Loss (49,609) (35,123)
------------- ------------
Total Other Expense (77,732) (55,034)
------------- ------------
Income Before Provision for Income Taxes 1,967,220 1,392,791
Provision for Income Taxes 98,000 69,384
------------- ------------
Net Income SF 1,869,220 $ 1,323,407
============= ============
Net Income Per Share SF 0.15 $ 0.11
============= ============
Weighted Average Number of Shares and
Equivalents Outstanding 12,192,400 12,192,400
============= ============
Pro Forma Net Income Per Share (1) SF 0.14 $ 0.10
============= ============
Pro Forma Weighted Average Number of Shares
and Equivalents Outstanding (1) SF 13,411,640 $ 13,411,640
============= ============
</TABLE>
(1) To give effect to the ten percent (10%) common stock split, effected
in the form of a stock dividend distributed on August 25, 1995 to
shareholders of record as of August 10, 1995.
See Notes to Consolidated Financial Statements.
<PAGE>
EXECUTIVE TELECARD, LTD
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED MARCH 31, 1994
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN
SHARES AMOUNT CAPITAL
----------- --------- -------
SWISS FRANCS
------------
<S> <C> <C> <C>
Balances at March 31, 1993: 11,468,489 SF 17,227 SF 15,211,532
Year Ended March 31, 1994:
Stock Issued in Connection
with Private Placements
to Affiliate 302,500 435 2,518,063
Stock Issued in Connection
with Private Placements 121,000 174 1,124,422
Exercise of Incentive Stock
Options 1,694 3 11,474
Exercise of Stock Warrant 121,000 183 684,748
Foreign Currency Translation
Adjustment
Net Income
---------- ----------- --------------
Balances at March 31, 1994 12,014,683 SF 18,022 SF 19,550,239
========== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
RETAINED ACCUMULATED TOTAL
EARNINGS TRANSLATION STOCKHOLDERS
(DEFICIT) ADJUSTMENT EQUITY
----------- --------- -------
SWISS FRANCS
------------
<S> <C> <C> <C>
Balances at March 31, 1993: SF 493,217 SF 4,454 SF 15,726,430
Year Ended March 31, 1994:
Stock Issued in Connection
with Private Placements
to Affiliate 2,518,498
Stock Issued in Connection
with Private Placements 1,124,596
Exercise of Incentive Stock
Options 11,477
Exercise of Stock Warrant 684,931
Foreign Currency Translation
Adjustment (59,343) (59,343)
Net Income 1,869,220 1,869,220
------------- ----------- --------------
Balances at March 31, 1994 SF 2,362,437 SF (54,889) SF 21,875,809
============= =========== ==============
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN
SHARES AMOUNT CAPITAL
----------- --------- -------
U.S. DOLLARS
------------
(Unaudited)
<S> <C> <C> <C>
Balances at March 31, 1993: 11,468,489 $ 12,197 $ 10,769,765
Year Ended March 31, 1994:
Stock Issued in Connection
with Private Placements
to Affiliate 302,500 308 1,782,788
Stock Issued in Connection
with Private Placements 121,000 123 796,091
Exercise of Incentive Stock
Options 1,694 2 8,124
Exercise of Stock Warrant 121,000 130 484,802
Foreign Currency Translation
Adjustment
Net Income
---------- ----------- --------------
Balances at March 31, 1994 12,014,683 $ 12,760 $ 13,841,570
========== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
RETAINED ACCUMULATED TOTAL
EARNINGS TRANSLATION STOCKHOLDERS
(DEFICIT) ADJUSTMENT EQUITY
----------- --------- -------
U.S. DOLLARS
------------
(Unaudited)
<S> <C> <C> <C>
Balances at March 31, 1993: $ 349,198 $ 3,153 $ 11,134,313
Year Ended March 31, 1994:
Stock Issued in Connection
with Private Placements
to Affiliate 1,783,096
Stock Issued in Connection
with Private Placements 796,214
Exercise of Incentive Stock
Options 8,126
Exercise of Stock Warrant 484,932
Foreign Currency Translation
Adjustment (42,014) (42,014)
Net Income 1,323,407 1,323,407
------------- ----------- --------------
Balances at March 31, 1994 $ 1,672,605 $ (38,861) $ 15,488,074
============= =========== ==============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
EXECUTIVE TELECARD, LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED MARCH 31, 1994
<TABLE>
<CAPTION>
SWISS FRANCS US DOLLARS
------------ -----------
(Unaudited)
Cash Flows from Operating Activities:
- -------------------------------------
<S> <S> <C>
Net Income SF 1,869,220 $ 1,323,407
Adjustments to Reconcile Net Income
to Net Cash Flows Provided by
Operating Activities:
Depreciation and Amortization of
Property, Plant and Equipment 827,563 585,915
Amortization of Intangible Assets 138,276 97,899
Provision for Bad Debts 76,432 54,114
Changes in Operating Assets and
Liabilities:
Accounts Receivable (2,276,669) (1,611,882)
Other Current Assets (118,237) (83,711)
Accounts Payable 39,719 28,121
Accrued Expenses 283,007 200,369
Income Taxes Payable 80,616 57,076
------------- ------------
Net Cash Flows Provided by
Operating Activities 919,927 651,308
------------- ------------
Cash Flows from Investing Activities:
- -------------------------------------
Acquisitions of Property, Plant and
Equipment (1,331,945) (943,017)
Acquisitions of Intangible Assets (34,575) (24,479)
Deposits (54,708) (38,733)
Advances to Affiliates (3,235,217) (2,290,534)
------------- ------------
Net Cash Flows Used In Investing
Activities (4,656,445) (3,296,763)
------------- ------------
Cash Flows from Financing Activities:
- -------------------------------------
Principal Payments on Long-Term Debt (118,268) (83,733)
Principal Payments on Capital Lease
Obligations (161,229) (114,150)
Proceeds from Issuance of Common Stock 4,339,502 3,072,368
------------- ------------
Net Cash Flows Provided by Financing
Activities 4,060,005 2,874,485
------------- ------------
Effect of Exchange Rate Changes on Cash (59,343) (42,015)
------------- ------------
Net Change in Cash and Cash Equivalents 264,144 187,015
Cash and Cash Equivalents,
Beginning of Year 1,639,149 1,160,517
------------- ------------
Cash and Cash Equivalents, End of Year SF 1,903,293 $ 1,347,532
============= ============
Supplemental Disclosures of Cash Flow Information
- -------------------------------------------------
Cash Paid During the Year For:
Interest SF 80,048 $ 56,674
Supplemental Disclosure of Noncash
- ----------------------------------
Investing and Financing Activities:
-----------------------------------
Equipment Acquired Under Capital Lease
Obligations SF 73,121 $ 51,770
Equipment Acquired with Funds Previously
held on Deposit SF 37,851 $ 26,799
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
EXECUTIVE TELECARD, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1994
Note 1 - Summary Significant Accounting Policies:
- --------------------------------------------------------------------------
Organization - Executive TeleCard, Ltd. (the "Company") was
incorporated as International 800 TeleCard, Inc. in February 1987 as
a wholly-owned subsidiary of International 800 Telecom Corp.
("Telecom"), a public U.S. corporation which changed its name to
Residual Corporation in February 1994. Hereinafter Telecom refers to
Residual Corporation and all of its subsidiaries. Telecom markets
and provides toll-free and related value-added telecommunications
services to businesses in many countries, utilizing facilities and
equipment of other entities. The Company is engaged in the
exploitation of an intra/intercountry calling service which it
markets as an enhancement to charge, credit and telephone calling
cards; a turnkey calling card system to countries that do not have a
telephone calling card; and company issued stand-alone calling cards
called "Executive TeleCard International-TM-" and "World Direct-TM-".
In October 1988, Telecom declared a distribution in kind of its
investment in the Company. The common stock of the Company was
distributed on the basis of one (1) share of the Company's common
stock for every ten (10) shares of Telecom's stock.
Basis of Presentation - The consolidated financial statements have
been prepared in accordance with United States generally accepted
accounting principles and include the accounts of the Company and its
wholly-owned subsidiaries, Executive TeleCard SA (Turks and Caicos
Islands), Executive TeleCard, Inc. and Turks and Caicos Islands'
wholly-owned subsidiary, Executive TeleCard SA (Swiss). All material
intercompany transactions and balances have been eliminated in
consolidation.
The consolidated financial statements are presented in Swiss Francs
(SF) which during 1994 was the functional and reporting currency of
the Company. The Swiss Franc was selected as the functional and
reporting currency because the Company's principal operations,
marketing and reporting were managed by the Company's operations in
Switzerland. Most customers, equipment, calls processed and PTT
suppliers are located outside the United States.
The consolidated financial statements for the year ended March 31,
1994, are also presented in United States Dollars ($) solely for
convenience at the March 31, 1994 conversion ratio of 1SF=$0.708.
Such translations should not be construed as a representation that
the Swiss Franc amounts could be converted into United States Dollars
at this or any other rate.
Revenue Recognition - Telephone usage revenue is recognized upon
billing to subscribers. The billings are based upon established
tariffs filed with the United States Federal Communications
Commission, or at rates established by the Company.
The Company recognizes revenue on sales of subscriptions of its
calling card upon receipt of the subscription price.
Cash Equivalents - Cash equivalents include all highly liquid debt
instruments with a maturity of three (3) months or less at the time
of purchase.
Property, Plant and Equipment - Property, plant and equipment is
stated at cost. Additions, renewals and improvements of property,
plant and equipment, unless of relatively minor amounts, are
capitalized. Expenditures for maintenance and repairs are expensed
as incurred. The cost of property, plant and equipment retired or
sold, together with the related accumulated depreciation or
amortization, are removed from the appropriate accounts and the
resulting gain or loss is included in the statement of income.
Depreciation and Amortization - Depreciation and amortization are
computed using the straight-line method over the estimated useful
lives of the related assets ranging from five to twenty years.
Depreciation and amortization expense for the year ended March 31,
1994 was SF 827,563 ($585,915).
Intangible Assets - Intangible assets consist of licenses and
trademarks, organization costs, deferred installation charges and a
customer database which are stated at cost. Amortization is provided
on the straight-line method over ten (10) years for licenses and
trademarks and over five (5) years for organization costs, deferred
installation charges and the customer database. Amortization expense
for the year ended March 31, 1994 was SF 138,276 ($97,899).
Income Taxes - Effective April 1, 1993, the Company adopted Statement
of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". The Statement requires the use of an asset and liability
approach for financial accounting and reporting for income taxes. If
it is more likely than not that some portion or all of the deferred
tax asset will not be realized, a valuation allowance is recognized.
Net Income Per Share - Net income per share is based on the weighted
average number of shares outstanding during the year. Warrants and
options are included using the treasury stock method when exercise
prices are less than the average market price.
Anticipated Effect of Recently Issued Statements of Financial
Accounting Standards - The Company does not expect the effect of
recently issued financial accounting standards, when adopted, to have
a material impact on its financial position and results of
operations.
Concentrations of Credit Risk - Financial instruments which
potentially subject the Company to concentrations of credit risk
consist principally of cash and cash equivalents and trade accounts
receivable. The Company places its cash and temporary cash
investments with quality financial institutions. At times, such
investments may be in excess of Federally insured limits.
Concentrations of credit risk with respect to trade accounts
receivable are limited due to the wide variety of customers and
markets which comprise the Company's customer base, as well as their
dispersion across many different geographic areas. The Company
routinely assesses the financial strength of its customers and, as a
consequence, believes that its trade accounts receivable credit risk
exposure is limited. Generally, the Company does not require
collateral or other security to support customer receivables.
Note 2 - Related Party Transactions - Telecom:
- --------------------------------------------------------------------------
Management Agreement - The Company has entered into a ten (10) year
agreement expiring January 25, 1999 with Telecom pursuant to which
Telecom will provide the Company all offices, personnel and other
facilities for general and administrative purposes, except for legal,
accounting, marketing expense, advertising and promotion and
stockholder relations (See Note 5). Regardless of the actual cost,
the Company has agreed to pay Telecom ten percent (10%) of all of
TeleCard's gross revenue from the use of the Company's calling
services (excluding revenue from card subscriptions, access and
activation fees and certain revenue from revenue sharing contracts)
in consideration for such general and administrative services.
Telecom charges the Company for telephone line usage and installation
costs. Telecom also requires the Company to make deposits for such
telephone lines. Telecom charges the Company a percentage of all
gross traffic revenue billed to the Company's customer. Telecom only
recovers the approximate cost of the lines. Management believes that
said charges are comparable to the charges which would be incurred
from other vendors.
Note 3 - Related Party Transactions - Network Data Systems Limited:
- --------------------------------------------------------------------------
During the year ended March 31, 1994 the Company sold, in two private
placements, 302,500 shares of the Company's common stock to Network
Data Systems Limited for SF 2,518,498 ($1,783,096). As of March 31,
1994, Network Data Systems Limited owned approximately 14.6% of the
Company's outstanding common stock.
Note 4 - Due from Affiliates:
- --------------------------------------------------------------------------
Due from affiliates consists of non-interest bearing advances to
Telecom and its subsidiaries. These advances are due on demand. In
April 1991, the Company and Telecom entered into a loan agreement
which formalized these advances. In addition, the Company entered
into a security and assignment agreement with Telecom whereby Telecom
granted the Company a security interest in all assets whether
tangible or intangible. The Company does not expect the remaining
advances to be repaid within the next twelve months.
Note 5 - Economic Dependence:
- --------------------------------------------------------------------------
In January 1989, the Company entered into a management agreement with
Telecom. The agreement permits the Company to use Telecom's toll-
free telephone operations and Telecom's arrangements with telephone
utilities in certain industrialized countries. These facilities and
arrangements allow Telecom to provide originating toll-free telephone
services from these certain countries to over one hundred countries.
The Company's ability to maintain and expand its existing
telecommunications markets was, at its inception and through its
development stage, significantly contingent upon Telecom's ability to
sustain its operations. During the past three (3) years, the Company
has established its own relationships with telephone utilities in
most of the countries where it presently operates. At the present
time, it is management's opinion that it can duplicate the services
provided by Telecom.
Note 6 - Capital Leases:
- --------------------------------------------------------------------------
The Company leases certain telephone and office equipment, accounted
for as capital leases, with lease terms of five (5) years.
Amortization expense of equipment under capital leases was SF 158,853
($112,468) for the year ended March 31, 1994.
Note 7 - Stock Option Plans:
- -------------------------------------------------------------------------
The Company has adopted a stock option plan (the "Plan") under which
incentive stock options to purchase shares of common stock may be
granted to officers, management personnel and other key employees
from time to time, but in no event after April 1997. Several members
of the Board of Directors of the Company serve as the stock option
committee (the "Committee") with full power and authority for
administering the Plan. Subject to adjustments, a total of 292,820
shares of common stock shall be available for options under this
Plan. The option price of the Company's stock options shall be
determined by the Committee. The price shall not be less than 100%
(110% in the case of an employee owning more than 10% of the
Company's outstanding common stock) of the fair market value of the
common stock on the date of grant. The options granted under the
Plan may be exercised immediately after the date of grant. All
options shall expire five (5) years after the date of grant, unless a
shorter period has been specified by the Committee. In September
1990, the Committee approved the issuance of options to directors and
certain employees of Telecom responsible for the operations of the
Company, to purchase 67,349 shares of the Company's common stock at
$3.415 per share.
During 1992, the Company adopted three additional stock option plans
under which stock options to purchase shares of common stock may be
granted to directors, employees and United States and foreign
consultants. Several members of the Board of Directors of the
Company serve as the stock option committee with full power and
authority for administering the plans. Subject to adjustments, a
total of 706,640 shares of common stock shall be available for
options under these plans. The option price of the Company's stock
options shall be determined by the Committee. The price shall be the
fair market value of the Company's common stock as of the date of
grant. The options granted under the plan may be exercised
immediately after the date of grant. Options expire three (3) years
after the date of grant or ninety (90) days after termination of
employment of service, whichever comes first. During 1992, the
Committee approved the issuance of options to directors, certain
employees and both United States and foreign consultants responsible
for the operations of the Company, to purchase 336,926 shares of the
Company's common stock at various prices ranging from $2.476 to
$6.302 per share.
During 1993, the Company adopted three (3) additional stock option
plans under which stock options to purchase shares of common stock
may be granted to directors, employees and United States and foreign
consultants. Several members of the Board of Directors of the
Company serve as the stock option committee with full power and
authority for administering the plans. Subject to adjustments, a
total of 363,000 shares of common stock shall be available for
options under these plans. The option price of the Company's stock
options shall be determined by the Committee. The price shall be the
fair market value of the Company's common stock as of the date of
grant. The options granted under the plan may be exercised
immediately after the date of grant. Options expire five (5) years
after the date of grant or ninety (90) days after termination of
employment of service, whichever comes first. During 1993, the
Committee approved the issuance of options to directors, certain
employees and both United States and foreign consultants responsible
for the operations of the Company, to purchase 192,641 shares of the
Company's common stock at various prices ranging from $5.785 to
$6.405 per share.
The applicable options granted have been adjusted for stock splits
through March 31, 1994, affecting both the number of shares and
exercise price per share.
A summary of stock option activity under the Company's Stock Option
Plans is as follows:
<TABLE>
<CAPTION>
NUMBER EXERCISE PRICE
OF SHARES Per Share Aggregate Price
--------- --------- ---------------
<S> <C> <C> <C>
Outstanding at March 31, 1993 362,015 $2.476-$6.302 $ 1,128,250
Retirement of Options (26,763) $2.476-$6.405 (127,863)
Issuance of Options under the
Stock Option Plan 192,641 $5.785-$6.405 1,235,600
Exercised During the Year (1,553) $2.476-$6.405 (7,695)
-------- ------------- -----------
Outstanding at March 31, 1994 526,340 $2.476-$6.405 $ 2,228,292
======== ============= ===========
*Of the 526,340 shares outstanding, 327,814 were issued to members of the
Board of Directors and Executive Officers of the Company.
</TABLE>
Note 8 - Income Taxes:
- --------------------------------------------------------------------------
The provision for income taxes for the year ended March 31, 1994 consists
of the following:
<TABLE>
<CAPTION>
Swiss Francs U.S. Dollars
------------ ------------
(Unaudited)
<S> <C> <C>
United States Federal SF - $ -
Foreign 98,000 69,384
------------ -----------
Total Provision for Income Taxes SF 98,000 $ 69,384
============ ===========
</TABLE>
Income before income taxes consisted of the following:
<TABLE>
<CAPTION>
Swiss Francs U.S. Dollars
------------ ------------
(Unaudited)
<S> <C> <C>
United States Federal SF (93,899) $ (66,481)
Foreign 2,061,119 1,459,272
------------ -----------
Total SF 1,967,220 $ 1,392,791
============ ===========
</TABLE>
A reconciliation of the U.S. Federal statutory income tax rates to the
effective rates follows:
<TABLE>
<CAPTION>
<S> <C>
United States Federal Statutory Rate 35.0%
State Income Tax 5.1
Foreign Income Tax 9.8
Adjustments Related to U.S. and State Losses (40.1)
Other Items (4.8)
------
Effective Income Tax Rates 5.0%
======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets as of March
31, 1994 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Net Operating Loss Carryforwards $ 587,715
---------
Total Deferred Tax Assets 587,715
Valuation Allowance (587,715)
---------
Net Deferred Tax Assets $ -
=========
</TABLE>
As of March 31, 1994, the Company has available net operating loss
carryforwards, which can be used to offset future years' taxable income
for U.S. income tax purposes, in the amount of approximately SF 2,347,458
($1,662,000) which expires in various years through 2005. The United
States Tax Reform Act of 1986 enacted an alternative minimum tax generally
effective for taxable years beginning after December 31, 1986. The
alternative minimum tax is imposed at a rate of 20% of the alternative
minimum taxable income. Net operating losses may be used to offset only
90% of the corporation's alternative minimum taxable income.
The Company is subject to income taxes of the Swiss taxing authorities
based on the net income of its foreign subsidiary. Net income from the
subsidiary is not subject to the United States tax laws unless the Company
establishes operations in the United States.
Note 9 - Stockholders' Equity:
- -------------------------------------------------------------------------
Common Stock Purchase Warrants
In September 1991, the Company retained Stephens, Inc., Investment Bankers
as its financial advisor. In consideration of the services to be provided
by Stephens Inc., the Company issued Stephens Inc. an immediately
exercisable two-year common stock purchase warrant to acquire 121,000
shares of the Company's common stock at a price of $3.72 per share. In
August 1993, Stephens, Inc. exercised the common stock purchase warrant.
Common Stock
On July 29, 1993, the Board of Directors declared a ten percent (10%)
split, effected in the form of a stock dividend and payable on August 27,
1993 to shareholders of record on August 20, 1993. The Board of Directors
declared another ten percent (10%) split, effected in the form of a stock
dividend, on January 5, 1994 and payable on February 4, 1994 to
shareholders of record on January 28, 1994. An amount equal to the par
value of the common stock issued was transferred from additional paid-in
capital to the common stock account for both splits. This transfer has
been reflected in the consolidated statement of stockholders' equity at
March 31, 1991.
Between June 1993 and August 1993, the Company sold, in private
placements, 121,000 shares of common stock for SF 1,124,596 ($796,214) to
unrelated parties and 302,500 shares of common stock to Network Data
Systems, Limited, a related party, for SF 2,518,498 ($1,783,096).
Stephens, Inc., Investment Bankers, exercised a common stock purchase
warrant to acquire 121,000 shares of common stock for SF 684,931
($484,932).
During the year ended March 31, 1994, the Company issued 1,694 shares of
common stock in connection with the exercise of stock options by employees
of the Company for SF 11,477 ($8,126).
All common share and per common share data presented in these consolidated
financial statements and notes have been retroactively restated for the
effects of the stock splits through March 31, 1994.
<PAGE>
EXECUTIVE TELECARD, LTD.
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
<TABLE>
<CAPTION>
Additions
Balance Charged to Balance
Beginning Cost and at End
Description of Period Expenses Deductions of Period
----------- --------- -------- ---------- ---------
Swiss Francs
------------
Year Ended March 31, 1994:
- --------------------------
<S> <C> <C> <C> <C>
Allowance for Doubtful
Accounts SF 101,687 SF 76,432 SF *86,885 SF 91,234
U.S. Dollars
(Unaudited)
Year Ended March 31, 1994:
- --------------------------
Allowance for Doubtful
Accounts $ 71,994 $ 54,114 $ *61,514 $ 64,594
*Uncollectible accounts written off, net of recoveries.
</TABLE>
<PAGE>
ITEM 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
- --------------------------------------------------------------------------
The independent public accountants for the Company for its fiscal year
ended March 31, 1994 was the firm of Goldstein, Karlewicz & Goldstein LLP
("GK&G"). As of May 23, 1995, GK&G was no longer the Company's
independent accountants. GK&G's report for the fiscal year ended March
31, 1994 did not contain an adverse opinion or a disclaimer of opinion,
and was not qualified or modified as to uncertainty, audit scope or
accounting principles.
Effective May 23, 1995, the Company engaged the accounting firm of BDO
Seidman, LLP to serve as the Company's independent public accountants.
The Company's decision to change accountants was recommended and approved
by the Audit Committee, the Special Committee of Independent Directors and
the full Board of Directors of the Company.
There has been no disagreement on accounting practices and principles and
financial statements disclosures with the Company's independent certified
public accountants.
ITEM 10 - Directors and Executive Officers of the Registrant
- --------------------------------------------------------------------------
The information required herein is incorporated by reference from the
Company's definitive proxy statement for the 1996 annual meeting of
stockholders.
ITEM 11 - Compensation of Executive Officers, Directors and Certain
Employees
- --------------------------------------------------------------------------
The information required herein is incorporated by reference from the
Company's definitive proxy statement for the 1996 annual meeting of
stockholders.
ITEM 12 - Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------------------
The information required herein is incorporated by reference from the
Company's definitive proxy statement for the 1996 annual meeting of
stockholders.
ITEM 13 - Certain Relationships and Related Transactions
- --------------------------------------------------------------------------
The information required herein is incorporated by reference from the
Company's definitive proxy statement for the 1996 annual meeting of
stockholders.
ITEM 14 - Exhibits, Financial Statements, Schedules and Reports on Form 8-
K
- --------------------------------------------------------------------------
a) 1. The financial statements are included in Part II, Item 8
beginning at Page F-1:
2. Financial Statement Schedules
- Schedule II Valuation and Qualifying Accounts
b) Reports on Form 8-K:
None
c) Exhibits:
3.1 Restated (and Amended) Certificate of Incorporation dated
October 28, 1988 filed as Exhibit 3.1 to the Company's Form S-3
Registration Statement (No. 33-67136) and incorporated herein by
reference.
3.2 Bylaws filed as Exhibit 3.2 to the Company's Form S-3
Registration Statement (No. 33-67136) and incorporated herein by
reference.
10.1 Management Agreement with International 800 Telecom Corp. filed
as Exhibit 10.2 to the Company's Form S-1 Registration Statement
(No. 33-25572) and incorporated herein by reference.
10.2 Dominant Carrier Agreement with MCI filed as Exhibit 10.3 to the
Company's Form S-1 Registration Statement (No. 33-25572) and
incorporated herein by reference.
10.3 Sales Agent Agreements filed as Exhibit 10.4 to the Company's
Form S-1 Registration Statement (No. 33-25572) and incorporated
herein by reference.
10.4 Section 214 License filed as Exhibit 10.5 to the Company's Form
S-1 Registration Statement (No. 33-25572) and incorporated
herein by reference.
10.5 Damiel Elektronik Development Agreement filed as Exhibit 10.6 to
the Company's Form S-1 Registration Statement (No. 33-25572)
and incorporated herein by reference.
10.6 Loan Agreement Between International 800 Telecom Corp., Service
800 SA, the Company and Executive TeleCard SA filed as Exhibit 1
to the Company's Form 10K for the period ended March 31, 1992
and incorporated herein by reference.
10.7 Security Agreement Between International 800 Telecom Corp. and
the Company filed as Exhibit 2 to the Company's Form 10K for the
period ended March 31, 1992 and incorporated herein by
reference.
10.8 Assignment Between International 800 Telecom Corp. and the
Company filed as Exhibit 3 to the Company's Form 10K for the
period ended March 31, 1992 and incorporated herein by
reference.
10.9 Agreement for Sale and Purchase of Assets Between the Company
and Residual Corporation filed as Exhibit 99.18 to the Company's
Form 8-K dated April 24, 1995 and incorporated herein by
reference.
21 Subsidiaries of the Registrant
27 Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
EXECUTIVE TELECARD, LTD.
Dated: June 21, 1996 BY:/S/Anthony Balinger
Anthony Balinger, President and Principal
Executive Officer
Pursuant to the requirement of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and
in capacities and on the dates indicated.
Dated: June 21, 1996 BY:/S/Anthony Balinger
Anthony Balinger, Director
Dated: June 21, 1996 BY:/S/Edward J. Gerrity
Edward J. Gerrity, Chairman and Director
Dated: June 21, 1996 BY:/S/Allen Mandel
Allen Mandel, Executive Vice President and
Principal Financial Officer
Dated: June 21, 1996 BY:/S/Timothy A. Peach
Timothy A. Peach, Controller, Principal
Accounting Officer
Dated: June 21, 1996 BY:/S/Stig Sonnerberg
Stig Sonnerberg, Director
Dated: June 21, 1996 BY:/S/Richard Krinsley
Richard Krinsley, Director
Dated: June 21, 1996 BY:/S/David Warnes
David Warnes, Director
Dated: June 21, 1996 BY:/S/Ebrahim Ali Abdul Aal
Ebrahim Ali Abdul Aal, Director
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT METHOD OF FILING
- ------- -------------------
<S> <C> <C>
3.1 Restated (and Amended) Certificate of
Incorporation dated October 28, 1988
filed as Exhibit 3.1 to the Company's
Form S-3 Registration Statement
(No. 33-67136) and incorporated herein
by reference.
3.2 Bylaws filed as Exhibit 3.2 to the
Company's Form S-3 Registration
Statement (No. 33-67136) and
incorporated herein by reference.
10.1 Management Agreement with International
800 Telecom Corp. filed as Exhibit 10.2
to the Company's Form S-1 Registration
Statement (No. 33-25572) and
incorporated herein by reference.
10.2 Dominant Carrier Agreement with MCI
filed as Exhibit 10.3 to the Company's
Form S-1 Registration Statement
(No. 33-25572) and incorporated
herein by reference.
10.3 Sales Agent Agreements filed as
Exhibit 10.4 to the Company's Form S-1
Registration Statement (No. 33-25572)
and incorporated herein by reference.
10.4 Section 214 License filed as Exhibit
10.5 to the Company's Form S-1
Registration Statement (No. 33-25572)
and incorporated herein by reference.
10.5 Damiel Elektronik Development Agreement
filed as Exhibit 10.6 to the Company's
Form S-1 Registration Statement
(No. 33-25572) and incorporated herein
by reference.
10.6 Loan Agreement Between International 800
Telecom Corp., Service 800 SA, the
Company and Executive TeleCard SA filed
as Exhibit 1 to the Company's Form 10K
for the period ended March 31, 1992 and
incorporated herein by reference.
10.7 Security Agreement Between International
800 Telecom Corp. and the Company filed
as Exhibit 2 to the Company's Form 10K
for the period ended March 31, 1992 and
incorporated herein by reference.
10.8 Assignment Between International 800
Telecom Corp. and the Company filed as
Exhibit 3 to the Company's Form 10K for
the period ended March 31, 1992 and
incorporated herein by reference.
10.9 Agreement for Sale and Purchase of Assets
Between the Company and Residual Corporation
filed as Exhibit 99.18 to the Company's
Form 8-K dated April 24, 1995 and
incorporated herein by reference.
21 Subsidiaries of the Registrant Filed herewith electronically
27 Financial Data Schedule Filed herewith electronically
</TABLE>
EXHIBIT 21
LIST OF SUBSIDIARIES
--------------------
STATE OR COUNTRY NAME UNDER WHICH
NAME OF BUSINESS OF INCORPORATION SUBSIDIARY DOES
BUSINESS
- ------------------------ ---------------- -----------------------
Executive TeleCard SA Turks & Caicos
Executive TeleCard, Inc. Colorado Telecall Long Distance,
Inc.
World Direct Ltd. Delaware
Service 800 SA Turks & Caicos
World DirectNet Ltd. Delaware
Executive TeleCard SA Switzerland
World Direct Limited Anguilla
Transworld
Telecommunications A/S Denmark
Fintel Services Inc. Colorado
Worldwide 800 Services
(Hong Kong) Ltd. Hong Kong
Service 800 (UK) United Kingdom
Service 800 SA Belgium
Service 800 Inc. Delaware
Service 800 SA Switzerland
Service 800 SA France
Service 800 SA Germany
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED MARCH 31, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 950
<SECURITIES> 0
<RECEIVABLES> 6,583
<ALLOWANCES> (239)
<INVENTORY> 0
<CURRENT-ASSETS> 7,657
<PP&E> 15,852
<DEPRECIATION> (7,437)
<TOTAL-ASSETS> 16,732
<CURRENT-LIABILITIES> 7,541
<BONDS> 2,151
0
0
<COMMON> 14
<OTHER-SE> 7,026
<TOTAL-LIABILITY-AND-EQUITY> 16,732
<SALES> 0
<TOTAL-REVENUES> 30,298
<CGS> 0
<TOTAL-COSTS> (18,501)
<OTHER-EXPENSES> 8,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 186
<INCOME-PRETAX> 3,167
<INCOME-TAX> 314
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,853
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
