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, 1997
[ ] 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
One Blue Hill Plaza, Suite 1650, Pearl River, New York 10965
(Address of principal executive offices)
Registrant's phone number including area code:
(914) 627-2060
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
(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 June
10, 1997 amounted to approximately $121,385,956.
The number of shares outstanding of each of the registrant's classes of
common stock as of June 10, 1997 was 17,286,563 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 1997 annual
meeting of stockholders are incorporated by reference into Part III of
this report.
(Balance of Page Left Blank Intentionally)
EXECUTIVE TELECARD, LTD.
FORM 10-K
FISCAL YEAR ENDED MARCH 31, 1997
TABLE OF CONTENTS
Page
Part I Item 1 Business 4 - 16
Item 2 Properties 16
Item 3 Legal Proceedings 16 - 18
Item 4 Submission of Matters to a Vote of
Security Holders 18
Part II Item 5 Market for Registrant's Common Stock
and Related 18
Stockholder Matters
Item 6 Selected Financial Data 19
Item 7 Management's Discussion and Analysis
of Financial 20 - 23
Condition and Results of Operations
Item 8 Consolidated Financial Statements and
Supplementary Data F-1 - F-31
Item 9 Changes in and Disagreements with
Accountants on 24
Accounting and Financial Disclosure
Part III Item 10 Directors and Executive Officers of
the Registrant 24
Item 11 Executive Compensation 24
Item 12 Security Ownership of Certain
Beneficial Owners and Management 24
Item 13 Certain Relationships and Related
Transactions 24
Part IV Item 14 Exhibits, Financial Statements,
Schedules and 24 - 27
Reports on Form 8-K
Signatures 28
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 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 66) 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 66 countries and territories.
To access CAVIAR, callers simply dial a toll-free number from any
telephone in any of the 66 countries and territories. This first step
bypasses hotel switchboards for both international and intracountry 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 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 40 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 major corporations such as: MasterCard International (several
regions of the world), Worldcom Communications Corp., LCI International,
Eurocard Danmark A/S, Eurocard Iceland SA, Telstra (Australia), KDD
(Japan), Tele Danmark A/S, Lufthansa Airlines, American Express Travel
Related Services-Brazil, Singapore Telecom, PLDT (Phillipines), and Telmex
(Mexico).
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 PTTs 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, Norway, the Philippines, Portugal,
Russia, 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, 1997 the Company had approximately 9,400 ETI
cardholders located in more than 128 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 is a global prepaid calling card that is marketed
directly to travelers by PTTs and carriers, 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, Telia Card (Swedish); Worldcom (English); Telecom Danmark
(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 66 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.
Countries and Territories Covered by Direct Calling Service
Andorra Gibraltar Madeira Singapore
Australia Greece Majorca South Africa
Austria Greenland Malaysia South Korea
Azores Guernsey Mexico Spain
Bahrain Hong Kong Monaco Sweden
Belgium Hungary Netherlands Switzerland
Brunei Iceland New Zealand Taiwan
Canada Indonesia No. Ireland Thailand
Canary Islands Ireland Norway Turkey
Chile Isle of Man Philippines U.A.E.
Colombia Israel Poland U.S. Virgin
Islands
Cyprus Italy Portugal United Kingdom
Denmark Japan Puerto Rico United States
Faeroe Islands Jersey Qatar Vatican City
Finland Liechtenstein Russia Wales
France Luxembourg San Marino
Germany Macau Scotland
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 78 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:
EUROPE
Andorra Gibraltar Madeira Spain
Austria Greece Majorca Sweden
Azores Guernsey Monaco Switzerland
Belgium Hungary Montserrat Turkey
Canary Islands Ireland Netherlands United Kingdom
Cyprus Isle of Man No. Ireland Vatican City
Denmark Italy Norway Wales
Finland Jersey Portugal
France Liechtenstein San Marino
Germany Luxembourg Scotland
THE AMERICAS AND WEST INDIES
Anguilla Dominica Trinidad & Tobago
Argentina Grenada Turks & Caicos Is.
Bahamas Jamaica United States
Brazil Netherland Antilles Uruguay
Canada Nicaragua U.S. Virgin Islands
Chile Puerto Rico Venezuela
Colombia St. Kitts/Nevis
MIDDLE EAST AND AFRICA
Abu Dhabi Israel Saudi Arabia
Bahrain Oman South Africa
Dubai Qatar U.A.E.
FAR EAST & AUSTRALIA
Australia Japan Singapore
China Malaysia South Korea
Guam New Zealand Taiwan
Hong Kong Philippines Thailand
Indonesia Saipan
H. Toll-free Telephone Service (Service 800-TM-)
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, 1997 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, 1997, 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 a wholly owned subsidiary of
Residual, a publicly traded company that provided toll-free and related
value-added telecommunications services to businesses around the world.
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 conducts most of its operations through
the following wholly owned subsidiaries:
1. Executive TeleCard SA, ("TeleCard, Turks & Caicos"). The Company
formed this company, which is now 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.
2. World Direct, Ltd. (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 Ltd. (Delaware) The Company conducts its U.S. prepaid
calling card business through World Direct Ltd.
6. Service 800 SA (Turks & Caicos). The Company conducts its worldwide
toll-free 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 140) 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 six 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. eGlobe, Ltd. (Delaware). The Company is actively developing a global
end-user Internet access service, which it markets through eGlobe,
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.
L. 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 carriers such 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), 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, Residual provided the Company with sales personnel
and access to its sales network to market and sell ETI cards. Since the
acquisition of Residual's operating subsidiaries on March 31, 1995, the
Company has utilized 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 Company's various competitors around the world, 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, but does not believe that such sales create a material
risk of enabling others to utilize this equipment in direct competition
with the Company.
There can be no assurance that all of the PTTs from which the Company
plans to offer service will approve the use of the Company's CAVIAR. In
such an event, 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 multinational 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. As a result of the
Company's acquisition of Residual's operating subsidiaries, on March 31,
1995, the Company itself employed eighty-three (83) full time employees.
As of March 31, 1997, the Company employed one hundred sixty-six (166) of
which one hundred forty-four (144) were located in the United States in
either Denver, Colorado or Pearl River, New York, one (1) was located in
Nyon, Switzerland, eleven (11) were located in Silkeborg, Denmark, seven
(7) were located in Hong Kong, one (1) was located in Qatar, one (1) was
located in Brussels, Belgium, and one (1) was located in Guildford, United
Kingdom.
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 leased by the
Company include the premises located in Paris, France; Brussels, Belgium;
Hong Kong; Singapore; Doha, Qatar; Silkeborg, Denmark; Nyon, Switzerland;
and Guildford, United Kingdom. Effective June, 1996 the Company leased
additional office space in Denver, Colorado, and effective September,
1996, the Company leased office space in Pearl River, New York.
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.
U. Intellectual Property Rights
The Company has registered certain marks, including WORLD DIRECT-
Registered Trademark-, EXECUTIVE TELECARD INTERNATIONAL-Registered
Trademark-, and SERVICE 800-Registered Trademark- 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-, GLOBAL EXECUTIVE-TM-, PHONE 123-TM-, 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. In such an event the Company might 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
The Company is engaged in one business segment - telecommunications.
See Geographic Segment Information in Note 9 of the Notes to Consolidated
Financial Statements.
For the year ended March 31, 1997, two customers, Telstra and Telmex
accounted for approximately twelve percent (12%) and fifteen percent (15%)
of total revenue, respectively. 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 sq. ft., was purchased in December 1992. The Company rents office
space in Pearl River, New York; Paris, France; Brussels, Belgium; Nyon,
Switzerland; Hong Kong; Singapore; Silkeborg, Denmark; Guildford, United
Kingdom and Anguilla. Effective June, 1996 the Company leased an
additional 10,000 sq. ft. of office space in Denver, Colorado at 1720 S.
Bellaire Street, Suite 1000 and effective September, 1996 the Company
leased an additional 3100 sq. ft. of office space in Pearl River, New York
at One Blue Hill Plaza, Suite 1650.
The Company believes that its facilities, including the new leases in
Denver and New York, 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.
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. Messrs. Krauth, Miller and Legere settled with the
Company in May of 1996. An April 1996 judgment in their favor
for approximately $48,000 in interim attorney's fees has now
been waived and released without any payment by the Company.
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.)
Mayer, a former treasurer of the Company, brought two civil
actions for attorneys fees pursuant to the indemnification
provisions of the Company's bylaws and under Delaware law,
totaling approximately $100,000. In the New York action, the
Company filed counterclaims for breach of fiduciary duty to the
Company based upon Mayer's actions and activities in promoting
and provoking the dissident shareholders to commence the proxy
contest. In the Delaware action, a judgment has been entered
against the Company for $56,000. A non-final adverse ruling has
been entered against the Company in the New York action. Upon
entry of a final judgment in the New York proceeding, either or
both of these rulings may be appealed. The Company has brought
an action against Mayer in the United States District Court for
the Southern District of New York pursuant to Section 16(b) of
the Securities Exchange Act for short-swing trading while Mayer
was an executive officer of the Company. Mr. Mayer's liability
from this action could exceed $380,000. Trial is currently
scheduled to begin July 21, 1997.
3. 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
court recently granted defendants' motion for dismissal on the
grounds that the firm has a 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.
The Company has not yet determined whether it will appeal the
court's ruling.
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 Forms 10-
K for the 1991, 1992, 1993 and 1994 fiscal years (i) did not
present fairly the financial condition of the Company and its
earnings; and (ii) failed to disclose the role of Richard
Bertoli as a consultant to the Company. Plaintiffs seek
unspecified monetary damages. In January 1997, the court
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 and its former auditors are vigorously opposing this
action, for which discovery has recently been completed. The
Company has moved for summary judgment and to preclude certain
expert testimony on the grounds that the plaintiffs have adduced
no evidence of damage. That motion, along with plaintiffs'
cross motion for partial summary judgment, is scheduled to be
heard by the Court July 18, 1997.
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 Company's
motion to dismiss all claims against it is currently pending.
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, 1997.
ITEM 5 - Market for Registrant's Common Stock and Related Stockholder
Matters
==========================================================================
A. 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,
1997.
High Low
Quarter Ended June 30, 1996 $14 5/8 $ 6 7/8
Quarter Ended September 1996 14 8
Quarter Ended December 31, 1996 11 5/8 5 1/8
Quarter Ended March 31, 1997 8 5
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.
High Low
Quarter Ended June 30, 1995 $5 1/2 $3 3/8
Quarter Ended September 30, 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
B. Holders
The approximate number of holders of the Company's common stock as of May
31, 1997 was in excess of 5,400 record and beneficial owners.
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 declared
another ten percent (10%) stock dividend. Shareholders of record as of
June 14, received the dividend on August 5, 1996.
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 Management's Discussion and Analysis,
the Consolidated Financial Statements and Notes included elsewhere in this
Form 10-K.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
1997 1996 1995
---- ---- ----
Successor(3) Successor(3) Successor(3)
------------ ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS:
Net Revenue $ 33,994,375 $ 30,298,228 $ 22,980,726
Income (Loss) from
Operations 2,423,564 3,097,009 (292,307)
Other Income (Expense) (1,401,612) 69,843 (4,324,193)
Net Income (Loss) 773,952 2,852,852 (4,616,500)
Net Income (Loss)
-Per Share(1)(2) 0.05 0.18 (0.30)
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
1994 1993
---- ----
Predecessor(4) Predecessor(4)
-------------- --------------
<S> <C> <C>
STATEMENT OF OPERATIONS:
Net Revenue $ 12,736,882 $ 6,985,357
Income (Loss) from
Operations 1,447,825 695,280
Other Income (Expense) (55,034) (9,198)
Net Income (Loss) 1,323,407 648,995
Net Income (Loss)
-Per Share(1)(2) 0.09 0.05
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
BALANCE SHEET:
Cash and Cash
Equivalent $ 2,172,480 $ 950,483 $ 1,734,232
Total Assets 23,679,686 16,732,074 12,943,044
Long-Term Obligations 9,737,007 2,150,649 671,774
Total Liabilities 15,720,414 9,692,065 9,023,293
Total Stockholders'
Equity 7,959,272 7,040,009 3,919,751
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
1994 1995
---- ----
<S> <C> <C>
BALANCE SHEET:
Cash and Cash
Equivalent $ 1,347,532 $ 1,099,869
Total Assets 16,645,307 11,517,028
Long-Term Obligations 500,939 584,844
Total Liabilities 1,157,233 964,593
Total Stockholders'
Equity 15,488,074 10,552,435
</TABLE>
(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, six 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, August 25, 1995 and August 5,
1996.
(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.
ITEM 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
==========================================================================
Year Ended March 31, 1997
Certain statements in this Annual Report on Form 10-K are "forward looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995 and involve known and unknown risk, uncertainties and other
factors that may cause the Company's actual results, performance or
achievements to be materially different from the results, performance or
achievements expressed or implied by the forward looking statement.
Factors that impact such forward looking statements include, among others,
changes in worldwide general economic conditions, changes in interest
rates, currency rates and worldwide competition.
Net revenue increased 12.2% to $33,994,375 in fiscal 1997 compared to
$30,298,228 reported in fiscal 1996. 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. During the year, the Company experienced an
overload on network capacity and deferred several new programs. An
upgrade to the entire network database system was completed in fiscal
1997. The Company now believes it is in position to launch new programs
and products, including its global end-user Internet access service
offered through its wholly owned subsidiary, eGlobe, Ltd. which made its
initial services available during April, 1997.
Cost of revenue for fiscal 1997 was $17,913,995 compared with $18,501,402
in fiscal 1996, a decrease of 3.2%, resulting from the overall increase in
the Company's realization of revenue sharing revenue for which there is no
direct usage cost. Additionally, the Company experienced general rate
decreases and volume discounts negotiated with domestic and foreign
telephone carriers based upon the continued increase in volume of traffic
generated over their networks.. As a percentage of net revenue, these
costs decreased 8.4% from 61.1% during fiscal 1996 to 52.7% for fiscal
1997.
Selling, general and administrative expenses increased by $4,780,482 (67%)
to $11,915,864, during fiscal 1997 versus $7,135,382 for the prior year.
This increase is primarily attributable to the addition of personnel and
related employee costs necessary to manage the increasing business volume,
provide additional marketing and promotion for the Company's calling card
services, develop new business services (primarily global end-user
Internet access service), and maintain quality customer support and
assistance. The number of employees increased to 166 at March 31, 1997
compared to 131 at the end of fiscal 1996, a 26.7% increase. As a
percentage of revenue, selling, general and administrative expenses
increased from 23.6% in fiscal 1996 to 35.1% in fiscal 1997. As
additional revenue is realized from the Company's current marketing and
new business development expenditures, selling, general and administration
expenses as a percentage of revenue are expected to decrease.
Depreciation and amortization expense increased by $176,517 to $1,740,952
as compared to $1,564,435 for fiscal 1996. This increase relates
primarily to equipment placed in service during the fiscal year including
upgrade of and additions to the Caviar network and call processing
equipment.
Interest expense of $849,073 increased over last year's $185,977 due
primarily to additional borrowings to finance business development and
expansion and an increase in lease financed asset transactions. The
Company's long term and current maturities of long term debt increased to
$10,740,390 as of March 31, 1997, compared to $2,312,899 as of March 31,
1996. Interest income increased by $49,443 to $51,291 for fiscal 1997
compared to $1,848 for fiscal 1996, representing the temporary investment
of working capital.
Foreign currency transaction loss decreased by $20,619 to $75,409 in
fiscal year 1997 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 1997, the Company incurred $528,421 in proxy related
litigation expense as described in ITEM 3- Legal proceedings. No proxy
expense was incurred in fiscal year 1996.
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.
==========================================================================
Liquidity and Capital Resources
Year Ended March 31, 1997
During the year ended March 31, 1997, cash and cash equivalents increased
from $950,483 to $2,172,480. The increase in cash and cash equivalents
consisted of the following components: (i) net cash flows used in
operating activities in the amount of $2,010,480 resulting primarily from
net income for the year of $773,952 increased by depreciation and
amortization expense of $1,740,952, offset by an increase in accounts
receivable of $2,169,404 and a decrease in accrued expenses of $2,175,153
which primarily relates to payment of usage costs for telephone services,
(ii) net cash flows used in investing activities in the amount of
$5,194,075 relating primarily to customization, modernization and
expansion of the Company's CAVIAR network which increases usage capacity
and facilitates transmission of voice and data traffic, and development of
Internet communication equipment, (iii) cash flows provided by financing
activities of $8,427,491 primarily relating to proceeds from the issuance
of notes payable and the assumption of capital lease obligations in the
amount of $10,297,429 decreased by principal payments on and retirement of
long term debt obligations of $1,869,938, and (iv) the negative effect of
exchange rate changes on cash which decreased cash and cash equivalents by
$939.
In June 1996, the Company borrowed $6,000,000 from a financial
institution. The loan is a senior secured term loan and was used for
capital expenditures, working capital and debt refinancing. The loan,
subject to certain financial covenants, is secured by all of the assets of
the Company and its subsidiaries, individually guaranteed by each of the
Company's subsidiaries and includes a pledge of the common stock of all of
the Company's subsidiaries. In connection with this loan, the lender
received warrants to purchase 100,000 shares of the Company's common stock
at an exercise price of $14.88 which expire on December 31, 2001. The
note is payable in June 1997 and carries an interest rate equal to the
lender's prime rate plus 2.5%, which was 11% at March 31, 1997.
On November 7, 1996, the Company obtained a $4,000,000 multiple draw down
term loan agreement from the same financial institution, of which
$3,000,000 had been borrowed against this agreement at March 31, 1997.
The multiple draw down term loan agreement carries an interest rate equal
to the lender's prime rate plus 2.5%, which was 11% at March 31, 1997, and
a commitment fee of .5% on the unused portion of the balance. In
addition, the Company issued detachable warrants to purchase 66,667 shares
of the Company's common stock at a price of $7 7/8 per share which expire
on December 31, 2001. Interest on amounts outstanding and commitment fee
on the unused portion of the loan are payable quarterly.
On June 3, 1997, the Board of Directors of the Company approved the sale
of 1,425,000 shares of the Company's common stock for $7,500,000 to one
individual. A portion of the proceeds from the sale has been used to
reduce the multiple draw down term loan by $3,000,000. The remainder of
the proceeds have been used either to provide working capital or invested
in short term obligations through a financial institution.
On June 27, 1997, the Company renegotiated both loans as described above,
extending the term of the loans to April, 1998, adjusting the price of
common stock subject to existing warrants to the lesser of (i) $7 per
share or (ii) the average stock price for the past ninety (90) trading
days, and extending the expiration date for the warrants for ten (10)
years.
The Company's future plans to fund its working capital and equipment needs
also consist of the following: (i) issuance of additional shares of common
stock or preferred stock, (ii) the creation of a long term debt facility,
and (iii) 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, 1997 the Company has recorded a net deferred tax asset of
$3,067,000 primarily as a result of the tax effect of net operating loss
carryforwards. As of March 31, 1997, 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.
New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 128 "Basic earnings per share" (SFAS
No. 128). This pronouncement provides a different method of calculating
earnings per share than is currently used in accordance with Accounting
Board Opinion (APB) No. 15, "Earnings Per Share". SFAS 128 provides for
the calculation of "Basic" and "Dilutive" earnings per share. Basic
earnings per share include no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an
entity, similar to fully diluted earnings per share. The Company will
adopt SFAS No. 128 in 1998 and its implementation is not expected to have
a material effect on the consolidated financial statements.
The next pages are F-1 through F-30
EXECUTIVE TELECARD, LTD.
ITEM 8 - FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Report of Independent Certified Public Accountants F-2
Balance Sheets as of March 31, 1997 and 1996 F-3 - F-4
Statements of Operations for the
Years Ended March 31, 1997, 1996 and 1995 F-5
Statements of Stockholders' Equity for
the Years Ended March 31, 1997, 1996 and 1995 F-6
Statements of Cash Flows for the
Years Ended March 31, 1997, 1996 and 1995 F-7
Summary of Accounting Policies F-8 - F-12
Notes to Consolidated Financial Statements F-13 - F-29
Schedule -
II Valuation and Qualifying Accounts F-30
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Executive TeleCard, Ltd.
Pearl River, New York
We have audited the accompanying consolidated balance sheets of Executive
TeleCard, Ltd. and subsidiaries as of March 31, 1997 and 1996 and the
related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended March 31, 1997.
We have also audited the schedule listed in the accompanying index. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and schedule 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
schedule are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the financial statements
and schedule. We believe that our audits 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, 1997 and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended March 31, 1997, in conformity with generally
accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material
respects, the information set forth therein.
BDO SEIDMAN, LLP
June 27, 1997
Denver, Colorado
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
March 31, 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
Assets
Current:
Cash and cash equivalents $ 2,172,480 $ 950,483
Trade accounts receivable, less
allowance of $123,000 and $239,000
for doubtful accounts 8,363,017 5,850,345
Accounts receivable from related
parties 175,114 732,794
Other current assets 347,995 123,482
- -------------------------------------------------------------------------
Total current assets 11,508,606 7,657,104
Property and equipment,
net of accumulated depreciation
and amortization 11,905,956 8,415,091
Other:
Intangible assets - net 286,941 222,265
Deposits 261,125 251,490
Other assets 167,058 186,124
- --------------------------------------------------------------------------
Total other assets 715,124 659,879
- --------------------------------------------------------------------------
$23,679,686 $16,732,074
- --------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
<S> <C> <C>
March 31, 1997 1996
- --------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current:
Accounts payable $2,466,056 $2,428,882
Accounts payable to related
parties - 66,321
Accrued expenses 2,038,415 4,293,496
Customer deposits 319,674 302,205
Unearned income 155,879 288,262
Current maturities of
long-term debt 1,003,383 162,250
- --------------------------------------------------------------------------
Total current liabilities 5,983,407 7,541,416
Long-term debt, less current maturities 9,737,007 2,510,649
- --------------------------------------------------------------------------
Total liabilities 15,720,414 9,692,065
- --------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value,
5,000,000 shares authorized;
none issued - -
Common stock - $.001 par value;
100,000,000 shares authorized,
15,861,240 and 15,849,488 outstanding 15,861 15,849
Additional paid-in capital 16,047,812 15,901,574
Accumulated deficit (8,186,244) (8,960,196)
Accumulated translation adjustment 81,843 82,782
- --------------------------------------------------------------------------
Total stockholders' equity 7,959,272 7,040,009
- --------------------------------------------------------------------------
$23,679,686 $16,732,074
- --------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31, 1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenue $33,994,375 $30,298,228 $22,980,726
Cost of revenue 17,913,995 18,501,402 15,459,946
- --------------------------------------------------------------------------
Gross profit 16,080,380 11,796,826 7,520,780
- --------------------------------------------------------------------------
Costs and expenses:
Selling, general and
administrative 11,915,864 7,135,382 6,589,380
Depreciation and
amortization 1,740,952 1,564,435 1,223,707
- --------------------------------------------------------------------------
Total costs and expenses 13,656,816 8,699,817 7,813,087
- --------------------------------------------------------------------------
Income (loss) from
operations 2,423,564 3,097,009 (292,307)
- --------------------------------------------------------------------------
Other income (expense):
Interest expense (849,073) (185,977) (82,054)
Interest income 51,291 1,848 39,532
Foreign currency
transaction loss (75,409) (96,028) (363,095)
Proxy related litigation
expense (528,421) - (3,917,258)
Other income (expense) - 350,000 (1,318)
- --------------------------------------------------------------------------
Total other income
(expense) (1,401,612) 69,843 (4,324,193)
- --------------------------------------------------------------------------
Income (loss) before
taxes on income 1,021,952 3,166,852 (4,616,500)
Taxes on income 248,000 314,000 -
- --------------------------------------------------------------------------
Net income (loss) $773,952 $2,852,852 $(4,616,500)
- --------------------------------------------------------------------------
Net income (loss) per share $0.05 $0.18 $(0.30)
- --------------------------------------------------------------------------
Weighted average number of
shares and share
equivalents outstanding 15,859,023 15,804,347 15,420,405
- --------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
--------------------
Additional
Years Ended Paid In
March 31, 1997, 1996 and 1995 Shares Amount Capital
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, April 1, 1994 15,305,377 15,307 14,327,692
Stock issued in
connection with
Private Placements
to affiliate 72,600 72 449,928
Stock issued in
connection with
Private Placements 249,377 249 602,935
Exercise of stock options 80,604 80 176,062
Foreign currency translation
adjustment - - -
Net loss - - -
- --------------------------------------------------------------------------
Balance, March 31, 1995 15,707,958 15,708 15,556,617
Stock issued in lieu
of cash payments 124,702 124 309,875
Exercise of stock options 16,828 17 35,082
Foreign currency
translation adjustment - - -
Net income - - -
- --------------------------------------------------------------------------
Balance, March 31, 1996 15,849,488 15,849 15,901,574
Stock issued in
connection with
litigation
settlement 11,000 11 146,238
Exercise of stock options 752 1 -
Foreign currency
translation adjustment - - -
Net Income - - -
- --------------------------------------------------------------------------
Balance, March 31, 1997 15,861,240 $15,861 $16,047,812
Accumulated Total
Years Ended Accumulated Translation Stockholders'
March 31, 1997, 1996 and 1995 Deficit Adjustment Equity
- --------------------------------------------------------------------------
Balance, April 1, 1994 (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
Stock issued in
connection with
litigation
settlement - - 146,249
Exercise of stock options - - 1
Foreign currency
translation adjustment - (939) (939)
Net Income 773,952 - 773.952
- --------------------------------------------------------------------------
Balance, March 31, 1997 (8,186,244) $81,843 $7,959,272
- --------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOW
Increase (Decrease) in Cash and Cash Equivalents
Years Ended March 31, 1997 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $773,952 $2,852,852 $(4,616,500)
Adjustments to reconcile
net income (loss) to
net cash flows provided by
operating activities:
Depreciation and
amortization 1,740,952 1,564,435 1,223,707
Provision for bad debts 214,412 176,950 207,849
Stock issued in lieu of
cash payments - 309,999 -
Changes in operating assets
and liabilities:
Accounts receivable (2,169,404) (2,850,592) (812,763)
Other assets (317,499) 88,342 162,505
Accounts payable 37,174 865,523 (330)
Accrued expenses (2,175,153) (1,712,818) 4,554,733
Other liabilities (114,914) 20,979 123,961
- --------------------------------------------------------------------------
Cash provided by (used in)
operating activities (2,010,480) 1,315,670 843,162
- --------------------------------------------------------------------------
Investing activities:
Acquisitions of property
and equipment (5,043,062) (3,426,322) (1,905,477)
Other assets (151,013) 22,204 31,621
- --------------------------------------------------------------------------
Cash used in investing
activities (5,194,075) (3,404,118) (1,873,856)
- -------------------------------------------------------------------------
Financing activities:
Proceeds from notes
payable 10,297,429 1,500,000 -
Proceeds from issuance of
common stock - 35,099 1,229,326
Principal payments on
long-term debt (1,869,938) (152,708) (145,166)
- -------------------------------------------------------------------------
Cash provided by financing
activities 8,427,491 1,382,391 1,084,160
- --------------------------------------------------------------------------
Effect of exchange rate
changes on cash (939) (77,692) 199,335
- --------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents 1,221,997 (783,749) 252,801
Cash and cash equivalents,
beginning of year 950,483 1,734,232 1,481,431
- --------------------------------------------------------------------------
Cash and cash equivalents,
end of year $2,172,480 $950,483 $1,734,232
- --------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
SUMMARY OF ACCOUNTING PRACTICES
Organization
and Business
Executive TeleCard, Ltd. (the "Company") provides
various worldwide telecommunications services,
including intra/intercounty calling card services
which it markets as an enhancement to charge, credit
and telephone calling cards; toll-free 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". The Company's telephone calling
services permit travelers to place calls directly from
66 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 through
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. 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 SFAS 52 and restated for the 1995
period 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.
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. As of March 31, 1997, the Company had
approximately 26% in trade accounts receivable from
one customer. At March 31, 1997 there were no other
significant concentrations of credit risk.
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 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 is computed using the
straight-line method over the estimated useful lives
of the related assets ranging from five to twenty
years.
The Company applies Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets" ("SFAS No. 121"). Under SFAS No.
121, long-lived assets and certain identifiable
intangibles are reported at the lower of the carrying
amount or their estimated recoverable amounts.
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 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.
Stock Options
The Company applies APB Opinion 25, Accounting for
Stock Issued to Employees, and related Interpretations
in accounting for all stock option plans. Under APB
Opinion 25, no compensation cost has been recognized
for stock options granted to employees as the option
price equals or exceeds the market price of the
underlying common stock on the date of grant.
SFAS Statement No. 123, "Accounting for Stock-Based
Compensation", requires the Company to provide pro
forma information regarding net income as if
compensation cost for the Company's stock option plans
had been determined in accordance with the fair value
based method prescribed in SFAS No. 123. To provide
the required pro forma information, the Company
estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing
model.
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 has issued
Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("SFAS No. 128"). This
pronouncement provides a different method of
calculating earnings per share than is currently used
in accordance with Accounting Board Opinion ("APB")
No. 15, "Earnings Per Share". SFAS 128 provides for
the calculation of "Basic" and "Dilutive" earnings per
share. Basic earnings per share includes no dilution
and is computed by dividing income available to common
shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings
per share reflects the potential dilution of
securities that could share in the earnings of an
entity, similar to fully diluted earnings per share.
The Company will adopt SFAS No.128 in 1998 and its
implementation is not expected to have a material
effect on the consolidated financial statements.
(Balance of Page Intentionally left Blank)
NOTES TO CONSOLIDATED FINANCIAL 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 767,610 (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 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, 1997 and 1996, $175,114 and
$732,794 was due from such stockholders and as of
March 31, 1996, $66,321 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
through March 27, 1997, to pay to the Company the sum
of $350,000 and not to compete with nor solicit
Company employees for a period of three years.
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 and were
related to a fight for control of the Board of
Directors of the Company. On June 20, 1995, the
United States District Court for the Southern District
of New York denied a June 1, 1995 action by the
minority stockholders to block the June 30, 1995
stockholders meeting. The vote of the stockholders at
that meeting effectively ended the struggle for
control of the Company when the slate of directors
proposed 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 to any
persons pursuant to that judgment.
Largely as a result of the minority stockholders'
legal actions, several class action complaints were
filed by minority stockholder 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, 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 a putative class
to include all persons who purchased the Company's
stock in the open market between October 28, 1991 and
October 27, 1994.
The ultimate disposition of the consolidated class
action cannot presently be determined. While the
Company intends to vigorously defend such action, if
the Company is unsuccessful in its efforts, such
outcome could have a material adverse impact on the
financial position, results of operations and cash
flows 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 $528,421 and $3,917,258 in costs
and expenses during the years ended March 31, 1997 and
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, 1997 consisted of
the following:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------
<S> <C> <C>
Land $247,300 $247,300
Buildings and
improvements 791,903 594,335
Call processor
equipment 10,693,487 8,206,030
Furniture and
equipment 5,544,814 4,377,076
Call diverters 1,396,540 1,396,246
Equipment under
capital leases 1,713,022 1,031,313
Internet communications
equipment 508,297 -
------------------------------------------------------
20,895,363 15,852,300
Less accumulated
depreciation and
amortization 8,989,407 7,437,209
------------------------------------------------------
$11,905,956 $8,415,091
------------------------------------------------------
</TABLE>
Depreciation and amortization expense for the years
ended March 31, 1997, 1996, and 1995 was $1,740,952,
$1,564,435, and $1,223,707.
Property and equipment at March 31, 1997 and 1996,
includes certain telephone and office equipment under
capital lease agreements with an original cost of
$1,713,022 and $1,031,313 and accumulated depreciation
of $704,966 and $447,224.
5. Accrued
Expenses
Accrued expenses at March 31, 1997 and 1996 consisted
of the following:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------
<S> <C> <C>
Telephone carriers $1,167,795 $2,198,965
Proxy related
litigation
expenses (Note 3) 362,037 664,003
Income taxes payable 230,015 314,000
Legal and
professional fees 214,964 219,619
Commissions - 416,089
Other 63,604 480,820
------------------------------------------------------
$2,038,415 $4,293,496
------------------------------------------------------
</TABLE>
6. Long-Term
Debt
<TABLE>
<CAPTION>
At March 31, 1997 and 1996, long-term debt consisted
of the following:
1997 1996
-----------------------------------------------------
<S> <C> <C>
11% (lender's
prime rate plus
2.5%) secured
term note payable
to a financial
institution,
interest payable
quarterly,
principal due
and payable
April 1, 1998 (1). $9,000,000 $ -
12% unsecured term
note payable
to a stockholder,
interest payable
monthly, principal
due and payable
December 27,
1997 (2). 500,000 -
Capitalized lease
obligations. 1,079,697 648,202
9% mortgage note,
payable
monthly, including
interest, through
November 1997, with
a December 1997
balloon payment,
secured by deed of
trust on the
related land and
building. 160,693 164,697
12% unsecured term
note payable to a
foreign corporation,
paid off in fiscal
1997 (3). - 1,000,000
12% unsecured term
note payable to a
stockholder,
paid off in fiscal
1997 (4). - 500,000
------------------------------------------------------
Total 10,740,390 2,312,899
Less current
maturities 1,003,383 162,250
------------------------------------------------------
Total long term
debt $9,737,007 $2,150,649
------------------------------------------------------
</TABLE>
(1) In June 1996, the Company borrowed $6,000,000 from a
financial institution. The note was originally
payable in June 1997. In November 1996, the Company
secured from the same financial institution a
$4,000,000 multiple draw down term loan originally
expiring June 1997. Any unused portion of the loan
is subject to a commitment fee of .5%. In connection
with these notes, the lender was granted warrants to
purchase 100,000 shares of the Company's common stock
at a price of $14.88 per share and 66,667 shares of
the Company's common stock at a price of $7.88 per
share. The warrants expire on December 31, 2001.
The nominal value assigned to such warrants when
granted in connection with the above note agreements
is amortized over the term of the notes. At March
31, 1997 these warrants have not been exercised.
The notes are subject to certain financial covenants
including maintenance of operating results, certain
debt ratios, and limitations on asset purchases. At
March 31, 1997 the Company was in compliance with
such covenants.
Subsequent to year end, the Company renegotiated both
the $6,000,000 loan and the $4,000,000 multiple draw
down term loan, extending the term of the loans to
April 1998, adjusting the price of common stock
subject to existing warrants to the lesser of (i) $7
per share or (ii) the average stock price for the
past ninety (90) trading days, and extending the
expiration date for the warrants for ten (10) years.
At March 31, 1997, as a result of this modification,
the Company has classified such loans as long-term
liabilities in the accompanying consolidated balance
sheet.
(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 $12.13 per
share, expiring June 27, 1999. At March 31, 1997,
such option have not been exercised (see Note 7).
(3) In connection with this transaction, the Company
issued options to purchase 110,000 shares of the
Company's common stock at a price of $5.45 per share,
expiring February 28, 1999. At March 31, 1997, such
options have not been exercised (see Note 7).
(4) In connection with this transaction, the Company
issued options to purchase 55,000 shares of the
Company's common stock at a price of $5.45 per share,
expiring February 28, 1999. At March 31, 1997, 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, 1997 are as follows:
<TABLE>
<CAPTION>
Year Ending Long-term Capital Total
March 31, Debt Leases
---------------------------------------------------------
<S> <C> <C> <C>
1998 $660,693 $437,222 $1,097,915
1999 9,000,000 437,221 9,437,221
2000 - 256,673 256,673
2001 - 94,293 94,293
2002 - 36,483 36,483
---------------------------------------------------------
Total
payments 9,660,693 1,261,892 10,922,585
Less amounts
representing
interest - 182,195 182,195
---------------------------------------------------------
Principal
payments 9,660,693 1,079,697 10,740,390
Less current
maturities 660,693 342,690 1,003,383
---------------------------------------------------------
Total long-
term debt $9,000,000 $737,007 $9,737,007
---------------------------------------------------------
</TABLE>
Subsequent to year end, the Company entered into a
$312,000 capital lease agreement for call processing
equipment.
7. Stockholders'
Equity
Common and Preferred Stock
In connection with the Residual acquisition discussed in
Note 1, the Company issued 767,610 (post stock dividend)
shares of its common stock. 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 May 14, 1996, the Board of Directors authorized a
stock split, effected in the form of a 10% stock
dividend, payable to shareholders of record on August 5,
1996. All references to common share and per share
amounts in the accompanying financial statements have
been restated to reflect the effect of this stock
dividend. Also on May 14, 1996, the Board of Directors
adopted certain resolutions which were approved by the
Company's stockholders to increase the number of
authorized shares of common stock from 20,000,000 to
100,000,000. The Company's stockholders also approved
the authorization of the issuance of a new class of
5,000,000 shares of preferred stock. The preferred stock
of the Company can be issued in series. With respect to
each series issued, the Board of Directors of the Company
will determine, among other things, the number of shares
in the series, voting rights and terms, dividend rates
and terms, liquidation preferences and redemption and
conversion privileges. There was no preferred stock
outstanding at March 31, 1997 (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 1,100,000 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 in value 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 may be exercised in lieu of the
exercise of the option. A SAR is exercisable at the same
time or times that the related option is exercisable.
The Company will pay the SAR in shares of common stock
equal in value to the excess of the fair market value, at
the date of exercise, of a share of common stock over the
exercise price of the related option. The exercise of a
SAR automatically results in the cancellation of the
related option on a share-for-share basis.
During the fiscal years 1997 and 1996, the Stock Option
Committee of the Board of Directors granted options to
purchase an aggregate of 439,600 and 612,920,
respectively, shares of common stock to its employees
under the Employee Plan at exercise prices from $5.45 to
$8.18 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 935,000 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 in value to the excess of the fair
market value, at the date of exercise, of a share of
common stock over the exercise price of the related
option. The exercise of an SAR automatically results in
the cancellation of the related option on a share-for-
share basis.
During the fiscal years 1997 and 1996, the Stock Option
Committee of the Board of Directors confirmed the
automatic grant of options to purchase 60,000 and 66,000,
respectively, shares of common stock to its directors
pursuant to the Company's Director Plan at exercise
prices of $5.75 and $5.45, respectively, 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
During 1995, the Company granted various options to
purchase an aggregate of 35,090 shares of its common
stock to directors and employees for services rendered.
Under the terms of the options, employees and directors
may exercise their options at prices ranging from $5.75
to $7.13 (which approximated the fair market value at the
date of grant) per share over a four to six year period
beginning on the grant date, provided they remain
directors or employees of the Company.
FASB Statement 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), requires the Company to
provide pro forma information regarding net income (loss)
and net income (loss) per share as if compensation costs
for the Company' stock option plans and other stock
awards had been determined in accordance with fair value
based method prescribed in SFAS No. 123. The Company
estimates the fair value of each stock award at March 31,
1997 by using the Black-Scholes option-pricing model with
the following weighted-average assumptions used
respectively: dividend yield of 10 percent for all years;
expected volatility of 58-72 percent; risk-free interest
rates of 5.18-6.03 percent; and expected lives of 1.5
years for the Plans and stock awards.
Under the accounting provisions for SFAS No. 123, the
Company's net income per share would have been decreased
by the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------------------
<S> <C> <C>
Net income (loss)
As reported $773,952 $2,852,852
Pro forma $(801,214) $1,080,620
Net income (loss)
per share
As reported $0.05 $0.18
Pro forma $(0.05) $0.07
</TABLE>
During the initial phase-in period of SFAS No. 123, the
effect on pro forma results are not likely to be
representative of the effects on pro forma results in
future years since the above numbers do not include the
effect of options granted prior to December 1995.
A summary of the status of the Company's stock options plans and
outstanding warrants as of March 31, 1997, 1996 and 1995 and changes
during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1997
-----------------------------------
Weighted
Average
Number of Exercise
Shares Price
<S> <C> <C>
Outstanding,
beginning of year 1,000,042 $5.55
Granted 849,267 7.64
Expired (141,644) 5.52
Exercised (833) 5.26
Outstanding and exercisable,
end of year 1,706,832 $6.58
Weighted average fair value
of options granted
during the year $1.85
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------
Number of Exercise
Shares Price
<S> <C> <C>
Outstanding,
beginning of year 545,977 $2.05-10.89
Granted 843,920 5.45-6.59
Expired (374,150) 2.05-8.16
Exercised (15,705) 2.05-5.29
- ----------------------------------------------------------------
Outstanding and exercisable,
end of year 1,000,042 $2.05-10.89
- ----------------------------------------------------------------
Weighted average fair value
of options granted
during the year $2.31
- ----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1995
---------------------------------
Number of Exercise
Shares Price
<S> <C> <C>
Outstanding,
beginning of year 636,871 $2.05-10.89
Granted 108,053 6.20-8.16
Expired (118,342) 2.05-6.20
Exercised (80,605) 2.05-2.82
- ----------------------------------------------------------------------
Outstanding and exercisable,
end of year 545,977 $2.05-10.89
- ----------------------------------------------------------------------
Weighted average fair value
of options granted
during the year $N/A
- ----------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options and
warrants outstanding at March 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
Weighted
Average Weighted
Range of Number Remaining Average
Exercise Outstanding Contractual Exercise
Prices and Exercisable Life Price
<S> <C> <C> <C> <C>
$5.29-5.91 1,177,154 8.58 $ 5.53
6.02- 7.00 286,270 5.45 6.56
7.12-14.88 243,408 2.22 11.64
- ----------------------------------------------------------------
Total 5.29-14.88 1,706,832 6.66 6.58
- ----------------------------------------------------------------
</TABLE>
8. Taxes on
Income
<TABLE>
<CAPTION>
Taxes on income for the years ended March 31, consisted of
the following:
1997 1996 1995
------------------------------------------------
<S> <C> <C> <C>
CURRENT:
Federal $ 70,000 $230,000 $ -
Foreign 166,000 64,000 -
State 12,000 20,000 -
------------------------------------------------
Total
current 248,000 314,000 -
-------------------------------------------------
DEFERRED:
Federal (584,000) (315,000) 1,699,000
State (52,000) (28,000) -
-------------------------------------------------
(636,000) (343,000) 1,699,000
Change in
valuation
allowance 636,000 343,000 (1,699,000)
-------------------------------------------------
Total $ 248,000 $ 314,000 $ -
-------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
As of March 31, the net deferred tax asset recorded and its
approximate tax effect consisted of the following:
1997 1996
<S> <C> <C>
Net operating
loss carryforwards $3,036,000 $2,085,000
Nondeductible expense
accruals - 314,000
Other 31,000 32,000
-------------------------------------------------
3,067,000 2,431,000
Valuation allowance (3,067,000) (2,431,000)
------------------------------------------------
Net deferred tax asset $ - $ -
------------------------------------------------
</TABLE>
As of March 31, 1997, 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, 1997, 1996 and 1995 a
reconciliation of the United States federal statutory rate
to the effective rate is shown below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C>
Federal tax
(benefit) computed
at statutory rate 34.0% 34.0% (34.0%)
State tax (benefit),
net of federal
tax benefit 1.0 1.0 (3.0)
Effect of foreign
operations (75.0) (14.0) -
Net operating losses
for which no tax
benefit is currently
available - - 9.0
Change in valuation
allowance 62.0 (11.0) 28.0
------------------------------------------------
Total 23.0% 10.0% - %
------------------------------------------------
</TABLE>
As of March 31, 1997, the Company has net operating loss
carryforwards available of approximately $8,275,000, which
can offset future years U.S. taxable income. Such
carryforwards expire in various years through 2012 and are
subject to limitation under the Internal Revenue Code of
1986, as amended.
(Balance of Page Intentionally Left Blank)
9. Segment
Information
The Company is engaged in one business segment -
Telecommunications. The following table presents
information about the Company by geographic area:
<TABLE>
<CAPTION>
Asia North
Europe Pacific America
<S> <C> <C> <C>
1997
Sales $ 6,169,378 $10,574,659 $13,247,167
----------------------------------------------------------
Operating
income
(loss) $ 512,886 $ 1,204,632 $ 882,492
----------------------------------------------------------
Identifiable
assets $ 6,744,909 $ 4,734,010 $11,636,603
----------------------------------------------------------
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>
1997
Sales $ 4,003,171 $33,994,375
----------------------------------------------------------
Operating
income
(loss) $ (176,446) $ 2,423,564
----------------------------------------------------------
Identifiable
assets $ 564,164 $23,679,686
----------------------------------------------------------
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, revenues from significant
customers consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Customer:
A 15% - -
B 12% 15% 12%
</TABLE>
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 two years. The
Company's remaining aggregate commitment at March 31,
1997 under such agreements is approximately $1,292,000.
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, operating results or cash
flows.
Lease Agreements
The Company leases office space and equipment under
various operating leases. As of March 31, 1997,
remaining minimum annual rental commitments under
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
Year Ended March 31, Total
<S> <C>
1998 $ 391,600
1999 283,500
2000 222,500
2001 110,500
$1,008,100
</TABLE>
Rent expense for the years ended March 31, 1997, 1996
and 1995 was approximately $406,000, $197,000 and
$203,000.
11. Government
Regulation
The telephone calling card industry is highly
competitive and subject to extensive government
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 regulations 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 regulations, that the Company 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, operating results or cash flows.
12. Subsequent
Events
On June 3, 1997, the Board of Directors of the Company
approved the sale of 1,425,000 shares of the Company's
common stock for $7,500,000 to one individual. A
portion of the proceeds ($3,000,000) from the sale has
been used to reduce long term debt. The remainder of
the proceeds have been used either to provide working
capital or invested in obligations through a financial
institution.
13. Supplemental
Disclosures of
Cash Flow
Information
<TABLE>
<CAPTION>
1997 1996 1995
CASH PAID DURING THE YEAR FOR:
<S> <C> <C> <C>
Interest $654,180 $160,088 $ 63,713
------------------------------------------------------
Income taxes $ 79,352 $ - $140,988
------------------------------------------------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired
under capital lease
obligations $705,660 $147,794 $282,800
------------------------------------------------------
Stock issued in
lieu of cash
payments $146,250 $309,999 $ -
------------------------------------------------------
</TABLE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Allowance for Doubtful Accounts
Balance at Charged to Balance at
Beginning Cost and End
Description of Period Expenses Deductions of Period
<S> <C> <C> <C> <C>
Year Ended
March 31, 1997 $ 239,000 $ 191,998 $ 307,998 $ 123,000
- -------------------------------------------------------------------------
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>
ITEM 9 - CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
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 1997 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 1997 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 1997 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 1997 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 Schedule
Schedule II Valuation and Qualifying Accounts
b) Reports on Form 8-K:
None
c) Exhibits:
3.1 Restated Certificate of Incorporation as amended July 26, 1996
and August 29, 1996 filed as Exhibit 3.1 to the Company's Form
10-Q for the period ended September 30, 1996 and incorporated
herein by reference.
3.2 Bylaws as amended March 15, 1995 and July 26, 1996 filed as
Exhibit 3.2 to the company's Form 10-Q for the period ended
September 30, 1996 and incorporated herein by reference.
3.3 Amendments to Bylaws filed as Exhibit 3.1 to the company's Form
8-K dated February 5, 1997 and incorporated herein by reference.
4.1 Rights Agreement dated as of February 18, 1997 between the
Company and American Stock Transfer & Trust Company, which
includes the form of Certificate of Designations setting forth
the terms of the Series A Participating Preference Stock, par
value $.001 per share, as Exhibit A, the form of right
Certificate as Exhibit B and the Summary of Rights to Purchase
Preference Shares as Exhibit C filed as Exhibit 1 to the
Company's Registration Statement on Form 8-A (No. 1-10210) and
incorporated herein by reference.
4.2 Form of Letter from the Board of Directors of the Company to
Stockholders mailed with copies of the Summary of Rights filed
as Exhibit 2 to the company's Registration Statement on Form 8-A
(No. 1-10210) 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.
10.10 Deed of Trust and Security Agreement between the Company and The
Capitol Life Insurance Company dated December 21, 1992 for the
4260 East Evans Avenue, Denver, Colorado offices filed as
Exhibit 10.10 to the Company's Form 10-K for the period ended
March 31, 1997 and incorporated herein by reference.
10.11 Directors and Employees 1993 Stock Option Plan filed as Exhibit
10.11 to the Company's Form 10-K for the period ended March 31,
1997 and incorporated herein by reference.
10.12 Agreement between Executive TeleCard S.A. (Switzerland) and
Telstra Corporation Limited (Australia) for Enhancement of
Telecom Australia Calling Card dated August 3, 1993 files as
Exhibit 10.12 to the Company's form 10-K for the period ended
March 31, 1997 and incorporated herein by reference. This
Agreement is subject to a grant of confidential treatment filed
separately with the U.S. Securities and Exchange Commission.
10.13 Employment Agreement between Executive TeleCard, S. A. and
Edward J. Gerrity, Jr. dated March 15, 1995 and Termination
Agreement dated August 31, 1995 filed as Exhibit 10.13 to the
Company's Form 10-K for the period ended March 31, 1997 and
incorporated herein by reference.
10.14 Settlement Agreement between the Company and Network Data
Systems Limited dated March 27, 1995 filed as Exhibit 10.14 to
the Company's Form 10-K for the period ended March 31, 1997 and
incorporated herein by reference
10.15 Employment Agreement an Termination Agreement between Executive
TeleCard, S. A. and Anthony Balinger dated June 30, 1995 filed
as Exhibit 10.15 to the Company's Form 10-K for the period ended
March 31, 1997 and incorporated herein by reference.
10.16 Employment Agreement and Termination Agreement between Executive
TeleCard, S. A. and Robert N. Schuck dated September 28, 1995
filed as Exhibit 10.16 to the Company's Form 10-K for the period
ended March 31, 1997 and incorporated herein by reference.
10.17 Employment Agreement between Executive TeleCard, S. A. and Stig
Sonnerberg dated November 1, 1995 filed as Exhibit 10.17 to the
Company's Form 10-K for the period ended March 31, 1997 and
incorporated herein by reference.
10.18 Employment Agreement between Executive TeleCard, S. A. and Stig
Sonnerberg dated November 1, 1995 filed as Exhibit 10.18 to the
Company's Form 10-K for the period ended March 31, 1997 and
incorporated herein by reference.
10.19 Office Building Lease between Executive TeleCard, S. A. and
Provident Life and Accident Insurance Company dated December 15,
1995 for the 1720 South Bellaire, Denver, Colorado offices and
First Amendment to the Lease dated April 19, 1996 filed as
Exhibit 10.19 to the Company's Form 10-K for the period ended
March 31, 1997 and incorporated herein by reference.
10.20 Promissory Note and Stock Option Agreement between the Company
and World Wide Export, Ltd. dated February 28, 1996 filed as
Exhibit 10.20 to the Company's Form 10-K for the period ended
March 31, 1997 and incorporated herein by reference.
10.21 Promissory Note and Stock Option Agreement between the Company
and Seymour Gordon dated February 28, 1996 filed as Exhibit
10.21 to the Company's Form 10-K for the period ended March 31,
1997 and incorporated herein by reference.
10.22 Term Loan Agreement between Executive TeleCard, SA, the Company
and Internationale Nederlanden (U. S.) Capital Corporation dated
June 28, 1996
10.23 Promissory note and Stock Option Agreement between the Company
and Network Data Systems, Limited dated June 27, 1996 filed as
Exhibit 10.2 to the Company's Form 10-Q for the period ended
June 30, 1996 and incorporated herein by reference.
10.24 Amendment to Term Loan Agreement by Executive TeleCard S. A.,
the Company, and ING (U. S.) Capital Corporation dated November
22, 1996 filed as Exhibit 10 to the Company's Form 10-Q for the
period ended December 31, 1996 and incorporated herein by
reference.
10.25 Settlement Agreement and Mutual Release dated as of May 28, 1996
between Executive TeleCard, Ltd. and Walter K. Krauth, Jr.
filed as Exhibit 10 to the Company's Form 8-K dated May 28, 1996
and incorporated herein by reference.
10.26 Directors and Employees 1993 Stock Option Plan filed as Exhibit
4.3a to the Company's Form S-8 Registration Statement (No. 333-
15057) and incorporated herein by reference.
10.27 1995 Employee Stock Option and Appreciation Rights Plan filed as
Exhibit 4.3b to the Company's Form S-8 Registration Statement
(No. 333-15057) and incorporated herein by reference.
10.28 1995 Directors Stock Option and Appreciation Rights Plan filed
as Exhibit 4.3c to the Company's Form S-8 Registration Statement
(No. 333-15057) and incorporated herein by reference.
21 Subsidiaries of the Registrant
23 Consent of BDO Seidman, LLP
27 Financial Data Schedule
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 27, 1997 BY: /S/
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 27, 1997 BY: /S/
Anthony Balinger, Director
Dated: June 27, 1997 BY: /S/
Edward J. Gerrity, Chairman and Director
Dated: June 27, 1997 BY: /S/
Allen Mandel, Executive Vice President
and Principal Financial Officer
Dated: June 27, 1997 BY: /S/
Timothy A. Peach, Controller, Treasurer,
and Principal Accounting Officer
Dated: June 27, 1997 BY: /S/
Stig Sonnerberg, Director
Dated: June 27, 1997 BY: /S/
Richard Krinsley, Director
Dated: June 27, 1997 BY: /S/
David Warnes, Director
Dated: June 27, 1997 BY:
Ronald W. Howard, Director
Dated: June 27, 1997 BY:
Ronald L. Jensen, Director
Dated: June 27, 1997 BY:
Ebrahim Ali Abdul Aal, Director
EXHIBIT 21
LIST OF SUBSIDIARIES
NAME OF BUSINESS STATE OR COUNTRY NAME UNDER WHICH
OF INCORPORATION SUBSIDIARY DOES
BUSINESS
Executive TeleCard, SA Turks & Caicos
Executive TeleCard, Inc. Colorado TeleCall Long Distance
World Direct, Ltd. Delaware
Service 800 SA Turks & Caicos
eGlobe, Ltd. Delaware
Executive TeleCard S.A. Switzerland
World Direct Limited Anguilla
Trans World
Telecommunications A/S Denmark
Fintel Services, Inc. Colorado
Worldwide 800 Services
(H.K.), Ltd. Hong Kong
Service 800 (UK) United Kingdom
Service 800 S.A. Belgium
Service 800, Inc. Delaware
Service 800 S.A. Switzerland
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Executive TeleCard, Ltd.
Pearl River, New York
We hereby consent to the incorporation by reference in this Registration
Statement of our report dated June 25, 1997, relating to the consolidated
financial statements and schedules of Executive TeleCard, Ltd. appearing
in the Company's Annual Report on Form 10-K for the year ended March 31,
1997.
BDO SEIDMAN, LLP
Denver, Colorado
June 25, 1997
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