1
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, 1998
[ ] 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.
(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)
1720 South Bellaire Street, Suite 1000, Denver, Colorado, 80222
(Address of principal executive offices)
Registrant's telephone number, including area code:
(303) 691-2115
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 May 31, 1998 amounted to $46,229,314.
The number of shares outstanding of each of the registrant's
classes of common stock as of May 31, 1998 was 17,346,766
shares, all of one class of $.001 par value Common stock.
(Balance of Page Left Blank Intentionally) EXECUTIVE TELECARD,
LTD.
FORM 10-K
FISCAL YEAR ENDED MARCH 31, 1998 TABLE OF CONTENTS
Page
Part I Item 1 Business 4-20
Item 2 Properties 20
Item 3 Legal Proceedings 21
Item 4 Submission of Matters to a Vote of Security 22-23
Holders
Part II Item 5 Market for Registrant's Common Stock and
Related Stockholder Matters 24
Item 6 Selected Financial Data 25
Item 7 Management's Discussion and Analysis of
Financial
Condition and Results of Operations 26-33
Item 8 Consolidated Financial Statements and F-1 to F34
Supplementary Data
Item 9 Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 34
Part III Item 10 Directors and Executive Officers of the 34-37
Registrant
Item 11 Executive Compensation 37-44
Item 12 Security Ownership of Certain Beneficial
Owners and Management 45-48
Item 13 Certain Relationships and Related 49
Transactions
Part IV Item 14 Exhibits, Financial Statements, Schedules
and Reports on Form 8-K 50-51
Signatures 52
EXECUTIVE TELECARD, LTD.
PART I
ITEM 1 - Business (General)
Forward-Looking Statements
When used in this Annual Report on Form 10-K, in
documents incorporated herein and elsewhere by Executive
TeleCard, Ltd. (the "Company") from time to time, the
words "believes," "anticipates," "expects" and similar
expressions are intended to identify forward-looking statements
concerning the Company's business operations, economic
performance and financial condition, including in particular, the
Company's business strategy and means to implement the
strategy, the Company's objectives, the amount of future
capital expenditures, the likelihood of the Company's success
in developing and introducing new products and expanding its
business, the timing of the introduction of new and modified
products or services and similar matters. For those
statements, the Company claims the protection of the safe
harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995. These statements
are based on a number of assumptions and estimates, which are
inherently subject to significant risks and uncertainties, many
of which are beyond the control of the Company and reflect
future business decisions, which are subject to change. A
variety of factors could cause actual results to differ
materially from those anticipated in the Company's forward
looking statements, including the following factors: (a) those
set forth in "The Business -- Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere herein; (b) those set forth from
time to time in the Company's press releases and reports
and other filings made with the Securities and Exchange
Commission; (c) the Company's ability to respond to rapid
technological change and risk of obsolescence of the Company's
products, services and technology; (d) competitive
pressures among enhanced communications services providers may
increase significantly; (e) expected benefits from future
acquisitions, if any, may not be fully realized or realized
within the expected time frame, revenues following future
acquisitions may be lower than expected, and operating costs or
customer loss and business disruption following future
acquisitions, if any, may be greater than expected, and costs or
difficulties related to the integration of the businesses, if
any, that may be acquired by the Company may be greater than
expected; (f) general economic or business conditions,
internationally, nationally or in the local jurisdiction in
which the Company is doing business, may be less favorable
than expected; (g) legislative or regulatory changes may
adversely affect the business in which the Company is
engaged; and (h) changes may occur in the securities markets.
The Company cautions that such factors are not exhaustive.
Consequently, all of the forward-looking statements made
herein are qualified by these cautionary statements and readers
are cautioned not to place undue reliance on these forward
looking statements, which speak only as of the date hereof.
The Company undertakes no obligation to publicly release the
results of any revisions of such forward-looking statements
that may be made to reflect events or circumstances after the
date hereof, or thereof, as the case may be, or to
reflect the occurrence of unanticipated events.
General
The Company is a global provider of value-added
telecommunications and information services, focused on
mobile end-users, messaging and information management. At
the present time, the Company's principal business is the
provisioning of global calling card services, and related
validation, billing and payment services. Operating through
its World DirectT network, the Company originates voice traffic
in 88 countries and territories and terminates such traffic
anywhere in the world. The Company's global services
are
delivered through proprietary routing, application and data
access software, which run on the Company's interactive
call processing platform ("Calling Card Platforms"). Forty
Calling Card Platforms are installed in strategic locations
around the world where they connect directly with national and
international telephone networks. In addition to routing
calls, the Company's Calling Card Platform validates calls,
controls fraud, captures usage information and issues bills
with full call details. The Calling Card Platform system
provides a user interface in multiple languages for operator
assisted calls and the Company's proprietary billing software
provides for multiple currency billing.
The Company provides its services principally to
telecommunications carriers (including Postal, Telegraph and
Telephone Authorities ("PTTs")) and to credit card issuers. The
Company enhances the calling card services of carriers so that
their calling cards operate globally through the World DirectT
network. Additionally, the Company provides a software
and hardware platform for carriers which provide their own
international transmission. Further, using its network of
Calling Card Platforms, the Company can turn any type of card
service, such as a credit card, into a global calling card.
In the near term, the Company will use its
longstanding global relationships to expand its position in the
growing mobile communications segment by offering a suite of
Internet Protocol ("IP") services known as Global OfficeT.
Global Office includes services for the mobile
professional, such as Internet and remote intranet dial-up
connectivity, unified messaging, IP voice, IP fax and remote
office services.
Organization and History of Operations
The Company was incorporated in 1987. The Company
established relationships with foreign telecommunications
authorities and, in 1989, the Company began installing Calling
Card Platforms in or close to the facilities of various
PTTs. The Company went public that same year by way of a
dividend from its former parent company.
Strategy
The Company's goal is to become a leading network-based
provider of global software-based services. In order to achieve
this goal, the Company will build on its existing global
network and provide a Global OfficeT suite of services for
its existing customers and new commercial relationships.
The Company's present strategies to achieve these goals are as
follows:
Leverage Global Presence and Strategic Relationships.
The Company believes that international
relationships and alliances are important in the offering of
services and that such relationships
will be even more important as competition expands
globally. The Company has longstanding relationships with
foreign carriers, including PTTs, in many of the
countries in which it provides services, and is seeking to
deepen its relationships with these carriers. The Company
believes that it will have a competitive advantage to the
extent that it can maintain and further develop its
existing strong relationships with foreign and international
carriers.
Expand Service Offerings and Functionality
While Maintaining Core Services. The Company believes that
it will be necessary to offer a suite of enhanced business
communications services, and that the early providers of
credible multi-service offerings will have an advantage. The
Company, therefore, plans to introduce under its
Global OfficeT mark services such as dial-up Internet and
intranet access, electronic mail, voice mail, IP voice, IP
fax and remote office services.
In addition, the Company is expanding
its unified messaging platform, which provides a single
source access to voice, electronic mail and fax messages.
The Company believes that new service offerings and increased
product diversification will allow the Company to
achieve a greater return on its assets, reduce the
seasonality of the Company's revenue stream and decrease
exposure to global or regional economic downturns. The Company
also believes that it will be well served by maintaining
its existing core calling card services -- local access and
validation (including anti-fraud services), communications
routing, billing and payment services -- which are a necessary
complement to many of its planned new services.
Focus on International Carriers and Other Card Companies
Unlike many calling card companies that market directly
to businesses and other end users, the
Company offers its services principally to carriers and
other producers of cards, including financial institutions,
large corporations and card distributors.
These companies, in turn, use the
Company's services to provide service to their customers. The
Company believes that many of these providers will continue
to outsource their international calling card and related
communications services and are increasingly seeking new
revenue sources by offering value-added products such as those
offered by the Company. The Company also believes that it
provides a costefficient opportunity for telecommunication
carriers and card companies to offer calling card and other
communications services because of its existing strong
international network and low cost processing made possible by
the Calling Card Platform. The Company further believes that it
derives a significant advantage in marketing to such
customers from its independence from the major global carriers,
which allows telecommunication carriers to do business with the
Company without the concern that they are jeopardizing their
customer bases.
Reduce Transmission Costs through Strategic Relationships
and New Technologies.
The Company believes that, as providers add new and
enhanced communications services, the cost of transmission
increasingly will be a pivotal element in distinguishing
the success of service providers. The Company is leveraging
its low cost processing services by pursuing low cost
routing and transmission arrangements with other strategic
partners. The Company recently entered into such an
arrangement with IDT Corporation to reduce transmission
costs and is pursuing low cost alternative routing
technologies.
Industry Background
The Traditional Calling Card Industry.
Calling card services permit travelers to place calls
directly from locations other than their home countries and
charge those calls to their accounts. Retail customers
obtain local access to their calling card provider, generally
through a toll-free or other local access number, then enter the
necessary account information to enable the calling card provider
to determine if the caller has an approved account for charging
telephone calls; the provider then completes the call over
the Public Switched Telephone Network ("PSTN"). This enables
mobile professionals or other travelers to make calls from any
jurisdiction, foreign or domestic, without the need for coins,
operator assistance, collect or other third party billed
calls, and to avoid the high surcharges imposed by most
hotel switchboards.
Customers are furnished with a list of toll-free and local
telephone numbers for each country in which the service is
available. These tollfree telephone numbers normally may be
accessed from any telephone, and they connect to the calling
card provider's computer (direct access) or an operator
(operator assisted). The calling card provider's computer or
operator requests the caller's telephone or credit card number,
a personal identification number ("PIN") and the destination
telephone number. Often the computer (such as the Company's) is
equipped to prompt a caller in the language indicated by
the caller's card number. When the
validation/authorization process is completed, the computer or
operator dials the caller's destination, and the billing
information is captured and recorded.
Traditional telephone calling card services, which consist
of a local access connection, processing services such as
validation and billing information accumulation, and
retransmission of the call over long distance telephone lines
have been, and continue to be, dominated in the United States
by companies such as AT&T, MCI, Sprint and abroad by PTTs and
other national carriers that provide the transmission lines.
The Contemporary Calling Card Industry.
The availability of leased transmission lines,
technological innovation in the telephone industry and the
introduction of more sophisticated value-added features have
made it possible for other types of companies to compete with
the large telephone companies in providing calling card
services. Low cost routing and transmission is being used by
the Company and other competitors to offset price advantages
the large carriers may have by reason of using their own
transmission networks.
During the last decade, due to changing regulatory
environments and numerous mergers, acquisitions and alliances
among the major communications providers, there has been a
convergence in the services offered by communications
companies. The result has been increased globalization of
services, strong competition from new entrants into
different communications industry segments and the increasing
need to differentiate services. In addition, companies have
been focusing on areas where they have expertise, superior
technology and cost advantages, and have sought to purchase or
outsource the portions of the service where they do not have
such advantages. The Company believes that this trend is
precipitating the pursuit of new services and expects that it
will result in increased outsourcing of the more complex value
added services that are unrelated to the core expertise of these
customer organizations.
The evolving environment for communications has increased
the number of messages sent and received and the types and
means of communications managed by mobile professionals.
With advances in many areas of communications technology,
professionals and other travelers are demanding additional
features from their calling card providers, particularly
Internet access, true global access and unified messaging.
Market
The global telecommunications services industry is
undergoing significant growth. According to a study
conducted by the World Observatory of Communications
Systems ("OMSYC"), the global telecommunications market was
$745.1 billion in 1997, up 6.6 percent from 1996. Of this
amount, equipment accounted for 17.4 percent and services 82.6
percent, a ratio which OMSYC reports has stayed fairly constant
for the past six years. The fastest growth sector is mobile
communication related services which have increased at an
average rate of 34.7 percent per year since 1991 when it
accounted for 5.1 percent of all telecommunication
services. One of the other strongest areas of growth over
the last decade has been international telecommunication
services, which has grown at a compound annual rate of 15.6%
from 1988 to 1993, according to U.S. Industrial Outlook,
1993. The traffic volume in the global telecommunications
market is estimated to grow at 13% per annum.
Growth in the telecommunication services market is widely
dispersed among types of services. For example, revenues
from fax calls were estimated at $11 billion in the U.S. and
$25 billion worldwide in 1993 and voice messaging services
(not including phone charges) generated $220 million in the
U.S. during 1993 and are projected at $1 billion in 1998.
According to the Washington D.C. based International TeleCard
Association, prepaid calling card revenues in the U.S. were
estimated at $1.4 billion in 1996 and are projected to double
every year. According to a recent research study by Frost &
Sullivan, the U.S. operator service and calling card markets
are expected to grow from $14.5 billion in 1996 to $22.7
billion in 2003, a compound annual growth rate of 6.7 percent
during that period. The Company believes that demand for
global calling card services will continue to grow substantially
as a result of (i) increased reliance by business users on
telecommunication services; (ii) increased globalization of
business; and (iii) use of the Internet.
Changes in global telecommunication services have
dramatically increased both the number of messages and the medium
used. A study by the Institute for the Future, the Gallup
Organization, Pitney-Bowes and San Jose State University, based
on responses from more than 1,000 employees of Fortune 100
companies, found that workers send and receive an average of
178 messages each day. Messages are increasingly taking
electronic form as electronic mail and other electronic
communications tools usage has grown. Increased e-mail usage, in
turn, will lead to increased demand for mobile, dial-up access
to the Internet. A study using data provided by the
investment bank Morgan Stanley predicts that the number of e-
mail users will increase to 200 million in the United States
(from the 20-35 million current users) by the year 2000.
The growth in the global telecommunications market also
reflects the increasingly international nature of business, the
significant growth of emerging and newly industrialized
economies and the increase in international trade. The
Company believes that as multinational corporations
globalize, and expand into new markets, their demand for
diverse and customized telecommunications services will continue
to grow. Increased globalization will lead to increased demand
for products and services that address the communication and
information management needs of an increasingly mobile society.
The World Tourism Organization reports that global
international arrivals increased by 3.8% in 1995 to 567 million
travelers, following a 3.7% increase in 1994 when international
arrivals totaled 531.4 million worldwide, of which approximately
30% reported travel for business purposes. Growth in
communication and information demand on the part of
international travelers is further evidenced by the
proliferation of electronic devices (such as notebook and
subnotebook computers with modems, both wireline and wireless)
and the explosive growth of the Internet, corporate intranets
and network services that allow travelers remote access to
their home offices. As business travel grows, the percentage
of travelers who have a need for remote office access to
messaging and communication services will increase. For example,
a survey of frequent flyers taken in June 1996 reported that 97%
would use the World Wide Web in the next year.
The Internet is rapidly becoming a preferred solution to the
increased message and communication needs of mobile consumers.
The Business Research Group estimates, in a recently released
report, that the size of the worldwide commercial
Internet/intranet market was over $2.5 billion in 1996 and
projected that the market would exceed $24 billion by the year
2000. The number of Internet users is currently estimated at 20
35 million, with projections of the number of users ranging from
120 million to 200 million. The number of Internet/on-line
service subscribers according to one study prepared by SIMBA
Information Inc. and Jupiter Communications, is forecasted to
grow to between 21 million and 65 million by the year 2000.
Many factors are driving this increase in demand for
Internet access by an increasingly more mobile group of end
users. Strategic developments affecting this demand for nomadic
Internet access include:
Increasing deregulation and competition in
telecommunications markets.
Growth of Internet usage to a
critical mass to achieve near universal acceptance.
Dramatic increase in the use of electronic mail
Decreasing access costs
to non-U.S. backbone providers and end users
In addition to consumer use, corporations have been moving online.
According to one estimate the number of Fortune 500 companies
with a Web presence increased in 1996 from 175 to nearly 400
(an increase from 35% to 80% penetration). Corporate use
is also reflected in the number of registered commercial
domains. Through December 1996, there were 987,662 registered
Internet domains, according to InterNic, of which 796,039 were
commercial domains. This increase in corporate use indicates
how quickly the Internet has become a mainstream channel
for corporate marketing, communications and business
transactions.
Services
The Company's Global Calling Card Services provide customers
(carriers and card issuers, such as PTTs and banks) with the
ability to offer calling card programs to their customers.
Services include platform services - the Company provides
processing technology, the customer provides transmission
services - and enhancement services where the Company
provides a combination of platform and transmission services.
Calling card services include validation, routing, multi
currency billing and payments, in addition to credit,
prepaid and true debit functionality. See Note 9 to the
Consolidated Financial Statements for geographic business
segment information.
Service Customer Service Cardholder Trans-
Type Category Description Payment Type mission
Global Carrier Provision of Prepaid Yes,
Calling Reseller both domestic Postpaid included
Card Corporate (home country)
and international
calling service.
Platform Carrier Validation, Prepaid No,
Reseller routing, Postpaid excluded
billing of
call
transactions-
no transmission.
Enhancement Financial Value-added, Postpaid Yes,
enhancement included
of financial
card issuer's
existing credit/
debit/limit card
to allow global
calling
Carrier Enhancement Prepaid
Reseller of existing Postpaid
domestic
Corporate calling card
service for
global
calling.
Global Calling Card Services.
Designed for carriers (including wholesale network providers
and resale carriers), and corporations looking for a calling
card solution to enhance their core business (which is not
calling card) with global calling capabilities on a prepaid,
postpaid, debit or limit card basis. These customers want the
Company to originate and terminate calls domestically and
internationally. Customers are billed for call transmission and
use of the Calling Card Platform.
Platform Services. Designed for carriers needing a calling
card platform provider through which the carriers run their own
transmission. The Company provides the validation, routing and
billing of call transactions. No transmission/transport lines
are included. Customers are billed for use of the Calling Card
Platform.
Enhancement Card Services. Designed for financial
institutions, banks, credit/debit card issuers, carriers
(including wholesale network providers), resellers and
corporations looking to enhance their existing card with global
calling card capability. These customers want to add value to
their existing financial or domestic calling card by extending
features and calling coverage. Customers are billed for call
transmission and use of the Calling Card Platform.
The Company maintains a central processing center in Denver,
Colorado for user validation and storing of billing information.
The Company's calling card services are provided (whether through
the computer or by operators) in multiple languages and
currencies, and the Calling Card Platform supports a range of
calling card services, including credit, debit, prepaid and limit
cards.
The Company provides 24-hour operator assistance and other
customer service. This assistance includes "default to operator"
assistance for calls from rotary and pulse-tone telephones.
Calls placed from such telephones are diverted by the Calling
Card Platform to an operator who processes the call. The default
to-operator feature enables the Company's Calling Card Platforms
to be accessed from any telephone in any country or territory in
the Company's network. Whenever special assistance is required
in placing calls, the Company's multilingual customer service
center can be reached 24 hours a day, 365 days a year.
The following table lists some features of the Company's calling
cards:
Calling Card Features
Standard Features: Enhanced Features:
Operator Default Customized Languages, Prompts
and Closing
Operator Assistance Conference Calling
Language Selection Translation Services
Self-Selected PIN Access to U.S. Toll-Free
Numbers
Multiple Calling
Star Key(*)Prompt Restart
Auto Redial
Prompt Interrupt
Voice Mail Compatibility
International Toll Free Services (Service 800). In addition
to its calling card services, the Company offers international
toll free telephone service that permits a caller to make a long
distance telephone call without paying the applicable
international toll charges, which are billed to the Service 800
subscriber (normally the recipient of the calls). This service
was the Company's original service prior to introduction of its
calling card services several years ago. The Company is
presently offering international 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.
Proprietary Calling Cards. Although it is not a principal
focus of the Company's services, the Company in the past issued
its own proprietary calling cards, Executive TeleCard
InternationalT and World DirectT cards. The calling card 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. Cardholders
generally select a major credit card to which their usage is
billed by the Company. As of March 31, 1998, the Company had
approximately 11,000 cardholders.
New Services. The Company plans to offer Global OfficeT, a
suite of enhanced business communications services such as dial
up Internet and Intranet access, unified messaging, IP voice, IP
fax and remote office services.
Recent Developments
IDX Merger Agreement. On June 17, 1998, the Company, IDX
International, Inc. ("IDX"), a privately held company located in
Northern Virginia, EXTEL Merger Sub No. 1, Inc., a wholly owned
subsidiary of the Company ("Merger Sub"), and the stockholders of
IDX (the "Stockholders") entered into an Agreement and Plan of
Merger (the "IDX Merger Agreement"), pursuant to which IDX will
merge with and into Merger Sub, with Merger Sub being the
surviving corporation and thereby becoming a wholly owned
subsidiary of the Company (the "Merger"). The name of the
surviving corporation will be IDX International, Inc.
The IDX Merger Agreement provides that all of the shares of
common stock, no par value ("IDX common stock"), and all of the
shares of preferred stock, no par value, of IDX, issued and
outstanding immediately prior to the effective time of the Merger
(excluding any treasury shares), shall be converted into and
exchanged for, in the aggregate, the right to receive (a) 500,000
shares of Series B Convertible Preferred Stock, par value $.0001
per share, convertible into 2,500,000 shares of common stock of
the Company at the end of one year, and warrants to purchase up
to 2,500,000 shares of common stock of the Company subject to
achieving certain revenue and cash flow objectives and
(b) $5,000,000 in cash, decreased based upon the satisfaction of
certain indebtedness of IDX and other amounts to be deducted as
provided for in the IDX Merger Agreement. The warrants are
convertible only to the extent that IDX achieves certain revenue
and cash flow goals over the twelve months following closing.
The Company has also guaranteed a price of $8.00 per share to
recipients of the Company's common stock at the date the
preferred stocks and warrants are convertible, subject to IDX's
achievement of certain revenue and cash flow objectives. The
transaction is subject to the Company raising the required
financing.
IDX is a supplier of IP (Internet protocol) fax and IP voice
platforms and services to telecommunications operators and
Internet Service Providers ("ISP's") in 12 countries. IDX, with
50 employees globally, currently has approximately $6 million of
annualized revenue. IDX provides the Company with two key
services for the Company's new suite of Internet services:
operationally proven IP fax and IP voice. For at least the first
year, IDX will operate as a separate subsidiary, although its
platform services will begin to be used immediately to serve the
Company's customer base.
AlphaNet Preliminary Strategic Agreements. The Company has
entered into an agreement with AlphaNet Telecom, Inc., a Toronto,
Ontario based international digital communications technology and
service provider ("AlphaNet"). AlphaNet develops, operates and
markets voice, fax and data services for telecommunications
service providers, corporations and the hotel industry.
Under the terms of the agreement which has a five
year renewable term, AlphaNet will market calling card services
to specified international telecommunications carriers. AlphaNet
will also provide its customers with enhancements to their
existing calling cards to provide for international calling
capability. Certain of the Company's Calling Card Platforms may
be co-located with AlphaNet's international points-of-presence to
improve the services offered by both companies. The Company will
then be able to offer its customers AlphaNet Global Carrier
Services, a global value-added network service. The AlphaNet
network delivers commercial-grade levels of voice quality over a
data network and value-added services by using AlphaNet's
proprietary voice-into-data conversion and compression
technology. The Company believes that this is the first carrier
application of its kind. The agreements contemplate AlphaNet
carrying certain portions of the Company's international traffic
over its facilities which, to the extent implemented, would
reduce the Company's transmission costs.
Other Potential Acquisitions. The Company has also
executed letters of intent to acquire, subject to obtaining
financing, substantially all of the assets of two other
companies. The cash element of the aggregate purchase prices for
these potential acquisitions is approximately $3.5 million and
liabilities to be assumed, principally long-term, aggregate $4.6
million. In addition, the Company will issue 375,000 warrants to
purchase common stock.
Stockholder Loan. In June 1998, the Company borrowed $1.0
million from an existing stockholder. The loan bears interest at
8 7/8% and is payable upon maturity in December 1999. Under the
terms of the agreement, the stockholder received warrants to
purchase 67,000 shares of common stock at a price of $3.03 per
share, exercisable for a period of three years. The stockholder
also received as consideration for the loan the repricing and
extension of a warrant for 55,000 shares which is now exercisable
on or before February 29, 2001 at a price of $3.75 per share.
Competition
The Company's industry is intensely competitive and rapidly
evolving. The communications industry is dominated by companies
much larger than the Company with much greater name recognition,
much larger customer bases and substantially greater financial,
personnel, marketing, engineering, technical and other resources
than the Company. In addition, several other companies have
commenced offerings, or have announced intentions to offer
enhanced communications services similar to certain of the
enhanced services the Company plans to offer.
The Company's core services compete with calling card
services provided by companies such as AT&T Corp., Global One,
PTTs and other national carriers as well as smaller long distance
providers. In providing enhanced services the Company expects to
compete with entities already offering or planning to offer such
services. Some of these companies include Premiere Technologies,
Inc. (provides enhanced communication services and is developing
a unified messaging platform), JFAX (remote office services) and
General Magic Inc. (provides integrated voice and data
applications). The Company expects that other parties will
develop platform products and services similar to the products
and services offered by the Company.
The Company believes that the principal factors affecting
competition in the calling card market include services and
features, geographic coverage, price, quality, reliability of
service and name recognition. The Company expects to leverage
its global network and Calling Card Platform by offering various
enhanced communications services, by expanding its relationships
with carriers and other large companies that outsource business
to the Company and to continue to be an efficient provider of
processing services. The Company will also leverage its assets
by a new focus on tier II and tier III carriers. The Company
believes that it will be able to compete effectively if it can
successfully implement its competitive strategy. However, to the
extent that other entities are successful in offering superior
enhanced communications services or introducing such services
before the Company does, the Company likely would be adversely
affected and such effects could be material. See "Risk Factors -
Possible Adverse Effects of Competition."
Sales and Marketing
The Company markets its services to and through PTTs,
international carriers, financial institutions, large
corporations and card issuers, such as credit card providers,
which provide the Company's services to their own customers. The
Company recently established a sixteen (16) person direct sales
force which focuses on sales to these customers, including
personnel based in Europe and Asia. The Company's newly
established marketing staff is primarily responsible for
providing marketing support to the sales efforts described above
at varying levels of involvement. The marketing staff is also
responsible for promoting the Company's corporate image in the
marketplace and providing marketing support to PTTs,
international carriers and other card issuers to promote the use
of the Company's services by their customers. The Company pays
sales commissions to its sales employees and agents.
Engineering
The Company's engineering personnel are responsible for
updating, testing and supporting proprietary software
applications, as well as creating and improving enhanced system
features and services. The Company's engineering efforts include
(i) updating its proprietary Calling Card Platforms and
integrating its software with commercially available software and
hardware when feasible; and (ii) identifying and procuring
improved communications services that are compatible with the
Company's calling card services and Calling Card Platforms.
Technology: Intellectual Property Rights
The Company regards its Calling Card Platforms and related
software as proprietary and has implemented protective measures
both of a legal and a practical nature to ensure that they retain
that status. The Company has filed a patent application relating
to certain aspects of the Calling Card Platform with the U.S.
Patent and Trademark Office, and is taking steps to extend its
patent application to certain international jurisdictions. The
Company has also registered certain trade or service marks with
the U.S. Patent and Trademark Office, and applications for
registration of additional marks are currently pending. Certain
trade or service marks also have been registered in some European
and other countries, and applications for registration of
additional marks are pending. In addition to filing patents and
registering marks in various jurisdictions, the Company obtains
contractual protection for its technology by entering into
confidentiality agreements with its employees and customers, and
limits access to and distribution of its Calling Card Platforms,
hardware, software, documentation and other proprietary
information.
There can be no assurance, however, that the steps taken by
the Company to protect its proprietary rights will be adequate to
deter misappropriation of its technology. Despite the Company's
measures, competitors could copy certain aspects of the Company's
Calling Card Platform and related software or obtain information,
which the Company regards as trade secrets. Further, there can
be no assurance that any patent issued to the Company or the
marks registered by the Company, if challenged, can be
successfully defended. In any event, the Company believes that
factors such as technological innovation and expertise and market
responsiveness are as (or more) important than the legal
protections described above. The Company believes that it is
likely that the Company's competitors will independently develop
similar technology and that the Company will not have any rights
under existing laws to prevent the introduction or use of such
technology. See "Risk Factors -- Limited Protection of
Proprietary Rights and Technology; Risks of Infringement Claims."
Customers
In fiscal 1998 Telefonos de Mexico, S.A., de C.V.,
Worldcom, Inc., (primarily its affiliates ATC and Metromedia)
Telecom Australia and LCI International accounted for 18%, 14%,
11%, and 11%, respectively of the Company's revenues and were the
only customers accounting for 10% or more of the Company's
revenues.
Regulation
Although the Company does not have its own
telecommunications facilities, and utilizes the facilities of
long-distance telephone carrier services in the United States and
of telephone utilities in various foreign countries, it is
subject to regulation as a telecommunications reseller in many
jurisdictions. In addition, either the Company or its local
partner is required to have licenses or approvals in those
countries where it operates and where equipment is installed.
United States Federal Regulation. Pursuant to the
Communications Act of 1934, as amended (the "Communications
Act"), the Federal Communications Commission ("FCC") is required
to regulate the telecommunications industry in the United States.
Under current FCC policy, telecommunications carriers reselling
the 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 streamlined regulation. The degree of
regulation varies between domestic telecommunications services
(services which originate and terminate within the United States)
and international telecommunications services (services which
originate in the United States and terminate in a foreign country
or vice versa).
For non-dominant providers of domestic services, no prior
authorization is required to provide service. Non-dominant
providers of international services are required to obtain
authorization for the provision of service from the FCC pursuant
to Section 214 of the Communications Act. Carriers providing
international service are also required to file a tariff with the
FCC, setting forth the terms and conditions under which they
provide international services. The FCC has determined that it no
longer will require non-dominant providers of domestic services
to file tariffs, but that decision has been stayed pending appeal
by the U.S. Court of Appeals for the District of Columbia
Circuit. The Company resells both domestic and international
services, and therefore is required to possess authority under
Section 214 of the Communications Act to resell international
service, and to file tariffs for domestic and international
services with the FCC. The Company has held an authorization to
resell international switched voice services and international
telex service since 1989. 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. The Company also
has tariffs on file with the FCC setting forth the terms and
conditions under which it provides domestic and international
services.
In addition to these authorization and tariff requirements,
the FCC imposes a number of additional requirements on all
telecommunications carriers, including obligations to: (1)
contribute a portion of telecommunications revenues from end
users to federal universal service programs, unless such
contribution would be considered de minimis under FCC rules; (2)
ensure that services are accessible and usable by persons with
disabilities; (3) comply with verification procedures in
connection with changing the presubscribed interexchange carrier
of a customer so as to prevent "slamming," a practice by which a
customer's chosen long distance carrier is switched without the
customer's knowledge; (4) protect the confidentiality of
proprietary information obtained from customers, manufacturers
and other carriers; (5) pay annual regulatory fees to the FCC;
and (6) contribute to the Telecommunications Relay Services Fund.
These regulatory requirements impose a relatively minimal
burden on the Company at the present time. There can be no
assurance, 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.
Non-U.S. Government Regulation. Telecommunications
activities are subject to government regulation to varying
degrees in every country throughout the world. In many countries
where the Company operates, equipment cannot be connected to the
telephone network without regulatory approval, and therefore
installation and operation of the Company's Communications
Platform or other equipment requires such approval. The Company
has licenses or other equipment approvals in the jurisdictions in
which operations are conducted; in most jurisdictions where the
Company conducts business it relies on its local partner to
obtain the requisite authority. In many countries the Company's
local partner is a PTT or national carrier, and in some
jurisdictions also is (or is controlled by) the regulatory
authority itself.
As a result of the reliance on its local partners, the
Company is dependent upon the cooperation of the telephone
utilities with which it has made arrangements for its authority
to conduct business, as well as 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, principally countries which are members of the European
Community and the United States, laws and regulations provide
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 presently has good
relations with most of the foreign utilities with which it does
business. There can be no assurance, however, that such
relationships will continue or that governmental authorities will
not seek to regulate the Company's rates or other aspects of its
calling card services or require the Company to obtain a license
to conduct its business.
Many aspects of the Company's international operations and
business expansion plans are subject to foreign government
regulations, including currency regulations. There can be no
assurance that foreign governments will not adopt regulations or
take other actions that would have a direct or indirect adverse
impact on the business opportunities of the Company. See "Risk
Factors -- Risks Associated with International Business."
Employees
As of March 31, 1998, the Company employed one hundred forty
five (145) employees as follows: one hundred sixteen (116) in
Denver, Colorado, five (5) in Tarrytown, New York, one (1) in
Nyon, Switzerland, eight (8) in Silkeborg, Denmark, ten (10) in
Hong Kong, one (1) in Brussels, Belgium, and four (4) in
Guildford, United Kingdom. See Note 9 to the Consolidated
Financial Statements for geographic business segment information.
Risk Factors
Rapid Technological and Market Changes Create Significant
Business Risks. The market for the Company's services is
characterized by rapid technological change, frequent new product
introductions, changes in demand, changes in cost structures and
evolving industry standards. The Company's success will depend
in significant part on its ability to anticipate customer demand,
keep pace with advances in technology, enhance its current
services, develop and introduce new services in a timely fashion,
modify its cost structure to maintain cost-effective services,
and compete successfully with products and services based on
evolving or new technologies. In particular, the Company, like
others in its industry, believes that it will be necessary to
offer a suite of enhanced business communications services, and
that those companies which do not offer acceptable services in a
timely manner will lose market share. There can be no assurance
that the Company will be able to keep up with the rapid
technological and market changes or that the Company will be able
to offer acceptable new services in a timely manner to avoid loss
of market share.
Possible Adverse Effects of Competition. The Company's
industry is intensely competitive and rapidly evolving. The
communications industry is dominated by companies much larger
than the Company with much greater name recognition, much larger
customer bases and substantially greater financial, personnel,
marketing, engineering, technical and other resources than the
Company. To the extent that such entities offer services that are
similar to and priced competitively with the Company's calling
card services there likely would be a material adverse effect on
the Company's business, financial condition and results of
operations. The Company's ability to succeed will depend in part
on such larger companies outsourcing to entities such as the
Company services of the type offered by the Company. In
addition, several other companies have commenced offering or
announced intentions to offer enhanced communications services
similar to certain of the enhanced services the Company plans to
offer. To the extent that such entities are successful in
offering superior services or introducing credible service
offerings before the Company, the Company likely would be
adversely affected and such effects could be material. The
Company expects new types of products and services not yet
announced or available in the marketplace to be developed and
introduced which will compete with the services offered and
proposed to be offered by the Company.
Need for Significant Additional Financing. The Company
estimates that it will need to raise up to $30 million during the
next several months to have sufficient working capital to
facilitate running its business, pursuing the IDX and other
acquisitions, upgrading its facilities, and developing new
services. In addition, the Company will need to repay or
refinance its existing $7.5 million term loan (plus approximately
$978,000 in interest) that will be due and payable in full in
August 1999. To the extent that the Company spends more on
acquisitions, service development or incurs losses, its need for
additional financing will increase. The Company presently
intends to pursue equity and debt financing. There can be no
assurance that the Company will be able to raise the necessary
funds in a timely manner or on favorable terms. Should the
Company be unsuccessful in its efforts to raise additional
capital, it may be required to institute cost cutting measures
and curtail its plans.
Dependence on Strategic Relationships. A principal element
of the Company's strategy is the maintenance of existing, and the
creation of new, strategic relationships with international
carriers and others that will enable the Company to offer
additional services that it cannot offer on its own and to offer
its services to a larger customer base than the Company could
otherwise reach through direct marketing efforts. The Company
believes that international relationships and alliances are
important in the offering of calling card services and that such
relationships will be even more important as providers add new
services. The Company's success depends in part on the Company's
ability to maintain and develop such relationships, the quality
of these relationships and the ability of these strategic
partners to market the Company's services effectively. Failure
to maintain and develop such relationships or of the Company's
strategic partners to successfully market the Company's services
could have a material adverse effect on the Company's results of
operations.
Limited Protection of Proprietary Rights and Technology;
Risks of Infringement Claims. The Company relies primarily on a
combination of intellectual property laws and contractual
provisions to protect its proprietary rights and technology.
However, these laws and contractual provisions provide only
limited protection. Unauthorized parties may copy the Company's
technology, reverse engineer its software or otherwise obtain and
use information the Company considers proprietary. In addition,
the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as the laws of the U.S.
There can be no assurance that the Company's means of protecting
its proprietary rights and technology will be adequate. In
addition, it is likely that the Company's competitors will
independently develop similar technology and that the Company
will not have any rights under existing laws to prevent the
introduction or use of such technology.
Many patents, copyrights and trademarks have been issued in
the telecommunication service area. The Company believes that in
the ordinary course of its business third parties will claim that
the Company's current or future products or services infringe the
patent, copyright or trademark rights of such third parties. No
assurance can be given that actions or claims alleging patent,
copyright or trademark infringement will not be brought against
the Company, or that, if such actions are brought, the Company
will ultimately prevail. Any such claims, regardless of their
merit, could be time consuming, result in costly litigation,
cause delays in introducing new or improved products or services,
require the Company to enter into royalty or licensing
agreements, or cause the Company to discontinue use of the
challenged technology, trade name or service mark at potentially
significant expense to the Company. Any infringement by the
Company's key technology of intellectual property rights of
others could have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Calling Card Platform; Damage, Failure and
Downtime. The Company's operations are dependent upon its ability
to protect and maintain its Calling Card Platforms and central
processing center against damage, technical failures,
unauthorized intrusion, natural disasters, sabotage and similar
events. The Company has taken certain precautions to protect
itself and its customers from events that could interrupt
delivery of the Company's services. However, there can be no
assurance that an event would not cause the failure of one or
more of the Company's Communications Platforms or even the entire
World DirectT network. Such an interruption could have a
material adverse effect on the Company's business, financial
condition and results of operations.
Risks Associated with International Business. A significant
portion of the Company's business is conducted outside the United
States and a significant portion of its revenues and expenses are
derived in foreign currencies. Accordingly, the Company's
results of operations may be materially affected by international
events and fluctuations in foreign currencies. Many aspects of
the Company's international operations and business expansion
plans are subject to foreign government regulations, currency
fluctuations, political uncertainties and differences in business
practices. There can be no assurance that foreign governments
will not adopt regulations or take other actions that would have
a direct or indirect adverse impact on the business opportunities
of the Company within such governments' countries, including
increased tariffs. Furthermore, there can be no assurance that
the political, cultural and economic climate outside the United
States will be favorable to the Company's operations and growth
strategy. The Company does not engage in the practice of
entering into foreign currency contracts in order to hedge the
effects of foreign currency fluctuations. See Item 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations, Other Expense (Income) for further
discussion.
Acquisition and Joint Venture Risks. The Company expects to
pursue acquisition and joint venture opportunities to be able to
introduce certain of the enhanced communications services it is
proposing to offer. This is expected to place significant
administrative, technical and financial demands on the Company's
systems, procedures and controls. Acquisitions also involve
numerous additional risks, including difficulties in the
assimilation of the operations, services, products and personnel
of the acquired company, the diversion of the Company's
management's attention from other business concerns, entry into
markets in which the Company has little or no direct prior
experience and the potential loss of key employees of the
acquired company. Acquisitions and joint ventures also will
require funding, which may necessitate the raising of additional
financing. Expected benefits from future acquisitions, if any,
may not be fully realized or realized within the expected time
frame, revenues following future acquisitions may be lower than
expected, and operating costs or customer loss and business
disruption following future acquisitions, if any, may be greater
than expected, and costs or difficulties related to the
integration of the businesses, if any, that may be acquired by
the Company may be greater than expected. Future acquisitions by
the Company may result in potentially dilutive issuances of
equity securities, the incurrence of debt, the assumption of
known and unknown liabilities, the write-off of software
development costs and the amortization of expenses related to
goodwill and other intangible assets, all of which could have a
material adverse effect on the Company's business, financial
condition, results of operations and earnings per share.
Dependence on Carriers and Others for Transmission Services.
The Company does not own any telecommunications facilities and
therefore depends on telecommunications carriers for transmission
of its long distance calls. These long distance
telecommunication services generally are procured pursuant to
strategic arrangements with the carriers owning such facilities
or more common commercial arrangements for the supply of
transmissions capacity. The Company's ability to operate its
business profitably will depend, in part, on its ability to
continue to obtain transmission services on favorable terms from
long distance carriers. The Company believes that as providers
add new and enhanced communications services, cost will re-emerge
as a key criterion for distinguishing between services, and the
Company therefore will need to keep reducing its transmission
costs and pursue low cost alternative routing technologies.
Failure to obtain long distance transmission services at
favorable rates could result in losses on particular services or
over particular routes, and could lead to a loss of customers,
which could have a material adverse effect on the Company.
Year 2000 Problem. It is possible that a portion of the
Company's currently installed computer systems, software
products, billing systems, networks, database or other business
systems (collectively the "Company's Systems"), or those of the
Company's customers working either alone or in conjunction with
other software or systems, will not accept input of, store,
manipulate and output dates for the years 2000 or thereafter
without error or interruption (commonly known as the "Year 2000"
problem); although initial review indicates that the Company's
primary Unix-based operating systems are not at significant risk,
other systems, particularly in the finance and administration
area, may be. The Company is currently in the process of further
evaluating the Company's Systems to determine whether or not
modifications will be required to prevent problems related to the
Year 2000. There can be no assurance that the Company will
identify all Year 2000 problems in the Company's Systems or those
of its customers, including network transmission providers, in
advance of their occurrence or that the Company will be able to
successfully remedy any problems that are discovered. In
addition, the Company is dependent upon third parties for
transmission of most of its calls and other communications.
There can be no assurance that these third party providers will
identify and remedy any Year 2000 problems in their transmission
facilities. The expense of the Company's efforts to address such
problems, in particular the failure of third party providers of
transmission facilities, could have a significant adverse effect
on the Company's business, financial condition and results of
operations.
Dependence on Key Management and Personnel. The Company's
success is largely dependent on its executive and other key
personnel, the loss of one or more of whom could have a material
adverse effect on the Company. The Company believes that its
continued success will depend to a significant extent upon the
efforts and abilities of Christopher J. Vizas, the Company's new
Chairman and Chief Executive Officer (who joined the Company in
December 1997), and certain other key executives. Mr. Vizas has
entered into an employment agreement, which expires on December
5, 2000. The Company also believes that to be successful it must
hire and retain highly qualified engineering personnel. In
particular, the Company relies on certain key employees to design
and develop the Company's proprietary Calling Card Platform and
related software. Competition in the recruitment of highly
qualified personnel in the telecommunications services industry
is intense. The inability of the Company to locate, hire and
retain such personnel would have an adverse effect on the
Company. The Company does not have key-man life insurance. No
assurance can be given that the Company will be able to retain
its key employees or that it will be able to attract qualified
personnel in the future.
Regulation. Although the Company does not have its own
telecommunications facilities and utilizes the facilities of PTTs
and other carriers, it is subject to regulation as a reseller in
many jurisdictions.
United States Federal Regulation. Under current FCC
policy, telecommunications carriers reselling the 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 streamlined regulation. The Company is required to
possess an authorization from the FCC for the provision of
international services, and must file tariffs at the FCC setting
forth the terms and conditions under which it provides both
international and domestic services. These and other regulatory
requirements to which the Company presently is subject impose a
relatively minimal burden on the Company at the present time.
There can be no assurance, 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.
Non-U.S. Government Regulation. In most countries
where the Company operates, equipment cannot be connected to the
telephone network without regulatory approval, and therefore
installation and operation of the Company's Calling Card Platform
or other equipment requires such approval. In most jurisdictions
where the Company conducts business it relies on its local
partner to obtain the requisite authority. As a result of the
reliance on its local partners, the Company is entirely dependent
upon the cooperation of the telephone utilities with which it has
made arrangements for its authority to conduct business, as well
as operational and certain of its administrative requirements.
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. There can be no
assurance that such relationships will continue or that
governmental authorities will not seek to regulate the Company's
rates or other aspects of its calling card services or require
the Company to obtain a license to conduct its business.
Relations with Certain Major Stockholders. The Company has
several major stockholders that have in the past been involved to
varying degrees with the management of the Company. The Company
does not believe that any stockholders have meritorious claims
arising out of the Company's business. However, there is a risk
that one, or more, of such stockholders might take positions
adverse to a present, or past, management action, including
litigation. The Company has no control over the actions of such
stockholders and were actions taken at any given time there could
be an adverse effect on the Company's ability to execute its
business plan.
Volatility of Common Stock Price. The market price of the
Company's common stock fluctuates over a wide range and may
continue to do so in the future. Such fluctuations could be in
response to factors and events related to matters other than the
performance of the Company, including the depth and liquidity of
the trading market of the common stock, changes in estimates by
analysts, market conditions in the industry, announcements by
competitors, regulatory actions and general economic conditions.
Dividend Policy. The Company has not declared or paid cash
dividends on its capital stock and does not anticipate paying
cash dividends in the foreseeable future.
Anti-Takeover Provisions. The Company has adopted a Rights
Plan and has entered into a Stockholder Rights Agreement dated
February 27, 1997 between the Company and American Stock Transfer
& Trust Company, as Rights Agent (the "Rights Agreement"). The
Rights Agreement provides for the issuance of rights (the
"Rights") for each share of common stock outstanding on February
28, 1997, each Right representing the right to purchase one one
hundredth of a share of the Company's Series A Participating
Preferred Stock (the "Series A Preferred Stock") at a price of
$70 per one-hundredth of a share of Series A Preferred Stock,
subject to adjustment. All shares of common stock issued by the
Company between the date of adoption of the Rights Agreement and
the distribution date (as defined in the Rights Agreement) or,
the date, if any, on which the Rights are redeemed will have
Rights attached to them. The Rights become exercisable upon the
occurrence of certain defined change of control triggering
events. The Rights will have certain anti-takeover effects as
they will cause substantial dilution to a person or group that
acquires a substantial interest in the Company without the prior
approval of the Board of Directors of the Company. The effect of
the Rights may be to inhibit a change in control of the Company
(including through a third party tender offer at a price which
reflects a premium to then prevailing trading prices) that may be
beneficial to the Company's stockholders.
The Company's Restated Certificate of Incorporation allows
the Board of Directors to issue up to five million shares of
preferred stock and to fix the rights, privileges and preferences
of those shares without any further vote or action by the
stockholders. The rights of the holders of the common stock will
be subject to, and may be adversely affected by, the rights of
the holders of any shares of preferred stock that may be issued
by the Company in the future. Any issuances of preferred stock
in the future could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting
stock of the Company. In addition, the Company is subject to
certain anti-takeover provisions of the Delaware General Business
Corporation Law, which could have the effect of discouraging,
delaying or preventing a change of control of the Company.
ITEM 2 - Properties
The land and building that was used by the Company at 8 Avenue C,
Nanuet, New York was purchased in March 1992 and is currently
under contract for sale. 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 at the following locations:
Tarrytown, New York; Paris, France; Brussels, Belgium; Nyon,
Switzerland; Hong Kong, H.K.; Silkeborg, Denmark; Guildford,
United Kingdom; and Washington D.C. 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.
The Company believes that its facilities 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 former executive officers and some of its current and former
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.
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 sought 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. By Memorandum and Order
dated October 16, 1997, the Court excluded all testimony by
plaintiffs' damages expert and denied the parties' cross-
motions for summary judgment.
On April 2, 1998, the parties entered into a formal
settlement agreement. Pursuant to the settlement agreement the
plaintiffs agreed to release the Company and the other
defendants from all obligation or liability and the Company
agreed, on behalf of itself and the other defendants, to
deliver to a settlement administrator a total of 350,000
shares of its common stock and to pay the settlement
administrator up to $50,000 in actual reasonable charges and
expenses incurred in connection with providing notice to the
plaintiffs and administering the settlement. A charge of
$3,500,000 was recorded in the fourth quarter of fiscal 1998 and
represents the value assigned to the 350,000 shares of common
stock referred to above, which have been valued at a maximum
possible value of $10.00 per share pursuant to the terms of
the settlement agreement. Such value relates to the Company's
obligation to issue additional stock or cash if the market
price of the Company's stock is less than $10.00 per share
during the relevant periods, as defined. The Company has no
obligation to issue additional stock if its share price is
above $10.00 per share for fifteen consecutive days during the
two year period after all shares have been distributed to the
class. The settlement is subject to Court approval. The
shares of the Company's common stock to be issued in
connection with the settlement are to be held in escrow until
the effective date of the settlement which will occur once
all of the following conditions have occurred: (a) the
settlement is finally approved in all respects by the Court;
(b) the Court's Order and Final Judgment is entered; (c) the
time to appeal for the Order and Final Judgment has expired;
or (d) if any appeal is taken, the expiration of five days
after such appeal shall have been finally determined by the
highest court before which appellate review is sought, and
not subject to further appeal; and (e) such final judgment or
appeals, if any, shall have been resolved in such manner as to
the permit the consummation of the settlement in
accordance with its terms.
ITEM 4 - Submission of Matters to a Vote of Security Holders
On February 26, 1998, the Company held its 1997 annual meeting of
stockholders (the "1997 Annual Meeting"). At the Annual Meeting,
the Company's stockholders took the following actions:
Elected Directors. The Company's stockholders elected eight
directors to the Company's Board of Directors. The names of the
elected directors (each of whom had served as a director prior to
the Annual Meeting) are Christopher J. Vizas, Edward J. Gerrity,
Jr., Anthony Balinger, David W. Warnes, Richard A. Krinsley,
Martin L. Samuels, Donald H. Sledge and James O. Howard.
Amended the Company's 1995 Employee Stock Option and Appreciation
Rights Plan. The Company's stockholders adopted amendments to
the Company's 1995 Employee Stock Option and Appreciation Rights
Plan (the "Employee Plan"), including an increase from 1,000,000
to 1,750,000 in the number of shares authorized to be issued
pursuant to options granted under such plan. Amended the
Company's 1995 Directors Stock Option and Appreciation
Rights Plan. The Company's stockholders adopted amendments
to the Company's 1995 Directors Stock Option and
Appreciation Rights Plan (the "Directors Plan"), which amendments
were designed to take advantage of recent changes in the
Securities Exchange Act of 1934 to permit greater flexibility in
administration of such plan.
Ratified Appointment of Independent Certified Public Accountants.
The Company's stockholders ratified the appointment by the Board
of Directors of the firm of BDO Seidman, LLP as independent
certified public accountants of the Company for the fiscal year
ending March 31, 1998.
Ratified Change in the Company's Fiscal Year. The Company's
stockholders ratified the change in the Company's fiscal year
from a fiscal year ending March 31 to a fiscal year ending
December 31, commencing with the fiscal year beginning April 1,
1998.
The following sets forth the voting results of the Annual Meeting
based on the Inspector of Elections report:
Election of Directors
Name of Nominee For Against Abstain
Vizas 13,603,192 1,373,069 1,425,000
Gerrity, Jr. 13,618,556 1,357,705 1,425,000
Balinger 13,624,409 1,351,852 1,425,000
Warnes 13,625,637 1,350,624 1,425,000
Krinsley 13,601,778 1,374,483 1,425,000
Samuels 13,623,877 1,352,384 1,425,000
Sledge 13,625,637 1,350,624 1,425,000
Howard 13,622,067 1,354,194 1,425,000
Amendments to Employee Plan
For Against Abstain
11,742,074 1,852,750 2,806,437
Amendments to Directors Plan
For Against Abstain
11,705,394 1,885,392 2,810,475
Ratification of Independent Certified Public Accountants
For Against Abstain
13,544,137 1,360,364 1,496,760
Ratification of Change in Fiscal Year
For Against Abstain
13,594,680 1,311,784 1,494,794
Executive TeleCard, Ltd.
Part II
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, 1998.
High Low
Quarter Ended June 30, 1997 $9 1/4 $4 1/2
Quarter Ended September 30, 1997 8 3/4 3 1/4
Quarter Ended December 31, 1997 4 1 19/32
Quarter Ended March 31, 1998 4 19/32 2 1/4
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
B. Holders
The approximate number of holders of the Company's common stock
as of May 31, 1998 was in excess of 5,300 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 June 30, 1995 and distributed
on August 25, 1995 to stockholders of record as of August 10,
1995. On May 21, 1996 the Company declared another ten percent
(10%) stock dividend. Stockholders of record as of June 14, 1996
received the dividend on August 5, 1996.
ITEM 6 - Selected Consolidated Financial Information
The following is a summary of selected consolidated financial data of
the Company as of and for the five years ended March 31, 1998. This
data should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations"
and the Company's Consolidated Financial Statements and the Notes
thereto appearing elsewhere in this document.
FOR THE YEARS ENDED MARCH 31,
1998 1997 1996 1995 1994
Successor Successor Successor Successor Predecessor
(3) (3) (3) (3) (4)
Statement of
Operations:
Net Revenues $33,122,767 $33,994,375 $30,298,228 $22,980,726 $12,736,882
Income(Loss)from (5,700,424) 2,423,564 3,097,009 (292,307) 1,447,825
Operations
Other Income (5,949,486) (1,401,612) 69,843 (4,324,193) (55,034)
(Expense)
Net Income(Loss)(13,289,910) 773,952 2,852,852 (4,616,500) 1,323,407
Net Earnings (Loss)
per Common Share:
(1) (2)
Basic $(0.78) $0.05 $0.18 $(0.30) $0.09
Dilutive (0.78) 0.05 0.18 (0.30) 0.08
AS OF MARCH 31,
1998 1997 1996 1995 1994
Balance Sheet:
Cash and Cash
Equivalents $2,391,206 $2,172,480 $950,483 $1,734,232 $1,347,532
Total Assets 22,900,456 23,679,686 16,732,074 12,943,044 16,645,307
Long-Ter 7,735,581 9,737,007 2,150,649 671,774 500,939
Obligations
Total Liabilities 15,779,696 15,720,414 9,692,065 9,023,293 1,157,233
Total Stockholders'7,120,760 7,959,272 7,040,009 3,919,751 15,488,074
Equity
(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 two ten percent (10%) stock
splits, effected in the form of stock dividends and distributed
August 25, 1995 and August 5, 1996.
(3) Includes the acquisition of the operating subsidiaries of
Residual Corporation ("Residual") of which the Company acquired
substantially all of the assets effective March 31, 1995. In
connection with the acquisition, a management agreement between
the Company and Residual under which 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 return for 10% of the Company's gross
revenues was transferred to a wholly-owned subsidiary of the
Company. As a result, as of April 1, 1995, the Company, through
its subsidiaries, was responsible for all expenses previously
included under the agreement. In consideration for the
transaction, the Company issued 767,610 restricted shares of its
common stock to Residual and also discharged approximately
$12,722,000 of debt obligations payable by Residual to the
Company.
(4) Does not include the acquisition of the operating
subsidiaries of Residual as described in (3) above.
ITEM 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
The Company is a global value-added service provider of
telecommunications and information services, focused on mobile
end-users, messaging and information management. At the
present time, the Company's core business is the
provisioning of global calling card services, and related
validation, billing and payment services. Operating through
its World DirectT network, the Company originates voice traffic
in 88 countries and territories and terminates such traffic
anywhere in the world. The Company's global services are
delivered through proprietary routing, application and data
access software, which run on the Company's interactive call
processing platform ("Calling Card Platforms"). Forty
Calling Card Platforms are installed in strategic locations
around the world where they connect directly with national and
international telephone networks. In addition to routing
calls, the Company's Calling Card Platform validates calls,
controls fraud, captures usage information and issues bills with
full call details. The Calling Card Platform system provides
a user interface in multiple languages for operator assisted
calls and the Company's proprietary billing software provides
for multiple currency billing.
Revenue. The large majority of the Company's revenue
results from providing services and is generated through
contracts for calling card enhancement and platform
services. Other services revenue sources include the sale
of international toll free services and revenue generated by
use of the Company's proprietary calling cards. The Company
generally charges its customers, principally PTT's, (Postal,
Telegraph and Telephone Authorities) other
telecommunications providers and issuers of credit cards,
for calling card enhancement and platform services on a per call
basis, where the charge per call is determined by minutes of
customer usage and the originating and terminating points
of the call. In the case of calling card enhancement
services, where the Company arranges for the transmission of
the call as well as the various processing functions, a
significant portion of the revenues relates to the costs of the
transmission which the Company obtains from third party
providers. For platform services the customer arranges for its
own transmission. As a result, calling card enhancement services
have much higher revenue from customers than do platform
services per minute of usage.
In certain years the Company has generated revenue from
other sources, classified as non-service, which generally have
consisted of sales of billing and platform systems and
nonrecurring special projects.
Costs. The principal component of the Company's cost of
revenue for calling card enhancement services is transmission
costs. The Company continues to pursue strategies for reducing
its cost of transmission. These strategies include establishing
partnering arrangements with various carriers, negotiating more
cost-effective agreements with other carriers and routing traffic
to the least-cost, highest quality providers. In addition, the
Company has entered into an outsourcing agreement with a company
that is reviewing all of the Company's domestic service
providers' bills to ensure that bills are in compliance with
current contracts and domestic telecommunications regulations.
Other components of the Company's operating costs are
selling, general and administrative expenses, which include
personnel costs, consulting and legal fees, travel expenses, bad
debt allowances and other administrative expenses. Depreciation
and amortization expense includes the allocation of the cost of
transmission equipment, property and office equipment, and
various intangible assets over their useful lives.
Results of Operations
Year Ended March 31, 1998 Compared to Year Ended March 31, 1997
Overview. The Company incurred a net loss of $13.3 million
for the year ended March 31, 1998, of which $10.9 million is
attributable to the following charges:
(in millions)
Corporate realignment costs $3.1
Proxy-related litigation settlement 3.9
costs
Additional income tax provision 1.5
Additional allowance for doubtful 1.3
accounts
Warrants associated with debt 0.5
Other items 0.6
$10.9
These charges result principally from a detailed
review of
the Company's activities initiated by new management during
the third quarter of fiscal 1998 and are described in
more detail below.
Excluding these items, the Company incurred a net loss
for fiscal 1998 of $2.4 million compared to net income in
fiscal 1997 of $0.8 million. The difference is
principally due to a $1.6 million contribution to net
income in fiscal 1997 of high margin revenues from non-
services sources which did not recur in fiscal 1998. Also
in fiscal 1998, the Company's gross profit from its
services business remained flat compared to fiscal 1997
while it incurred additional recurring operating expenses
of $1.1 million, principally depreciation and
amortization. Interest expense, excluding a $0.5
million charge related to the amortization of debt discount
associated with warrants related to term loans (See Note 3
to Consolidated Financial Statements for further
information) increased by $0.3 million over fiscal 1997.
Foreign exchange losses increased by $0.3 million over
fiscal 1997.
New management is taking steps to increase revenues
and improve margins. They have completed a review of the
operations and activities of the Company and have refocused
the Company's marketing and sales activities with an
emphasis on stabilizing and growing the existing core
business and on adding new services. In practical
terms, this means that recently: (1) the Company has
refocused its resources on calling card enhancement and
platform services and plans to leverage its global network
to offer various enhanced communications services; (2) the
Company has established a small staff devoted to improving
its network structure and reducing its marginal
transmission costs (and, therefore, its cost of revenue),
and contracts have been entered into with several vendors
which will help to reduce transmission costs in the next
fiscal year; (3) the Company has increased its sales and
marketing staff and allocated additional funds for
marketing and promotional activities; and (4) staffing needs
have been assessed and reductions and realignments
have been
completed. The Company has instituted a process to add
new network and operations staff as necessary to
support new
contracts.
A thorough review of corporate practices and
procedures has been completed. This review resulted in a
number of improvements to internal reporting and review
procedures. The Company has also undertaken a study to
simplify its organizational and tax structure and has
identified potential international tax issues. In
connection with this study, the Company realized it
had a potential tax liability and recorded an additional
tax provision of $1.5 million in the fiscal fourth
quarter to reserve against liabilities which might arise
under the existing structure. The Company's study is
continuing and the eventual outcome cannot be predicted
with certainty. No tax claims have been asserted against
the Company.
Revenue. The Company's revenue sources can be classified
into two categories:
Years Ended March 31, (in millions)
1998 1997
Services $33.0 $ 32.0
Non-Services .1 2.0
Total $33.1 $ 34.0
As the above table indicates, revenue for the year
ended March 31, 1998 was $33.1 million. By comparison,
revenue for the year ended March 31, 1997 was $34.0
million, including $2.0 million attributable to non-
service revenue (principally billing and platform equipment sales,
revenue from calling card
production and contract settlement charges related to
special projects). Although total revenue decreased from
fiscal 1997 to fiscal 1998, service revenue increased $1.0
million or 3%. The
increase was due to increased customer usage partially
offset by a combination of three elements: a decline in
revenue from the long distance resale services of the
Company; lower per minute revenue due to new pricing
programs which went into effect in the first and second
quarters of fiscal 1998; and a lack of new revenue
generating contracts in the current fiscal year. As
anticipated, the Company's focused sales efforts did not
have an impact on the fiscal year ended March 31, 1998,
but management believes that these efforts will have their
initial impact in the fourth quarter of calendar year 1998.
Gross Profit. Gross profit was 43% or $14.3 million
for the year ended March 31, 1998, compared to 47% or $16.1
million for the year ended March 31, 1997. This decline was
due partially to
the positive margin contribution of non-service revenues in
the year ended March 31, 1997 which did not reoccur in the
year ended March 31, 1998. Excluding the effects of non-
service revenue, gross profit for services revenue was
43% for fiscal 1998 compared to 45% for fiscal 1997.
This decrease was due to lower pricing related to
various customer contracts which was not offset by
corresponding decreases in transmission costs, the
principal component of cost of revenue. The Company expects
that unit pricing in its core business of calling card
enhancement is likely to continue to decline, and is
taking steps that it believes will reduce its
transmission costs. Cost of revenue may be expected to
fluctuate in the next few periods as new pricing and
contractual arrangements are put in place and as the Company
works to improve its network structure and transmission
costs.
Selling, General and Administrative Expenses.
Selling,
general and administrative expenses were $14.0 million for
the year ended March 31, 1998, compared to $11.9 million for
the year ended March 31, 1997, an increase of $2.1 million
or 18%. As a percentage of revenue, selling, general
and administrative expenses were 42% and 35% for the years
ended March 31, 1998 and 1997, respectively. A major
factor in the increase is the addition of $1.3 million
to the allowance for doubtful accounts. Of this amount,
half is related to one customer who has, in the Company's
view, unilaterally taken unsubstantiated credits off
invoiced amounts and has refused to pay a large invoice
for contract settlement charges related to a special prepaid
calling card service. The Company believes the full
amount of the amounts invoiced to this customer is
legally due and owing but has established an allowance
as of March 31, 1998 to reflect potential costs of
collection. The balance of the remaining increase in
the allowance is spread among several accounts,
principally in the Asia-Pacific area, to provide for
collection issues that may arise from economic and other
factors. The
Company incurred $0.8 million in other selling, general
and administrative expenses related to increases in payroll
due to the hiring of new management and other personnel,
consulting and legal fees, travel expenses and for internal
communication costs.
Corporate Realignment Expense. The Company
incurred various realignment costs during fiscal 1998
resulting from the review of operations and activities
undertaken by new corporate management. These costs,
which totaled $3.1 million, include employee severance,
legal and consulting fees and the write down of certain
investments made in the Company's Internet service
development program. The Company does not anticipate
further realignment costs in the future.
Depreciation and Amortization Expense. Depreciation
and
amortization expense for the year ended March 31, 1998 was
$2.8 million compared to $1.7 million for the year ended
March 31, 1997, an increase of $1.1 million or 59%. In
addition to an increase in the asset base of $2.1 million
in fiscal 1998, a full year's depreciation was recorded in
fiscal 1998 for fiscal 1997 property additions of $5.0
million, a significant portion of which occurred in the
latter part of fiscal 1997.
Other Expense (Income). Interest expense (net of
interest income) for the year ended March 31, 1998 was
$1.6 million, compared to $0.8 million for the year ended
March 31, 1997, an increase of $0.8 million or 101%.
This increase relates
primarily to expenses of $0.5 million related to
additional interest expense associated with warrants to
purchase common stock issued in conjunction with debt
obligations. Also, in fiscal 1998, there was an increase
in average borrowings during the fiscal year and the
Company incurred additional finance
charges relating to the extensions of a term loan.
The Company recorded a foreign currency transaction
loss of $0.4 million during fiscal 1998 arising from
foreign currency cash and accounts receivable balances
maintained by the Company during the year in which
the U.S. dollar strengthened significantly. The
Company's exposure to foreign currency losses is mitigated
due to the variety of customers and markets which comprise
the Company's customer base, as well geographic
diversification of that customer base. In addition, most of
the Company's largest customers settle their accounts
in U.S. dollars.
During fiscal 1998, the Company incurred proxy
related litigation expense of $3.9 million arising from the
class action lawsuit for which a settlement agreement
was reached, as
described above (See "Item 3 - Legal Proceedings"). Of
this amount, $3.5 million relates to the escrow of 350,000
shares of the Company's common stock, which have been
valued at $10.00 per share pursuant to the terms of the
settlement agreement. Such value relates to the
Company's obligation to issue additional stock or cash if
the market price of the Company's stock is less than $10.00
per share during the defined periods.
Taxes on Income. Taxes on income for the year ended
March 31, 1998 were $1.6 million, compared to $0.2 million
for the year ended March 31, 1998, an increase of $1.4
million. The increase in the tax provision for amounts
currently due is primarily the result of the Company's
completion of a study to simplify its tax structure
wherein, it identified potential international tax
issues. In connection with this study, the Company
realized it had potential tax liabilities and recorded
an additional tax provision of $1.5 million in the fiscal
fourth quarter. Refer to Note 8 to the Consolidated
Financial Statements for further discussion regarding
taxes on income.
Year Ended March 31, 1997 Compared to Year Ended March 31,
1996
Revenue. Revenue for the year ended March 31, 1997
was
$34.0 million, compared to $30.3 million for the year ended
March 31, 1996, an increase of $3.7 million or 12%. The
growth in revenue resulted primarily from higher
overall minutes of
customer usage of the Company's calling card services by
existing customers, the addition of customers and
$2.0 million
attributable to non-service revenue (principally billing
and platform equipment sales, revenue from calling card
production and contract settlement charges related to
special projects).
Cost of Revenue. Cost of revenue for the year ended
March 31, 1997 was $17.9 million, compared with $18.5
million for the year ended March 31, 1996, a decrease of
$0.6 million or 3%. 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 revenue, cost of
revenue decreased 8% from 61% during the year ended March
31, 1996 to 53% for the year ended March 31, 1997. The
decrease resulted from the overall increase in the
Company's realization of revenue-sharing revenue for which
there is no direct usage cost.
Gross Profit. Gross profit for the year ended March
31, 1997 was $16.1 million, compared to $11.8 million for
the year ended March 31, 1996, an increase of $4.3 million
or 37%. The
increase in gross profit largely resulted from
corresponding revenue growth.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses were $11.9
million for the year ended March 31, 1997, compared to
$7.1 million for the year ended March 31, 1996, an increase
of $4.8 million or 68%. This increase was 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 for
the year ended March 31, 1997 compared to 131 for the
year ended March 31, 1996, a 27% increase. As a
percentage of revenue, selling, general and
administrative expenses increased from 24% for the year
ended March 31, 1996 to 35% for the year ended March 31,
1997.
Depreciation and Amortization Expense. Depreciation
and amortization expense was $1.7 million for the year
ended March 31, 1997, compared to $1.5 million for the
year ended March 31, 1996, an increase of $0.2 million or
11%. This increase related primarily to equipment placed
in service during the year ended March 31, 1997
including upgrade of and additions to call processing
equipment.
Interest Expense. Interest expense (net of interest
income) for the year ended March 31, 1997 was $0.8 million,
compared to $0.2 million for the year ended March 31,
1996, an increase of $0.6 million or 333%. The
increase was 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 $10.7 million as
of March 31, 1997, compared to $2.3 million as of March 31,
1996.
Liquidity, Capital Resources and Other Financial Data
Cash and cash equivalents were $2.4 million at March
31, 1998 compared to $2.2 million at March 31, 1997.
Cash outflow from operating activities totaled $2.5
million for fiscal 1998 compared to $2.0 million for
fiscal 1997. Working capital decreased from $5.1 million
at March 31, 1997 to $2.4 million at March 31, 1998.
Capital expenditures and other investing activities consumed
$2.1 million for fiscal 1998 compared to $5.2 million for
fiscal 1997 and related primarily to upgrades and
additions to call processing equipment. Cash generated
from financing activities totaled $4.8 million for fiscal
1998 compared to $8.4 million for fiscal 1997. The
primary source of financing for fiscal 1998 was the
issuance of common stock of $7.5 million partially
reduced by the net
retirement of long-term debt obligations of $3.0 million.
Cash flows from financing activities in fiscal 1997 related
primarily to the proceeds from the issuance of notes
payable and the assumption of capital lease obligations
totaling $10.3 million decreased by principal payments
and retirement of long-term debt obligations of $1.9
million.
Subsequent to March 31, 1998, the Company expended
$0.8 million in connection with potential acquisitions (See
"Item 1 Business - Recent Developments" above) and has
committed to
expend an additional $0.7 million in July and August,
1998 related to these transactions. At March 31, 1998, net
accounts receivable equaled $7.7 million compared to $8.4
million at March 31, 1997.
Due to the total cash commitments of $1.5 million on
the acquisitions in progress, the Company's cash
resources are currently limited. Under the direction of
its new management, the Company has instituted a program
to improve this situation, the principal elements of
which are: (1) executing more aggressive collection
efforts of accounts receivable; (2)establishing
effective controls over capital expenditures; (3)
reducing transmission costs by negotiating new contracts
with carriers; and (4) implementing policies and procedures
to control overhead costs associated with staffing,
travel, communications and other
areas. These steps, coupled with substantial
augmentation of the marketing and sales efforts, should
permit the Company to achieve positive operating cash
flow for the existing core business by the end of the
fiscal quarter ending December 31, 1998, in the absence of
any unexpected developments. For the existing core
business, should the anticipated revenue growth, accounts
receivable collection effort and cost control program
described above not result in positive cash flow by
December 31, 1998, the Company intends to institute
more significant cost-cutting measures.
Current Funding Requirements. Management estimates
that, based upon its current expectations for growth, the
Company will require additional funding of up to $30
million through the end of 1998 for the execution of its
business plan, the principal requirements being the
financing of its acquisition program and capital
expenditures for new service offerings. The funding
required by the Company may consist of one or more of
the following: (i) issuing additional shares of common
stock or
preferred stock or convertible debt (ii) obtaining a
loan facility secured by accounts receivable; (iii)
establishing a credit facility to finance equipment
purchased and other capital additions; or (iv)
additional cash flow generated from
operations. There can be no assurance that the Company
will be
successful in its efforts to raise such additional
capital on
favorable terms. Should the Company be unsuccessful in
its efforts to raise capital it may be required to modify
or curtail its plans for growth.
In June 1998, the Company entered into an Agreement and
Plan of Merger (the "IDX Merger Agreement") to acquire
100% of the stock of IDX (see "Item 1 - Business--Recent
Developments" above) in return for 500,000 shares of
Series B Convertible Preferred Stock of the Company and
warrants plus $5 million in cash (subject to certain
deductions and adjustments). The transaction is subject to
the Company raising the required financing.
The Company has also executed letters of intent to
acquire, subject to obtaining financing, substantially all
of the assets of two other companies. The cash element
of the aggregate purchase prices for these potential
acquisitions is $3.5 million and liabilities to be
assumed, principally long-term, total approximately $4.6
million. In addition, the Company will issue 375,000
warrants to purchase common stock.
Existing Obligations. In February 1998, the Company
entered into a loan agreement with IDT Corporation
("IDT"), a multinational telecommunications carrier, the
principal amount of which is $7.5 million. The loan matures
in August 1999 and bears interest at the rate of 8 7/8%,
which is due at maturity. As
part of this agreement, the Company also issued to IDT
warrants to purchase 500,000 shares of the Company's common
stock at $3.03 per share, exercisable for a period of three
years. The proceeds of this loan were used to repay in
full, term loans in the amount of $7.0 million and
balances of certain capital leases totaling $0.4 million.
In June 1998, the Company borrowed $1.0 million
from an existing stockholder. The loan bears interest at 8
7/8% and is payable upon maturity in December 1999. Under
the terms of the agreement, the stockholder received
warrants to purchase 67,000 shares of common stock at a
price of $3.03 per share, exercisable for a period of
three years. The stockholder also received as
consideration for the loan the repricing and extension
of a
warrant for 55,000 shares which is now exercisable on or
before
February 29, 2001 at a price of $3.75 per share.
Taxes
The Company has undertaken a study to simplify
its organizational and tax structure and has identified
potential international tax issues. In connection with
this study, the
Company realized it had potential tax liabilities and
recorded an additional tax provision of $1.5 million in
the fiscal fourth quarter for liabilities which might arise
under the existing structure. The Company's study is
continuing and the eventual outcome cannot be predicted
with certainty. No tax claims have been asserted against
the Company.
As of March 31, 1998, the Company has recorded
a net deferred tax asset of $5.1 million and has
$9.5 million of net operating loss carryforwards
available. The Company has recorded a valuation allowance
equal to the net deferred tax asset as management has not
been able to determine that it is more likely than not
that the deferred tax asset will be realized based in part
on the foreign operations and availability of the
operating loss carryforwards to offset only U.S. tax
provisions. See Note 8 to the Consolidated Financial
Statements regarding further discussion of taxes on income.
Effect of Inflation
The Company believes that inflation has not had a
material effect on the results of operations to date.
Accounting Pronouncements and Year 2000 Issues
In June 1997, the Financial Accounting Standards
Board issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." Both are
required for financial statements in fiscal years
beginning after December 15, 1997. SFAS No. 130
establishes standards for reporting and display of
comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments
by owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized
under current accounting standards as components of
comprehensive income be reported in a financial statement
that displays with the same prominence as other financial
statements. SFAS No. 131 supersedes SFAS No. 14
"Financial Reporting for
Segments of a Business Enterprise." SFAS No. 131
establishes standards on the way that public companies
report financial information
about operating segments in interim
financial
statements issued to the public. It also establishes
standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines
operating segments as components of a company about
which separate
financial
information is available and is evaluated regularly by the
chief operating decision maker in deciding how to allocate
resources and in
assessing performance. SFAS 130 and 131
require
comparative information for earlier years to be
restated.
Because of the recent issuance of these standards,
management has been unable to fully evaluate the impact, if
any, the standards may have on future financial statement
disclosures. Results of operations, financial position and
cash flows, however, will be unaffected by implementation
of these standards.
In February 1998, the FASB issued SFAS No.
132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" which standardizes the
disclosure requirements for pensions and
other postretirement benefits and
requires
additional information on changes in the benefit obligations
and fair values of plan assets that will facilitate
financial analysis.
SFAS No. 132 is effective for years beginning after
December 15, 1997 and requires comparative information
for earlier years to be restated, unless such information
is not readily available. Management believes the adoption of
this statement will have no material impact on the Company's
financial statements.
In anticipation of the year 2000 ("Year 2000"),
management is in the process of developing a plan to review
software that is internally developed and/or externally
purchased or licensed for compliance with Year 2000
processing requirements. An
initial
review indicates that the Company's primary Unix-based
operating systems are not at significant risk. Other
systems, with the exception of
banking interfaces, are primarily externally
developed "off-the-shelf" software. Correspondence with
vendors
which supply the Company with its e-mail, office
support
software, and the accounting package that the Company
will be converting to in calendar 1998 indicate that these
packages are Year 2000 compliant. The Company presently
believes that with modifications to existing software
and converting to new
software, the Year 2000 issue will not pose
significant
operational problems for the Company's computer
systems.
However, if such modifications and conversions are not
completed timely, the Year 2000 problem may have a material
impact on the
operations of the Company. In accordance with Emerging
Issues Task Force Opinion No. 96-14, "Accounting for
the Costs Associated with Modifying Computer Software for
the Year 2000," the Company will expense all costs as
incurred. See discussion of Year 2000 Problem in Item 1 -
Business (General).
The next pages are F- 1 through F-34
Executive TeleCard, Ltd.
Item 8 - Financial Statements
Index to Consolidated Financial Statements
Consolidated Financial Statements:
Report of Independent Certified Public F-2
Accountants
Consolidated Balance Sheets as of March 31, F-3 - F-4
1998 and 1997
Consolidated Statements of Operations for
the Years Ended March 31, 1998, 1997 and F-5
1996
Consolidated Statements of Stockholders'
Equity for the Years Ended March 31, 1998,
1997 and 1996 F-6
Consolidated Statements of Cash Flows for
the Years Ended March 31, 1998, 1997 and F-7 - F-8
1996
Summary of Accounting Policies F-9 - F-13
Notes to Consolidated Financial Statements F-14- F-33
Schedule -
II Valuation and Qualifying Accounts F-34
F-1
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Executive TeleCard, Ltd.
Denver, Colorado
We have audited the accompanying consolidated balance sheets
of Executive TeleCard, Ltd. and subsidiaries as of March 31
1998 and 1997 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of
the three years in the period ended March 31, 1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three
years in the period ended March 31, 1998 in conformity with
generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all
material respects, the information set forth therein.
_______________/S/_____________
BDO SEIDMAN, LLP
June 19, 1998
Denver, Colorado
F-2
Executive TeleCard, Ltd.
Consolidated Balance Sheets
March 31, 1998 1997
ASSETS
Current:
Cash and cash $2,391,206 $ 2,172,480
equivalents
Accounts receivable, 7,719,853 8,363,017
less allowance of
$1,472,197 and
$372,988 for
doubtful accounts
Accounts receivable from
related - 175,114
parties (Note 6)
Other current assets 376,604 347,995
Total current assets 10,487,663 11,058,606
Property and equipment, 11,911,310 11,905,956
net of accumulated
depreciation and
amortization (Note 1)
Other:
Intangible assets - net 203,875 286,941
Deposits 233,901 261,125
Other assets 63,707 167,058
Total other assets 501,483 715,124
Total assets $ 22,900,456 $ 23,679,686
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-3
Executive TeleCard, Ltd.
Consolidated Balance Sheets
March 31, 1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Accounts payable $1,135,800 $2,191,006
Accrued expenses (Note 2) 4,222,806 1,808,400
Customer deposits 262,008 319,674
Income taxes payable (Note 8) 2,004,944 505,065
Other current liabilities 174,537 155,879
Current maturities of long- 244,020 1,003,383
term debt (Note 3)
Total current liabilities 8,044,115 5,983,407
Long-term debt, net of current 7,735,581 9,737,007
(Note 3)
Total liabilities 15,779,696 15,720,414
Commitments and Contingencies (Notes
5,7,8,10 and 11)
Stockholders' equity (Note 7):
Preferred stock, $.0001 par - -
value, 5,000,000
shares authorized; none
issued
Common stock, $.001 par 17,347 15,861
value, 100,000,000
shares authorized,
17,346,766 and
15,861,240 outstanding
Additional paid-in capital 25,046,830 16,047,812
Stock to be subscribed 3,500,000 -
Accumulated deficit (21,476,154) (8,186,244)
Accumulated translation 32,737 81,843
adjustment
Total stockholders' equity 7,120,760 7,959,272
Total liabilities and
stockholders' equity $22,900,456 $23,679,686
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-4
Executive TeleCard, Ltd.
Consolidated Statements of Operations
Years Ended March 31, 1998 1997 1996
Revenue (Note 9) $33,122,767 $33,994,375 $30,298,228
Cost of revenue 18,866,292 17,913,995 18,501,402
Gross profit 14,256,475 16,080,380 11,796,826
Costs and expenses:
Selling, general and 14,047,864 11,915,864 7,135,382
administrative
Corporate realignment 3,139,191 - -
expense (Note 2)
Depreciation and 2,769,844 1,740,952 1,564,435
amortization
Total costs and expenses 19,956,899 13,656,816 8,699,817
Income (loss) from (5,700,424) 2,423,564 3,097,009
operations
Other income (expense):
Interest expense (1,651,236) (849,073) (185,977)
Interest income 45,839 51,291 1,848
Foreign currency (409,808) (75,409) (96,028)
transaction loss
Proxy related (3,900,791) (528,421) -
litigation expense (Note 5)
Other income (33,490) - 350,000
(expense), net
Total other income (5,949,486) (1,401,612) 69,843
(expense)
Income (loss) before taxes (11,649,910) 1,021,952 3,166,852
on income
Taxes on income (Note 8) 1,640,000 248,000 314,000
Net income (loss) $(13,289,910) 773,952 2,852,852
Net earnings (loss) per
share (Note 4):
Basic $(0.78) $0.05 $0.18
Diluted $(0.78) $0.05 $0.18
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-5
Executive TeleCard, Ltd.
Consolidated Statements of Stockholders' Equity
Years Ended
Additional
March 31, 1998, 1997 and 1996
Common Stock Additional Accumulated
Shares Amount Stock to Paid -In Accumulated Translation Stockholders'
be Subscribed Capital Deficit Adjustment Equity
Balance, April 1, 1995 15,707,958 $15,708 $ - $15,556,617 $(11,813,048) $160,474 $3,919,751
Stock issued in lieu of 124,702 124 - 309,875 - - 309,999
cash payments
Exercise of stock 16,828 17 - 35,082 - - 35,099
options
Foreign currency - - - - - (77,692) (77,692)
translation adjustment
Net income - - - - 2,852,852 - 2,852,852
Balance, March 31, 1996 15,849,488 15,849 - 15,901,574 (8,960,196) 82,782 7,040,009
Stock issued in 11,000 11 - 146,238 - - 146,249
connection with
litigation
settlement
Exercise of stock 752 1 - - - - 1
options
Foreign currency - - - - - (939) (939)
translation adjustment
Net income - - - - 773,952 - 773,952
Balance, March 31, 1997 15,861,240 15,861 - 16,047,812 (8,186,244) 81,843 7,959,272
Stock issued in lieu of 42,178 42 - 244,226 - - 244,268
cash payments
Stock issued in 1,425,000 1,425 - 7,481,075 - - 7,482,500
connection with
private placement,net
Stock to be subscribed - - 3,500,000 - - - 3,500,000
(Note 5)
Exercise of stock 18,348 18 - 137,530 - - 137,548
appreciation rights
Issuance of warrants to - - - 1,136,188 - - 1,136,188
purchase stock (Note 7)
Foreign currency - - - - - (49,106) (49,106)
translation adjustment
Net loss - - - - (13,289,910) - (13,289,910)
Balance,March 31, 1998 $17,346,766 $17,346$3,500,000$25,046,831 $(21,476,154) $ 32,737 $7,120,760
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
Executive TeleCard, Ltd.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Years Ended March 31
1998 1997 1996
Operating activities:
Net income (loss) $(13,289,910) $773,952 $2,852,852
Adjustments to reconcile
net cash flows
provided by (used in)
operating activities:
Depreciation and 2,769,844 1,740,952 1,564,435
amortization
Provision for bad debts 1,433,939 404,410 736,611
Common stock issued in 144,268 146,250 309,999
lieu of cash payments
Issuance of warrants 220,000 - -
for services (Note 7)
Amortization of debt 478,580 - -
discount (Note 3)
Proxy related 3,500,000 - -
litigation expense (Note 5)
Impairment reserve for 143,668 - -
assets
Other, net 137,548 - -
Changes in operating
assets and liabilities:
Accounts (915,661) (2,359,402)(3,410,253)
receivable
Other assets 52,860 (318,438) 10,650
Accounts payable 444,673 37,174 865,523
Accrued expenses 2,414,406 (2,321,403)(1,712,818)
Other liabilities (39,008) (114,914) 20,979
Cash provided by (used in) (2,504,793)(2,011,419) 1,237,978
operating activities
Investing Activities:
Acquisitions of property (2,150,280)(5,043,062)(3,426,322)
and equipment
Other assets 26,693 (151,013) 22,204
Cash used in investing (2,123,587)(5,194,075)(3,404,118)
activities
Financing Activities:
Proceeds from long-term 7,810,000 10,297,429 1,500,000
debt
Proceeds from issuance of 7,482,500 - 35,099
common stock
Principal payments on (10,445,394)(1,869,938) (152,708)
long-term debt
Cash provided by financing 4,847,106 8,427,491 1,382,391
activities
Net increase (decrease) in cash 218,726 1,221,997 (783,749)
Cash and cash equivalents, 2,172,480 950,483 1,734,232
beginning of year
Cash and cash equivalents, end
of year $2,391,206 $2,172,480 $ 950,483
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-7
Executive TeleCard, Ltd.
Consolidated Statements of Cash Flows
Supplemental Disclosures of Cash Flow
Information
1998 1997 1996
Cash paid during the year for:
Interest $1,267,399 $654,180 $160,088
Income taxes $ 101,181 $79,352 $ -
Noncash investing and financing
activities:
Equipment $ 312,213 $705,660 $147,794
acquired under
capital lease
obligations
Stock issued $ 100,000 $- $-
for
acquisition of
equipment
Unamortized $ 437,608 $- $-
debt discount
related to
warrants
See accompanying summary of
accounting policies and notes to consolidated financial
statements.
F-8
Executive TeleCard, Ltd.
Summary of Accounting Policies
Organization Executive TeleCard, Ltd. and subsidiaries, (collectively,
and Business the "Company") is a global value-added service provider
of telecommunications and information services, focused
on mobile end-users, messaging and information
management. At the present time, the Company's core
business is the provisioning of global calling card
services, and related validation, billing and payment
services. Operating through its World DirectT network,
the Company originates voice traffic in 88 countries and
territories and terminates such traffic anywhere in the
world. The Company's global services are delivered
through proprietary routing, application and data access
software, which run on the Company's interactive call
processing platform (a "Calling Card Platform "). Forty
Calling Card Platforms are installed in strategic
locations around the world where they connect directly
with national and international telephone networks. In
addition to routing calls, the Company's Calling Card
Platform validates calls, controls fraud, captures usage
information and issues bills with full call details. The
Calling Card Platform provides a user interface in
multiple languages for operator assisted calls and the
Company's proprietary billing software provides for
multiple currency billing.
Basis of The consolidated financial statements have been prepared
Presentation in accordance with United States generally accepted
and accounting principles and include the accounts of the
Consolidation Company and its wholly-owned subsidiaries. All material
intercompany transactions and balances have been
eliminated in consolidation.
Foreign For subsidiaries whose functional currency is the local
Currency currency and which do not operate in highly inflationary
Translation economies, all net monetary and non-monetary assets and
liabilities are translated at current exchange rates and
translation adjustments are included in stockholders'
equity. Revenues and expenses are translated at the
weighted average rate for the period. Foreign currency
gains and losses resulting from transactions are included
in the results of operations in the period in which the
transactions occurred.
Use of The preparation of financial statements in conformity
Estimates with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the
reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Financial Financial instruments, which potentially subject the
Instruments Company to concentrations of credit risk consist
and principally of cash and cash equivalents and trade
Concentrations accounts receivable.
of Credit
Risk The Company places its cash and temporary cash
investments with quality financial institutions.
F-9
Executive TeleCard, Ltd.
Summary of Accounting Policies
Financial Concentrations of credit risk with respect to
Instruments trade accounts receivable are limited due to the
and variety of customers and markets which comprise
Concentrations the Company's customer base, as well as the
of Credit Risk geographic diversification of the customer base.
(cont'd) 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, 1998, the Company had approximately 21%
and 25% in trade accounts receivable from two
customers. At March 31, 1998 there were no other
significant concentrations of credit risk.
The Company's customers are permitted to choose
the currency in which they pay for calling
services from among several different currencies
determined by the Company. Thus, the Company's
earnings may by materially affected by movements
in the exchange rate between the U.S. dollar and
such other currencies. The Company does not
engage in the practice of entering into foreign
currency contracts in order to hedge the effects
of foreign currency fluctuations.
The carrying amounts of financial instruments
including cash and cash equivalents, 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, Property and equipment are recorded at cost.
Equipment, Additions, installation costs and major
Depreciation improvements of property and equipment are
and capitalized. Expenditures for maintenance and
Amortization 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.
F-10
Executive TeleCard, Ltd.
Summary of Account Policies
The Company follows the provisions of the Financial
Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to Be Disposed Of ".
Long-lived assets and certain identifiable
intangibles to be held and used by the Company are
reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount
of an asset may not be recoverable. The Company
continuously evaluates the recoverability of its
long-lived assets based on estimated future cash
flows from and the estimated liquidation value of
such long-lived assets, and provides for impairment
if such undiscounted cash flows are insufficient to
recover the carrying amount of the long-lived
asset.
Intangible Intangible assets consist of licenses and
Assets trademarks and organization costs, which are
recorded at cost. Amortization is provided on the
straight-line method over ten years for licenses
and trademarks and over five years for organization
costs. 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 Telephone usage revenue is recognized as utilized
Recognition by customers. Billings to customers are based
upon established tariffs filed with the United
States Federal Communications Commission, or for
usage outside of the tariff requirements, at rates
established by the Company.
Taxes on The Company accounts for income taxes under SFAS
Income No. 109, "Accounting for Income Taxes." 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 Earnings At March 31, 1998, the Company implemented SFAS No.
(Loss) Per 128, "Earnings Per Share." SFAS No. 128 provides
Share for the calculation of "Basic" and "Diluted"
earnings per share. Basic earnings per share
includes no dilution and is computed by dividing
income available to common stockholders 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. All
prior earnings per share data has been restated to
reflect the requirements of SFAS No. 128. The
adoption of SFAS No. 128 had no effect on the
Company's previously reported earnings per share.
See Note 4 for computation of earnings per share.
F-11
Executive TeleCard, Ltd.
Summary of Accounting Policies
Stock Options The Company applies Accounting Principles Board
("APB") Opinion 25, "Accounting for Stock Issued
to Employees," and related Interpretations in
accounting for all stock option plans. 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 No. 123, "Accounting for Stock-Based
Compensation," requires the Company to provide pro
forma information regarding net income (loss) as
if compensation cost for the Company's stock
option plans had been determined in accordance
with the fair value based method prescribed in
SFAS No. 123. To provide the required pro forma
information, the Company estimates the fair value
of each stock option at the grant date by using
the Black-Scholes option-pricing model. See Note
7 for required disclosure.
Cash The Company considers cash and all highly liquid
Equivalents investments purchased with an original maturity of
three months or less to be cash equivalents.
Recent In June 1997, the FASB issued SFAS No. 130,
Accounting "Reporting Comprehensive Income," and SFAS No.
Pronouncements 131, "Disclosures About Segments of an Enterprise
and Related Information." Both are required for
financial statements in fiscal years beginning
after December 15, 1997. SFAS No. 130 establishes
standards for reporting and display of
comprehensive income, its components and
accumulated balances. Comprehensive income is
defined to include all changes in equity except
those resulting from investments by owners. Among
other disclosures, SFAS No. 130 requires that all
items that are required to be recognized under
current accounting standards as components of
comprehensive income be reported in a financial
statement that displays with the same prominence
as other financial statements. SFAS No. 131
supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." SFAS No. 131
establishes standards on the way that public
companies report financial information about
operating segments in interim financial statements
issued to the public. It also establishes
standards for disclosures regarding products and
services, geographic areas and major customers.
SFAS No. 131 defines operating segments as
components of a company about which separate
financial information is available that is
evaluated regularly by the chief operating
decision maker in deciding how to allocate
resources and in assessing performance. SFAS Nos.
130 and 131 require comparative information for
earlier years to be restated. Because of the
recent issuance
F-12
Executive Telecard, Ltd.
Summary of Accounting Policies
of these standards, management has been unable to
fully evaluate the
impact, if any, the standards may have on future
financial statement disclosures. Results of
operations, financial position and cash flows,
however, will be unaffected by implementation of
these standards.
In February 1998, the FASB issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other
Postretirement Benefits" which standardizes the
disclosure requirements for pensions and other
postretirement benefits and requires additional
information on changes in the benefit obligations
and fair values of plan assets that will
facilitate financial analysis. SFAS No. 132 is
effective for years beginning after December 15,
1997 and requires comparative information for
earlier years to be restated, unless such
information is not readily available. Management
believes the adoption of this statement will have
no material impact on the Company's financial
statements.
Reclass- Certain consolidated financial amounts have been
ifications reclassified for consistent presentation.
(Balance of Page Intentionally Left Blank)
F-13
Executive TeleCard, Ltd.
Notes to Consolidated Financial Statements
1. Property and equipment at March 31, 1998 and 1997
Property andconsisted of the following:
Equipment
1998 1997
Land $192,300 $247,300
Buildings and improvements 941,458 791,903
Calling card platform 12,424,718 10,693,487
equipment
Operations center equipment 7,142,360 5,544,814
and furniture
Call diverters 1,400,855 1,396,540
Equipment under capital 949,322 1,713,022
leases (Note 3)
Internet communications 563,175 508,297
equipment
23,614,188 20,895,363
Less accumulated 11,702,878 8,989,407
depreciation and
amortization
$11,911,310 $11,905,956
Property and equipment at March 31, 1998, and 1997,
includes certain telephone and office equipment under
capital lease agreements with an original cost of
$949,322 and $1,713,022, respectively, and accumulated
depreciation of $292,995 and $704,966 respectively.
Certain capital leases were paid off in fiscal 1998.
2. Accrued Accrued expenses at March 31, 1998 and 1997 consisted of
Expenses the following:
1998 1997
Telephone carriers $ 2,591,511 $1,167,795
Proxy related litigation 1,063 362,037
expenses (Note 5)
Corporate realignment 754,849 -
expenses
Legal and professional 320,341 214,964
fees
Other 555,042 63,604
$ 4,222,806 $1,808,400
The Company incurred various realignment expenses during fiscal
1998 resulting from the review of operations and activities
undertaken by new corporate management. These costs, which
totaled $3,139,191, include primarily employee severance, legal
and consulting fees and the write down of certain investments
made in the Company's Internet service development program. The
Company does not anticipate further realignment expenses in the future.
F-14
Executive TeleCard, Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Long- At March 31, 1998 and 1997, long-term debt consisted
Term of the following:
Debt
1998 1997
8.875% unsecured term note
payable to a $7,062,392 $ -
telecommunications
company, interest and
principal payable August
22, 1999, net of
unamortized discount of
$437,608 (1).
8% mortgage note, payable 310,000 -
monthly, including
interest through March
2010, with an April 2010
balloon payment; secured
by deed of trust on the
related land and building.
Capitalized lease 607,209 1,079,697
obligations (Note 1).
11% secured term note - 9,000,000
payable to a financial
institution, paid off in
fiscal 1998 (2).
12% unsecured term note - 500,000
payable to a stockholder,
paid off in fiscal 1998
(3).
9% mortgage note, payable - 160,693
monthly including
interest, paid off in
fiscal 1998.
Total 7,979,601 10,740,390
Less current maturities 244,020 1,003,383
Total long-term debt $7,735,581 $ 9,737,007
F-15
Executive TeleCard, Ltd.
Notes to Consolidated Financial Statements
(1) In February 1998, the Company borrowed $7,500,000 from
a telecommunications company. In connection with this
transaction, the lender was granted warrants to
purchase 500,000 shares of the Company's common stock
at a price of $3.03 per share. The warrants expire on
February 23, 2001. The value assigned to such
warrants when granted in connection with the above
note agreement was $463,350 and was initially recorded
as a discount to long-term debt and is being amortized
over the term of the note through interest expense.
At March 31, 1998 these, warrants have not been
exercised.
(2) The Company borrowed $6,000,000 from a financial
institution in June 1996 pursuant to a one-year term
note. In November 1996, the Company obtained a
$4,000,000 multiple draw down term loan from the same
institution, with both loans maturing in June 1997.
In connection with these borrowings, the Company
issued warrants to purchase shares of the Company's
common stock to the lender.
In June 1997, the Company obtained an extension of the
$6,000,000 term loan and the $4,000,000 multiple draw
loan until April 1998 in exchange for the payment of
certain fees, an adjustment of the exercise price of
certain of the existing warrants, the cancellation of certain
warrants and the issuance of additional penalty
warrants exercisable if the loans were not paid by
specific dates. As a result of non-payment of the
loans at September 30, 1997 and December 31, 1997,
125,000 and 15,000 of the penalty warrants,
respectively, became exercisable. The loans were
repaid in February 1998.
As of March 31, 1998, total warrants outstanding in
connection with these loan agreements consisted of
both warrants and penalty warrants exercisable by the
lender. The lender holds ten-year warrants and ten-
year penalty warrants to purchase 166,667 and 140,000
shares, respectively. The warrants are exercisable at
a price of $6.61 per share. Penalty warrants equal to
125,000 of the total 140,000 are exercisable at the
lesser of $6.61 per share or 120% of the average
quoted price of the Company's stock for five trading
days before exercise. The remaining 15,000 penalty
warrants became exercisable on January 1, 1998 at
$0.01 per share. The value assigned to these
warrants, ($344,038), was recorded to interest expense
and additional paid-in capital in the fourth quarter
of fiscal 1998. As of March 31, 1998, none of these
warrants have been exercised.
(3) In connection with this transaction, the Company
issued options to purchase 50,000 shares of the
Company's common stock to the stockholder at a price
of $12.13 per share. These options expire June 27,
1999. The term note, as originally issued, had a due
date of December 27, 1997. During April 1997, the
Company re-negotiated the note extending the term to
December 27, 1998, adjusting the exercise price of the
options to $6.00 per share and extending the term of
the options to April 24, 2000. The incremental value
assigned to these revised warrants ($108,800) was
recorded to interest expense and additional paid-in
capital in the fourth quarter of fiscal 1998. As of
March 31, 1998, such options have not been exercised.
F-16
Executive TeleCard, Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future maturities of long-term debt and future minimum
lease payments under capital lease obligations at March
31, 1998 are as follows:
Long- Capital
Term
Year ending March 31, Debt Leases Total
1999 $ 5,986 $287,243 $293,229
2000 7,507,049 205,992 7,713,041
2001 7,634 184,315 191,949
2002 8,268 30,403 38,671
2003 8,954 - 8,954
Thereafter 272,109 - 272,109
Total payments 7,810,000 707,953 8,517,953
Less amounts - 100,744 100,744
representing interest
Principal payments 7,810,000 607,209 8,417,209
Less:
Current maturities 5,986 238,034 244,020
Unamortized debt 437,608 - 437,608
discount
Total Long-Term Debt $7,366,406 $369,175 $7,735,581
F-17
Executive TeleCard, Ltd.
Notes to Consolidated Financial Statements
4. Earnings In February 1997, SFAS No. 128, "Earnings per
(Loss) Share," was issued, which required the Company to
Per change the method used to calculate earnings per
Share share. Under SFAS No. 128, basic earnings per
share is calculated as income available to common
stockholders divided by the weighted average
number of common shares outstanding. Diluted
earnings per share is calculated as net income
divided by the diluted weighted average number of
common shares. The diluted weighted average
number of common shares is calculated using the
treasury stock method for common stock issuable
pursuant to outstanding stock options and common
stock warrants. Common stock options and
warrants of 203,782 were not included in diluted
earning (loss) per share in 1998 as the effect
was antidilutive due to the Company recording a
loss for the year.
Options and warrants to purchase 2,049,315 shares
of common stock at exercise prices from $3.00 to
$6.94 per share were outstanding at March 31,
1998 but were not included in the computation of
diluted earnings per share because the exercise
prices were greater than the average market price
of the common shares. Options and warrants to
purchase 821,087 shares of common stock at
exercise prices from $5.75 to $14.88 per share
were outstanding at March 31, 1997 but were not
included in the computation of diluted earnings
per share because the exercise prices were
greater than the average market price of the
common shares. Options and warrants to purchase
562,029 shares of common stock at exercise prices
from $6.00 to $11.98 per share were outstanding
at March 31, 1996 but were not included in the
computation of diluted earnings per share because
the exercise prices were greater than the average
market price of the common shares. The following
is provided to reconcile the earnings per share
calculations:
Balance of page intentionally left blank.
F-18
Executive TeleCard, Ltd.
Notes to Consolidated Financial Statements
Year ended March 31,
1998 1997 1996
Basic earnings (loss) per share:
Numerator
Net earnings (loss) $(13,289,910) $773,952 $2,852,852
Denominator
Weighted average shares 17,082,495 15,861,240 15,791,965
outstanding
Per share amounts
Basic earnings (loss) $(0.78) $0.05 $0.18
Diluted earnings (loss) per share:
Numerator
Net earnings (loss) $(13,289,910) $773,952 $2,852,852
Denominator
Weighted average shares 17,082,495 15,861,240 15,791,965
outstanding
Effect of dilutive
securities
Options and - 297,390 16,925
warrants
Weighted average common 17,082,495 16,158,630 15,808,890
shares and assumed
conversions
outstanding
Per share amounts
Diluted earnings (loss) $ (0.78) $ 0.05 $0.18
5. Proxy The Company, its former auditors, certain of its present
Related and former directors and others were defendants in a
Litigation consolidated securities class action which alleged that
and certain public filings and reports made by the Company,
Settlement including its Forms 10-K for the 1991, 1992, 1993 and
Costs 1994 fiscal years (i) did not present fairly the
financial condition of the Company and its earnings; and
(ii) failed to disclose the role of a consultant to the
Company.
The Company and its auditors vigorously opposed the
action, however, the Company decided it was in the
stockholders' best interest to curtail costly legal
proceedings and settle the case.
F-19
Executive TeleCard, Ltd.
Notes to Consolidated Financial Statements
The Company is required under the Stipulation of
Settlement dated April 2, 1998
to issue 350,000 shares of its common stock into a
Settlement Fund that will be distributed among the
Class. The Company has also agreed to pay up to $50,000
for reasonable expenses incurred in connection with
providing notice to the Class and administration of the
settlement. The settlement is expected to be finalized
by calendar year end. Settlement becomes effective only
upon entry of a final judgment by the Court and upon
entry of final judgments in two related Delaware
Actions, and upon the expiration of the time to appeal
or upon exhaustion of appellate review in this action,
were any appeal to be taken.
As a result of the above action and related matters, the
Company recorded $3,900,791 and $528,421 in costs and
expenses during the years ended March 31, 1998 and March
31, 1997. Included in the fiscal 1998 amount is a
charge of $3,500,000 which was recorded in the fourth
quarter and represents the value assigned to the 350,000
shares of common stock referred to above, which have
been valued at $10.00 per share pursuant to the terms of
the settlement agreement. Such value relates to the
Company's obligation to issue additional stock if the
market price of the Company's stock is less than $10.00
per share during the defined periods. The Company has
no obligation to issue additional stock if its share
price is above $10.00 per share for fifteen consecutive
days during the two year period after all shares have
been distributed to the Class.
6. Related The Company has transactions with stockholders primarily
Party in the ordinary course of business as customers or
vendors. Such transactions are not significant to the
Transactions operations of the Company and as of March 31, 1998 and
1997, $0 and $175,114, respectively, was due from such
stockholders.
7. Stockholders' Common and Preferred Stock
Equity
On May 14, 1996, the Board of Directors authorized a
stock split, effected in the form of a 10% stock
dividend, payable to stockholders of record on August 5,
1996. On June 30, 1995, the Board of Directors
authorized a stock split, effected in the form of a 10%
stock dividend, payable to stockholders of record on
August 10, 1995. All references to common share and per
share amounts in the accompanying financial statements
have been restated to reflect the effect of these stock
dividends. 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
F-20
Executive TeleCard, Ltd.
Notes to Consolidated Financial Statements
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, 1998.
On June 3, 1997, the Board of Directors approved the
sale of 1,425,000 shares of the Company's common stock
for $7,500,000 to one individual. Proceeds of
$3,000,000 from the sale were used to reduce long-term
debt. The remainder of the proceeds was used for
working capital or invested in obligations through a
financial institution.
Employee Stock Option and Appreciation Rights Plan
On December 14, 1995, the Board of Directors adopted the
Employee Stock Option and Appreciation Rights Plan (the
"Employee Plan"), expiring December 15, 2005, reserving
for issuance 1,000,000 shares of the Company's common
stock. The Employee Plan was amended and restated in
its entirety in fiscal 1998, including an increase in
the number of shares available for grant to 1,750,000,
an increase of 750,000 shares.
The Employee Plan provides for grants to key employees,
advisors or consultants to the Company at the discretion
of the Compensation Committee of the Board of Directors,
stock options to purchase common stock of the Company.
The Employee Plan provides for the grant of both
"incentive stock options," as defined in the Internal
Revenue Code of 1986, as amended, and nonqualified stock
options. Options that are granted under the Employee
Plan that are incentive stock options may only be
granted to employees (including employee-directors) of
the Company. Stock options granted under the Employee
Plan must have an exercise price equal in value to the
fair market value, as defined, of the Company's common
stock on the date of grant. Any options granted under
the Employee Plan must be exercised within ten years of
the date they were granted.
Under the Employee Plan, Stock Appreciation Rights
("SAR's") may also be granted in connection with the
granting of an option and may be exercised in lieu of
the exercise of the option. A SAR is exercisable at the
same time or times that the related option is
exercisable. The Company will pay the SAR in shares of
common stock equal in value to the excess of the fair
market value, at the date of exercise, of a share of
common stock over the exercise price of the related
option. The exercise of a SAR automatically results in
the cancellation of the related option on a share-for-
share basis.
F-21
Executive TeleCard, Ltd.
Notes to Consolidated Financial Statements
During the fiscal years 1998, 1997 and 1996, the
Compensation Committee of the Board of Directors granted
options to purchase an aggregate of 1,584,629, 439,600
and 612,920, respectively, shares of common stock to its
employees under the Employee Plan at exercise prices
from $2.32 to $3.12 per share for 1998, $5.75 to $9.00
per share for 1997 and $5.45 to $6.59 per share for
1996. The employees were also granted SAR's in tandem
with the options granted to them in connection with
grants prior to December 5, 1997.
Directors Stock Option and Appreciation Rights Plan
On December 14, 1995, the Board of Directors adopted
the Directors Stock Option and Appreciation Rights
Plan (the "Director Plan"), expiring December 14,
2005. There are 870,000 shares of the Company's
common stock reserved for issuance under the Director
Plan. The Director Plan was amended and restated in
its entirety in fiscal year 1998 so that it now
closely resembles the Employee Plan. In fiscal 1998,
the Director Plan was amended so that grants of
options to directors are at the discretion of the
Board of Directors or the Compensation Committee. In
November 1997, each director (other than members of
the Compensation Committee) was granted two options
under the Director Plan, each to purchase 10,000
shares of common stock with each option being
effective for five years commencing on April 1, 1998
and 1999, respectively, and with each option vesting
only upon the achievement of certain corporate
economic and financial goals. Prior to the
amendments to the Director Plan, each director
received an automatic grant of ten year options and a
corresponding SAR to purchase 10,000 shares of common
stock on the third Friday in December in each
calendar year.
During the fiscal years 1998, 1997 and 1996, the
Compensation Committee of the Board of Directors
confirmed the automatic grant of options to purchase
85,000, 60,000 and 66,000, respectively, shares of
common stock to its directors pursuant to the
Company's Director Plan at exercise prices of $2.63
and $2.69 per share for 1998, $5.75 per share for
1997 and $5.45 per share for 1996 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 years so long as the director remains with
the Company. The directors were also granted SAR
in tandem with options granted to
them for all grants prior to November 10, 1997.
F-22
Executive TeleCard, Ltd.
Notes to Consolidated Financial Statements
Warrants
In connection with the issuance of debt, the Board of
Directors granted warrants to purchase an aggregate
of 981,667, 466,667 and 150,000 shares of common
stock, respectively, during fiscal years 1998, 1997
and 1996, at exercise prices ranging from $0.01 to
$6.61 per share for 1998, $7.88 to $14.88 per share
for 1997 and $5.45 for 1996. As a result of the 10%
stock split, in 1996, certain warrants were increased
from 50,000 to 55,000. During fiscal 1998 and 1997,
466,667 and 100,000, respectively, of the warrants
granted above were cancelled as the terms of the
related debt were renegotiated. See Note 3 for
further discussion of terms. Subsequent to year end,
the terms of 55,000 warrants to purchase common stock
were revised as discussed in Note 13.
In fiscal 1998 and 1997 the Board of Directors
granted warrants to purchase an aggregate of 91,200
and 238,800 shares of common stock, respectively, to
non-affiliates at exercise prices of $2.75 per share
for 1998 and $6.88 to $6.98 for 1997. The warrants
are exercisable for periods ranging from 12 to 18
months.
SFAS No. 123, "Accounting for Stock-Based Compensation"
requires the Company to provide pro forma information
regarding net income (loss) and net earnings (loss) per
share as if compensation costs for the Company's stock
option plans and other stock awards had been determined
in accordance with fair value based method prescribed
in SFAS No. 123. The Company estimates the fair value
of each stock award by using the Black-Scholes option-
pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996,
respectively: no expected dividend yields for all
years; expected volatility of 55%, 65% and 69%; risk-
free interest rates of 5.82%, 5.91% and 5.18%; and
expected lives of 2 years, 1.5 years and 1.5 years for
the Plans and stock awards.
F-23
Executive TeleCard, Ltd.
Notes to Consolidated Financial Statements
Under the accounting provisions for SFAS No. 123,
the Company's net earnings (loss) and earnings (loss)per share
would have been decreased by the pro forma amounts
indicated below:
1998 1997 1996
Net earnings (loss)
As reported $(13,289,910) $733,952 $2,852,852
Pro forma $(13,457,713) (801,214) 1,080,620
Earnings (loss) per
share
Basic:
As reported $(0.78) $0.05 $0.18
Pro forma $(0.79) $(0.05) $0.07
Diluted:
As reported $(0.78) $0.05 $0.18
Pro forma (0.79) (0.05) 0.07
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.
F-24
Executive TeleCard, Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's stock option plans and
outstanding warrants as of March 31, 1998, 1997 and 1996 and
changes during the years ending on those dates is presented
below:
1998 1997 1996
Number Weighted Number Weighted Number Weighted
of Average of Average of Average
Shares Exercise Shares Exercise Shares Exercise
Price Price Price
Outstanding, 1,706,832 $6.58 1,000,042 $5.55 545,977 $2.05-10.89
beginning of year
Granted 2,710,096 $3.47 849,267 $7.64 843,920 $5.45-6.59
Expired (986,091) $6.87 (141,644) $5.52 (374,150) $2.05-8.16
Exercised (18,348) $5.75 (833) $5.26 (15,705) $2.05-5.29
Outstanding,end 3,412,489 $3.96 1,706,832 $6.58 1,000,042 $2.05-10.89
of year
Exercisable,end 1,875,860 $5.02 1,302,095 $6.78 1,000,042 $2.05-10.89
of year
Weighted average $1.41 $1.85 $2.31
fair value of
options and
warrants granted
the year
The following table summarizes information about stock options
and warrants outstanding at March 31, 1998:
Outstanding Exercisable
Range of Weighted Weighted Weighted Weighted
Exercise Average Remaining Average Remaining
Prices Number Contractual Number Contractual
Outstanding Life Exercisable Life
$0.01 15,000 9.75 15,000 9.75
$2.11- 2,167,629 4.35 631,000 3.30
3.13
$5.29- 521,163 7.29 521,163 7.29
5.91
$6.00- 708,697 5.16 708,697 5.16
6.94
Total $0.01- 3,412,489 5.87 1,875,860 5.76
6.94
F-25
Executive TeleCard, Ltd.
Notes to Consolidated Financial Statements
8. Taxes on The Company has undertaken a study to simplify its
Income organizational and tax structure and has identified
potential international tax issues. In connection
with this study, the Company realized it had potential
tax liabilities and recorded an additional tax
provision of $1,500,000 in the fourth quarter of 1998
to reserve against liabilities which might arise under
the existing structure. The Company's study is
continuing and the eventual outcome cannot be
predicted with certainty. No tax claims have been
asserted against the Company.
Taxes on income for the
years ended March 31, consisted of the following:
1998 1997 1996
Current:
Federal $ - $ 70,000 $ 230,000
Foreign 140,000 166,000 64,000
State - 12,000 20,000
Other 1,500,000 - -
Total Current 1,640,000 248,000 314,000
Deferred:
Federal (1,830,000) (584,000) (315,000)
State (163,000) (52,000) (28,000)
(1,993,000) (636,000) (343,000)
Change in 1,993,000 636,000 343,000
valuation
allowance
Total $1,640,000 $248,000 $314,000
F-26
Executive TeleCard, Ltd.
Notes to Consolidated Financial Statements
8. Taxes As of March 31, the net deferred tax asset recorded
on and its approximate tax effect consisted of the
Income following:
(con't.)
1998 1997 1996
Net operating loss
carry-forwards $3,496,000 $3,036,000 $2,085,000
Nondeductible 1,295,000 - 314,000
expense accurals
Other 269,000 31,000 32,000
5,060,000 3,067,000 2,431,000
Valuation (5,060,000) (3,067,000) (2,431,000)
allowance
Net deferred tax
asset $ - $ - $ -
F-27
Executive TeleCard, Ltd.
Notes to Consolidated Financial Statements
As of March 31, 1998, 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 availability of the operating
loss carryforwards to offset only U.S. tax
provisions.
For the years ended March 31, 1998, 1997, and
1996, a reconciliation of the United States
Federal statutory rate to the effective rate is
shown below:
1998 1997 1996
Federal tax (34.0%) 34.0% 34.0%
(benefit)
computed at
statutory rate
State tax (1.0) 1.0 1.0
(benefit),
net of
federal tax
benefit
Effect of 19.0 (74.0) (14.0)
foreign
operations
Additional 17.0 - -
taxes
Change in 5.0 62.0 (11.0)
valuation
allowance
Total 14.0% 23.0% 10.0%
As of March 31, 1998, the Company has net
operating loss carryforwards available of
approximately $9,450,000 which can offset future
years U.S. taxable income. Such carryforwards
expire in various years through 2013 and are
subject to limitation under the Internal Revenue
Code of 1986, as amended.
F-28
Executive TeleCard, Ltd.
Notes to Consolidated Financial Statements
9. Segment The Company is engaged in one business segment
Information - Telecommunications Services.
The following table presents information about
the Company by geographic area:
Asia North
Europe Pacific America Other Totals
1998
Revenue $2,907,851 $10,880,552 $17,205,572 $2,128,812 $33,122,767
Operating
Income $(513,038)$(1,881,140)$(2,964,220) $(342,026)$(5,700,424)
(loss)
Identifiable
Assets $4,880,910 $7,169,872 $9,852,242 $997,432 $22,900,456
1997
Revenue $6,169,378 $10,574,659 $13,247,167 $4,003,171 $33,994,375
Operating
Income
(loss) $ 512,886 $1,204,632 $882,492 $(176,446) $2,423,564
Identifiable
Assets $6,744,909 $4,734,010 $11,636,603 $564,164 $23,679,686
1996
Revenue $8,600,644 $9,153,873 $8,636,057 $3,907,654 $30,298,228
Operating
Income
(loss) $1,386,829 $1,145,898 $(68,332) $632,614 $3,097,009
Identifiable
Assets $5,225,110 $3,659,245 $6,578,431 $1,269,288 $16,732,074
F-29
Executive TeleCard, Ltd.
Notes to Consolidated Financial Statements
For the years ended March 31, revenues from
significant customers consisted of the
following:
1998 1997 1996
Customer:
A 18% 15% 2%
B 14% 9% 8%
C 11% 12% 15%
D 11% 7% 3%
Employment Agreements
10. Commitments
and The Company and certain of its subsidiaries have
Contingencies agreements with certain key employees expiring at
varying times over the next three years. The Company's
remaining aggregate commitment at March 31, 1998 under
such agreements is approximately $810,000.
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, operating results or cash
flows of the Company.
Carrier Arrangements
The Company has entered into agreements with certain
long-distance carriers in the United States and with
telephone utilities in various foreign countries to
transmit telephone signals domestically and
internationally. The Company is entirely dependent
upon the cooperation of the telephone utilities with
which it has made arrangements for its operational and
certain of its administrative requirements. The
Company's arrangements are nonexclusive and take
various forms. Although some of these arrangements
are embodied in formal contracts, a telephone utility
could cease to accommodate the Company's arrangements
at any time. The Company does not foresee any threat
to existing arrangements with these utilities,
however, depending upon the location of the telephone
utility, such action could have a material adverse
affect on the Company's financial position, operating
results or cash flows.
Lease Agreements
The Company leases office space and equipment under
various operating leases. As of March 31, 1998,
remaining minimum annual rental commitments under
noncancelable operating leases are as follows:
F-30
Executive TeleCard, Ltd.
Notes to Consolidated Financial Statements
Year Ended March 31,
Total
1999 $ 609,428
2000 384,861
2001 204,934
2002 39,596
2003 41,000
Thereafter 113,105
$1,392,924
Rent expense for the years ended March 31,
1998, 1997 and 1996 was approximately
$616,000, $406,000 and $197,000, respectively.
11. Government The telephone calling card industry is highly
Regulations 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 communication
industry in the United States. Under current FCC
policy, telecommunication carriers, including the
Company, who resell the domestic services of other
carriers and who do not own telecommunication
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 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 in 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.
F-31
Executive TeleCard, Ltd.
Notes to Consolidated Financial Statements
12. Fourth The Company recorded in the fourth quarter certain
Quarter adjustments relative to warrants issued in connection
Adjustments with debt, proxy related litigation settlement costs
and taxes amounting to an aggregate of $5,479,000 which
are discussed in Notes 3, 5 and 8 to the consolidated
financial statements.
13. On June 17, 1998, the Company, IDX International, Inc.,
Subsequent a privately held company located in Northern Virginia
Events ("IDX"), EXTEL Merger Sub No. 1, Inc., a wholly-owned
subsidiary of the Company ("Merger Sub"), and the
stockholders of IDX (the "Stockholders") entered into
an Agreement and Plan of Merger (the "IDX Merger
Agreement"), pursuant to which IDX will merge with and
into Merger Sub, with Merger Sub being the surviving
corporation and thereby becoming a wholly-owned
subsidiary of the Company (the "Merger"). The name of
the surviving corporation will be IDX International,
Inc.
The IDX Merger Agreement provides that all of the
shares of common stock, no par value ("IDX Common
Stock"), and all of the shares of preferred stock, no
par value, of IDX, issued and outstanding immediately
prior to the effective time of the Merger (excluding
any treasury shares), shall be converted into and
exchanged for, in the aggregate, the right to receive
(a) 500,000 shares of Series B Convertible Preferred
Stock, par value $.0001 per share, convertible into
2,500,000 shares of common stock of the Company at the
end of one year ("Company Convertible Preferred
Stock"), and warrants to purchase up to 2,500,000
shares of common stock of the Company subject to
achieving certain revenue and cash flow objectives and
(b) $5,000,000 in cash, decreased based upon the
satisfaction of certain indebtedness of IDX and other
amounts to be deducted as provided for in the IDX
Merger Agreement. The warrants are convertible only to
the extent that IDX achieves certain revenue and cash
flow goals over the twelve months following closing.
The Company has also guaranteed a price of $8.00 per
share to recipients of the Company's common stock at
the date the preferred stocks and warrants are
convertible, subject to IDX's achievement of certain
revenue and cash flow objectives.
The Company has also executed letters of intent to
acquire, subject to obtaining financing, substantially
all of the assets of two other companies. The cash
element of the aggregated purchase prices for these
potential acquisitions is approximately $3,500,000 and
liabilities to be assumed, principally long-term,
aggregate $4,650,000. In addition, the Company will
issue 375,000 warrants to purchase common stock.
F-32
Executive TeleCard, Ltd.
Notes to Consolidated Financial Statements
In June 1998, the Company borrowed $1.0 million from an
existing stockholder. The loan bears interest at
8.875% and is payable in December 1999. Under the
terms of the agreement, the stockholder received
warrants to purchase 67,000 shares of common stock at a
price of $3.03 per share, exercisable for a period of
three years. The stockholder also received as
consideration for the loan the repricing and extension
of a warrant for 55,000 shares which is now exercisable
on or before February 29, 2001 at a price of $3.75 per
share.
Balance of page intentionally
left blank
F-33
Executive TeleCard, Ltd.
Schedule II - Valuation and Qualifying Accounts
Allowance for Doubtful Accounts
Balance Charged Balance
at to
Beginning Cost and at End of
Description of Period Expenses Deductions Period
Year Ended March 31, 1998 $372,988 $1,433,939 $334,730 $1,472,197
Year Ended March 31, 1997 $625,864 $55,122 $307,998 $372,988
Year Ended March 31, 1996 $818,052 $264,559 $456,747 $625,864
F-34
ITEM 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures
None.
Executive TeleCard, Ltd.
Part III
ITEM 10 - Directors and Executive Officers of the Registrant
Set forth below are the names of all Directors and executive
officers of the Company, all positions and offices held by each
such person, the period during which each person has served as
such, and the principal occupations and employment of each such
person during the last five years:
Directors and Executive Officers
CHRISTOPHER J. VIZAS, age 48, has been a Director of the
Company since October 25, 1997 and the Chairman of the Board of
Directors since November 10, 1997. Mr. Vizas served as the
Company's acting Chief Executive Officer from November 10, 1997
to December 5, 1997, on which date he became the Company's Chief
Executive Officer. Prior to joining the Company, Mr. Vizas was a
co-founder of, and since October 1995, has served as Chief
Executive Officer of Quo Vadis International, an investment and
financial advisory firm. Prior to forming Quo Vadis
International, he was Chief Executive Officer of Millennium
Capital Development, a merchant banking firm, and of its
predecessor Kouri Telecommunications & Technology. From April
1987 to 1992, Mr. Vizas served as Vice Chairman of Orion Network
Systems, Inc., a satellite communications company ("Orion"), and
served as a Director of Orion from 1982 until 1992. Mr. Vizas
has held various positions in the United States government.
EDWARD J. GERRITY, JR., age 74, has been a Director of the
Company since its inception. He is a business consultant and
President of Ned Gerrity & Associates, a consulting firm, begun
in 1985. Mr. Gerrity has also served as Chairman of the
Company's Board of Directors. Mr. Gerrity served as an officer
of ITT Corp. from 1961 to 1985. While at ITT Corp., he was a
member of the Management Policy Committee, Director of Corporate
and Government Relations on a worldwide basis and a Director of
several ITT Corp. subsidiaries. He retired from ITT Corp. in
February 1985. Mr. Gerrity was the President of American
National Collection Corp., a New York corporation, from 1993 to
1995 and he was a director of Residual Corporation from 1987
until October 1994. See "Certain Relationships and Related
Transactions" below.
ANTHONY BALINGER, age 44, has been a Director of the Company
since March 15, 1995. He served as the Company's President from
April 25, 1995 to November 10, 1997 and also served as the
Company's Chief Executive Officer from January 3, 1997 to
November 10, 1997. On November 10, 1997, he was appointed Senior
Vice President and Vice Chairman of the Company. Mr. Balinger
has held a variety of positions at the Company since his arrival
in September 1993, including Chief Operating Officer and Director
of the Company's Asia-Pacific Operations. Mr. Balinger started
his career in 1971 with British Telecom as a digital systems
design engineer. In 1983, he joined the Cable & Wireless
Federation, an international alliance of companies that provide
telephone, cable and wireless operations in over 50 countries,
where he performed much of the early design work for the Mercury
Communications Optical Fiber National Digital Network. In 1989,
Mr. Balinger moved to New York where he headed the Banking and
Finance division for Cable & Wireless Americas, Inc. from 1989 to
1992. In 1992, while still at Cable & Wireless, Mr. Balinger was
appointed International Product Manager for Optus Communications,
where he remained until he joined the Company. Mr. Balinger is a
Director and 45% stockholder of Executive Card Services HK Ltd.
which provides printing services to an affiliate of the Company
in Hong Kong. See "Certain Relationships and Related
Transactions" below.
DAVID W. WARNES, age 51, has been a Director since June 30,
1995. He currently holds the positions of President and Chief
Executive Officer of Vitacom, which provides satellite
communications in the Far East and Latin America, a company he
joined in October 1995 as Chief Operating Officer. From August
1994 until October 1995 he was Assistant Managing Director
(Deputy CEO) of Tele2, Sweden, a member of the Cable & Wireless
Federation. From 1992 to 1994, Mr. Warnes was Vice President
Operations of Tele2, and in that role launched card services for
Tele2 with the Company. Mr. Warnes has been in the
telecommunications industry since 1962. From 1962 to 1992, he
held various management positions at Mercury Communications Ltd.,
Cable & Wireless and Commonwealth Telecommunications
Organization. Mr. Warnes is a Chartered Engineer, is a Fellow of
the Institute of Electrical Engineers and has extensive
telecommunications engineering experience.
RICHARD A. KRINSLEY, age 67, has been a Director of the
Company since June 30, 1995. Mr. Krinsley retired in 1991 as the
Executive Vice President and Publisher of Scholastic Inc.; a
publicly held company traded on the Nasdaq Stock Market. He is
presently, and has been since 1991, a member of Scholastic's
Board of Directors. While employed by Scholastic between 1983
and 1991, Mr. Krinsley, among many other duties, served on that
company's management committee. From 1961 to 1983, Mr. Krinsley
was employed by Random House where he held, among other
positions, the post of Executive Vice President. At Random
House, Mr. Krinsley also served on that company's executive
committee.
JAMES O. HOWARD, age 55, has been a Director of the Company
since January 16, 1998. Since 1990, Mr. Howard has served as the
Chief Financial Officer and a member of the management committee
of Benton International, Inc., a wholly owned subsidiary of Perot
Systems Corporation. From 1981 to 1990, Mr. Howard was employed
by Benton International, Inc. as a consultant and sector manager.
Prior to joining Benton International, Inc., Mr. Howard held a
number of legal positions in the federal government, including
General Counsel of the National Commission on Electronic Funds
Transfer.
MARTIN SAMUELS, age 54, has been a Director of the Company
since October 25, 1997. Mr. Samuels is an entrepreneur,
strategic business planner and professional investor with over
twenty years of experience. Mr. Samuels' current project is Y2K
Strategies Corp. ("YSC"), a liaison company that Mr. Samuels co
founded in 1997. Mr. Samuels is a principal, director and senior
vice president of YSC. Mr. Samuels' responsibilities at YSC
include identifying, negotiating with and contracting with the
Year 2000 service providers and systems integrators that YSC
assists with their marketing, proposal development and ongoing
business relationship management. YSC also works with
significant public and private sector institutions in
identifying, coordinating and fulfilling their Year 2000
remediation requirements.
DONALD H. SLEDGE, age 57, has been a Director of the Company
since November 10, 1997. Mr. Sledge has served as vice chairman,
President and Chief Executive Officer of TeleHub Communications
Corp., a privately held technology development company, since
1996. Mr. Sledge served as President and Chief Operating Officer
of West Coast Telecommunications, Inc., a long distance company,
from 1994 to 1995. From 1993 to 1994, Mr. Sledge was employed by
New T&T, a Hong Kong-based company, as its head of operations.
Mr. Sledge was Chairman and Chief Executive Officer of Telecom
New Zealand International from 1991 to 1993 and the Managing
Director of Telecom New Zealand International's largest local
carrier from 1988 to 1991. Mr. Sledge is currently Chairman of
the Board of United Digital Network, a small interexchange
carrier that operates primarily in Texas, Oklahoma, Arizona and
California. Mr. Sledge is a member of the Board of Advisors of
DataProse and serves as a director of AirCell Communications,
Inc. He also serves as advisor and board member to several small
technology-based start-up companies.
JOHN E. KOONCE, age 56, has been a Director of the Company
since March 27, 1998. In April 1998 Mr. Koonce was also engaged
to serve as a financial advisor to the Company (see "Compensation
of Directors" below). Mr. Koonce served as Chief Financial
Officer of Orion from 1990 to 1993. During 1981-89, Mr. Koonce
was employed by Biotech Capital Corporation and its successor,
Infotechnology, Inc. where he served in the positions of Chief
Financial Officer and President. During this time, he also
served on the boards of several public and private companies.
Prior to 1981, Mr. Koonce worked for the accounting firm Price
Waterhouse at various domestic and foreign offices.
ALLEN MANDEL, age 59, was named Senior Vice President in
1991 and a Director of the Company in 1990. He resigned from the
Board of Directors on March 29, 1995 and as Senior Vice President
on August 18, 1995 in connection with the then ongoing proxy
contest. Mr. Mandel was engaged to serve as a consultant to the
Company concerning accounting and financial matters on August 18,
1995 and was renamed an officer of the Company on September 27,
1995, when he became Executive Vice President - Finance and
Administration and Chief Financial Officer, in which post he
served until December 1997. Mr. Mandel currently serves as
Senior Vice President, Corporate Affairs of the Company. Mr.
Mandel is a Certified Public Accountant. He was an officer of
Residual Corporation from 1991 to March 1995. See "Certain
Relationships and Related Transactions" below.
COLIN SMITH, age 54, was named Vice President of Legal
Affairs and General Counsel of the Company on February 1, 1998.
From 1972 to February 1998, Mr. Smith was a professor of law at
the New England School of Law. Mr. Smith's areas of legal
expertise include business organizations, dispute resolution and
practice management. In addition to his teaching, Mr. Smith also
ran a private consulting practice that specialized in issues of
corporate governance and entrepreneurial ventures.
RONALD A. FRIED, age 38, was named Vice President of
Development of the Company on February 20, 1998. Prior to
joining the Company, Mr. Fried worked for a subsidiary of Sun
Healthcare Group, Inc. (formerly Regency Health Services) as Vice
President of Business Development from January 1997 to March
1998. Mr. Fried served as the Director of Development for Vitas
Healthcare Corporation from June 1992 to January 1997. From
March 1983 to May 1985. Mr. Fried worked as Director of
Regulatory Affairs for a subsidiary of Orion, Orion Satellite
Corporation.
ANNE HAAS, age 47, was appointed Vice President, Controller
and Treasurer of the Company on October 21, 1997. Ms. Haas served
as the Vice President of Finance of Centennial Communications
Corp., a start-up multi-national two way radio company, during
1996-97. From 1992 to 1996 Ms. Haas served as Controller of
Quark, Inc., a multi-national desk top publishing software
company. Prior to 1992, Ms. Haas worked for the accounting firm
of Price Waterhouse in San Jose, California and Denver, Colorado.
Directors are elected annually and hold office until the
next annual meeting of stockholders and until their successors
are elected and qualified. Executive Officers serve at the
pleasure of the Board or until the next annual meeting of
stockholders. There are no family relationships between the
Company's Directors and Executive Officers.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's
executive officers and directors, and persons who own more than
ten percent of the common stock of the Company, to file reports
of ownership and changes in ownership with the Securities and
Exchange Commission and the exchange on which the common stock is
listed for trading. Those persons are required by regulations
promulgated under the Exchange Act to furnish the Company with
copies of all reports filed pursuant to Section 16(a). Based
solely upon its review of the copies of such reports furnished to
the Company by its directors and officers during and with respect
to the fiscal year 1998, the Company believes that all reports
were submitted on a timely basis.
ITEM 11 - Executive Compensation
The following table summarizes the compensation for the three
fiscal years ended March 31, 1998, 1997 and 1996 of the
Company's Chief Executive Officer and the most highly
compensated other executive officers whose total annual salary
and bonus exceed $100,000.
Long-Term
Compensation
Annual Compensation Awards
Other Securities
Annual Restricted Underlying
Name and Salary Bonus Compensation Stock Options/SARs
Principal Year ($) ($) ($) Awards ($) (#)
Position
Christopher
J. Vizas 1998 $62,308 $0 $0 $0 520,000
CEO(1) 1997 0 0 0 0 0
1996 0 0 0 0 0
Anthony Balinger 1998 $150,000 $0 $0 $0 84,310
Senior Vice
President 1997 109,612 8,000 28,500 7,875 50,000
and Vice
Chairman(2) 1996 86,673 0 27,000 0 11,000
Allen Mandel 1998 $105,000 $0 $0 $0 87,676
Senior Vice 1997 105,404 0 0 0 40,000
President (3) 1996 101,635 0 0 0 55,000
______________________________
(1)Mr. Vizas has served as the Company's Chief Executive Officer
since December 5, 1997. From November 10, 1997 to December
5, 1997, Mr. Vizas served as the Company's acting Chief
Executive Officer. Mr. Vizas' employment agreement provides
for a base salary of $200,000, performance based bonuses of up
to 50% of base salary and options to purchase up to
500,000 shares, subject to various performance criteria. See
"Employment Agreements and Termination of Employment and
Change in Control Arrangements."
(2) Mr. Balinger served as the Company's President from April
1995 until November 10, 1997. Mr. Balinger served as Chief
Executive Officer from January 3, 1997 through November 10, 1997.
Amounts shown as Other Annual Compensation consist of an annual
housing allowance paid to Mr. Balinger while he resided in Hong
Kong and while he resides in the United States.
(3) Mr. Mandel has served as the Company's Senior Vice President,
Corporate Affairs of the Company since December 31,
1997. Mr. Mandel served as the Company's Executive Vice
President - Finance and Administration and Chief Financial
Officer from September 27, 1995 until December 31, 1997. Mr.
Mandel's employment agreement provides for a base salary of
$105,000.
Option/SAR Grants in Last Fiscal Year
The following table sets forth the information concerning
individual grants of stock options and stock appreciation rights
("SARs") during the last fiscal year to each of the named
Executive Officers during such period.
Individual Grants
Percent of Potential Realizable
Number of Total Value at Assumable
Securities Options/SARs Exercise Annual Rates of Stock
Underlying Granted to or Base Price Appreciation for
Options/SARs Employees in Price Expiration Option Term
Granted(#)(1) Fiscal Year(2) ($/share) Date 5% 10%
Christopher J. 200,000 12.06% $2.32 12/05/02 $126,408 $281,022
Vizas (3)
20,000 1.21% $2.625 12/05/02 6,541 22,002
150,000 9.04% $3.50 12/05/02 0 33,766
150,000 9.04% $4.50 12/05/02 0 0
Anthony Balinger 84,310 5.08% $2.625 11/10/02 61,145 135,114 4
Allen Mandel 87,676 5.29% $2.32 12/05/02 55,415 123,194
(1) All of the options and related SARs granted in fiscal 1998
to the named Executive Officers have a five year term.
(2) A total of 1,669,629 options were granted to employees of
the Company in fiscal 1998.
(3) On December 5, 1997, in connection with his employment
agreement, Mr. Vizas has been granted a total of 500,000
options with a five year term, subject to various
performance criteria. See "Employment Agreements and
Termination of Employment and Change in Control
Arrangements."
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
The following table sets forth information concerning each
exercise of stock options during the last fiscal year by each of
the named Executive Officers during such fiscal year and the
fiscal year end value of unexercised options.
Shares
Acquired Number of Securities
on Value Underlying Unexercised Value of Unexercised
Exercise Realized Options/SARs at "In-the-Money" Options
Name (#) ($) Fiscal Year-End(#)(1)(2) Fiscal Year-End($)(2)
Unexercisable Exercisable Unexercisable Exercisable
Christopher J. 0 0 450,000 70,000 $ 148,950 $63,410
Vizas
Allen Mandel 0 0 87,676 0 $ 87,062 $ 0
Anthony 0 0 10,000 74,310 $ 6,880 $51,125
Balinger
(1) Represents the aggregate number of stock options held as of
March 31, 1998, including those which can and those which
cannot be exercised pursuant to the terms and provisions of the
Company's current stock option plans.
(2) Values were calculated by multiplying the closing
transaction price of the common stock as reported on the
Nasdaq National Market on March 31, 1998 of $3.3125 by the
respective number of shares of common stock and subtracting the
exercise price per share, without any adjustment for any
termination or vesting contingencies.
Compensation of Directors
Effective November 10, 1997, and contingent upon the Company
experiencing a fiscal quarter of profitability, members of the
Board receive a Director's fee of $500 for each regular meeting
and committee meeting attended. Directors of the Company are also
reimbursed for expenses incurred in connection with attendance at
Board meetings.
During the fiscal years ended 1995, 1996 and 1997, under the
Company's 1995 Directors Stock Option and Appreciation Rights
Plan (as amended, the "Directors Stock Option Plan"), which then
provided for automatic annual grants, each Director received an
annual grant of ten year options to purchase 10,000 shares at an
exercise price equal to the fair market value of the Company's
common stock on the date of grant. Commencing with the
amendments to the Directors Stock Option Plan which were approved
by the Company's stockholders at the 1997 annual meeting held on
February 26, 1998, options to Directors may be made at the
discretion of the Board of Directors or Compensation Committee
and there are no automatic grants.
Effective November 10, 1997, each Director who continued to
serve on the Board after subsequent stockholder meetings (other
than members of the Compensation Committee) was granted two
options under the Directors Stock Option Plan, each to purchase
10,000 shares of common stock with each option being effective
for five years terms commencing on April 1, 1998 and 1999,
respectively, with each such option vesting only upon the
achievement of certain corporate economic and financial goals to
be set by the Board and having an exercise price per share equal
to the market price per share at the close of trading on the date
they become effective.
On November 10, 1997, each of Messrs. Gerrity, Warnes,
Krinsley, Balinger, Sledge and Samuels received an option to
purchase 10,000 shares of common stock exercisable at $2.625 per
share, the fair market value on the date of the grant. These
options vest on October 1, 1998 if the Company achieves a 20%
increase in annual gross revenues for the period October 1, 1997
through September 30, 1998 and are for a term of five years. In
addition, Mr. Sledge was granted an option on November 10, 1997
to purchase 20,000 shares of common stock at $2.625 per share,
the fair market value on the date of the grant, which vested on
the grant date and has a term of five years. Also on November
10, 1997, Mr. Balinger was granted new options to purchase 74,310
shares of common stock exercisable at $2.625 per share, the fair
market value on the date of the grant, in exchange for the
surrender of options previously issued to Mr. Balinger to
purchase the same number of shares of common stock. On December
5, 1997, Mr. Samuels was granted an option to purchase 5,000
shares of common stock at $2.625 per share, the fair market value
on the date of the grant, which vested on the grant date and has
a term of five years.
In connection with his new employment agreement with the
Company, on December 5, 1987, Mr. Vizas was granted options to
purchase an aggregate of 500,000 shares of common stock that
superseded all other option grants that Mr. Vizas received as
either an officer or director of the Company. See "Employment
Agreements and Termination of Employment and Change in Control
Arrangements" below.
Following the February 26, 1998 annual meeting of
stockholders, each of the present members of the Board of
Directors, except for Messrs. Vizas and Balinger, received
options to purchase 10,000 shares of common stock. Such options
have a term of five years commencing on April 1, 1998, with each
such option vesting only upon the achievement of certain
corporate economic and financial goals to be set by the Board and
having an exercise price per share equal to $3.19, the market
price per share at the close of trading on April 1, 1998.
On April 16, 1998, Mr. Balinger was granted options to
purchase an aggregate of 10,000 shares of common stock. Such
options have a term of five years and vest in three equal annual
installments, beginning in April 16, 1999, at an exercise price
per share equal to $3.68, the fair market value on the date of
the grant.
Employment Agreements and Termination of Employment and Change in
Control Arrangements
Effective December 5, 1997, the Company entered into a three
year employment agreement with Christopher J. Vizas, the Chief
Executive Officer of the Company. Mr. Vizas' employment
agreement provides for a minimum salary of $200,000 per annum,
reimbursement of certain expenses, annual bonuses based on
financial performance targets to be adopted by the Company and
Mr. Vizas, and the grant of options to purchase an aggregate of
500,000 shares of common stock. The options granted to Mr. Vizas
pursuant to his employment agreement are comprised of options to
purchase 50,000 shares of common stock at an exercise price of
$2.32 which vested upon their grant, options to purchase 50,000
shares of common stock at an exercise price of $2.32 which vest
on December 5, 1998 (contingent upon Mr. Vizas' continued
employment as of such date), options to purchase up to 100,000
shares of common stock at an exercise price of $2.32 which vest
on December 5, 1998 (contingent upon Mr. Vizas' continued
employment as of such date and the attainment of certain
financial performance targets), options to purchase 50,000 shares
at an exercise price of $3.50 which vest on December 5, 1999
(contingent upon Mr. Vizas' continued employment as of such
date), options to purchase up to 100,000 shares of common stock
at an exercise price of $3.50 which vest on December 5, 1999
(contingent upon Mr. Vizas' continued employment as of such date
and the attainment of certain financial performance targets),
options to purchase 50,000 shares at an exercise price of $4.50
which vest on December 5, 2000 (contingent upon Mr. Vizas'
continued employment as of such date), and options to purchase up
to 100,000 shares of common stock at an exercise price of $4.50
which vest on December 5, 2000 (contingent upon Mr. Vizas'
continued employment as of such date and the attainment of
certain financial performance targets). Each of the options have
a term of five years.
Mr. Vizas' employment agreement provides that, if the
Company terminates Mr. Vizas' employment other than pursuant to a
"termination for cause", Mr. Vizas shall continue to receive, for
one year commencing on the date of such termination, his full
base salary, any bonus that is earned after the termination of
employment, and all other benefits and compensation that Mr.
Vizas would have been entitled to under his employment agreement
in the absence of termination of employment (the "Vizas Severance
Amount"). "Termination for cause" is defined as termination by
the Company because of personal dishonesty, willful misconduct,
breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law,
rule, or regulation (other than traffic violations or similar
offenses), or material breach of any provision of his employment
agreement.
In the event there is an early termination of Mr. Vizas'
employment following a "change of control," Mr. Vizas would be
entitled to a lump cash payment equal to the Vizas Severance
Amount. Additionally, if during the term of Mr. Vizas'
employment agreement there is a "change in control" of the
Company and in connection with or within two years after such
change of control the Company terminates Mr. Vizas' employment
other than "termination for cause," all of the options described
above will vest in full to the extent and at such time that such
options would have vested if Mr. Vizas had remained employed for
the remainder of the term of his employment agreement. A "change
of control" is deemed to have taken place under Mr. Vizas
employment agreement, among other things, if (i) any person
becomes the beneficial owner of 20% or more of the total number
of voting shares of the Company; (ii) any person becomes the
beneficial owner of 10% or more, but less than 20%, of the total
number of voting shares of the Company, if the Board of Directors
makes a determination that such beneficial ownership constitutes
or will constitute control of the Company; or (iii) as the result
of any business combination, the persons who were directors of
the Company before such transaction shall cease to constitute at
least two-thirds of the Board of Directors.
On September 22, 1997, the Company entered into a new three
year employment agreement with Anthony Balinger. Pursuant to his
new employment agreement, Mr. Balinger served as the Company's
President and Chief Executive Officer until November 10, 1997
when he resigned that position and was appointed Senior Vice
President and Vice Chairman of the Company. Mr. Balinger's
employment agreement provides for a minimum salary of $150,000
per annum, reimbursement of certain expenses, a $1,600 per month
housing allowance, and payment for health, dental and disability
insurance and various other benefits. Mr. Balinger's employment
agreement also provides for payment of one year severance pay
paid out over time, relocation to the Philippines, buy-out of his
auto lease and a 90 day exercise period for his vested options
after termination if the Company terminates Mr. Balinger without
"cause." "Cause" is defined as any criminal conviction for an
offense by Mr. Balinger involving dishonesty or moral turpitude,
any misappropriation of Company funds or property or a willful
disregard of any directive of the Company's Board of Directors.
This employment agreement superseded a prior employment
agreement.
On September 22, 1997, the Company entered into a three year
employment agreement with Allen Mandel pursuant to which Mr.
Mandel agreed to serve as a Senior Vice President of the
Company. Mr. Mandel's employment agreement provides for a minimum
salary of $105,000 per annum, reimbursement of certain
expenses and payment for health, dental and disability
insurance and various other benefits. Mr. Mandel's employment
agreement also provides for payment of one year severance pay
paid out over time and a 90 day exercise period for his
vested options after termination if Mr. Mandel is terminated
without "cause." In addition, if Mr. Mandel is terminated
without "cause," his obligation to repay a 1991 loan from the
Company in the amount of $25,000 would be forgiven.
"Cause" is defined as any criminal conviction for an
offense by Mr. Mandel involving dishonesty or moral turpitude,
any misappropriation of Company funds or property or a willful
disregard of any directive of the Company's Board of
Directors. This employment agreement superseded a prior
employment agreement. Compensation Committee Interlocks and
Insider Participation None.
Compensation Committee Report on Executive Compensation
The Compensation Committee is responsible for approving all
compensation for senior officers and employees, making
recommendations to the Board with respect to the grant of stock
options and eligibility requirements, including grants under
and the requirements of the Company's stock option plans
and may make grants to directors under the Directors Stock
Option Plan. The Compensation Committee believes that the
actions of each executive officer have the potential to
impact the short-term and long-term profitability of the Company
and considers the impact of each executive officer's
performance in designing and administering the executive
compensation program.
During the fiscal year 1998, the Company, under the
direction the Company's new Chairman and Chief Executive Officer
(retained in December 1998), hired a number of new executive
officers. Compensation for new executive officers was negotiated
with each officer. The Compensation Committee has obtained two
salary surveys, obtained by the Company, regarding the
compensation practices of other companies in the communications
or related industries and believes that the new executive
officers' compensation is consistent with salary surveys. In
setting compensation, the Compensation Committee adhered to the
following philosophy, objectives and policies:
Philosophy and Objectives. The purpose of the Company's
executive compensation program is to: (i) attract, motivate and
retain key executives responsible for the success of the Company
as a whole; (ii) increase stockholder value; (iii) increase the
overall performance of the Company; and (iv) increase the
performance of the individual executive.
Executive Compensation Policies. The Compensation
Committee's executive compensation policies are designed to
provide competitive levels of compensation that integrate
compensation with the Company's short-term and long-term
performance goals, reward above-average corporate performance,
recognize individual initiative and achievements, and assist the
Company in attracting and retaining qualified executives. The
two salary surveys, indicate that the levels of the executive
officers' overall compensation is to be at or below the mid range
of salaries of similarly situated senior executives in the
communications or related industries. In determining the
incentive portions of executive compensation levels, particular
factors apart from industry comparables which the Compensation
Committee believes are important are growth in revenues,
completion of the Company's financing plans, or other major
transactions or corporate goals, implementation of the Company's
strategic plan and, on a longer term basis, growth in stockholder
value measured by stock price.
The Company's executive compensation structure is comprised
of base salary, annual cash performance bonuses, long-term
compensation in the form of stock option grants, and various
benefits, including medical, and other benefits generally
available to all employees of the Company.
Base Salary. In establishing appropriate levels of base
salary, the Compensation Committee negotiated with its new
executives, considering their functions, the significant level of
commitment required to move the Company to the next level, the
size and growth rate of the Company and other factors. The
Compensation Committee has obtained the salary surveys of similar
companies in the local area. According to the surveys, executive
base salaries for fiscal 1998 generally were in the mid range
salary levels of similarly sized companies in similar industries.
During fiscal 1998, the Compensation Committee
established the salary level for the Company's new Chairman and
Chief Executive Officer, Christopher J. Vizas. See "Employment
Agreements" below for applicable detail.
Annual Performance Bonuses. During fiscal 1998, the
Compensation Committee placed increased reliance on cash bonuses
as a significant portion of compensation for executives.
Generally, potential bonuses have ranged up to 50% of a senior
executive's annual base salary and are paid on an quarterly or
annual basis. The actual amount of a bonus grant is determined
based upon performance criteria detailed in written performance
goals established based upon discussions between the senior
executive and the Company's human resource and/or senior
management. Performance criteria include the achievement of
financial targets expressed in gross revenues and EBITDA and
other criteria based upon the Company's performance and the
individual's achievements during the course of the year.
Salary Increases and Bonus Awards: The Compensation
Committee expects that future salary increases and bonuses will
be based on performance, either by the Company or individual
performance by the executive officer.
Stock Options and Stock Appreciation Rights: The
Compensation Committee expects that stock options will continue
to play an important role in executive officer compensation. The
Compensation Committee has decided not to grant any more tandem
stock appreciation rights with stock options. The members of the
Committee believe that stock options not only encourage
performance by the Company's executive officers but they align
the interests of the Company's executive officers with the
interests of the Company's stockholders. The number of stock
options granted to each senior executive officer is determined
subjectively, both at the time such executive is hired by the
Company and subsequently for performance achievement, based on a
number of factors, including the individual's anticipated degree
of responsibility, salary level, performance milestones achieved
and stock option awards by other similarly sized communications
or related companies. Stock option grants by the Compensation
Committee generally are under the Company's employee stock option
and appreciation rights plan at the prevailing market value and
will have value only if the Company's stock price increases.
Grants made by the Compensation Committee generally vest in equal
annual installments over the five year grant period; executives
must be employed by the Company at the time of vesting in order
to exercise the options. Option grants to Messrs. Vizas, Mandel
and Balinger are discussed above under "Employment Agreements and
Termination of Employment and Change in Control Arrangements."
Employment Agreements. In September 1997, the Compensation
Committee authorized new employment agreements with Messrs.
Mandel and Balinger. In exchange for three year commitments to
the Company, the new agreements provide these two officers with
varying degrees of specified benefits, including life,
disability, health and dental insurance, retirement benefits,
post-employment relocation costs and travel expense
reimbursements. The agreements with both officers are described
above under "Employment Agreements and Termination of Employment
and Change in Control Arrangements." The salaries and other cash
compensation were based upon the officers' previous employment
agreements and negotiations with the officers.
In December 1997, the Compensation Committee authorized an
employment agreement with Mr. Vizas in connection with his
retention as Chief Executive Officer. The compensation levels
reflected in Mr. Vizas' employment agreement were based on
negotiations with Mr. Vizas and information on appropriate
compensation levels for the position obtained from an executive
search firm retained by the Company to help locate a chief
executive officer. Mr. Vizas' employment agreement reflects the
increased emphasis placed by the Compensation Committee on stock
options that are tied to performance as a component of executive
officer compensation. Mr. Vizas' employment agreement provides
for the grant of options to purchase up to 500,000 shares of
common stock, of which 60% are tied to the attainment of certain
financial performance targets.
ITEM 12 - Security Ownership of Certain Beneficial Owners and
Management
Security Ownership of Management
The following table sets forth the number and percentage of
shares of the Company's common stock owned beneficially, as of
May 31, 1998, by each Director and executive officer of the
Company, and by all Directors and executive officers of the
Company as a group. Information as to beneficial ownership is
based upon statements furnished to the Company by such persons.
Name and Address Number of Shares Percent of
of Beneficial Owner Owned of Record Common stock
and Beneficially(1) Outstanding (2)
Christopher J. Vizas 110,000 (3) *
2000 Pennsylvania
Avenue, N.W.
Suite 4800
Washington, D.C. 20006
Edward J. Gerrity, Jr. 91,791 (4) *
7 Sunset Lane
Rye, New York 10580
Anthony Balinger 75,310 (5) *
450 Tappan Road
Norwood, New Jersey
07648
David W. Warnes 21,000 (6) *
1330 Charleston Road
Mountain View,
California 94043
Richard A. Krinsley 75,182 (7) *
201 West Lyon Farm
Greenwich, Connecticut
06831
Martin L. Samuels 62,000 (8) *
3675 Delmont Avenue
Oakland, California
94605
Donald H. Sledge 20,000 (9) *
2033 N. Main Street
Suite 340
Walnut Creek,
California 94043
James O. Howard 10,000 (10) *
2601 Airport Drive,
Suite 370
Torrance, California
90505
John E. Koonce 0 (11) 0%
11416 Empire Lane
Rockville, Maryland
20852
Allen Mandel 37,132 (12) *
9362 S. Mountain Brush
Street
Highlands Ranch,
Colorado 80126
Colin Smith 0 (13) 0%
1720 S. Bellaire Street
Denver, Colorado
80222
Ronald A. Fried 0 (14) 0%
1720 S. Bellaire Street
Denver, Colorado
80222
Anne Haas 5,000 (15) *
1720 S. Bellaire Street
Denver, Colorado
80222
All Named Executive 507,415 (16) 2.93 %
Officers and Directors
as a Group
(13 persons)
________________________
* Less than 1%
(1)In accordance with Rule 13d-3 under the Exchange Act, a
person is deemed to be a "beneficial owner" of a security if he
or she has or shares the power to vote or direct the
voting of such security or the power to dispose or direct the
disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which that person has the
right to acquire beneficial ownership within 60 days from May
31, 1998. More than one person may be deemed to be a
beneficial owner of the same securities. All persons shown in
the table above have sole voting and investment power, except
as otherwise indicated. This table includes shares of common
stock subject to outstanding options granted pursuant to the
Company's option plans.
(2)For the purpose of computing the percentage ownership of each
beneficial owner, any securities which were not outstanding
but which were subject to options, warrants, rights or
conversion privileges held by such beneficial owner
exercisable within 60 days were deemed to be outstanding in
determining the percentage owned by such person, but were not
deemed outstanding in determining the percentage owned by any
other person.
(3)Includes options to purchase 70,000 shares of common stock
exercisable within 60 days from May 31, 1998. Does not
include options to purchase 460,000 shares of common stock
which are not exercisable within such period.
(4)Includes 1,100 shares held by Mr. Gerrity as a trustee and
options to purchase 85,691 shares of common stock exercisable
within 60 days from May 31, 1998. Does not include options to
purchase 20,000 shares of common stock which are not
exercisable within such period.
(5)Includes options to purchase 74,310 shares of common stock
exercisable within 60 days from May 31, 1998. Does not
include options to purchase 30,000 shares of common stock
which are not exercisable within such period.
(6)Consists solely of options to purchase common stock
exercisable within 60 days from May 31, 1998. Does not
include options to purchase 20,000 shares of common stock
which are not exercisable within such period.
(7)Includes options to purchase 21,000 shares of common stock
exercisable within 60 days from May 31, 1998. Does not
include options to purchase 20,000 shares of common stock
which are not exercisable within such period.
(8)Includes 56,000 shares held by Mr. Samuels as an estate
executor and options to purchase 5,000 shares of common stock
exercisable within 60 days from May 31, 1998. Does not
include options to purchase 20,000 shares of common stock
which are not exercisable within such period.
(9)Consists solely of options to purchase common stock
exercisable within 60 days from May 31, 1998. Does not
include options to purchase 20,000 shares of common stock
which are not exercisable within such period.
(10)Consists solely of options to purchase common stock
exercisable within 60 days from May 31, 1998. Does not
include options to purchase 10,000 shares of common stock
which are not exercisable within such period.
(11)Does not include options to purchase 75,000 shares of common
stock which are not exercisable within 60 days from May 31,
1998.
(12)Includes options to purchase 29,222 shares of common stock
exercisable within 60 days from May 31, 1998. Does not
include options to purchase 68,454 shares of common stock
which are not exercisable within such period.
(13)Does not include options to purchase 100,000 shares of
common stock not exercisable within 60 days from May 31,
1998.
(14)Does not include options to purchase 100,000 shares of
common stock not exercisable within 60 days from May 31,
1998.
(15)Consists solely of options to purchase common stock
exercisable within 60 days from May 31, 1998. Does not
include options to purchase 25,000 shares of common stock
which are not exercisable within such period.
(16) Includes options to purchase 341,223 shares of common stock
exercisable within 60 days from May 31, 1998. Does not include
options to purchase 968,454 shares of common stock not
exercisable within such period.
Security Ownership of Certain Beneficial Owners
The following table sets forth the number and percentage of
shares of the Company's common stock owned beneficially, as of
May 31, 1998, by any person who is known to the Company to be the
beneficial owner of 5% or more of such common stock. Information
as to beneficial ownership is based upon statements furnished to
the Company by such persons.
Number of Shares Percent of
Name and Address Owned of Record Common stock
of Beneficial Owner and Beneficially(1) Outstanding (2)
Ronald L. Jensen 1,425,000 8.2%
5215 N. O'Connor, #300
Irving, Texas 75039
Network Data Systems 1,351,536 7.8% Limited(3)
44 The Fairways II
Cranberry Village
Colingwood, Ontario L9Y4S9
(1)In accordance with Rule 13d-3 under the Exchange Act, a
person is deemed to be a "beneficial owner" of a security if he
or she has or shares the power to vote or direct the voting
of such security or the power to dispose or direct the
disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which that person has the
right to acquire beneficial ownership within 60 days from May
31, 1998. More than one person may be deemed to be a
beneficial owner of the same securities. All persons shown in
the table above have sole voting and investment power, except
as otherwise indicated.
(2)For the purpose of computing the percentage ownership of each
beneficial owner, any securities which were not outstanding
but which were subject to options, warrants, rights or
conversion privileges held by such beneficial owner
exercisable within 60 days were deemed to be outstanding in
determining the percentage owned by such person, but were not
deemed outstanding in determining the percentage owned by any
other person.
(3)Includes options to purchase 200,000 shares of common stock.
Also includes 308,386 shares of the Company's common stock
owned by Residual Corporation ("Residual") (58.0% of 531,700
shares). NDS is the stockholder of record of 58.0% of the
outstanding shares of Residual. If all of the 531,700 shares of
the Company owned by Residual were included, the number of shares
held by NDS would increase to 1,574,850 (9.0%). NDS has
disclaimed beneficial ownership of all of the shares owned
by Residual in its statement filed with the Company. If none
of the shares owned by Residual were included, NDS would
beneficially own 1,043,150 shares (6.0%).
ITEM 13 - Certain Relationships and Related Transactions
The Company was formed in 1987 as a wholly owned subsidiary
of International 800 Telecom Corp., a publicly traded company,
which changed its name to Residual Corporation in February 1994.
The Company became a public company in March 1989 by way of a
dividend in kind of Residual's common stock.
In January 1989, the Company entered into a ten year
agreement with Residual (the "Service Agreement") pursuant to
which Residual provided the Company with essentially all
personnel, office space and other facilities required by the
Company for general and operational administrative purposes,
excluding attorneys fees, accounting fees, marketing expenses,
advertising and promotion, stockholder relations and certain
other items. Salaries of the Company's executive officers in the
United States in fiscal 1995 were paid by Fintel Services, Inc.
("Fintel"), which was then a wholly-owned subsidiary of Residual.
Pursuant to the Service Agreement, the Company was obligated to
pay Residual 10% of its annual gross revenue per year until 1999.
Pursuant to an Agreement for Sale and Purchase of Assets
dated as of March 31, 1995 between the Company and Residual (the
"Asset Purchase Agreement"), the Company acquired substantially
all of the subsidiaries of Residual, including Fintel, and
certain intellectual property rights including trademarks and
service marks relating to those companies. Because the Asset
Purchase Agreement effected a transfer of the Service Agreement
to a wholly-owned subsidiary of the Company, the Company, through
its subsidiary, became responsible for payment of salaries and
bonuses to its Executive Officers. The Asset Purchase Agreement
prohibited Residual from competing with the Company for six years
and from soliciting the Company's employees for three years.
Under the terms of the Asset Purchase Agreement, the Company
transferred 697,828 shares of the Company's restricted stock to
Residual. In connection with the transaction, the Company,
through its acquisition of Service 800, SA, also assumed
$12,722,000 in indebtedness due to the Company as of March 31,
1995 incurred by Residual and/or Service 800, SA. The Company
received a fairness opinion on the transaction from Griffin
Capital Management Corporation.
Allen Mandel, Senior Vice President, and a former Director
of the Company, formerly served as a Senior Vice President of
Residual. Edward J. Gerrity, Jr., the former Chairman of the
Board and a present Director, was a Director of Residual until
October 1994.
EXECUTIVE TELECARD, LTD.
PART IV
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:
A report on Form 8-K dated June 24, 1998 under Item 2
was filed with the Commission on June 24, 1998 to report
the signing of a definitive agreement to acquire IDX
International, Inc.
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 Amended and Restated Bylaws.
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 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.
10.2 Agreement between Executive TeleCard S.A. (Switzerland)
and Telstra Corporation Limited (Australia) for Enhancement of
Telecom Australia Calling Card dated August 3, 1993 filed as
Exhibit 10.12 to the Company's Form 10-K for the period ended
March 31, 1996 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.
10.1 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, 1996 and incorporated herein by reference.
10.2 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, 1996 and incorporated herein by reference.
10.3 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, 1996 and incorporated herein by reference.
10.4 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.
10.5 Settlement Agreement and Mutual Release dated as of
May
28, 1996 between the Company 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.
10.6 Settlement Agreement dated April 2, 1998 between the
Company and parties to In re: Executive TeleCard, Ltd. Securities
Litigation, Case No. 94 Civ. 7846 (CLB), U.S.D.C., S.D.N.Y.
10.7 1995 Employee Stock Option and Appreciation Rights
Plan, as amended and restated.
10.8 1995 Directors Stock Option and Appreciation Rights
Plan, as amended and restated.
10.9 Employment Agreement for Christopher J. Vizas dated
December 5, 1997 filed as Exhibit 10 to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1997 and
incorporated herein by reference.
10.10 Employment Agreement for Colin Smith dated February 1,
1998.
10.11 Employment Agreement for Ronald A. Fried dated
February
20, 1998.
10.12 Promissory Note dated February 23, 1998 between the
Company and IDT Corporation.
10.13 Warrant to purchase 500,000 shares of common stock of
the Company dated February 23, 1998 issued to IDT
Corporation.
10.14 Consulting Agreement for John Koonce dated April 13,
1998.
21 Subsidiaries of the Registrant
22 Consent of BDO Seidman, LLP
27 Financial Data Schedule
99.1 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.
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 26, 1998 BY:
_________________/S/____________________
Anne E. Haas
Vice President, Controller and Treasurer
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 26, ___________________/S/__________
1998 BY: Christopher J. Vizas
Chairman of the Board of Directors,
and Chief Executive Officer
(Principal Executive Officer)
Dated: June 26, ___________________/S/__________
1998 BY: Anne E. Haas
Vice President, Controller and Treasurer
(Principal Accounting Officer)
Dated: June 26, ___________________/S/__________
1998 BY: Anthony Balinger,
Vice Chairman and Director
Dated: June 26, ___________________/S/__________
1998 BY: Edward J. Gerrity, Director
Dated: June 26, ___________________/S/__________
1998 BY: James O. Howard, Director
Dated: June 26, __________________/S/___________
1998 BY: John E. Koonce, Director
Dated: June 26, ___________________/S/__________
1998 BY: Richard A. Krinsley, Director
Dated: June 26, ___________________/S/__________
1998 BY: Martin L. Samuels, Director
Dated: June 26, ___________________/S/__________
1998 BY: Donald H. Sledge, Director
Dated: June 26, ___________________/S/__________
1998 BY: David W. Warnes, Director