ITEM 1 - Business (General) ==========================================================================
A. The Company
Executive TeleCard, Ltd. ("the Company") provides various worldwide telecommunications services, including intra/intercountry calling card services, toll-free services, turnkey calling card systems and, on a limited basis, long distance services within the United States. The Company's telephone calling services permit travelers to place calls directly within and from a growing list of countries and territories (presently 66) at competitive rates and to avoid the high surcharges imposed by most hotel switchboards. Unlike most of its competitors, the Company does not rely on redialing through the United States for calls placed between foreign countries. Instead, customers dial a toll-free or local number to access the Company's proprietary CAVIAR (Computer Assisted Variable International Automatic Redialer) system, which routes calls through local Postal, Telegraph and Telephone Authorities ("PTTs") over the public voice network to virtually anywhere in the world. The Company markets its services as subscription calling cards, prepaid calling cards, turnkey calling systems (in countries that do not have telephone calling cards), and as enhancements to charge cards, credit cards, and telephone calling cards.
The Company was formed in 1987 as a wholly-owned subsidiary of International 800 Telecom Corporation, a publicly traded corporation which changed its name to Residual Corporation ("Residual") in February 1994. The Company went public in March 1989 by way of a dividend in kind on Residual's common stock. Effective March 31, 1995 the Company acquired substantially all of the assets of Residual, which consisted primarily of all of Residual's operating subsidiaries ("Residual Acquisition"). The principal Residual subsidiary, Service 800 SA, has worked with PTTs since 1974, establishing relationships with over 60 foreign telecommunications administrations. Building on the relationships established by Service 800, the Company began installing its proprietary CAVIAR system in or close to the facilities of PTTs in 1989, and today callers can access the Company's CAVIAR system from 66 countries and territories.
To access CAVIAR, callers simply dial a toll-free number from any telephone in any of the 66 countries and territories. This first step bypasses hotel switchboards for both international and intracountry calls made from hotel rooms, and high hotel surcharges are thereby avoided. After entry of a card number CAVIAR then voice prompts users in their own language from a broad range of languages (currently 32) to enter a personal identification number ("PIN") and a destination phone number. A validation process takes place as the user enters the requested information. CAVIAR also allows the Company to capture usage information and issue bills in numerous major currencies, with full call details, which are not available to residents or businesses in most countries.
During fiscal 1994, the Company introduced "default to operator" assistance for calls placed to the CAVIAR system from rotary and pulse- tone telephones. Calls placed from such telephones are speed-dialed by the CAVIAR system to an operator, which collects the caller's account number, PIN and destination phone number and inputs the data back into the CAVIAR located in the country from which the caller initiated the call. The CAVIAR system then completes the call. With the default-to-operator feature, the Company's CAVIAR system can be accessed from any telephone in any country or territory in the Company's network; the Company's call completion rate improved as a result. Prior to the introduction of the "default to operator" feature, the CAVIAR system would only accept calls placed from touch-tone telephones or from rotary and pulse-tone telephones using a tone-dialer. Whenever special assistance is required in placing calls, the Company's multilingual customer service center can be reached via a toll-free number 24 hours a day, 365 days a year.
B. CAVIAR System
Connection to the Company's direct intra/intercountry calling system is made primarily over a toll-free line via the local PTT. Connection to the destination is made by the CAVIAR computer which redials through the PTT over the public voice network to virtually anywhere in the world. The Company has a policy of not bypassing the networks of the PTTs. Therefore, the PTTs benefit by capturing all of the increased traffic. The software in CAVIAR is designed to accept Executive TeleCard International and World Direct Cards as well as other issuers' credit, charge or calling cards.
CAVIAR uses various procedures to validate the credit, charge or calling card, depending on the protocol of the card issuer. When authorization is received, the local CAVIAR computer automatically redials the destination number through the public network of the local PTT. When the call is completed, billing information is recorded in the local CAVIAR computer.
On a daily basis, CAVIAR computers transmit batch files to the Company's central processing center. These files are then transmitted to the credit, charge or calling card billing centers for billing to their customers. Card issuing companies, after deducting commissions or fees, remit the balance to the Company.
C. Enhancement Arrangements
The Company has enhancement agreements with over 40 companies to provide international calling service to their credit, charge and telephone calling card customers. The card issuers are compensated for marketing and administrative services rendered, including billing and collection services in connection with usage of the Company's calling service by their customers.
The enhancement agreements require credit, charge and calling card issuers to promote the use of the Company's service through advertisements, direct mail, newsletters and other marketing activities that the card issuers deem suitable. In support of this process, the Company directs a stream of marketing ideas, advertising materials and advice to its card issuing customers.
The principal market for the Company's calling service consists of business people, executives and professionals who travel frequently and who are required to make international and/or intracountry phone calls during their travels. The Company's list of enhancement customers includes major corporations such as: MasterCard International (several regions of the world), Worldcom Communications Corp., LCI International, Eurocard Danmark A/S, Eurocard Iceland SA, Telstra (Australia), KDD (Japan), Tele Danmark A/S, Lufthansa Airlines, American Express Travel Related Services-Brazil, Singapore Telecom, PLDT (Phillipines), and Telmex (Mexico).
D. Revenue Sharing Arrangements (Applicable to Telephone Companies or PTTs)
The Company supplies turnkey calling card systems, including a self- contained customer maintenance center and billing system to PTTs that do not have their own telephone calling card. The Company generally pays for the cost of the CAVIAR system, including the cost of shipping and installation. The Company trains the personnel of the PTT in the operation of the system and makes its international network available to the PTT's customers. The Company presently has revenue sharing arrangements with the major international telephone carriers in Brunei, Colombia, Iceland, Indonesia, Mexico, Norway, the Philippines, Portugal, Russia, South Africa, South Korea, Sweden, Taiwan and Thailand.
The Company generally shares in the gross billings of all national and outbound international calls made through the CAVIAR system by the PTT's calling card customers. The PTT shares in the gross billings for all calls placed through CAVIARs located outside of its jurisdiction by its traveling calling card customers.
E. Propriety Calling Cards
1. Executive TeleCard International-TM- ("ETI") is a telephone charge card that is available to foreign and domestic business executives, professionals and others for use primarily in placing direct intra/intercountry calls. ETI cardholders generally select a major credit card to which their usage is billed by the Company. ETI cardholders are charged an annual fee which is currently U.S. $50.00 for each individual card. As of March 31, 1997 the Company had approximately 9,400 ETI cardholders located in more than 128 countries. All of the features and benefits of the Company's direct and operator-assisted calling services are available to ETI subscribers.
2. World Direct is a global prepaid calling card that is marketed directly to travelers by PTTs and carriers, travel agents and issuers of travelers checks. The cards are sold in bulk to marketers, at a discount from the face value.
F. Features of Direct Calling Service
Customers of the Company's international direct calling service are furnished with a list of toll-free and local telephone numbers for each country in which the service is available. These toll-free telephone numbers may be accessed from any telephone, and they permit entry through PTT authorities to the Company's CAVIAR computer.
CAVIAR prompts a caller to enter his or her telephone or credit card number, a PIN and the destination telephone number. CAVIARs are equipped to prompt a caller in the language indicated by the caller's card number, for example, Telia Card (Swedish); Worldcom (English); Telecom Danmark (Danish). At present, 32 languages are available. When the validation/authorization process is completed, the local CAVIAR dials the caller's destination number through a PTT, and CAVIAR captures and records the billing information.
The Direct Calling Service:
/ / Allows callers to call from any telephone in 66 countries and territories to virtually any other country in the world. It also allows callers to place long-distance calls directly within most of these countries, and access to the service is via toll-free or local telephone numbers. Presently no other long distance carrier, including AT&T, MCI, Sprint and British Telecom, provides similar direct intra/intercountry calling service. / / Allows callers to avoid the surcharges that hotels impose on long distance and international calls. Hotel surcharges can increase the cost of an international call by 300%-to-800%.
/ / Overcomes hotel blocking of toll-free access to its calling system by also providing callers with an alternative "local" access number.
/ / Avoids language problems when users are in a foreign country. The CAVIAR system's audio response software prompts callers in their native language, preselected by either the customer or the card issuing company.
/ / Allows use of most pay telephones because toll-free access eliminates the need to carry large quantities of coins; eliminates the need to decipher foreign usage instructions; and eliminates the reliance on foreign operators who may not be fluent in the language of the card user.
/ / Offers multi-lingual customer service which may be accessed via a toll-free number, 24 hours a day, 365 days a year.
/ / Allows use of the system to be billed directly to credit, charge or calling cards.
/ / Provides detailed invoices not available in most countries.
Countries and Territories Covered by Direct Calling Service
Andorra Gibraltar Madeira Singapore Australia Greece Majorca South Africa Austria Greenland Malaysia South Korea Azores Guernsey Mexico Spain Bahrain Hong Kong Monaco Sweden Belgium Hungary Netherlands Switzerland Brunei Iceland New Zealand Taiwan Canada Indonesia No. Ireland Thailand Canary Islands Ireland Norway Turkey Chile Isle of Man Philippines U.A.E. Colombia Israel Poland U.S. Virgin Islands Cyprus Italy Portugal United Kingdom Denmark Japan Puerto Rico United States Faeroe Islands Jersey Qatar Vatican City Finland Liechtenstein Russia Wales France Luxembourg San Marino Germany Macau Scotland
G. Features of Operator-Assist Service
Customers of the Company's international operator-assist calling system are furnished with a list of toll-free telephone numbers to reach the United States and Canada and connect with multilingual operators. The system may be accessed from any telephone within the countries from which the service is offered.
By using the Company's international calling system, callers can avoid delays and language problems. The service is user friendly, and connection back to the United States and Canada is rapid. The operator requests the caller's card number and a PIN. The caller then gives the operator the telephone number he/she wishes to call, and the call is validated and connected.
The Operator-Assist Service:
/ / Allows callers to access the service via a toll-free telephone number from any telephone in 78 countries and territories and place calls to the U.S. and Canada.
/ / Allows callers to access the service from the U.S. via a toll-free telephone number and place calls to virtually anywhere in the world.
/ / Avoids the surcharges that hotels impose on international and long distance calls. Hotel surcharges often increase an international call by 300%-to-800%.
/ / Avoids language problems because the toll-free access number connects directly with an operator who speaks English and other languages.
/ / Offers Customer Service accessed via a toll-free number, 24 hours a day, 365 days a year.
/ / Allows use of the system to be billed directly to a credit, charge or calling card with detailed billing.
/ / Allows access to all U.S. 800 numbers.
/ / Offers facsimile services.
/ / Provides language and document translation services.
/ / Allows conference calling.
Countries and Territories Covered by Operator-Assist Service:
EUROPE
Andorra Gibraltar Madeira Spain Austria Greece Majorca Sweden Azores Guernsey Monaco Switzerland Belgium Hungary Montserrat Turkey Canary Islands Ireland Netherlands United Kingdom Cyprus Isle of Man No. Ireland Vatican City Denmark Italy Norway Wales Finland Jersey Portugal France Liechtenstein San Marino Germany Luxembourg Scotland
THE AMERICAS AND WEST INDIES
Anguilla Dominica Trinidad & Tobago Argentina Grenada Turks & Caicos Is. Bahamas Jamaica United States Brazil Netherland Antilles Uruguay Canada Nicaragua U.S. Virgin Islands Chile Puerto Rico Venezuela Colombia St. Kitts/Nevis
MIDDLE EAST AND AFRICA
Abu Dhabi Israel Saudi Arabia Bahrain Oman South Africa Dubai Qatar U.A.E.
FAR EAST & AUSTRALIA
Australia Japan Singapore China Malaysia South Korea Guam New Zealand Taiwan Hong Kong Philippines Thailand Indonesia Saipan
H. Toll-free Telephone Service (Service 800-TM-)
Toll-free telephone service permits a caller to make a long distance telephone call without paying the applicable toll charges, which are billed to the Service 800 subscriber who receives the call. The Company arranges both "city-specific" and "nationwide" toll-free service. City- specific telephone service permits the call to be made on a toll-free basis to the caller only from a particular city or other limited geographic area within the country of call origination specified by the Service 800 subscriber. (The caller generally pays for the local call to the toll-free number). While a city-specific telephone number may be dialed from outside this limited area, any additional toll charges thereby incurred are paid by the caller rather than the Service 800 subscriber. With nationwide toll-free service, calls are toll-free to the caller when dialed from any location within the country of call origination, and the caller is generally not charged for a local call.
As of March 31, 1997 city-specific telephone numbers accounted for approximately 65% of the Company's toll-free telephone numbers. Most of the Company's city-specific telephone numbers permit toll-free calls to locations outside the country of call origination. Until the introduction of modern electronic equipment by telephone utilities, this was the only type of toll-free service offered by the Company.
The introduction of modern electronic equipment by some telephone utilities has enabled the Company to offer to its subscribers, in addition to city-specific international toll-free service, the option of obtaining a Service 800 telephone number which permits international calls to be made toll-free from any location in the service area of the telephone utility which has installed this equipment. The electronic equipment has the capacity to automatically "translate" the Service 800 telephone number into the telephone number of the recipient of the toll-free call, without the need for a call diverter. The Company is presently offering international nationwide toll-free service with respect to calls originating in Australia, Austria, Canada, Denmark, France, Hong Kong, Japan, the Netherlands, Switzerland, the United Kingdom, the United States and West Germany, among others. As of March 31, 1997, nationwide toll- free telephone numbers accounted for approximately 35% of the Company's toll-free telephone numbers. The Company expects that an increasing number of telephone utilities will install such modern equipment.
I. Organization and History of Operations
The Company was incorporated in 1987 as a wholly owned subsidiary of Residual, a publicly traded company that provided toll-free and related value-added telecommunications services to businesses around the world. The Company built on the relationships Residual established with foreign telecommunications administrations, and in 1989 the Company began installing CAVIAR computers in or close to the facilities of various PTTs. The Company went public that same year by way of a dividend in kind on Residual's common stock, and effective March 31, 1995 entered into an Agreement of Sale and Purchase of Assets (the "Asset Purchase Agreement") with Residual pursuant to which the Company acquired substantially all of the subsidiaries of Residual and certain intellectual property rights including trademarks and service marks relating to the Residual subsidiaries. As a result, as of April 1, 1995, the Company, through its subsidiaries, is responsible for all expenses previously included under a service agreement in effect between Residual and the Company whereby the Company had agreed to pay Residual 10% of its gross revenues in exchange for general and administrative services, including use of Residual's facilities and administrative personnel but excluding costs for legal, accounting, marketing, advertising, promotion, and stockholder relations. Under the terms of the Asset Purchase Agreement, the Company transferred 697,828 shares of restricted stock of the Company to Residual in accordance with a fairness opinion rendered by the firm of Griffen Capital Management Corporation. In connection with the transaction the Company has, through its acquisition of Service 800, S.A., also assumed an indebtedness in the approximate amount of $12,722,000, which was incurred by Residual and Service 800, S.A. and due to the Company as of March 31, 1995. The Asset Purchase Agreement also prohibits Residual from competing with the Company for six years and from soliciting the Company's employees for three years.
At the present time, the Company conducts most of its operations through the following wholly owned subsidiaries:
1. Executive TeleCard SA, ("TeleCard, Turks & Caicos"). The Company formed this company, which is now its primary operating subsidiary, on December 20, 1993. The registered offices of TeleCard, Turks & Caicos are located at MacLaw House, Duke Street, Grand Turk, Turks and Caicos Islands, British West Indies, telephone number (809) 497 5056.
2. World Direct, Ltd. (Anguilla). The Company conducts its worldwide prepaid calling card business through World Direct Anguilla. The registered and operations offices of World Direct, Anguilla, are located at Hanse Bank Building, P.O. Box 213, The Valley, Anguilla, BWI, telephone number (809) 497-3800.
3. Transworld Telecommunications A/S (Denmark). The Company customizes its software and constructs its CAVIAR computers through Transworld Telecommunications A/S Denmark.
4. Executive TeleCard, Inc. (Colorado). The Company offers long distance services to Colorado businesses and residents through Executive TeleCard, Inc. Executive TeleCard, Inc. is considered a facilities based reseller offering 1+, 1-800, international calling card, debit card, and conference calling services.
5. World Direct Ltd. (Delaware) The Company conducts its U.S. prepaid calling card business through World Direct Ltd.
6. Service 800 SA (Turks & Caicos). The Company conducts its worldwide toll-free business through Service 800 SA (Turks & Caicos). The Company's toll-free services allow callers to make long distance telephone calls without paying applicable toll charges, which are instead billed to the subscriber who receives the call.
7. Fintel Services, Inc. (Colorado). The Company employs all of its U.S. employees (approximately 140) through Fintel Services, Inc. The employees of Fintel Services, Inc. provide services to the Company's other subsidiaries pursuant to various service agreements.
8. World Wide 800 Ltd. (Hong Kong). The Company employs six people to conduct its Asia/Pacific Rim marketing activities through World Wide 800 Ltd. (Hong Kong). The Company plans to increase its business presence in the Asia/Pacific Rim region in the future.
9. Service 800 SA (Belgium). The Company currently employs one person on a part-time basis to provide sales and maintenance services in Europe through Service 800 SA (Belgium).
10. eGlobe, Ltd. (Delaware). The Company is actively developing a global end-user Internet access service, which it markets through eGlobe, Ltd. By extending the capabilities of the Company's CAVIAR system, the Company plans to provide subscribers with an easy to use, high performance internet connection accessible through local or toll-free phone numbers from major cities and countries around the world. In connection with internet access, the Company also plans to offer electronic mail, fax mail, voice mail, and an intelligent web site with easy access to country-specific travel resource information and personalized news reports.
J. The Telephone Calling Card Industry
Presently, telephone calling card services are available primarily to those individuals or corporations that have residential or business telephone numbers to which a telephone call may be charged. Accordingly, the telephone calling card industry is dominated in the United States by companies such as AT&T, MCI, Sprint and others, and abroad by PTT authorities. Decreases in the cost of providing services, technological innovation in the telephone industry, and the introduction of more sophisticated value-added features have made it possible for other telephone companies to compete with the PTTs. While a number of telecommunications companies have entered the international telephone services market by providing call reorigination services that reroute calls through the United States, the Company is the only calling card company that has built its business by entering into cooperative agreements with an extensive number of PTTs around the world. By developing relationships with numerous PTTs, the Company is able to offer improved access to calls at competitive rates even while the PTTs benefit from increased traffic within their local systems.
L. United States Federal Regulation
Pursuant to the Federal Communications Act, the Federal Communications Commission ("FCC") is required to regulate the telephone communications industry in the United States. Under current FCC policy, telecommunications carriers reselling the domestic services of other carriers and not owning telecommunications facilities of their own, are considered to be non-dominant and, as a result, are subject to the least rigorous regulation. Such carriers are not required to obtain authorization for the provision of service.
Telecommunications carriers providing international service continue to be required to obtain authorization from the FCC pursuant to Section 214 of the Act even if they resell the services provided by another carrier and construct no facilities of their own. Carriers providing international service are also required to file a tariff with the FCC, setting forth the terms and conditions for the provision of international service. The extent of regulation of non-dominant international carriers, including the Company, and the demonstration required of such carriers in support of applications for Section 214 authorizations and tariffs, has been eased by the FCC as a result of its "Report and Order in International Competitive Carrier Policies". There can be no assurances, however, that the current regulatory environment and the present level of FCC regulation will continue, or that the Company will continue to be considered non-dominant. At this point, it is contemplated that the Company will resell the services of other carriers and will not construct its own facilities.
On January 4, 1989, the FCC released an order authorization and certificate pursuant to Section 214 of the Act authorizing the Company to (a) provide international switched voice services by the resale of the international switched voice services set forth in AT&T tariffs FCC Nos. 1 and 2, MCI tariff FCC No. 1, Sprint tariffs FCC Nos. 1 and 2, between the United States and the overseas points listed in such tariffs and (b) provide international telex service by the resale of international telex service set forth in ITT World Communications, Inc.'s tariff FCC No. 12 between the United States and the points listed in such tariff. On April 29, 1989, the FCC granted the tariff of the Company and as a result, the Company is free to provide resold international service. The tariffs of the Company are on file with the FCC. The underlying service being resold could be provided to the Company pursuant to the tariffs filed with the FCC by any U.S. international carrier.
L. Foreign Government Regulation
Telecommunications activities are subject to government regulation to varying degrees in every country throughout the world. In most countries where the Company operates, equipment cannot be connected to the telephone network without regulatory approval; installation of the Company's equipment necessary to provide certain services of the ETI card requires, in most countries, such approval. In addition, with the exception of the United States, Canada, Japan and the United Kingdom, among others, most telephone utilities are government owned, controlled and/or operated.
The Company has numerous licenses, agreements, or equipment approvals in Hong Kong, Canada, the United States, Denmark, Germany, Japan and elsewhere in countries in which operations are conducted.
To date, the Company has not been required to comply with any material international regulations in order to pursue its existing business activities, or notified that it cannot comply with any such regulations. There can be no assurances, however, that various governmental authorities will not seek to assert jurisdiction over the Company's rates or other aspects of its calling service. Governmental authorities could also enact exchange controls or other legislation which might impede the payment of the Company's receivables.
M. Carrier Arrangements
The Company utilizes existing long-distance telephone carrier services in the United States to transmit telephone signals domestically and internationally, and for this purpose, the Company has entered into arrangements with carriers such as AT&T, MCI and Worldcom, among others.
The Company applied for and has obtained from the FCC Section 214 authorization, which gives the Company the right to use the telecom- munications network of a United States carrier to provide international service at then prevailing tariffs and rates. The Company has entered into agreements with telephone utilities in various foreign countries including, among others, Mercury (UK), Singapore Telecom, Hong Kong Telecom, CPRM (Portugal), Entel (Chile), Macau Telecom, South Africa TeleKom, Telefonica (Spain) and AEROCOM (Russia). In addition, the Company has licenses or approvals in those countries where it operates and where equipment is installed and continues to seek approval of various other foreign countries within which to provide services.
The Company is entirely dependent upon the cooperation of the telephone utilities with which it has made arrangements for its operational and certain of its administrative requirements. The Company's arrangements with these utilities are nonexclusive and take various forms. Although some of such arrangements are embodied in formal contracts, any telephone utility could cease to accommodate the Company's requirements at any time. Depending upon the location of the telephone utility, such action could have a material adverse effect on the Company's business and prospects. In some cases, notably those countries which are members of the European Economic Community and the United States, laws and regulations may purport to assure that the arrangements necessary for the Company to conduct its service may not be arbitrarily terminated. However, the time and cost of enforcing the Company's rights may be such as to make legal remedies impractical. The Company does not foresee any threat to its continued amicable relations with the various utilities.
N. Sales Force
Until March 31, 1995, Residual provided the Company with sales personnel and access to its sales network to market and sell ETI cards. Since the acquisition of Residual's operating subsidiaries on March 31, 1995, the Company has utilized its own personnel and network. The Company has also entered into agreements with independent sales agents to market and sell ETI cards.
In addition, the Company joint ventures or franchises to corporations in various nations the right to market and sell the Executive Tele-Card International. The Company also has arrangements with various marketers to distribute the World Direct prepaid calling card and with several marketers to sell the Service 800 toll free services.
O. New Technology
Due to the highly competitive nature of the telecommunications industry and correspondingly sophisticated technological research and development capabilities of the Company's various competitors around the world, it is possible that equipment and software similar to the CAVIAR system will be developed by or for a competitor of the Company. The Company has no reason to believe that any similar equipment and software have already been developed, patented or are protected by another party. The Company may lease or sell its equipment to unaffiliated parties in the telecommunications industry who may or may not be competitors. The Company has made sales of such equipment to Fintelcom, the long distance carrier of Finland, INDOSAT, the Indonesian international carrier, and Tele2 of Sweden, but does not believe that such sales create a material risk of enabling others to utilize this equipment in direct competition with the Company.
There can be no assurance that all of the PTTs from which the Company plans to offer service will approve the use of the Company's CAVIAR. In such an event, nonapproving PTTs could either block service in their country or require the Company to use the PTT's operator services or call forwarding equipment.
P. Payment for ETI Services
Individual holders of the ETI card are required to maintain on file with the Company an account with a recognized credit card for billing purposes (i.e. MasterCard, American Express, Eurocard, Visa, and others). All ETI calls by such customers are billed to such credit card accounts. Corporate holders of the ETI card are billed directly by the Company.
Credit and calling card issuers that have their cards enhanced with the telephone capabilities of the Company's system are expected to pay within 2 to 30 days from the receipt of a magnetic media billing information, which is provided by the Company on a daily, weekly or monthly basis, depending upon volume and the billing system of the issuer.
Q. Competition
The Company faces significant competition within the United States during all phases of its operations from such multinational corporations as AT&T, MCI, US Sprint and others. The Company also faces international competition from various PTT authorities. While the Company believes that no other enterprise presently offers international services of the type and scope provided by the Company, its competitors may choose to do so. In 1992, AT&T, MCI and Sprint introduced intra/intercountry calling services. Those services require a call back to an operator (or automated attendant) in the United States who collects the call information and then places the call to its foreign destination. For example, a call from Copenhagen, Denmark to Copenhagen would first be sent to the United States and then back to Copenhagen at a rate substantially over that charged by the Company, and a call from Copenhagen to Stockholm would also be made via the United States operator at a rate that is also substantially over that of the Company. Providing intra/intercountry calling in this manner is referred to as "refiling" or "rerouting". Although AT&T, MCI and Sprint have greater resources than those of the Company, it is management's belief that the price advantage of the Company over AT&T, MCI and Sprint will prevent any significant impact on its market share and that the added exposure from competitive advertising will actually increase the Company's call volume. By refiling calls and thus taking a share of the market away from the PTTs, AT&T, MCI and Sprint may encounter difficulties in obtaining approvals to offer their services in many countries and may encounter difficulties with the tax authorities of many countries.
Most of the Company's competitors are likely to have significantly larger financial, management, personnel and other resources, greater telecommunications experience, and vastly larger current customer bases. Additionally, such competitors are likely to have greater industry and governmental contacts than the Company, are better established and have long-standing reputations for quality of service. There can be no assurances that the Company will be able to compete successfully with such entities should they choose to offer services that are similar, identical and price competitive to the Company's calling services.
R. Employees
Pursuant to an administrative services agreement entered into with Residual, as more fully described above, the Company utilized the employees and administrative services of Residual. As a result of the Company's acquisition of Residual's operating subsidiaries, on March 31, 1995, the Company itself employed eighty-three (83) full time employees. As of March 31, 1997, the Company employed one hundred sixty-six (166) of which one hundred forty-four (144) were located in the United States in either Denver, Colorado or Pearl River, New York, one (1) was located in Nyon, Switzerland, eleven (11) were located in Silkeborg, Denmark, seven (7) were located in Hong Kong, one (1) was located in Qatar, one (1) was located in Brussels, Belgium, and one (1) was located in Guildford, United Kingdom.
S. Properties
The Company owns the land and building at 8 Avenue C, Nanuet, New York and 4260 East Evans Avenue, Denver, Colorado. The properties leased by the Company include the premises located in Paris, France; Brussels, Belgium; Hong Kong; Singapore; Doha, Qatar; Silkeborg, Denmark; Nyon, Switzerland; and Guildford, United Kingdom. Effective June, 1996 the Company leased additional office space in Denver, Colorado, and effective September, 1996, the Company leased office space in Pearl River, New York.
T. Foreign Currency Exposure
The Company's enhancement customers are permitted to choose the currency in which they pay for calling services from among several different currencies determined by the Company. Thus, the Company's earnings, which are reported in U.S. Dollars, may be materially affected by movements in the exchange rate between the U.S. Dollar and such other currencies.
U. Intellectual Property Rights
The Company has registered certain marks, including WORLD DIRECT- Registered Trademark-, EXECUTIVE TELECARD INTERNATIONAL-Registered Trademark-, and SERVICE 800-Registered Trademark- with the U.S. Patent and Trademark Office. Applications for registration of the following marks with the U.S. Patent and Trademark Office are currently pending: GLOBAL OFFICE-SM-, CAVIAR-TM-, WORLD DIRECTNET-TM-, EGLOBE-SM-, ELECTRONIC GLOBE- SM-, GLOBAL EXECUTIVE-TM-, PHONE 123-TM-, and ITS A BIG WORLD WITHOUT US- SM-. The EXECUTIVE TELECARD INTERNATIONAL-TM- and WORLD DIRECT-TM- marks have also been registered in Belgium, Canada, Great Britain, Luxembourg, and the Netherlands, and applications for registration of those marks are pending in Australia, Denmark, France, West Germany, Hong Kong, Indonesia, Israel, Italy, Japan, Korea, New Zealand, Spain, Sweden, Switzerland, Taiwan and Thailand. If the Company's registration efforts are successful in those countries, the Company will have a prima facie exclusive right to the use of its EXECUTIVE TELECARD INTERNATIONAL-TM- and WORLD DIRECT-TM- marks.
In the event the Company fails to obtain a service mark or trademark in a particular jurisdiction, the Company may be precluded from the use of the EXECUTIVE TELECARD INTERNATIONAL-TM- or WORLD DIRECT-TM- marks in that jurisdiction. In such an event the Company might have to market its product under a different name. Failure to obtain a registered trademark will not preclude the Company from marketing its product in those jurisdictions under a different name. The Company is also considering registration of additional marks internationally.
The Company has filed a patent application relating to the digital CAVIAR- TM- system with the U.S. Patent and Trademark Office, and the Company is in the process of evaluating the possible application for patent of its billing system. It is anticipated that a patent application for the digital CAVIAR-TM- will also be filed internationally.
V. Segment Information and Major Customers
The Company is engaged in one business segment - telecommunications.
See Geographic Segment Information in Note 9 of the Notes to Consolidated Financial Statements.
For the year ended March 31, 1997, two customers, Telstra and Telmex accounted for approximately twelve percent (12%) and fifteen percent (15%) of total revenue, respectively. No other customer accounted for more than ten percent (10%) of total revenue during the year.
Management of the Company does not believe that its operations are significantly impacted by the effects of inflation nor trends regarding a seasonal nature of the business.
ITEM 2
ITEM 2 - Properties ==========================================================================
The land and building used by the Company at 8 Avenue C, Nanuet, New York was purchased in March 1992. The land and building used by the Company at 4260 East Evans Avenue, Denver, Colorado, consisting of approximately 14,000 sq. ft., was purchased in December 1992. The Company rents office space in Pearl River, New York; Paris, France; Brussels, Belgium; Nyon, Switzerland; Hong Kong; Singapore; Silkeborg, Denmark; Guildford, United Kingdom and Anguilla. Effective June, 1996 the Company leased an additional 10,000 sq. ft. of office space in Denver, Colorado at 1720 S. Bellaire Street, Suite 1000 and effective September, 1996 the Company leased an additional 3100 sq. ft. of office space in Pearl River, New York at One Blue Hill Plaza, Suite 1650.
The Company believes that its facilities, including the new leases in Denver and New York, are adequate for operations for the coming year.
ITEM 3
ITEM 3 - Legal Proceedings ==========================================================================
The following information sets forth information relating to material legal proceedings involving the Company and certain of its executive officers and directors. From time to time, the Company and its executive officers and directors become subject to litigation which is incidental to and arises in the ordinary course of business. Other than as set forth herein, there are no material pending legal proceedings involving the Company or its executive officers and directors.
1. Walter Krauth Litigation. (Krauth v. Executive TeleCard, Ltd., No. 95 Civ. 3967 (RWS), U.S.D.C, S.D.N.Y. and related cases.)
Commencing in October, 1994, a small group of dissident stockholders of the Company, Walter K. Krauth, Jr., William Miller and David Legere, began a contest for control of the Company. That struggle resulted in a proxy contest and a series of related legal proceedings, including the above referenced case. Messrs. Krauth, Miller and Legere settled with the Company in May of 1996. An April 1996 judgment in their favor for approximately $48,000 in interim attorney's fees has now been waived and released without any payment by the Company.
2. Theodore Mayer Litigation. (Mayer v. Executive TeleCard, Ltd., No. 95 Civ. 5403 (RWS), U.S.D.C., S.D.N.Y.; Mayer v. Executive TeleCard, Ltd., No. 14459, Chancery Court of Delaware, New Castle County; Executive TeleCard, Ltd. v. Mayer, No. 95 Civ. 9641 (LLS), U.S.D.C., S.D.N.Y.)
Mayer, a former treasurer of the Company, brought two civil actions for attorneys fees pursuant to the indemnification provisions of the Company's bylaws and under Delaware law, totaling approximately $100,000. In the New York action, the Company filed counterclaims for breach of fiduciary duty to the Company based upon Mayer's actions and activities in promoting and provoking the dissident shareholders to commence the proxy contest. In the Delaware action, a judgment has been entered against the Company for $56,000. A non-final adverse ruling has been entered against the Company in the New York action. Upon entry of a final judgment in the New York proceeding, either or both of these rulings may be appealed. The Company has brought an action against Mayer in the United States District Court for the Southern District of New York pursuant to Section 16(b) of the Securities Exchange Act for short-swing trading while Mayer was an executive officer of the Company. Mr. Mayer's liability from this action could exceed $380,000. Trial is currently scheduled to begin July 21, 1997.
3. Executive TeleCard, Ltd. v. Anderson, et al., Index No. 116002/95 IAS Part 9, Supreme Court of the State of New York, County of New York.
The Company has filed an action against Peter J. Anderson and his law firm based upon a letter transmitted by Mr. Anderson which contained libelous statements against the Company. The court recently granted defendants' motion for dismissal on the grounds that the firm has a privilege under law because the statements were made in relationship to litigation between the Company and the dissident shareholders, whom the law firm represented in both the proxy contest and the Krauth litigation. The Company has not yet determined whether it will appeal the court's ruling.
In re Executive TeleCard, Ltd. Securities Litigation, Case No. 94 Civ. 7846 (CLB), U.S.D.C., S.D.N.Y.
The Company, its former auditors, certain of its present and former directors and others are defendants in this consolidated securities law class action, which alleges that certain public filings and reports made by the Company, including its Forms 10- K for the 1991, 1992, 1993 and 1994 fiscal years (i) did not present fairly the financial condition of the Company and its earnings; and (ii) failed to disclose the role of Richard Bertoli as a consultant to the Company. Plaintiffs seek unspecified monetary damages. In January 1997, the court certified the named plaintiffs, except Moise Katz, as adequate class representatives, and certified the putative class to include all persons who purchased the Company's common stock in the open market between October 28, 1991 and October 27, 1994. The Company and its former auditors are vigorously opposing this action, for which discovery has recently been completed. The Company has moved for summary judgment and to preclude certain expert testimony on the grounds that the plaintiffs have adduced no evidence of damage. That motion, along with plaintiffs' cross motion for partial summary judgment, is scheduled to be heard by the Court July 18, 1997.
Residual Litigation. Victor L. Wegard, et. al. v. International 800 Telecom Corp., et. al., No. 10747/94, Supreme Court of the State of New York. The Company has been named as a defendant in this action, which was brought by certain underwriters who represented Residual in its initial public offering. The underwriters contend that Residual breached its contract with the underwriters by allegedly failing to register certain warrants held by the underwriters. The underwriters also claim that the Company is liable for inducing Residual's refusal to register the warrants. No trial has been set, and the Company's motion to dismiss all claims against it is currently pending.
ITEM 4
ITEM 4 - Submission of Matters to a Vote of Security Holders ==========================================================================
No matters were submitted to a vote of the security holders during the quarter ended March 31, 1997.
ITEM 5
ITEM 5 - Market for Registrant's Common Stock and Related Stockholder Matters ==========================================================================
A. Market Information
The Company's common stock has traded on the NASDAQ National Market under the symbol ("EXTL") since December 1, 1989.
The following table reflects the high and low prices reported on the NASDAQ National Market for each quarter of the fiscal year ended March 31, 1997.
High Low
Quarter Ended June 30, 1996 $14 5/8 $ 6 7/8 Quarter Ended September 1996 14 8 Quarter Ended December 31, 1996 11 5/8 5 1/8 Quarter Ended March 31, 1997 8 5
The following table reflects the high and low prices reported on the NASDAQ National Market for each quarter of the fiscal year ended March 31, 1996.
High Low
Quarter Ended June 30, 1995 $5 1/2 $3 3/8 Quarter Ended September 30, 1995 9 1/8 4 1/8 Quarter Ended December 31, 1995 7 7/8 5 3/4 Quarter Ended March 31, 1996 9 3/8 5 3/4
B. Holders
The approximate number of holders of the Company's common stock as of May 31, 1997 was in excess of 5,400 record and beneficial owners.
C. Dividends
The Company has not paid or declared any cash dividends on its common stock since its inception and does not anticipate paying any cash dividends on its common stock in the near future. The Company declared a ten percent (10%) common stock split, effected in the form of a stock dividend, on January 5, 1994 and distributed February 4, 1994 to shareholders of record on January 28, 1994. On June 30, 1995, the Company declared another ten percent (10%) common stock split, effected in the form of a stock dividend, distributed on August 25, 1995 to shareholders of record as of August 10, 1995. On May 21, 1996 the Company declared another ten percent (10%) stock dividend. Shareholders of record as of June 14, received the dividend on August 5, 1996.
ITEM 6
ITEM 6 - Selected Financial Information ==========================================================================
The following information is derived from the consolidated financial statements included elsewhere herein. All information presented below should be read in conjunction with Management's Discussion and Analysis, the Consolidated Financial Statements and Notes included elsewhere in this Form 10-K.
(1) Based on the weighted average number of shares outstanding during the period.
(2) The weighted average number of shares outstanding during the periods have been adjusted to reflect a 100% stock dividend distributed March 16, 1990, six ten percent (10%) stock splits, effected in the form of stock dividends and distributed August 14, 1992, February 5, 1993, August 27, 1993, February 4, 1994, August 25, 1995 and August 5, 1996.
(3) Includes the acquisition of the operating subsidiaries of Residual. (See Note 1 - Business Combination in the Notes to Consolidated Financial Statements.)
(4) Does not include the acquisition of the operating subsidiaries of Residual. (See Note 1 - Business Combination in the Notes to Consolidated Financial Statements.
ITEM 7
ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations ==========================================================================
Year Ended March 31, 1997
Certain statements in this Annual Report on Form 10-K are "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and involve known and unknown risk, uncertainties and other factors that may cause the Company's actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward looking statement. Factors that impact such forward looking statements include, among others, changes in worldwide general economic conditions, changes in interest rates, currency rates and worldwide competition.
Net revenue increased 12.2% to $33,994,375 in fiscal 1997 compared to $30,298,228 reported in fiscal 1996. The continuing growth in revenue resulted primarily from increased volume usage of the Company's calling card services by existing customers as well as the addition of customers due to new agreements. During the year, the Company experienced an overload on network capacity and deferred several new programs. An upgrade to the entire network database system was completed in fiscal 1997. The Company now believes it is in position to launch new programs and products, including its global end-user Internet access service offered through its wholly owned subsidiary, eGlobe, Ltd. which made its initial services available during April, 1997.
Cost of revenue for fiscal 1997 was $17,913,995 compared with $18,501,402 in fiscal 1996, a decrease of 3.2%, resulting from the overall increase in the Company's realization of revenue sharing revenue for which there is no direct usage cost. Additionally, the Company experienced general rate decreases and volume discounts negotiated with domestic and foreign telephone carriers based upon the continued increase in volume of traffic generated over their networks.. As a percentage of net revenue, these costs decreased 8.4% from 61.1% during fiscal 1996 to 52.7% for fiscal 1997.
Selling, general and administrative expenses increased by $4,780,482 (67%) to $11,915,864, during fiscal 1997 versus $7,135,382 for the prior year. This increase is primarily attributable to the addition of personnel and related employee costs necessary to manage the increasing business volume, provide additional marketing and promotion for the Company's calling card services, develop new business services (primarily global end-user Internet access service), and maintain quality customer support and assistance. The number of employees increased to 166 at March 31, 1997 compared to 131 at the end of fiscal 1996, a 26.7% increase. As a percentage of revenue, selling, general and administrative expenses increased from 23.6% in fiscal 1996 to 35.1% in fiscal 1997. As additional revenue is realized from the Company's current marketing and new business development expenditures, selling, general and administration expenses as a percentage of revenue are expected to decrease.
Depreciation and amortization expense increased by $176,517 to $1,740,952 as compared to $1,564,435 for fiscal 1996. This increase relates primarily to equipment placed in service during the fiscal year including upgrade of and additions to the Caviar network and call processing equipment.
Interest expense of $849,073 increased over last year's $185,977 due primarily to additional borrowings to finance business development and expansion and an increase in lease financed asset transactions. The Company's long term and current maturities of long term debt increased to $10,740,390 as of March 31, 1997, compared to $2,312,899 as of March 31, 1996. Interest income increased by $49,443 to $51,291 for fiscal 1997 compared to $1,848 for fiscal 1996, representing the temporary investment of working capital.
Foreign currency transaction loss decreased by $20,619 to $75,409 in fiscal year 1997 and generally reflects the currency exchange rate movements between foreign currencies billed to customers and paid to suppliers against the United States Dollar.
During fiscal year 1997, the Company incurred $528,421 in proxy related litigation expense as described in ITEM 3 - Legal proceedings. No proxy expense was incurred in fiscal year 1996.
Year Ended March 31, 1996
Net revenue increased 32% to $30,298,228 in fiscal 1996 compared to $22,980,726 reported in fiscal 1995. The continuing growth in revenue resulted primarily from increased volume usage of the Company's calling card services by existing customers as well as the addition of customers due to new agreements.
Cost of revenue for fiscal 1996 was $18,501,402 compared with $15,459,946 in fiscal 1995, an increase of 20%, resulting from the overall increase in the Company's usage of domestic and foreign telephone carrier networks to service its growing customer base. As a percentage of net revenue, these costs decreased 6% from 67% during fiscal 1995 to 61% for fiscal 1996. This decrease reflects negotiated rate decreases and volume discounts from domestic and foreign telephone carriers based upon the Company's continued increase in volume of traffic generated over their networks.
Selling, general and administrative expenses increased by $546,002 to $7,135,382, in fiscal 1996, from $6,589,380 in fiscal 1995, an 8.3% increase. This increase is primarily attributable to the addition of personnel, a 59% increase to 131 employees at the end of fiscal 1996, and related employee costs necessary to manage the increased business volume, provide additional marketing and promotion for the Company's calling card services, and maintain quality customer support and assistance. As a percentage of net revenue, selling, general and administrative expenses decreased from 29% in fiscal 1995 to 24% for fiscal 1996.
Depreciation and amortization increased by $340,728 to $1,564,435 compared to $1,223,707 for fiscal 1995. This increase relates primarily to call processor equipment placed in service during the past twelve months to satisfy the requirements of new customers obtained and calling services volume increases during the period.
Interest expense of $185,977 increased over last year's $82,054 due primarily to increases in lease financed asset transactions and borrowings during the year. Interest income decreased by $37,684 from fiscal year 1995 to $1,848 as funds were used to finance the growth of the Company's business. Foreign currency transaction loss decreased by $267,067 to $96,028 in fiscal year 1996 and generally reflects the currency exchange rate movements between foreign currencies billed to customers and paid to suppliers against the United States Dollar.
During fiscal year 1995, the Company incurred $3,917,258 in proxy related litigation expense as described in ITEM 3 - Legal Proceedings. No additional expenses were incurred during fiscal year 1996.
Other income includes receipt of $350,000 in settlement of claims against a corporate stockholder relating to purchases and sales of the Company's stock. Under the settlement agreement, the corporate stockholder also granted the Company an irrevocable proxy to vote all of the shares beneficially owned or controlled by the stockholder in favor of the director nominees proposed by the Board and agreed not to compete with the Company nor solicit Company employees for a period of three years.
==========================================================================
Liquidity and Capital Resources
Year Ended March 31, 1997
During the year ended March 31, 1997, cash and cash equivalents increased from $950,483 to $2,172,480. The increase in cash and cash equivalents consisted of the following components: (i) net cash flows used in operating activities in the amount of $2,010,480 resulting primarily from net income for the year of $773,952 increased by depreciation and amortization expense of $1,740,952, offset by an increase in accounts receivable of $2,169,404 and a decrease in accrued expenses of $2,175,153 which primarily relates to payment of usage costs for telephone services, (ii) net cash flows used in investing activities in the amount of $5,194,075 relating primarily to customization, modernization and expansion of the Company's CAVIAR network which increases usage capacity and facilitates transmission of voice and data traffic, and development of Internet communication equipment, (iii) cash flows provided by financing activities of $8,427,491 primarily relating to proceeds from the issuance of notes payable and the assumption of capital lease obligations in the amount of $10,297,429 decreased by principal payments on and retirement of long term debt obligations of $1,869,938, and (iv) the negative effect of exchange rate changes on cash which decreased cash and cash equivalents by $939.
In June 1996, the Company borrowed $6,000,000 from a financial institution. The loan is a senior secured term loan and was used for capital expenditures, working capital and debt refinancing. The loan, subject to certain financial covenants, is secured by all of the assets of the Company and its subsidiaries, individually guaranteed by each of the Company's subsidiaries and includes a pledge of the common stock of all of the Company's subsidiaries. In connection with this loan, the lender received warrants to purchase 100,000 shares of the Company's common stock at an exercise price of $14.88 which expire on December 31, 2001. The note is payable in June 1997 and carries an interest rate equal to the lender's prime rate plus 2.5%, which was 11% at March 31, 1997.
On November 7, 1996, the Company obtained a $4,000,000 multiple draw down term loan agreement from the same financial institution, of which $3,000,000 had been borrowed against this agreement at March 31, 1997. The multiple draw down term loan agreement carries an interest rate equal to the lender's prime rate plus 2.5%, which was 11% at March 31, 1997, and a commitment fee of .5% on the unused portion of the balance. In addition, the Company issued detachable warrants to purchase 66,667 shares of the Company's common stock at a price of $7 7/8 per share which expire on December 31, 2001. Interest on amounts outstanding and commitment fee on the unused portion of the loan are payable quarterly.
On June 3, 1997, the Board of Directors of the Company approved the sale of 1,425,000 shares of the Company's common stock for $7,500,000 to one individual. A portion of the proceeds from the sale has been used to reduce the multiple draw down term loan by $3,000,000. The remainder of the proceeds have been used either to provide working capital or invested in short term obligations through a financial institution.
On June 27, 1997, the Company renegotiated both loans as described above, extending the term of the loans to April, 1998, adjusting the price of common stock subject to existing warrants to the lesser of (i) $7 per share or (ii) the average stock price for the past ninety (90) trading days, and extending the expiration date for the warrants for ten (10) years.
The Company's future plans to fund its working capital and equipment needs also consist of the following: (i) issuance of additional shares of common stock or preferred stock, (ii) the creation of a long term debt facility, and (iii) cash flow generated from operations. There can be no assurance that the Company will be successful in its efforts to raise such additional capital.
Income Taxes
The Company's effective tax rate is lower than the federal statutory rate as discussed in Note 8 to the Consolidated Financial Statements. As of March 31, 1997 the Company has recorded a net deferred tax asset of $3,067,000 primarily as a result of the tax effect of net operating loss carryforwards. As of March 31, 1997, a valuation allowance equal to the net deferred tax asset recognized has been recorded, as management of the Company has not been able to determine that it is more likely than not that the deferred tax asset will be realized based in part on the foreign operations and the operating loss carryforwards availability only to offset U.S. tax provisions.
New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards No. 128 "Basic earnings per share" (SFAS No. 128). This pronouncement provides a different method of calculating earnings per share than is currently used in accordance with Accounting Board Opinion (APB) No. 15, "Earnings Per Share". SFAS 128 provides for the calculation of "Basic" and "Dilutive" earnings per share. Basic earnings per share include no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted earnings per share. The Company will adopt SFAS No. 128 in 1998 and its implementation is not expected to have a material effect on the consolidated financial statements.
The next pages are through
EXECUTIVE TELECARD, LTD.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Report of Independent Certified Public Accountants
Balance Sheets as of March 31, 1997 and 1996 -
Statements of Operations for the Years Ended March 31, 1997, 1996 and 1995
Statements of Stockholders' Equity for the Years Ended March 31, 1997, 1996 and 1995
Statements of Cash Flows for the Years Ended March 31, 1997, 1996 and 1995
Summary of Accounting Policies -
Notes to Consolidated Financial Statements -
Schedule -
II Valuation and Qualifying Accounts
Report of Independent Certified Public Accountants
Board of Directors and Stockholders Executive TeleCard, Ltd. Pearl River, New York
We have audited the accompanying consolidated balance sheets of Executive TeleCard, Ltd. and subsidiaries as of March 31, 1997 and 1996 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 1997. We have also audited the schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Executive TeleCard, Ltd. and subsidiaries at March 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein.
BDO SEIDMAN, LLP
June 27, 1997 Denver, Colorado
See accompanying summary of accounting policies and notes to consolidated financial statements.
See accompanying summary of accounting policies and notes to consolidated financial statements.
See accompanying summary of accounting policies and notes to consolidated financial statements.
See accompanying summary of accounting policies and notes to consolidated financial statements.
See accompanying summary of accounting policies and notes to consolidated financial statements.
SUMMARY OF ACCOUNTING PRACTICES
Organization and Business Executive TeleCard, Ltd. (the "Company") provides various worldwide telecommunications services, including intra/intercounty calling card services which it markets as an enhancement to charge, credit and telephone calling cards; toll-free services; a turnkey calling card system to countries that do not have a telephone calling card; and company issued stand-alone calling cards called "Executive Telecard International". The Company's telephone calling services permit travelers to place calls directly from 66 countries and territories to virtually anywhere in the world. Basis of Presentation and Consolidation The consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles and include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.
As described in Note 1, effective March 31, 1995, the Company acquired the operating subsidiaries of Residual Corporation, an affiliated entity. The acquisition was accounted for in a manner similar to a pooling-of-interests and, accordingly, the Company's financial statements have been presented to include the results of the operating subsidiaries as through the acquisition occurred as of April 1, 1994. Foreign Currency Translation The functional currency for the Company's foreign operations is the applicable local currency. The translation of the applicable foreign currency into United States Dollars is computed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. Gains and losses resulting from such translation are included in stockholders' equity.
As a result of changes in the nature and activities of the Company's consolidated operations, including among other things, the Residual acquisition, effective April 1, 1995, the Company changed its reporting currency from Swiss Francs to United States Dollars. Previously, the Company's reporting currency was Swiss Francs. The information previously reported in Swiss Francs has been converted to United States Dollars in accordance with SFAS 52 and restated for the 1995 period presented.
In connection with this change in the Company's reporting currency, the Company also changed the functional currency of its two Turks & Caicos subsidiaries from Swiss Francs to United States Dollars. The impact of this change was not material to the Company's consolidated financial statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Financial Instruments and Concentrations of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable.
The Company places its cash and temporary cash investments with quality financial institutions. At times, such investments may be in excess of Governmental insured limits.
Concentrations of credit risk with respect to trade accounts receivable are limited due to the wide variety of customers and markets which comprise the Company's customer base, as well as their dispersion across many different geographic areas. The Company routinely assesses the financial strength of its customers and, as a consequence, believes that its trade accounts receivable credit risk exposure is limited. Generally, the Company does not require collateral or other security to support customer receivables. As of March 31, 1997, the Company had approximately 26% in trade accounts receivable from one customer. At March 31, 1997 there were no other significant concentrations of credit risk.
The Company's enhancement card customers are permitted to choose the currency in which they pay for calling services from among several different currencies determined by the Company. Thus, the Company's earnings may be materially affected by movements in the exchange rate between the United States Dollar and such other currencies.
The carrying amounts of financial instruments including cash and cash equivalents, trade accounts receivable, accounts payable and accrued expenses approximated fair value because of the immediate or short-term maturity of these instruments. The difference between the carrying amount and fair value of the Company's long-term debt is not significant. Property, Equipment, Depreciation and Amortization Property and equipment are stated at cost. Additions, installation costs and major improvements of property and equipment are capitalized. Expenditures for maintenance and repairs are expensed as incurred. The cost of property and equipment retired or sold, together with the related accumulated depreciation or amortization, are removed from the appropriate accounts and the resulting gain or loss is included in the statement of operations.
Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the related assets ranging from five to twenty years.
The Company applies Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets" ("SFAS No. 121"). Under SFAS No. 121, long-lived assets and certain identifiable intangibles are reported at the lower of the carrying amount or their estimated recoverable amounts. Intangible Assets Intangible assets consist of licenses and trademarks, organization costs, deferred installation charges and a customer database which are stated at cost. Amortization is provided on the straight-line method over ten (10) years for licenses and trademarks and over five (5) years for organization costs, deferred installation charges and the customer database. The carrying value of intangible assets is periodically reviewed and impairments, if any, are recognized when expected future benefit to be derived from individual intangible assets is less than its carrying value.
Revenue Recognition Telephone usage revenue is recognized as utilized by subscribers. Billings to subscribers are based upon established tariffs filed with the United States Federal Communications Commission, or for usage outside of the tariff requirements at rates established by the Company. Taxes on Income The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"). Under SFAS No. 109 temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Net Income (Loss) Per Share Net income (loss) per share and common equivalent share is computed using the weighted average number of shares outstanding during each period. Warrants and options outstanding to purchase common stock are included as common stock equivalents when dilutive. Stock Options The Company applies APB Opinion 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for all stock option plans. Under APB Opinion 25, no compensation cost has been recognized for stock options granted to employees as the option price equals or exceeds the market price of the underlying common stock on the date of grant.
SFAS Statement No. 123, "Accounting for Stock-Based Compensation", requires the Company to provide pro forma information regarding net income as if compensation cost for the Company's stock option plans had been determined in accordance with the fair value based method prescribed in SFAS No. 123. To provide the required pro forma information, the Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model. Cash Equivalents The Company considers cash and all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Recent Accounting Pronouncements The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128"). This pronouncement provides a different method of calculating earnings per share than is currently used in accordance with Accounting Board Opinion ("APB") No. 15, "Earnings Per Share". SFAS 128 provides for the calculation of "Basic" and "Dilutive" earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted earnings per share. The Company will adopt SFAS No.128 in 1998 and its implementation is not expected to have a material effect on the consolidated financial statements.
(Balance of Page Intentionally left Blank)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business Combination Effective March 31, 1995, the Company acquired substantially all of the assets of Residual Corporation ("Residual"). In connection with the acquisition, the management agreement between the Company and Residual, as described in Note 2, resulted in a transfer of the agreement to a wholly-owned subsidiary of the Company. As a result, as of April 1, 1995, the Company, through its subsidiaries, is responsible for all expenses previously included under the agreement. In consideration for the transaction, the Company issued 767,610 (restated to reflect the effect of a stock dividend as described in Note 7) restricted shares of its common stock to Residual and also discharged approximately $12,722,000 of debt obligations payable by Residual to the Company.
As a result of the transfer of the management agreement and considering the historical relationship between the Company and Residual, the transaction is considered to be an exchange between enterprises under common control and accordingly, it has been accounted for at historical cost in a manner similar to that in pooling-of-interests accounting with the accompanying financial statements presented to include the accounts and operations of the acquired companies as though the acquisition had occurred as of April 1, 1994.
2. Related Party Transactions During 1989, the Company entered into a ten year management agreement with Residual. Under the agreement Residual provided the Company with general and administrative services including facilities and administrative personnel but excluded costs for legal, accounting, marketing, advertising and promotion and stockholder relations. In consideration for these services, the Company paid Residual 10% of gross revenues, as defined. As discussed in Note 1, as of March 31, 1995 the Company acquired substantially all of the assets of Residual effectively terminating the agreement.
Through March 30, 1995, the Company had advanced Residual approximately $12,722,000 under a non- interest bearing loan agreement secured by substantially all of Residual's tangible and intangible assets. In connection with the acquisition by the Company of substantially all of the assets of Residual as of March 31, 1995, as discussed in Note 1, the outstanding loan balance was discharged.
The Company has transactions with corporate stockholders primarily in the ordinary course of business as customers or vendors. Such transactions are not significant to the operations of the Company and as of March 31, 1997 and 1996, $175,114 and $732,794 was due from such stockholders and as of March 31, 1996, $66,321 was payable to such stockholders.
During April 1995 an agreement between the Company and a corporate stockholder was finalized to resolve certain claims and potential claims between the two parties. The claims arose out of negotiated transactions whereby sales of the Company's restricted common stock had occurred at prices at or below the quoted market price. Under the agreement, the corporate stockholder granted the Company an irrevocable proxy to vote all of the shares beneficially owned or controlled by the stockholder in favor of the director nominees proposed by the Board through March 27, 1997, to pay to the Company the sum of $350,000 and not to compete with nor solicit Company employees for a period of three years. 3. Contingency and Litigation Costs During fiscal 1995, a number of legal actions were commenced involving certain minority stockholders and the Company, certain of its directors and officers and affiliates. The initial claims and counterclaims concerned the filing of the Company's proxy statement for the year ended March 31, 1994 and whether such proxy statement was false and misleading and were related to a fight for control of the Board of Directors of the Company. On June 20, 1995, the United States District Court for the Southern District of New York denied a June 1, 1995 action by the minority stockholders to block the June 30, 1995 stockholders meeting. The vote of the stockholders at that meeting effectively ended the struggle for control of the Company when the slate of directors proposed by the Company was elected.
In May 1996, the minority stockholders dismissed all of their claims against the Company with prejudice. The Company issued 10,000 restricted shares of the Company's common stock, which will be increased if the Company's stock is trading at a price less than $11.00 per share on May 28, 1998. The shares were issued to resolve claims arising from a purported settlement agreement calling for payment by the Company of approximately $730,000, plus legal fees, to the dissident stockholders. Further, the dissident stockholders released all claims against the Company under an April 1996 judgment for approximately $48,000 in interim attorney's fees and indemnified the Company for any amounts ultimately paid by the Company to any persons pursuant to that judgment.
Largely as a result of the minority stockholders' legal actions, several class action complaints were filed by minority stockholder groups, involving the Company, its officers and directors and certain affiliates which actions were, by order dated January 18, 1995 consolidated into a single action, alleging that the Company's financial statements for fiscal years 1991, 1992, 1993 and 1994 misrepresented and/or omitted material facts regarding the Company's operations and/or financial condition.
In January, 1996, the Court certified a putative class to include all persons who purchased the Company's stock in the open market between October 28, 1991 and October 27, 1994.
The ultimate disposition of the consolidated class action cannot presently be determined. While the Company intends to vigorously defend such action, if the Company is unsuccessful in its efforts, such outcome could have a material adverse impact on the financial position, results of operations and cash flows of the Company. Since such outcome cannot presently be determined, no amounts have been provided for in the accompanying consolidated financial statements.
As a result of the above actions and related matters, the Company recorded $528,421 and $3,917,258 in costs and expenses during the years ended March 31, 1997 and 1995. See Note 5.
The Company and its subsidiaries are also parties to various other legal actions and various claims arising in the ordinary course of business. Management of the Company believes that the disposition of such other actions and claims will not have a material effect on the financial position of the Company.
4. Property and Equipment Property and equipment at March 31, 1997 consisted of the following:
Depreciation and amortization expense for the years ended March 31, 1997, 1996, and 1995 was $1,740,952, $1,564,435, and $1,223,707.
Property and equipment at March 31, 1997 and 1996, includes certain telephone and office equipment under capital lease agreements with an original cost of $1,713,022 and $1,031,313 and accumulated depreciation of $704,966 and $447,224.
5. Accrued Expenses Accrued expenses at March 31, 1997 and 1996 consisted of the following:
6. Long-Term Debt
(1) In June 1996, the Company borrowed $6,000,000 from a financial institution. The note was originally payable in June 1997. In November 1996, the Company secured from the same financial institution a $4,000,000 multiple draw down term loan originally expiring June 1997. Any unused portion of the loan is subject to a commitment fee of .5%. In connection with these notes, the lender was granted warrants to purchase 100,000 shares of the Company's common stock at a price of $14.88 per share and 66,667 shares of the Company's common stock at a price of $7.88 per share. The warrants expire on December 31, 2001. The nominal value assigned to such warrants when granted in connection with the above note agreements is amortized over the term of the notes. At March 31, 1997 these warrants have not been exercised.
The notes are subject to certain financial covenants including maintenance of operating results, certain debt ratios, and limitations on asset purchases. At March 31, 1997 the Company was in compliance with such covenants.
Subsequent to year end, the Company renegotiated both the $6,000,000 loan and the $4,000,000 multiple draw down term loan, extending the term of the loans to April 1998, adjusting the price of common stock subject to existing warrants to the lesser of (i) $7 per share or (ii) the average stock price for the past ninety (90) trading days, and extending the expiration date for the warrants for ten (10) years. At March 31, 1997, as a result of this modification, the Company has classified such loans as long-term liabilities in the accompanying consolidated balance sheet.
(2) In connection with this transaction, the Company issued options to purchase 50,000 shares of the Company's common stock at a price of $12.13 per share, expiring June 27, 1999. At March 31, 1997, such option have not been exercised (see Note 7).
(3) In connection with this transaction, the Company issued options to purchase 110,000 shares of the Company's common stock at a price of $5.45 per share, expiring February 28, 1999. At March 31, 1997, such options have not been exercised (see Note 7).
(4) In connection with this transaction, the Company issued options to purchase 55,000 shares of the Company's common stock at a price of $5.45 per share, expiring February 28, 1999. At March 31, 1997, such options have not been exercised (see Note 7).
The value assigned to such options when granted in connection with the above note agreements is being amortized over the term of the respective notes.
Future maturities of long-term debt and future minimum lease payments under capital lease obligations at March 31, 1997 are as follows:
Subsequent to year end, the Company entered into a $312,000 capital lease agreement for call processing equipment.
7. Stockholders' Equity Common and Preferred Stock
In connection with the Residual acquisition discussed in Note 1, the Company issued 767,610 (post stock dividend) shares of its common stock. The acquisition has been accounted for in a manner similar to a pooling-of- interests with the accompanying financial statements presented to include the accounts and operations as though the acquisition occurred as of April 1, 1994.
On May 14, 1996, the Board of Directors authorized a stock split, effected in the form of a 10% stock dividend, payable to shareholders of record on August 5, 1996. All references to common share and per share amounts in the accompanying financial statements have been restated to reflect the effect of this stock dividend. Also on May 14, 1996, the Board of Directors adopted certain resolutions which were approved by the Company's stockholders to increase the number of authorized shares of common stock from 20,000,000 to 100,000,000. The Company's stockholders also approved the authorization of the issuance of a new class of 5,000,000 shares of preferred stock. The preferred stock of the Company can be issued in series. With respect to each series issued, the Board of Directors of the Company will determine, among other things, the number of shares in the series, voting rights and terms, dividend rates and terms, liquidation preferences and redemption and conversion privileges. There was no preferred stock outstanding at March 31, 1997 (see Note 12).
Employee Stock Option and Appreciation Rights Plan
On December 14, 1995 the Board of Directors adopted the Employee Stock Option and Appreciation Rights Plan (the "Employee Plan"), expiring December 15, 2005, reserving for issuance 1,100,000 shares of the Company's common stock. The Employee Plan provides for grants to key employees, advisors or consultants of or to the Company at the discretion of the Stock Option Committee of the Board of Directors, stock options to purchase common stock of the Company at a price equal in value to the fair market value, as defined, on the date of grant. Any options granted under the Employee Plan must be exercised within ten years of the date they were granted.
Under the Employee Plan, stock appreciation rights ("SAR"s) may also be granted in connection with the granting of an option and may be exercised in lieu of the exercise of the option. A SAR is exercisable at the same time or times that the related option is exercisable. The Company will pay the SAR in shares of common stock equal in value to the excess of the fair market value, at the date of exercise, of a share of common stock over the exercise price of the related option. The exercise of a SAR automatically results in the cancellation of the related option on a share-for-share basis.
During the fiscal years 1997 and 1996, the Stock Option Committee of the Board of Directors granted options to purchase an aggregate of 439,600 and 612,920, respectively, shares of common stock to its employees under the Employee Plan at exercise prices from $5.45 to $8.18 per share. The employees were also granted Stock Appreciation Rights in tandem with the options granted to them.
Directors Stock Option and Appreciation Rights Plan
On December 14, 1995 the Board of Directors adopted the Directors Stock Option and Appreciation Rights Plan (the "Director Plan"), expiring December 15, 2005, reserving for issuance 935,000 shares of the Company's common stock. The Director Plan provides that each person who is a member of the board of directors in December of each year (as defined) shall be granted, each year, a ten-year stock option to purchase 10,000 shares of common stock of the Company at a price equal to the fair market value, as defined, on the date of grant, as well as a corresponding stock appreciation right. An SAR is exercisable at the same time or times that the related option is exercisable. The Company will pay the SAR in shares of common stock equal in value to the excess of the fair market value, at the date of exercise, of a share of common stock over the exercise price of the related option. The exercise of an SAR automatically results in the cancellation of the related option on a share-for- share basis.
During the fiscal years 1997 and 1996, the Stock Option Committee of the Board of Directors confirmed the automatic grant of options to purchase 60,000 and 66,000, respectively, shares of common stock to its directors pursuant to the Company's Director Plan at exercise prices of $5.75 and $5.45, respectively, per share which was equal to the fair market value of the shares on the date of grant. The options are exercisable for a period of ten (10) years so long as the director remains with the Company. The directors were also granted Stock Appreciation Rights in tandem with options granted to them.
Other Stock Option Plans
During 1995, the Company granted various options to purchase an aggregate of 35,090 shares of its common stock to directors and employees for services rendered. Under the terms of the options, employees and directors may exercise their options at prices ranging from $5.75 to $7.13 (which approximated the fair market value at the date of grant) per share over a four to six year period beginning on the grant date, provided they remain directors or employees of the Company.
FASB Statement 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), requires the Company to provide pro forma information regarding net income (loss) and net income (loss) per share as if compensation costs for the Company' stock option plans and other stock awards had been determined in accordance with fair value based method prescribed in SFAS No. 123. The Company estimates the fair value of each stock award at March 31, 1997 by using the Black-Scholes option-pricing model with the following weighted-average assumptions used respectively: dividend yield of 10 percent for all years; expected volatility of 58-72 percent; risk-free interest rates of 5.18-6.03 percent; and expected lives of 1.5 years for the Plans and stock awards.
Under the accounting provisions for SFAS No. 123, the Company's net income per share would have been decreased by the pro forma amounts indicated below:
During the initial phase-in period of SFAS No. 123, the effect on pro forma results are not likely to be representative of the effects on pro forma results in future years since the above numbers do not include the effect of options granted prior to December 1995.
A summary of the status of the Company's stock options plans and outstanding warrants as of March 31, 1997, 1996 and 1995 and changes during the years ending on those dates is presented below:
The following table summarizes information about stock options and warrants outstanding at March 31, 1997:
8. Taxes on Income
As of March 31, 1997, a valuation allowance equal to the net deferred tax asset recognized has been recorded, as management of the Company has not been able to determine that it is more likely than not that the deferred tax asset will be realized based in part on the foreign operations and the operating loss carryforwards availability only to offset U.S. tax provisions.
For the years ended March 31, 1997, 1996 and 1995 a reconciliation of the United States federal statutory rate to the effective rate is shown below:
As of March 31, 1997, the Company has net operating loss carryforwards available of approximately $8,275,000, which can offset future years U.S. taxable income. Such carryforwards expire in various years through 2012 and are subject to limitation under the Internal Revenue Code of 1986, as amended.
(Balance of Page Intentionally Left Blank)
9. Segment Information
The Company is engaged in one business segment - Telecommunications. The following table presents information about the Company by geographic area:
For the years ended March 31, revenues from significant customers consisted of the following:
10. Commitments and Contingency
Employment Agreements
The Company and certain of its subsidiaries have employment agreements with certain key employees expiring at varying times over the next two years. The Company's remaining aggregate commitment at March 31, 1997 under such agreements is approximately $1,292,000.
Carrier Arrangements
The Company has entered into agreements with certain long-distance carriers in the United States and with telephone utilities in various foreign countries to transmit telephone signals domestically and internationally. The Company is entirely dependent upon the cooperation of the telephone utilities with which it has made arrangements for its operational and certain of its administrative requirements. The Company's arrangements are nonexclusive and take various forms. Although some of such arrangements are embodied in formal contracts, a telephone utility could cease to accommodate the Company's arrangements at any time. The Company does not foresee any threat to existing arrangements with these utilities, however, depending upon the location of the telephone utility, such action could have a material adverse affect on the Company's financial position, operating results or cash flows.
Lease Agreements
The Company leases office space and equipment under various operating leases. As of March 31, 1997, remaining minimum annual rental commitments under noncancelable operating leases are as follows:
Rent expense for the years ended March 31, 1997, 1996 and 1995 was approximately $406,000, $197,000 and $203,000.
11. Government Regulation
The telephone calling card industry is highly competitive and subject to extensive government regulations, both in the United States and abroad. Pursuant to the Federal Communications Act, the Federal Communications Commission ("FCC") is required to regulate the telephone communications industry in the United States. Under current FCC policy, telecommunications carriers, including the Company, who resell the domestic services of other carriers and who do not own telecommunications facilities of their own, are considered to be non-dominant and, as a result, are subject to the least rigorous regulation. Telecommunications activities are also subject to government regulations in every country throughout the world. The Company has numerous licenses, agreements, or equipment approvals in Hong Kong, Canada, Denmark, Germany, Japan and in other foreign countries where operations are conducted. To date, the Company has not been required to comply or been notified that it cannot comply with any material international regulations in order to pursue its existing business activities. There can be no assurances, however, that the current United States regulatory environment, including the present level of FCC regulations, that the Company will continue to be considered non-dominant and that various foreign governmental authorities will not seek to assert jurisdiction over the Company's rates or other aspects of its calling services. Such changes could have a material adverse affect on the Company's financial condition, operating results or cash flows.
12. Subsequent Events
On June 3, 1997, the Board of Directors of the Company approved the sale of 1,425,000 shares of the Company's common stock for $7,500,000 to one individual. A portion of the proceeds ($3,000,000) from the sale has been used to reduce long term debt. The remainder of the proceeds have been used either to provide working capital or invested in obligations through a financial institution.
13. Supplemental Disclosures of Cash Flow Information
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ITEM 9
ITEM 9 - CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein is incorporated by reference from the Company's definitive proxy statement for the 1997 annual meeting of stockholders.
ITEM 11
ITEM 11 - COMPENSATION OF EXECUTIVE OFFICERS, DIRECTORS AND CERTAIN EMPLOYEES
The information required herein is incorporated by reference from the Company's definitive proxy statement for the 1997 annual meeting of stockholders.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from the Company's definitive proxy statement for the 1997 annual meeting of stockholders.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from the Company's definitive proxy statement for the 1997 annual meeting of stockholders.
ITEM 14
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:
2. Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts
b) Reports on Form 8-K:
None
c) Exhibits:
3.1 Restated Certificate of Incorporation as amended July 26, 1996 and August 29, 1996 filed as Exhibit 3.1 to the Company's Form 10-Q for the period ended September 30, 1996 and incorporated herein by reference.
3.2 Bylaws as amended March 15, 1995 and July 26, 1996 filed as Exhibit 3.2 to the company's Form 10-Q for the period ended September 30, 1996 and incorporated herein by reference.
3.3 Amendments to Bylaws filed as Exhibit 3.1 to the company's Form 8-K dated February 5, 1997 and incorporated herein by reference.
4.1 Rights Agreement dated as of February 18, 1997 between the Company and American Stock Transfer & Trust Company, which includes the form of Certificate of Designations setting forth the terms of the Series A Participating Preference Stock, par value $.001 per share, as Exhibit A, the form of right Certificate as Exhibit B and the Summary of Rights to Purchase Preference Shares as Exhibit C filed as Exhibit 1 to the Company's Registration Statement on Form 8-A (No. 1-10210) and incorporated herein by reference.
4.2 Form of Letter from the Board of Directors of the Company to Stockholders mailed with copies of the Summary of Rights filed as Exhibit 2 to the company's Registration Statement on Form 8-A (No. 1-10210) and incorporated herein by reference.
10.1 Management Agreement with International 800 Telecom Corp. filed as Exhibit 10.2 to the Company's Form S-1 Registration Statement (No. 33-25572) and incorporated herein by reference.
10.2 Dominant Carrier Agreement with MCI filed as Exhibit 10.3 to the Company's Form S-1 Registration Statement (No. 33-25572) and incorporated herein by reference.
10.3 Sales Agent Agreements filed as Exhibit 10.4 to the Company's Form S-1 Registration Statement (No. 33-25572) and incorporated herein by reference.
10.4 Section 214 License filed as Exhibit 10.5 to the Company's Form S-1 Registration Statement (No. 33-25572) and incorporated herein by reference.
10.5 Damiel Elektronik Development Agreement filed as Exhibit 10.6 to the Company's Form S-1 Registration Statement (No. 33-25572) and incorporated herein by reference.
10.6 Loan Agreement Between International 800 Telecom Corp., Service 800 SA, the Company and Executive TeleCard SA filed as Exhibit 1 to the Company's Form 10K for the period ended March 31, 1992 and incorporated herein by reference.
10.7 Security Agreement Between International 800 Telecom Corp. and the Company filed as Exhibit 2 to the Company's Form 10K for the period ended March 31, 1992 and incorporated herein by reference.
10.8 Assignment Between International 800 Telecom Corp. and the Company filed as Exhibit 3 to the Company's Form 10K for the period ended March 31, 1992 and incorporated herein by reference.
10.9 Agreement for Sale and Purchase of Assets Between the Company and Residual Corporation filed as Exhibit 99.18 to the Company's Form 8-K dated April 24, 1995 and incorporated herein by reference.
10.10 Deed of Trust and Security Agreement between the Company and The Capitol Life Insurance Company dated December 21, 1992 for the 4260 East Evans Avenue, Denver, Colorado offices filed as Exhibit 10.10 to the Company's Form 10-K for the period ended March 31, 1997 and incorporated herein by reference.
10.11 Directors and Employees 1993 Stock Option Plan filed as Exhibit 10.11 to the Company's Form 10-K for the period ended March 31, 1997 and incorporated herein by reference.
10.12 Agreement between Executive TeleCard S.A. (Switzerland) and Telstra Corporation Limited (Australia) for Enhancement of Telecom Australia Calling Card dated August 3, 1993 files as Exhibit 10.12 to the Company's form 10-K for the period ended March 31, 1997 and incorporated herein by reference. This Agreement is subject to a grant of confidential treatment filed separately with the U.S. Securities and Exchange Commission.
10.13 Employment Agreement between Executive TeleCard, S. A. and Edward J. Gerrity, Jr. dated March 15, 1995 and Termination Agreement dated August 31, 1995 filed as Exhibit 10.13 to the Company's Form 10-K for the period ended March 31, 1997 and incorporated herein by reference.
10.14 Settlement Agreement between the Company and Network Data Systems Limited dated March 27, 1995 filed as Exhibit 10.14 to the Company's Form 10-K for the period ended March 31, 1997 and incorporated herein by reference
10.15 Employment Agreement an Termination Agreement between Executive TeleCard, S. A. and Anthony Balinger dated June 30, 1995 filed as Exhibit 10.15 to the Company's Form 10-K for the period ended March 31, 1997 and incorporated herein by reference.
10.16 Employment Agreement and Termination Agreement between Executive TeleCard, S. A. and Robert N. Schuck dated September 28, 1995 filed as Exhibit 10.16 to the Company's Form 10-K for the period ended March 31, 1997 and incorporated herein by reference.
10.17 Employment Agreement between Executive TeleCard, S. A. and Stig Sonnerberg dated November 1, 1995 filed as Exhibit 10.17 to the Company's Form 10-K for the period ended March 31, 1997 and incorporated herein by reference.
10.18 Employment Agreement between Executive TeleCard, S. A. and Stig Sonnerberg dated November 1, 1995 filed as Exhibit 10.18 to the Company's Form 10-K for the period ended March 31, 1997 and incorporated herein by reference.
10.19 Office Building Lease between Executive TeleCard, S. A. and Provident Life and Accident Insurance Company dated December 15, 1995 for the 1720 South Bellaire, Denver, Colorado offices and First Amendment to the Lease dated April 19, 1996 filed as Exhibit 10.19 to the Company's Form 10-K for the period ended March 31, 1997 and incorporated herein by reference.
10.20 Promissory Note and Stock Option Agreement between the Company and World Wide Export, Ltd. dated February 28, 1996 filed as Exhibit 10.20 to the Company's Form 10-K for the period ended March 31, 1997 and incorporated herein by reference.
10.21 Promissory Note and Stock Option Agreement between the Company and Seymour Gordon dated February 28, 1996 filed as Exhibit 10.21 to the Company's Form 10-K for the period ended March 31, 1997 and incorporated herein by reference.
10.22 Term Loan Agreement between Executive TeleCard, SA, the Company and Internationale Nederlanden (U. S.) Capital Corporation dated June 28, 1996
10.23 Promissory note and Stock Option Agreement between the Company and Network Data Systems, Limited dated June 27, 1996 filed as Exhibit 10.2 to the Company's Form 10-Q for the period ended June 30, 1996 and incorporated herein by reference.
10.24 Amendment to Term Loan Agreement by Executive TeleCard S. A., the Company, and ING (U. S.) Capital Corporation dated November 22, 1996 filed as Exhibit 10 to the Company's Form 10-Q for the period ended December 31, 1996 and incorporated herein by reference.
10.25 Settlement Agreement and Mutual Release dated as of May 28, 1996 between Executive TeleCard, Ltd. and Walter K. Krauth, Jr. filed as Exhibit 10 to the Company's Form 8-K dated May 28, 1996 and incorporated herein by reference.
10.26 Directors and Employees 1993 Stock Option Plan filed as Exhibit 4.3a to the Company's Form S-8 Registration Statement (No. 333- 15057) and incorporated herein by reference.
10.27 1995 Employee Stock Option and Appreciation Rights Plan filed as Exhibit 4.3b to the Company's Form S-8 Registration Statement (No. 333-15057) and incorporated herein by reference.
10.28 1995 Directors Stock Option and Appreciation Rights Plan filed as Exhibit 4.3c to the Company's Form S-8 Registration Statement (No. 333-15057) and incorporated herein by reference.
21 Subsidiaries of the Registrant
23 Consent of BDO Seidman, LLP
27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EXECUTIVE TELECARD, LTD.
Dated: June 27, 1997 BY: /S/ Anthony Balinger, President and Principal Executive Officer
Pursuant to the requirement of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in capacities and on the dates indicated.
Dated: June 27, 1997 BY: /S/ Anthony Balinger, Director
Dated: June 27, 1997 BY: /S/
Edward J. Gerrity, Chairman and Director Dated: June 27, 1997 BY: /S/ Allen Mandel, Executive Vice President and Principal Financial Officer
Dated: June 27, 1997 BY: /S/ Timothy A. Peach, Controller, Treasurer, and Principal Accounting Officer
Dated: June 27, 1997 BY: /S/ Stig Sonnerberg, Director
Dated: June 27, 1997 BY: /S/ Richard Krinsley, Director
Dated: June 27, 1997 BY: /S/ David Warnes, Director
Dated: June 27, 1997 BY: Ronald W. Howard, Director
Dated: June 27, 1997 BY: Ronald L. Jensen, Director
Dated: June 27, 1997 BY: Ebrahim Ali Abdul Aal, Director