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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended January 31, 1998 .
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to .
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Commission File Number 0-2180
TOTAL-TEL USA COMMUNICATIONS, INC. .
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(Exact name of registrant as specified in its charter)
New Jersey . 22-1656895 .
- ------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 Clove Road, Little Falls, NJ 07424
--------------------------------------------------
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (973) 812-1100
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.05 par value per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Aggregate market value (based upon a $40.25 closing price) of the voting
stock held by nonaffiliates of the Registrant as of May 12, 1998:
$100,481,509.
Number of shares of Common Stock outstanding on May 12, 1998:
3,441,447.
DOCUMENTS INCORPORATED BY REFERENCE
None
PART 1
------
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Annual Report on Form 10-K are
"forward-looking statements" intended to qualify for the safe harbors
from liability established by the Private Securities Litigation Reform
Act of 1995. These forward-looking statements can generally be
identified as such because the context of the statement will include
words such as the Company "believes", "anticipates", "expects", or words
of similar import. Similarly, statements that describe the Company's
future plans, objectives or goals are also forward-looking statements.
Such forward-looking statements are subject to certain risks and
uncertainties which are described in close proximity to such statements
and which could cause actual results to differ materially from those
anticipated as of the date of this report. Shareholders, potential
investors and other readers are urged to consider these factors in
evaluating the forward-looking statements and are cautioned not to
place undue reliance on such forward-looking statements. The forward-
looking statements included herein are only made as of the date of this
report and the Company undertakes no obligation to publicly update such
forward-looking statements to reflect subsequent events or
circumstances.
ITEM 1. BUSINESS
--------
Total-Tel USA Communications, Inc. ( "TotalTel", the "Registrant"
or the "Company" ), a New Jersey corporation, was organized on June 8,
1959, under the name of Faradyne Electronics Corp. and adopted its
present name on November 4, 1991. The Registrant's principal executive
office is located at 150 Clove Road, Little Falls, New Jersey, 07424 and
its telephone number is (973) 812-1100. The Registrant operates as a
full service inter-exchange carrier as more fully described herein.
PRINCIPAL PRODUCTS AND SERVICES
- -------------------------------
Telecommunications Services
- ---------------------------
In September, 1982, Registrant formed Total-Tel, as a division of
its principal operating subsidiary, commenced offering interstate
telephone communication services in January, 1983 and provided the
foundation for what is now the Registrant's primary business. Total-Tel
operates as a full service interexchange carrier providing 24 hour, 7
day a week, telephone communication services to customers nationwide.
The Registrant's principal market is Northern New Jersey and the New
York Metropolitan area for direct transmission within the contiguous
United States, and to over 150 countries around the world. The
intercity circuits TotalTel utilizes to transmit its customers'
telephone calls include, among other facilities, private lines leased
from AT&T, World Com, Inc., Qwest and other usage sensitive services
leased from other competing carriers. TotalTel offers its services
primarily through its network consisting of digital computerized
switches in Newark, New Jersey, New York, New York and Miami, Florida,
and intercity circuits which provide access and identification, call
routing, transmission and billing records. Subscribers are billed based
on the distance and duration of each call completed.
In July, 1987, TotalTel began offering its telecommunication
services to commercial customers in New York City through Total-Tel USA,
Incorporated, a wholly owned subsidiary. On August 1, 1992, TotalTel
extended its telecommunications services to commercial customers in the
Southeastern United States through Total-Tel Southeast, Inc., a wholly
owned subsidiary. TotalTel began offering its dedicated services and
related high usage T1.544 services in late 1985. These services were
designed to attract larger, more sophisticated business customers to the
Registrant. In April, 1995, the Registrant formed TotalTel Carrier
Services, Inc. for the purpose of providing long distance service to
other common carriers in the telecommunications industry, on a wholesale
basis. Wholesale sales were $57,981,349 and $31,429,277 for the fiscal
years ended January 31, 1998 and 1997, respectively.
TotalTel employs SS7 digital technology and Sonet Ring technology
in its network. Digital facilities utilize more sophisticated
engineering to yield enhanced voice quality as opposed to older analog
technology. The capital expenditure necessary to increase transmission
capability through digital technology is less than the comparable cost
to expand on an analog basis. Additionally, most of TotalTel's calling
volume is carried over fiber optic facilities leased from other carriers
as described above and from Bell Atlantic, and other Regional Bell
Operating Companies, (RBOC'S).
During the Fiscal year ended January 31, 1998, and in Fiscal 1997,
a majority of the traffic was carried through various equal access
services, also known as switched access, and are priced and offered
based on the calling volume of the particular customer. The retail
marketing focus is on customizing services for business customers in the
niche market now served by Registrant.
TotalTel currently has approximately 16,000 active accounts, of
which approximately 95% are commercial and the balance are residential
subscribers. Sales are made primarily through advertising, direct
telephone solicitation, field sales contacts, agent sales and referrals
from present customers.
Due to TotalTel's strategic geographic location in the New York
Metropolitan Area, the Company continues to foresee benefits from the
availability of a large number of suppliers of transmission facilities
located in New York which should provide potential for improved
operating efficiency.
Competition
- -----------
The most significant competitor in the telecommunications industry,
AT&T, has indicated that it intends to compete vigorously with other
common carriers (other independent telephone companies). In the past
several years, AT&T has implemented several significant rate reductions
for its long distance message services. These reductions have required
other carriers, including TotalTel, to lower their rates in order to
remain competitive.
In addition, TotalTel competes with carriers such as MCI
Communications Corporation ( "MCI" ), U. S. Sprint, WorldCom, Inc.,
Frontier and other large companies engaged in providing services in
competition with those services offered by TotalTel. TotalTel also
directly competes with local and regional companies which resell
services, a number of which are substantially larger than TotalTel.
The Telecommunications Act of 1996 ("The Act") allows local
exchange carriers (LECs), under certain circumstances, to compete in the
long distance telecommunications market which should substantially
increase competition in the future. The Act also allows long distance
carriers to provide local service and the Registrant anticipates
entering this market during the latter half of Fiscal 1999.
In the opinion of Registrant's management, TotalTel's principal
methods of competition with AT&T and others have been and are expected
to continue to be pricing, customized service, quality and the
development of special billing and other niche services. TotalTel's
long distance capability and its customer services should continue to
make it competitive for most business users of AT&T, MCI and US Sprint
services.
Year 2000 Matters
- -----------------
As is the case with most other companies using computers in their
operations, the Company is in the process of addressing the Year 2000
problem. This matter will be addressed concurrently with another
project to enhance the companies billing system. While the primary focus
of the project is to install a state of the art billing system, it will
also include a solution to the Year 2000 problem, As such, no
additional cost for the Year 2000 problem over and above the normal cost
of the new billing system is anticipated. The switching and accounting
programs have been audited and found to be Year 2000 compliant.
Seasonal Nature of Business
- ---------------------------
Registrant's business is not seasonal.
Patents, Trademarks, Licenses, etc.
- ----------------------------------
Registrant does not hold any material patents, franchises or
concessions.
Government Regulations
- ----------------------
On August 1, 1982, the Federal Communications Commission ( "FCC" )
substantially deregulated resale common carriers, such as the
Registrant. The FCC does not require certification of such carriers to
initiate business activities nor does it exercise its authority to
regulate their rates and services, although it has the power to do so in
the future. The FCC may act upon complaints against the Registrant or
any other common carrier for failure to comply with its statutory
obligations as a common carrier. Registrant is duly tariffed with the
FCC as a switch-based interexchange carrier.
In 1995, the FCC discontinued regulating the rates and services of
AT&T, determining that AT&T is a non-dominant carrier. This
determination may affect the Registrant because it competes with AT&T,
utilizes AT&T lines to transmit some of its long distance traffic, and
leases local access transmission facilities from RBOCS and other local
telephone companies which are FCC regulated. The FCC currently
prohibits carriers such as AT&T from refusing to permit resale of their
services.
Services in New York City are regulated by the New York State
Public Service Commission, which requires the filing of a tariff, among
other requirements. TotalTel has received approval of its tariff and
continues to maintain its tariff in full force and effect. TotalTel
Southeast, Inc. is regulated by the Georgia Public Service Commission
which requires the filing of a tariff. TotalTel Southeast, Inc. has
received approval of its tariff and continues to maintain its tariff in
full force and effect.
Since Fiscal 1996, the Registrant is registered in 49 states, in
respect to service within those states, and is thus subject to the
regulatory requirements of the various Public Service Commissions or
similar agencies of these states.
Beginning in April, 1988, TotalTel provided its domestic customers
international phone service to numerous foreign countries.
International services are regulated by the FCC which requires a license
and the filing of a tariff. TotalTel's license has been granted, and
its tariff has been approved.
Compliance with Environmental Provisions
- ----------------------------------------
Registrant believes that it complies in all material respects with
current pertinent federal, state, and local provisions relating to the
protection of the environment and does not believe that continued
compliance should require any material capital expenditure.
Personnel
- ---------
Registrant and its subsidiaries currently employ 231 full-time
employees in its long distance telecommunication service, of the full
time employees 48 are engaged in sales activities, 11 in customer
support, 25 in customer service, 33 in technical and field services, 16
in data processing, and 98 in general and administrative activities.
The Company also employs approximately 15 part time employees and
utilizes the services of approximately 260 independent sales agents. The
Registrant considers its relations with its employees to be excellent.
ITEM 2. PROPERTIES
----------
On November 15, 1993, and December 28, 1993, Total-Tel entered
into leases to rent an aggregate of approximately 3,500 square feet of
space at 744 Broad Street, Newark, New Jersey, for its upgraded
switching equipment. The leases run from January 1, 1994 through
December 31, 1998 at an annual rental of $51,480 and also require the
tenant to pay a proportionate share of any increase in the "Consumer
Price Index", U. S. City Average, over the base year.
On December 1, 1993, Total-Tel entered into a five year lease to
rent approximately 20,000 square feet of space from a partnership in
which two of the partners are directors and major shareholders of the
Company. The lease provides for annual rentals of $58,560 for the first
three years and $63,885 for years four and five. This space is used
for warehousing and office space for the technical support employees.
The lease requires the payment of any increase in operating expenses and
real estate taxes over the base year.
On February 22, 1994, Total-Tel Inc. entered into a lease,
subsequently modified on April 15, 1994, for approximately 17,700 square
feet of space at 150 Clove Road, Little Falls, New Jersey to be used as
sales, executive and administrative offices. The lease provided for a
rent holiday until July, 1995, after which the annual rental would be
approximately $360,000. The lease is for five years and ten months and
has been amended by a second lease modification agreement dated February
9, 1995 whereby the Registrant leased approximately 6,700 additional
square feet of space at the same location at an additional annual rental
of $121,707 for the first four years and $138,154 for the next year and
two months. The modified agreement also extended the term of the
existing lease for an additional two years to August 14, 2002 at a then
annual rental of $563,063. The lease requires the payment of the
tenant's proportionate share of operating expenses and real estate taxes
increased over the base year.
On January 30, 1997, the Company entered into a third modification
of its lease for approximately 16,640 square feet of additional office
space at its existing facility at 150 Clove Road, Little Falls, New
Jersey. The annual rental on the additional space will be $357,760 per
annum from July 1, 1997 through February 14, 1998, $366,800 per annum
from February 15, 1998 through August 14, 2000, and $382,720 per annum
from August 15, 2000 through August 14, 2002. In addition, the Company
is liable for its proportionate share of increases in real estate taxes
and operating expenses over the base year.
On November 1, 1996, the Company entered into a lease for
approximately 8,300 square feet of space at 40 Rector Street, New York
City, New York, to be used for a second switching facility. The term of
the lease is for fifteen years and ten months from the date of
commencement which was February 1, 1998. Rental payments are $133,184
per annum for the first five years after commencement, $166,480 per
annum for the next five years, and $183,128 per annum for five years and
ten months. The lease requires the payment of the tenant's proportional
share of increased operating expenses and real estate taxes over the
base year.
On November 8, 1996, a subsidiary of the Company entered into a
lease for approximately 2,300 square feet of office space in New York
City, New York at an annual rental of approximately $75,900. The lease
commenced February 1, 1997 and is for sixty three months. The lease
requires the payment of the tenant's proportionate share of increased
operating expenses and real estate taxes over the base year.
On February 6, 1998, the Company entered into a lease for
approximately 5,000 square feet of space at 28 W. Flagler Street, Miami,
Florida. The term of the lease is 15 years, commencing February 1,
1998. The annual rental fee is $106,618, with an annual adjustment
based on the Revised Urban Wage Earners and Clerical Workers Index,
capped at a maximum of 3% increase over the prior years rental payment.
In addition, the Company is liable for its proportionate share of
increases in real estate taxes and operating expenses over the base
year.
Certain of the leases contain options to renew for various periods
at rentals to be determined by the then prevailing fair market rental
rates for similar real estate in the area.
ITEM 3. PENDING LEGAL PROCEEDINGS
-------------------------
The Registrant brought suit in Civil Court of the City of New York,
County of New York against a customer, Community Network Services, Inc.
d/b/a Telecommunity, for the recovery of an account receivable of
$37,917 plus interest, attorneys fees and damages. Defendant asserted a
counter claim against the Registrant in the Supreme Court of the State
of New York, County of New York alleging breach of contract and seeks
compensatory and punitive damages of $1,300,000. The Registrant
believes the counter suit is without merit and is vigorously defending
this action.
On March 31, 1998 the Board of Directors of the Registrant adopted
a Shareholders Rights Plan. Subsequently Gold and Appel Transfer, SA
commenced a proceeding, in the Chancery Court, Bergen County, State of
New Jersey, to enjoin the adoption of the Plan as well as certain by-law
amendments adopted by the Board. The proceeding is currently pending.
Registrant believes that the adoption of the Plan and by-law amendments
will be sustained by the court.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
(THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK)
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
------------------------------------------------
SECURITY HOLDER MATTERS
-----------------------
(a) Registrant's Common Stock is traded in the
over-the-counter market on the NASDAQ National Market System. The
following table sets forth, for the quarterly fiscal periods indicated,
the high and low closing sales prices for Registrant's Common Stock in
such market, as reported by the National Association of Securities
Dealers, Inc. Closing sale prices prior to July 1, 1996 have been
adjusted to reflect the stock split, discussed in (d) below.
FISCAL 1998 HIGH LOW
----------- ---- ---
February 1 thru April 30 18 1/4 11
May 1 thru July 31 25 1/2 13 5/8
August 1 thru October 31 30 1/4 18
November 1 thru January 31,1998 33 25 1/4
FISCAL 1997
-----------
February 1 thru April 30 12 1/4 8 3/4
May 1 thru July 31 18 1/8 9 1/4
August 1 thru October 31 25 7/8 16 1/2
November 1 thru January 31, 1997 23 15 1/4
(b) As of April 20, 1998, the approximate number of
recordholders of Registrant's Common Stock was 752, as reported by
Registrant's transfer agent.
(c) Registrant has not paid or declared any cash dividends
during the past two fiscal years and does not anticipate paying any in
the foreseeable future.
(d) On July 1, 1996, the Registrant distributed 1,873,420
shares of Common Stock in connection with a 2 for 1 stock split of all
outstanding shares as of June 15, 1996.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
(In thousands except per share amounts)
Year ended January 31, .
-----------------------------------------------------------------------------
RESULTS OF OPERATIONS: 1998 1997 1996 1995 1994 .
----------- ----------- ----------- ----------- -----------
RESTATED
Net sales $ 123,286 $ 89,326 $ 49,873 $ 29,817 $ 18,999
Earnings from
continuing operations $ 1,094 $ 492 $ 1,555 $ 1,100 1,052
Net earnings $ 1,094 $ 492 $ 1,555 $ 1,100 $ 1,156
Earnings Per Common and Common Equivalent Shares (b):
Basic:
Continuing Operations
Before Cumulative Effect
Of Accounting Change $ 0.35 $ 0.17 $ 0.53 $ 0.34 $ 0.34
Accounting Change $ -- $ -- $ -- $ -- $ 0.03
Net earnings per share $ 0.35 $ 0.17 $ 0.53 $ 0.34 $ 0.37
Diluted:
Continuing Operations
Before Cumulative Effect
Of Accounting Change $ 0.32 $ 0.15 $ 0.48 $ 0.34 $ 0.32
Accounting Change $ -- $ -- $ -- $ -- $ 0.03
Net earnings per share $ 0.32 $ 0.15 $ 0.48 $ 0.34 $ 0.35
Average common shares
outstanding (a)
Basic 3,107 2,941 2,909 3,258 3,158
Diluted 3,421 3,369 3,263 3,258 3,268
Cash dividends per
common share NONE NONE NONE NONE NONE
Additions to property
& equipment $ 3,268 $ 6,397 $ 3,028 $ 2,268 $ 1,375
Depreciation and
amortization $ 2,028 $ 1,382 $ 1,026 $ 663 $ 492
FINANCIAL POSITION:
Working Capital $ 7,936 $ 5,419 $ 4,799 $ 5,031 $ 4,683
Property and equipment - net $ 12,406 $ 11,066 $ 6,011 $ 3,924 $ 2,236
Total assets $ 40,245 $ 31,029 $ 20,520 $ 15,110 $ 11,071
Long-term debt $ 2,092 $ 2,940 $ -- $ -- $ --
Shareholders' Equity $ 18,598 $ 14,772 $ 10,700 $ 9,093 $ 7,917
Common shares
outstanding (a) 3,329 2,945 2,927 2,900 2,876
(a) All per share amounts have been restated to reflect the 2 for 1
stock split distributed July 1, 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Results of Operations
- ---------------------
Fiscal 1998 as Compared to Fiscal 1997
--------------------------------------
The following discussion of the results of operations relates to
the continuing operations of the Registrant.
Net sales of telecommunications services and systems in Fiscal 1998
were $123,286,028 as compared to $89,325,921 in fiscal 1997,
representing approximately a $33,960,000 increase, or 38%.
The continued growth in revenues in Fiscal 1998 is largely
attributable to the rapid expansion of the Registrant's sales to other
carriers along with aggressive internal sales and marketing efforts.
The Registrant completed the installation of its upgraded DEX 600 switch
at its new facility in Newark, New Jersey in the second quarter of
Fiscal 1995, which increased transmission capabilities significantly and
was designated to allow for substantial future expansion.
The Registrant also completed installation of a DEX 600E MEGAHUB
switch at its new facility in New York City which should double the
Registrant's current revenue capacity. This facility became operational
in July, 1997.
The Registrant is currently in the process of bringing on line a
DEX 600E MEGAHUB switch at its facility in Miami, Florida. This site
will increase revenue capacity for the Eastern Seaboard as well as serve
as an international gateway to South America. This site should be
operational in the second quarter of Fiscal 1999.
TotalTel had operating income of $1,547,574 in Fiscal 1998 and
operating income, as restated, of $653,241 in Fiscal 1997. The
operating income represents the income before interest income, interest
expense, other income, other expense and provision for income taxes.
For Fiscal 1998, the Registrant billed approximately 862,479,000
minutes of calls as compared to approximately 616,990,000 minutes of
calls for the prior fiscal year, an increase of approximately
245,489,000 minutes or 39.8%.
Cost of sales includes line costs, operations costs and purchase of
phone systems for resale. Cost of sales for Fiscal 1998 increased
approximately $32,257,000 or 48.3% as compared to the prior fiscal year.
This increase was unfavorable in relation to the 38.0% increase in sales
volume for the period and is attributable to having a higher mix of
lower margin wholesale sales and competitive pricing pressure in the
industry. Line costs for Fiscal 1998 were $94,492,000, an increase of
$30,657,000 or 48.0% over the prior year. The increase in line cost,
was attributable primarily to the substantially increased sales volume
of the Company. The balance of cost of sales was for phone system
sales. The operating expense components are switch and field
technician salaries, utilities, rent and depreciation which totaled
$4,142,000 for Fiscal 1998, an increase of $1,148,000 or 38.3%. This
increase was primarily due to the additions of the New York switch and a
new Network Operations Center.
Selling, general and administrative expenses increased
approximately $3,779,000 or 20.6% for Fiscal 1998 as compared to the
prior fiscal year. The increase was primarily due to increased salaries
of $3,282,626 or 49.9%, increased commissions of $839,000 or 18.4%.
The increase in salaries results from the buildup of infrastructure in
Product Development, MIS, Customer Service, and Sales. The buildup is
to serve the anticipated growth. The substantial increase in
commission, is directly attributable to the sales volume growth.
Stock compensation expense decreased approximately $2,970,000. In
Fiscal 1997, options to purchase 218,000 shares of common stock had
their expiration dates extended to January 17, 2002. This caused a non-
cash charge of approximately $3,482,000. In 1998, stock
options to purchase only 16,500 stock options were remeasured giving
rise to a $433,000 expense item.
Other income of $359,000 consists of insurance proceeds upon the
death of a former officer and director of the Company.
Interest income for Fiscal 1998 decreased approximately $39,000 as
compared to Fiscal 1997 primarily due to a reduction in the funds
available for investment.
Fiscal 1997 as Compared to Fiscal 1996
--------------------------------------
The following discussion of the results of operations relates to
the continuing operations of the Registrant.
Net sales for Fiscal 1997 increased approximately $39,453,000 as
compared to Fiscal 1996. The increase in telephone sales volume of
approximately 79.1% was primarily due to intensive sales and marketing
by the Registrant, both internally, through expanded agency sales
partially offset by lower prices and the substantial increase in sales
to other carriers on a wholesale basis.
For Fiscal 1997, the Registrant billed approximately 616,990,000
minutes of calls as compared to approximately 365,878,000 minutes of
calls for the prior fiscal year, an increase of approximately
251,112,000 minutes or 68.6%.
Cost of sales for Fiscal 1997 increased approximately $31,975,000
or 91.7% as compared to the prior fiscal year. This increase was
unfavorable in relation to the 79.1% increase in sales volume for the
period and is attributable to the lower gross profit in wholesale sales
to other carriers and competitive pricing pressures in the industry.
Line costs for Fiscal 1997 were $63,835,000, an increase of
$31,393,000 or 96.8% over the prior year. The other components are
switch and field technician salaries, utilities, rent and depreciation
which totaled $2,994,000 for Fiscal 1997, an increase of $580,000 or
24.1%. The increase in cost of sales was attributable primarily to
the substantially increased sales of the Company. Gross profit
decreased in Fiscal 1997 to 25.2% from 30.1% in Fiscal 1996. The
decrease in gross profit was due to carrier sales having a substantial
lower gross margin.
Selling, general and administrative expenses increased
approximately $5,662,000 or 44.8% for Fiscal 1997 as compared to the
prior fiscal year. The increase was primarily due to increased salaries
of $2,113,000 or 47.3%, increased commissions of $1,228,000 or 36.8%,
increased provision for bad debts of $130,000 or 15.9% and an
increase in legal and professional of $445,000 or 38.7%. The continued
substantial increase in commission is attributable to the aggressive
pursuit of new business in a highly competitive market. The
substantial increase in legal and professional is attributable to the
defense of a lawsuits as disclosed in the Registrant's Financial
Statements, which was settled during the year.
Stock compensation expense of $3,539,653 arose from the remeasuring
of certain stock options granted to executives of the Registrant. As
required by Financial Accounting Standards Board opinion number 123,
when the expiration date of stock options is extended, the compensation
expense related to those options is remeasured at the Fair Market Value
on the date of the extension.
Interest income for Fiscal 1997 decreased approximately $25,000 as
compared to Fiscal 1996 primarily due to a reductions in the funds
available for investment.
Liquidity and Capital Resources
-------------------------------
At January 31, 1998, the Registrant had working capital of
approximately $7,936,000 as compared to $5,419,000 at January 31, 1997,
an increase of $2,517,000. This increase in working capital at January
31, 1998 was attributable primarily to an increase in accounts
receivable of $6,413,000 (net of allowance for doubtful accounts), an
increase in cash and cash equivalents of $828,000, an increase in
prepaid and other current assets of $1,914,000, and a decrease in other
current and accrued liabilities of $465,000, partially offset by a
decrease in investments available for sale of $432,000, a decrease in
deferred tax assets of $46,000, an increase in accounts payable of
$6,134,000, and an increase in the current portion of long term debt of
$487,000.
The current ratio of 1.4 to 1, remained constant between fiscal
1997 and 1998. The Registrant continues to maintain a strong liquid
position with cash and cash equivalents and investments available for
sale of $4,000,000 representing 21.8% of current liabilities.
The cash flow statement of the Registrant for Fiscal 1998 indicated
an increase in cash of $828,000. Net earnings of $1,094,001 and non
cash adjustments of $4,427,000 reduced by net changes in assets and
liabilities of $3,046,000 provided cash from operations of $2,475,000.
Cash used in investing activities totaled $2,705,000. The major
components were purchases of property and equipment of $3,268,000 and
additions to line installation costs of $123,000, partially offset by
the proceeds from the sale of securities for $443,000, and collection of
notes due from employees of $233,000. Cash provided by financing
activities totaled $1,057,000 and was the result of the exercise of
stock options, partially offset by the scheduled paydown of long term
debt.
Capital Expenditures
--------------------
Capital expenditures during Fiscal 1998 totaled approximately
$3,268,000 and were financed from funds provided from Registrant's
working capital, cash derived from operations, and bank borrowings.
Of the $3,268,000, $1,074,000 was used for additional enhancements to
the New York city switch, $504,000 was for switch enhancements in
Newark, $759,000 was spent on leasehold improvements and furniture and
fixtures in the additional space leased at the Company's principal
office in New Jersey, $310,000 was spent on the new NOC, $424,000 was
spent on improvements to the LAN networks and MIS software and hardware
upgrades, $40,000 for trucks for service and $100,000 initial
expenditures on the Miami switch.
Capital expenditures for Fiscal 1999 are estimated at approximately
$15,000,000 and are expected to be financed from funds provided from the
registrants bank line of credit, existing working capital, and cash
derived from operations.
The capital expenditures are expected to be used for the installation
of a switch in Miami, $1,139,000, installation of a switch in London
(4th quarter), $3,000,000, new EDS billing system, $3,000,000, LAN/WAN
software and hardware upgrades, $1,100,000, installation of switch
equipment to enter the local market, $2,255,000, various improvements to
current switch operations, $1,100,000 and the purchase of an IRU to London,
$3,000,000.
As of January 31, 1998, the Registrant had a bank line of credit of
$6,000,000. In March of 1998 the Company entered into a modification of
the agreement which increased the line of credit to $8,000,000 and
$5,000,000 for the purchase of machinery and equipment. During Fiscal
1998 Registrant had bank borrowings of $2,579,201. For further detail
see Note 10 to the Consolidated Financial Statements.
Inflation
- ---------
Since inflation has slowed in recent years, the Registrant does not
believe that its business has been materially affected by the relatively
modest rate of price increases in the economy. The Registrant continues
to seek improvements in operations and efficiency through capital
expenditures. Expenditures to improve the signaling system, information
systems and the local area network are expected to result in operating
costs savings which could partially offset any cost increases which may
occur in the future.
Environmental Matters
---------------------
The Registrant is not a party to any legal proceedings or the
subject of any claim regarding environmental matters generally
incidental to its business. In the opinion of Management, compliance
with the present environmental protection laws should not have a
material adverse effect on the financial condition of the Registrant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The Financial Statements and Supplementary Data are included under
Item 14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The directors and officers of the Registrant are as follows:
Name Age Position
- ---- --- --------
Solomon Feldman 77 Director
Warren H. Feldman 42 Chairman, Chief Executive Officer
and Director
Leon Genet 66 Director
Thomas P. Gunning 60 Vice President, Treasurer
and Secretary
Jay J. Miller 65 Director
The Registrant's directors all serve for one year terms or until
their successors are elected and qualify. Officers serve at the
pleasure of the Board of Directors.
Mr. Solomon Feldman has served as a Director of the Registrant
continuously since its inception in 1959, and as Treasurer from
inception to May 2, 1997. Mr. Feldman is currently a private investor
and devotes approximately 25% of his time to the business of the
Company.
Warren H. Feldman, Esq. was elected President and Chief Executive
Officer of the Registrant in September, 1992 and was elected Chairman of
the Board in September, 1994. Prior to such time, he served as Vice
President - Regulatory Affairs of the Registrant since January, 1986,
and had been the General Manager of Total-Tel USA Division and in-house
General Counsel of Registrant since 1984. He was elected a Director on
April 1, 1987 and President of Total-Tel USA Division on October 27,
1988. Warren H. Feldman is the son of Solomon Feldman.
Leon Genet is a partner in Genet Realty, a commercial and
industrial real estate brokerage firm. Following graduation from
Syracuse University, he was an officer in the United States Air Force.
Mr. Genet continues his significant involvement with Syracuse University
as a benefactor and as a charter member of the Board of the College for
Human Development, home of the highly popular Genet lecture series,
which brings CEO's of leading worldwide corporations to the Syracuse
campus. He serves as a member of the National Commerce and Industry
Board for the State of Israel Bonds Organization and is a shareholder,
director and officer of LPJ Communications, Inc. which has earned
commissions from TotalTel USA Communications, Inc. on the same basis as
other independent representatives.
Thomas P. Gunning was appointed Chief Financial Officer in
September, 1994 and Secretary of the Registrant in January, 1995. He
has served as Controller of the Registrant since September 1992. He is
a Certified Public Accountant licensed by the States of New York and New
Jersey. From 1989 until joining the Registrant, Mr. Gunning was the
Senior Audit Manager at Rosenberg Selsman & Company a certified public
accounting firm. From 1976 to 1989, he was Chief Financial Officer of
Flyfaire, Incorporated a travel wholesale operator. Prior to such time,
Mr. Gunning held various positions in both public and private accounting
Jay J. Miller, Esq. has been a practicing attorney for more than
thirty years in the State of New York. Mr. Miller is a Director of
Edison Control Corporation, a manufacturer of pipe, fittings and
accessories for concrete pumping equipment. He is also Chairman of the
Board of AmTrust Pacific, LTD., a New Zealand real estate company.
OTHER SIGNIFICANT EMPLOYEES
Ben Goldberg joined TotalTel, Inc., the principal operating
subsidiary of the Registrant, in February, 1983 as an account executive.
In January 1992, Mr. Goldberg was promoted to Vice President of Sales.
In June, 1994, Mr. Goldberg was promoted to Senior Vice President of
TotalTel , Inc.
David Hess, President and Chief Operating Officer of TotalTel,
Inc., joined TotalTel Carrier Services, Inc., an operating subsidiary of
the Registrant, in May 1995 as Vice President. Mr. Hess was appointed
Senior Vice President of TotelTel Carrier Services, Inc. in October
1996. On September 27, 1997 , Mr. Hess was promoted to President of
Total Tel, Inc.. Prior to joining the Registrant, Mr. Hess served as
Director of Eastern Regional Carrier Sales for West Coast
Telecommunication, Inc. from 1993 to 1995. From 1991 to 1993, Mr. Hess
was National Account Manager for Sprint Carrier Services. From 1989 to
1993, Mr. Hess was Strategic Account Manager for United Telephone
Systems. From 1986 to 1989, Mr. Hess was employed by M C I in various
sales management positions.
Jeff Slater joined TotalTel, Inc., as Senior Vice President in
September 1996. From 1991 to 1996, Mr. Slater was founder and President
of JTEK Systems, Ltd., a firm which provides consulting services to
various telecommunications companies including the Registrant. In 1990,
Mr. Slater served as Corporate Director of Product Development for LCI
Communications, Inc. From 1987 to 1990, Mr. Slater served as Executive
Vice President of Operations of Charter Network Company which was
acquired by LCI Communications, Inc. in 1990. Prior to such time, Mr.
Slater held various executive positions with Companies in the
telecommunications industry. Mr. Slater resigned his position effective
December 31, 1997. Effective January 1, 1998, Mr. Slater ceased to be
an employee, and currently serves as a consultant to the Company.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
a) The following table sets forth the compensation which the Registrant paid during the fiscal years ended January 31, l998,
1997, 1996 to the Chief Executive, each Executive Officer of the Registrant whose aggregate remuneration exceeded $100,000.
Summary Compensation Table
--------------------------
Name and Fiscal Year Annual Compensation Other Compensation
Principal Ended Annual Awards All Other
Position January 31 Salary ($) Bonus(s) Compensation($) Options (#) Compensations(s)
- -------- ------------ ---------- -------- --------------- ----------- ---------------
Warren H. 1998 $287,115 (1) $350,000 $ 15,325 (4)
Feldman 1997 $315,000 (1) $295,000 $ 7,025 (5)
Chairman and 1996 $195,000 (1) $274,241 $ 4,667 (6)
Chief Executive
Officer
Kevin Alward 1998 (2)(3) $268,817 $270,499 $ 12,877 (7)
President and 1997 $315,000 $280.000 $ 9,769 (8)
Chief Operating 1996 $195,000 $274.241 $ 6,010 (9)
Officer
Thomas P. 1998 $116,000 $ 4,000 $ 8,265 (10)
Gunning 1997 $ 95,231 $ 6,000 $ 6,560 (11)
Vice President,
Treasurer and
Secretary
David Hess 1998 $264,615 $176,773 $115,008 (12) $ 8,655 (13)
President &
Chief Operating
Officer of
Total Tel, Inc.
Jeff Slater 1998 $235,846 $235,433 $ 3,461 (14)
Senior Vice
President of
Total Tel, Inc.
(1) Does not include an annual Director's fee of $15,000.
(2) Resigned as an officer of the Company on January 23, 1998
(3) Does not include director's fees of $2,500.
(4) The amounts shown represent the Registrant's contribution under its 401 (K) Deferred Compensation and Retirement
Savings Plan of $4,688 and $2,357 for the use of a company vehicle for non-business purposes and $8,280 term life
insurance premiums.
(5) The amount shown represents the Registrant's contribution under its 401 (K) Deferred Compensation and Retirement
Savings Plan of $4,668 and $2,357 for the use of a company vehicle for non-business purposes.
(6) The amounts shown represents the Registrant's contribution under its 401 (K) Deferred Compensation and Retirement
Savings Plan of $2,310 and $2,357 for the use of a company vehicle for non-business purposes.
(7) The amounts shown represent the Registrant's contribution under its 401 (K) Deferred Compensation and Retirement
Savings Plan of $5,931 and $4,041 for the use of a company vehicle for non-business purposes and $2,905 term life
insurance premiums.
(8) The amounts shown represent the Registrant's contribution under its 401 (K) Deferred Compensation and Retirement
Savings Plan of $5,620 and $3,071 for the use of a company vehicle for non-business purposes and $1,078 term life
insurance premiums.
(9) The amount shown represents the Registrant's contribution under its 401 (K) Deferred Compensation and Retirement
Savings Plan of $2,310 and $2,643 for the use of a company vehicle for non-business purposes and $1,057 term life
insurance premiums.
(10) The amount shown represent the Registrant's contribution under its 401 (K) Deferred compensation and Retirement
Savings Plan of $3,468 and $1,393 for the use of a company vehicle for non-business purposes and $3,404 term life
insurance premiums.
(11) The amount shown represent the Registrant's contribution under its 401 (K) Deferred compensation and Retirement
Savings Plan of $3,110 and $1,179 for the use of a company vehicle for non-business purposes and $2,271 term life
insurance premiums.
(12) The amount shown represent commissions paid to Mr. Hess in his capacity as Vice President of Total-Tel Carrier
Services, Inc.
(13) The amount shown represents the Registrant's contribution under its 401 (K) Deferred compensation and Retirement
Savings Plan of $5,795, and $2,860 term life insurance premiums.
(14) The amount shown represents the Registrants contribution under its 401K Deferred compensation and Retirement
Savings Plan of $3,461.
(b) Compensation Pursuant to Plans
------------------------------
1987 Stock Option Plan
----------------------
In October 1987, the Registrant adopted its 1987 Stock Option Plan
and in October 1996, adopted its 1996 Stock Option Plan (the "Plans").
The Plans provide that certain options granted thereunder are intended
to qualify as "incentive stock options" within the meaning of Section
422A of the United States Internal Revenue Code of 1954, as amended (the
" Code " ), while non-qualified options may also be granted under the
Plans. Incentive stock options may be granted only to employees of the
Registrant, while non-qualified options may be granted to non-executive
directors, consultants and others as well as to employees.
The Plans are administered by a Committee of the Registrant's
Board of Directors. The Registrant has reserved 664,900 shares of
Common Stock under the 1987 Plan and 300,000 shares of Common Stock
under the 1996 Plan for issuance to employees, officers, directors and
consultants of the Company. The shares for options granted prior to July
15, 1994 have been adjusted for the 10% stock dividend. The shares for
options granted prior to July 1, 1996 have been adjusted to reflect the
2 for 1 stock split.
No option may be transferred by an optionee other than by will or
the laws of descent and distribution, and during the lifetime of an
optionee, an option may be exercised only by him. In the event of
termination of employment other than by death or disability, the
optionee will have one month, (subject to extension not to exceed an
additional two months), after such termination during which he may
exercise his option. Upon termination of employment of an optionee by
reason of death or permanent total disability, his option remains
exercisable for one year thereafter to the extent it was exercisable on
the date of such termination. No similar limitation applies to non-
qualified options.
Options under the Plans must be granted within ten years from the
effective date of the Plans. Incentive stock options granted under the
Plans cannot be exercised later than ten years from the date of grant.
Options granted under the Plans will permit payment of the exercise
price in cash or by delivery to the Registrant of shares of Common Stock
already owned by the optionee having a fair market value equal to the
exercise price of the options being exercised, or by a combination of
such methods of payment. Therefore, an optionee may be able to tender
shares of Common Stock to purchase additional shares of Common Stock and
may theoretically exercise all of his stock options with no additional
investment other than his original shares.
Any options that expire unexercised or that terminate upon an
employee's ceasing to be employed by the Registrant become available
once again for issuance under the Plans.
OPTIONS GRANTS IN LAST FISCAL YEAR
----------------------------------
Options /SAR Grants in last Fiscal Year Potential realizable Value
at Assumed Annual rates
Individual Grants of stock Appreciation for
- ------------------------------------------------------------------------------------------ Option term
Number of
Securities % of Total
Underlying Options/SARs
options / Granted to
SARs Employees in Exercise or Base Expiration
Name Granted (#)(1) Fiscal Year Price Date 5% ($) 10% ($)
- --------------------------------------------------------------------------------------------------------------------
Warren Feldman 40,000 17.24% $ 14.50 January 15, 2001 $124,994 $269,178
Kevin Alward (2) 40,000 17.24% $ 14.50 January 15, 2001 $124,994 $269,178
David Hess 20,000 8.62% $ 14.50 January 15, 2001 $ 62,497 $134,589
David Hess 50,000 21.55% $ 20.00 September 29, 2001 $215,506 $464,100
Jeffrey Slater 20,000 8.62% $ 14.50 January 15, 2001 $ 62,497 $134,589
Jeffrey Slater 40,000 17.24% $ 20.00 January 2, 2001 $172,405 $371,280
(1) Stock option granted under the 1996 Plan. One fifth of the new options are exercisable on each of the first, second,
third, fourth and fifth anniversary dates of the original grant.
(2) Kevin Alward exercised 10,000 shares on January 16, 1998. The balance of his shares were canceled.
Aggregated Options/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
Number of
Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End (#)
Shares Acquired
Name on Exercise(#) Value Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------------
Warren Feldman 69,200 $ 155,892 139,000 30,000 $3,465,125 $442,500
Kevin Alward 260,000 $988,263 -- -- -- --
David Hess -- -- 12,500 82,500 $224,063 $1,114,063
Jeffrey Slater 4,772 11,543 35,900 59,000 $776,695 $676,290
Thomas Gunning -- .-- 21,500 1,000 $572,513 $20,500
(c) Other Compensation
------------------
None.
(d) Compensation of Directors
-------------------------
Each director of the Registrant receives $15,000 per year for services in such capacity.
(e) Termination of Employment and Change of Control Arrangements
------------------------------------------------------------
None.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
--------------------------------------------------------------
MANAGEMENT
----------
(a) Security Ownership of Certain Beneficial Owners
-----------------------------------------------
Set forth below is certain information concerning persons who are known by Registrant to own beneficially more than
5% of any class of the Registrant's voting shares on May 12, 1998.
Name and Amount and
Title Address of Nature of Percentage
of Beneficial Beneficial of
Class Owner Ownership (1) Class
- ----- ---------- ------------- -----
Common Warren H. Feldman 587,262 (2) 16.4%
Stock $.05 150 Clove Road shares
par value Little Falls, NJ 07424
Common Heartland Advisors, Inc. 200,200 5.6%
Stock $.05 790 North Milwaukee St. shares
par value Milwaukee, WI 53202
Common Solomon Feldman 443,190 12.4%
Stock $.05 1890 South Ocean Drive shares
par value Hallandale, FL 33009
Common Gold & Appel, SA 928,817 25.9%
Stock $.05 Morris F.DeFeo,Jr shares
par value Swidler & Berlin, Chartered
3000 K St., NW, Suite 300
Washington, DC 20007
Common Michael A. Karp 219,340 6.1%
Stock $.05 3416 Sansom Street shares
par value Philadelphia, PA 19104
(1) All shares are beneficially owned and sole investment and voting power is held by the persons named to the best
of the Registrant's knowledge.
(2) Includes options to purchase 139,000 shares of the Registrant's Common Stock which are currently exercisable or
within 60 days hereof.
(b) Security Ownership of Management
--------------------------------
The following table sets forth as of May 12, 1998, information concerning the beneficial ownership of each class of
equity securities by each director of the Registrant and all directors and officers of the Registrant as a group:
Name and Amount and
Title Address of Nature of Percentage
of Beneficial Beneficial of
Class Owner Ownership (1) Class
- ----- ---------- ------------- -----
Common Solomon H. Feldman 443,190 12.3%
Stock $.05 1890 South Ocean Drive shares
par value Hallandale, FL 33009
Common Warren H. Feldman 587,262 (2) 16.3%
Stock $.05 150 Clove Road shares
par value Little Falls, NJ 07424
Common Leon Genet 45,560 1.3%
Stock $.05 30 Farmstead Road
value Short Hills, NJ 07078
Common Jay J. Miller 200
Stock $.05 430 E 57th St.,Suite 5D
value New York, NY 10022
Common All directors 1,131,612(3) 31.4%
Stock $.05 and officers as a shares
par value group (6 in number)
(1) All shares are beneficially owned and sole investment and voting power is held by the persons named.
(2) Includes options to purchase 139,000 shares of the Registrant's Common Stock which are currently exercisable
or within 60 days hereof.
(3) Includes options to purchase 158,500 shares of the Registrant's Common Stock which are currently excercisable
or within 60 days hereof.
c) Changes in Control
------------------
The Registrant knows of no contractual arrangement which may, at a subsequent date, result in a change in control of
the Registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
On December 1, 1993, the Company leased warehouse space in
Belleville, New Jersey, from a partnership in which two directors and
major shareholders are partners and a former director and major
shareholder is also a partner. During the fiscal year ended January 31,
1998, the Company paid rent of $60,450 to the partnership. The annual
rent for this premise is $58,560 for the first three years and $63,885
for years four and five. Registrant believes such premises are leased
on terms not less favorable to Registrant than in an arm's length
transaction.
As set forth in Note 9 to the Financial Statements, the Registrant
from time to time has made loans to a former executive employee and
shareholder of the Registrant.
(THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK)
TOTAL-TEL USA COMMUNICATIONS, INC.
----------------------------------
AND SUBSIDIARIES
----------------
I
TEM 14. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULE
------------------------------------------
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996
--------------------------------------------
INDEX
-----
(a) (1) FINANCIAL STATEMENTS: The following consolidated financial statements of Total-Tel USA Communications,
--------------------
Inc. and subsidiaries are included at the end of this Report:
CONSOLIDATED FINANCIAL STATEMENTS: PAGE
- --------------------------------- ----
Independent auditors' report F-1
Consolidated balance sheets - January 31, 1998
and 1997 F-2
Consolidated statements of earnings - years
ended January 31, 1998, 1997 and 1996 F-3
Consolidated statements of shareholder's equity -
years ended January 31, 1998, 1997, 1996 F-4
Consolidated statements of cash flow - years
ended January 31, 1998, 1997, 1996 F-5
Notes to consolidated financial statements F-7
(a) (2) SUPPLEMENTARY DATA FURNISHED PURSUANT
TO THE REQUIREMENTS OF FORM 10-K:
Schedule - years ended January 31, 1998, 1997
and 1996.
II Valuation and Qualifying Accounts (Consolidated) F-16
***************
Schedules other than those listed above are omitted because they are not required, not applicable or the information has
been otherwise supplied.
(THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK)
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, on
the 13th day of May, 1998
TOTAL-TEL USA COMMUNICATIONS, INC.
(Registrant)
By: /S/ Warren H. Feldman
------------------------
Warren H. Feldman
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/S/ Solomon Feldman Director May 13, l998
Solomon Feldman
/S/ Warren H. Feldman Chairman of the Board, May 13, l998
Warren H. Feldman Chief Executive Officer
and Director
/S/ Leon Genet Director May 13, l998
Leon Genet
/S/ Thomas P. Gunning Vice President, Treasurer, May 13, l998
Thomas P. Gunning Secretary and Principal
Accounting Officer
/S/ Jay J. Miller Director May 13, l998
Jay J. Miller
Exhibit No. Description of Document
- ----------- -----------------------
(3) (a) Certificate of Incorporation, as amended. Incorporated by
reference to Exhibits 2-A, 2-B, 2-C and 2-D to
Registration Statement No. 2-15546 and Registrant's proxy
statement relating to its 1987 Annual Stockholder's
Meeting.
(3) (b) By-Laws of Registrant. Incorporated by reference to
Exhibit A to Registrant's Annual Report on Form 10-K for
the year ended January 31, 1972.
(3) (c) Amended Certificate of Incorporation to change the name
of the Corporation from Faradyne Electronics Corp. to
Total-Tel USA Communications, Inc., dated November 4,
l991. Incorporated by reference to Exhibit 3 (c) to
Registrant's Annual Report on Form 10-K for the year ended
January 31, l992.
(3)(d) By-Law Amendments incorporated by reference to Form 8K
filed on April 7, 1998.
(3)(e) Shareholder Rights plan filed by reference to Form 8K, on
April 12, 1998.
(10)(a) Lease of premises at 140 Little Street, Belleville, New
Jersey, between Mansol Realty Company and Mansol Ceramics
Company, dated March 30, 1960. Incorporated by reference
to Exhibit 13 (e) to Registration Statement No. 2-17546.
(10)(a) (1) Assignment of lease from Mansol Realty Company to Mansol
Realty Associates. Incorporated by reference to Exhibit
10 (a) (1) to Registrant's Annual Report on Form 10-K for
the year ended January 31, l982.
(10)(b) Extension Agreement re: Lease of premises at 140 Little
Street dated October 31, l974. Incorporated by reference
to Exhibit 10 (b) to Registrant's Annual Report on Form
10-K for the year ended January 31, l981.
(10)(c) Lease of premises at 471 Cortland Street, Belleville, New
Jersey, between Birnfeld Associates and Mansol Ceramics
Company, dated October 31, 1974. Incorporated by
reference to Exhibit 10 (c) to Registrant's Annual Report
on Form 10-K for the year ended January 31, 1981.
(10)(d) Lease Modification Agreement re: Lease of premises at 471
Cortland Street dated July 24, 1980. Incorporated by
reference to Exhibit 10 (d) to Registrant's Annual Report
on Form 10-K for the year ended January 31, 1981.
(10)(e) (i) Term Loan Agreement and Term Note both dated April 22,
1983 between Mansol Ceramics Company and United Jersey
Bank in the principal amount of $1,192,320. Incorporated
by reference to Exhibit 10 (e) to Registrants Annual
Report on Form 10-K for the year ended January 31, 1983.
(10)(e) (ii) Installment Note and Equipment Loan and Security Agreement
of Mansol Ceramics Company and Guaranty of Registrant,
dated August 1, 1988, in connection with extension of the
maturity date of the loan referenced to in Exhibit 10 (e)
(i).
(10)(f) Lease of premises at 17-25 Academy Street, Newark, New
Jersey between Mansol Ceramics Company and Rachlin & Co.,
dated April 29, 1983. Incorporated by reference to
Exhibit 10 (f) to Registrant's Annual Report on Form 10-K
for the year ended January 31, 1984.
(10)(g) Lease Modification Agreement re: Lease of Premises at 471
Cortland Street dated July 24, 1985. Incorporated by
reference to Exhibit 10 (g) to Registrant's Annual Report
on Form 10-K for the year ended January 31, l986.
Exhibit No. Description of Document
- ---------- -----------------------
(10)(h) Master Lease Agreement between Mansol Ceramics Company and
Fidelcor Services, Inc. dated December 30, l985.
Incorporated by reference to Exhibit 10 (h) to
Registrant's Annual Report on Form 10-K for the year ended
January 31, l986.
(10)(i) Deed, Mortgage and Mortgage Note between William and Fred
Schneper as Grantees and Borrowers and Mansol Ceramics
Company as Grantor and Lender, dated July 26, l985 re:
property located in Hanover Township, New Jersey.
Incorporated by reference 10 (i) to Registrant's
Annual Report on Form 10-K for the year ended January 31,
l986.
(10)(j) Lease of premises at 140 Little Street, Belleville, New
Jersey, between Mansol Realty Association and Mansol
Ceramics Company, dated July 31, 1986. Incorporated by
reference to Exhibit 10 (j) to Registrant's Annual Report
on Form 10-K for the year ended January 31, l987.
(10)(k) 1987 Stock Option Plan. Incorporated by reference to
Registrant's proxy statement relating to its 1987 Annual
Stockholders' Meeting.
(10)(k)(1) Amendment to the 1987 Stock Option Plan. Incorporated by
reference to Registrant's Form S-8 dated November 13,
l995.
(10)(l) Renewal of Lease and Extension to additional space at 17-
25 Academy Street, Newark, New Jersey (a/k/a 1212 Raymond
Boulevard, Newark, New Jersey) between Mansol Ceramics
Company and Rachlin & Co. Incorporated by reference to
Exhibit 10 (l) to Registrant's Annual Report on Form 10-K
for the year ended January 31, l988. (See also Exhibit 10
(f)).
(10)(m) Agreement, dated June 13, 1989, between Mansol Ceramics
Company and Bar-lo Carbon Products, Inc. providing for the
sale of Ceramics' Carbon fixtures division. Incorporated
by reference to Exhibit 10 (m) to Registrant's Annual
Report on Form 10-k for the year ended January 31, 1990.
(10)(n) Modification of Note and Mortgage from William Schneper,
Fred Schneper and Leon Schneper (Mortgagor) to Mansol
Ceramics Company (Mortgagee) dated August 1, l990,
extending the term of the Note and Mortgage and modifying
the interest provision.
(10)(o) Asset Purchase Agreement between Registrant, Mansol
Ceramics Company and Mansol Industries Inc. dated May 22,
l990, including Subordinated Term Promissory Note and
Security Agreement, covering sale of assets and business
of Manufacturing Division of Mansol Ceramics Company.
Incorporated by reference to Exhibits 1, 2 and
3 to Registrant's Current Report on Form 8-K dated May 22,
l990.
(10)(p) Modification of Loan between Mansol Industries, Inc.
(borrower) and Mansol Ceramics Company (Lender) dated
January 31, 1992, allowing for the deferral of the
principal for twelve months through and including the
period ending June 22, l992 in consideration for personal
guarantees from Borrower. Incorporated by reference to
Exhibit 10 (p) to Registrant's Annual Report on Form 10-K
for the year ended January 31, 1992.
(10)(q) Lease of premises at 470 Colfax Avenue, Clifton, New
Jersey, between Total-Tel USA Communications, Inc. and
Broadway Financial Investment Services, Inc. dated March
25, 1991. Incorporated by reference to Exhibit 10 (q) to
Registrant's Annual Report on Form 10-K for the year ended
January 31, l992.
(10)(r) Lease of premises at 744 Broad Street, Newark, New Jersey
between Total-Tel USA Inc. and Investment Property
Services, Inc. dated November 15, 1993. Incorporated by
reference to Exhibit 10 (r) to the Registrant's Annual
Report on Form 10-K for the year ended January 31,
1994.
Exhibit No. Description of Document
- ---------- -----------------------
(10)(s) Lease of premises at 744 Broad Street, Newark, New Jersey
between Total-Tel USA, Inc. and Investment Property
Services, Inc. dated December 28, 1993. Incorporated by
reference to Exhibit 10 (s) to the Registrant's Annual
Report on Form 10-K for the year ended January 31, 1994
(10)(t) Lease of premises at 471 Cortland Street, Belleville, New
Jersey, between Total-Tel USA Inc. and Birnfeld Associates -
Belleville dated December 1, 1993. Incorporated by
reference to Exhibit 10 (t) to the Registrant's Annual
Report on Form 10-K for the year ended January 31, 1994.
(10)(u) Lease of premises at 150 Clove Road, Little Falls, New
Jersey, between Total-Tel USA Inc. and the Prudential
Insurance Company of America dated February 22, 1994.
Incorporated by reference to Exhibit 10 (u) to the
Registrant's Annual Report on Form 10-K for the
year ended January 31, 1994.
(10)(v) Lease modification to the lease of the premises at 150
Clove Road, Little Falls, New Jersey between TotalTel,
Inc. and The Prudential Company of America dated
May 18, 1994. Incorporated by reference to Exhibit 10 (v)
to the Registrant's Annual Report on Form 10-K for the
year ended January 31, l995.
(10)(w) Second lease modification to the lease of the premises at
150 Clove Road, Little Falls, New Jersey between TotalTel,
Inc. and Theta Holding Company, L. P., successor to the
Prudential Insurance Company of America dated
February 9, 1995. Incorporated by reference to
Exhibit 10 (w) to the Registrant's Annual Report on Form
10-K for the year ended January 31, 1995.
(10)(x) Third lease modification to the lease of the premises at
150 Clove Road, Little Falls, New Jersey between TotalTel,
Inc. and Theta Holding Company, L. P., successor to the
Prudential Insurance Company of America dated January 31,
1997. Incorporated by reference to exhibit (10)(x) to the
registrants Annual Report on Form 10-K for the
year ended January 31, l997.
(10)(y) Equipment Facility and Revolving Credit Agreement dated
August 23, 1996 between Total-Tel USA Communications,
Inc., TotalTel, Inc., Total-Tel USA, Inc., and Total-Tel
Carrier Services, Inc. and the Summit Bank in the amount
of $10,000,000. Incorporated by referral to Exhibit
(10)(y) to the Registrants Annual Report on Form 10K for
the year ended January 3, 1997.
(10)(z) Lease of premises at 500 Fifth Avenue, New York City, New
York between TotalTel, Inc. and 1472 Broadway, Inc. dated
November 8, 1996. Incorporated by reference to Form 10K
for the year ended January 31, 1997.
(10)(AA) Lease of premises at 40 Rector Street, New York City, New
York between Total-Tel USA Communications, Inc. and 40
Rector Street Company dated November 1, 1996.
Incorporated by reference to Form 10K for the year ended
January 31, 1997.
(10)(AB) 1996 Stock Option Plan, Incorporated by reference to
Registrant's Proxy Statement relating to its 1996 Annual
Stockholder Meeting.
(10)(AC) Lease of premises of 28 West Flagler Street, Miami,
Florida between TotalTel, Inc. and Mosta Corporation, Inc.
dated February 6, 1998.
(10)(AD) Amended Equipment Facility and Revolving Credit Agreement
dated August 23, 1996 between Total-Tel USA
Communications, Inc., TotalTel, Inc., Total-Tel USA, Inc.,
and Total-Tel Carrier Services, Inc. and the Summit Bank
in the amount of 13,000,000.
(22) Subsidiaries of Registrant. Incorporated by reference to
Exhibit 22 to Registrant's Annual Report on Form 10-K for
the year ended January 31, 1996.
(27) Financial Data Schedules.
Total-Tel USA Communications, Inc.
and Subsidiaries
Consolidated Financial Statements for the
Years Ended January 31, 1998, 1997 (Restated) and 1996, and
Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Total-Tel USA Communications, Inc.
Little Falls, New Jersey
We have audited the accompanying consolidated balance sheets of
Total-Tel USA Communications, Inc. and subsidiaries as of January
31, 1998 and 1997, and the related consolidated statements of
earnings, shareholders' equity, and cash flows for each of the three
years in the period ended January 31, 1998. Our audits also
included the financial statement schedule listed in the index at
item 14(a)(2). These financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements and financial statement 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 are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Total-
Tel USA Communications, Inc. and subsidiaries as of January 31, 1998
and 1997, and the results of their operations and their cash flows
for each of the three years in the period ended January 31, 1998 in
conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information
set forth therein.
As discussed in Note 14, the accompanying 1997 financial statements
have been restated.
DELOITTE & TOUCHE LLP
New York, New York
May 8, 1998
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1998 AND 1997 (RESTATED)
- -----------------------------------------------------------------------------------------------------
ASSETS 1998 1997
(As Restated,
See Note 14)
CURRENT ASSETS:
Cash and cash equivalents $3,416,904 $2,589,187
Investments available for sale 578,293 1,010,594
Trade accounts receivable (net of allowance for doubtful accounts
of $866,421 and $1,053,670 in 1998 and 1997, respectively) 20,346,988 13,933,652
Notes receivable - employees 117,590 163,706
Deferred income taxes 151,256 196,800
Prepaid expenses and other current assets 2,497,707 583,223
------------ ------------
Total current assets 27,108,738 18,477,162
------------ ------------
PROPERTY AND EQUIPMENT - Net 12,405,924 11,065,689
------------ ------------
OTHER ASSETS:
Notes receivable - employees -- 86,383
Deferred line installation costs (net of accumulated amortization
of $389,827 and $283,801 in 1998 and 1997, respectively) 298,304 281,392
Deferred income taxes -- 602,159
Other assets 432,275 516,635
------------ ------------
Total other assets 730,579 1,486,569
------------ ------------
$40,245,241 $31,029,420
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $16,356,427 $10,222,260
Other current and accrued liabilities 1,757,375 2,222,141
Salaries and wages payable 572,112 613,477
Current portion of long-term debt 487,000 --
------------ ------------
Total current liabilities 19,172,914 13,057,878
------------ ------------
OTHER LONG-TERM LIABILITIES 331,754 259,220
------------ ------------
LONG-TERM DEBT 2,092,201 2,940,000
------------ ------------
DEFERRED INCOME TAXES 50,491 --
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS' EQUITY:
Common stock, par value $.05 per share; authorized
20,000,000 shares in 1998 and 1997, issued
4,141,187 and 3,755,840 shares in 1998 and 1997, respectively 207,059 187,792
Additional paid-in capital 9,656,488 7,054,370
Retained earnings 10,175,784 9,081,783
------------ ------------
20,039,331 16,323,945
Treasury stock - at cost - 812,110 shares in 1998 and 810,510
shares in 1997 (1,547,331) (1,547,251)
Receivable from shareholder -- (100,000)
Unrealized gain on available for sale securities 105,881 95,628
------------ ------------
Total shareholders' equity 18,597,881 14,772,322
------------ ------------
$40,245,241 $31,029,420
============ ============
See notes to consolidated financial statements.
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED JANUARY 31, 1998, 1997 (RESTATED) AND 1996
- ------------------------------------------------------------------------------------------------------------
1998 1997 1996
(As Restated,
See Note 14)
NET SALES $123,286,028 $ 89,325,921 $ 49,873,477
------------ ------------- --------------
COSTS AND EXPENSES:
Cost of sales 99,086,234 66,829,283 34,854,000
Selling, general and administrative 22,082,829 18,303,834 12,641,680
Stock compensation 569,391 3,539,563 68,815
------------ ------------- --------------
Total costs and expenses 121,738,454 88,672,680 47,564,495
------------ ------------- --------------
OPERATING INCOME 1,547,574 653,241 2,308,982
------------ ------------- --------------
OTHER INCOME (EXPENSE):
Interest income 101,865 141,181 166,170
Other income 358,729 50,920 36,091
Interest expense (183,623) (68,348) (3,854)
------------ ------------- --------------
Total other income 276,971 123,753 198,407
------------ ------------- --------------
EARNINGS BEFORE INCOME TAXES 1,824,545 776,994 2,507,389
INCOME TAX PROVISION 730,544 285,540 952,800
------------ ------------- --------------
NET EARNINGS $ 1,094,001 $ 491,454 $ 1,554,589
============ ============= ==============
BASIC EARNINGS PER COMMON SHARE $0.35 $0.17 $0.53
===== ===== =====
DILUTED EARNINGS PER COMMON SHARE $0.32 $0.15 $0.48
===== ===== =====
See notes to consolidated financial statements.
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Unrealized
Gain (Loss) on
Additional Receivable Available
Common Paid-in Retained Treasury from for Sale
Stock Capital Earnings Stock Shareholder Securities Total
BALANCE AT JANUARY 31, 1995 $ 93,240 $ 3,621,324 $ 7,035,740 $ (1,584,687) $ (100,000) $ 27,177 $ 9,092,794
Unrealized gain on available for
sale securities -- -- -- -- -- 35,780 35,780
Exercise of employee stock option 200 15,727 -- -- -- -- 15,927
Issuance of employee stock grants -- (36,946) -- 37,436 -- -- 490
Net earnings -- -- 1,554,589 -- -- -- 1,554,589
---------- ------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT JANUARY 31, 1996 93,440 3,600,105 8,590,329 (1,547,251) (100,000) 62,957 10,699,580
Remeasurement of employee stock
options (see Note 14) -- 3,482,344 -- -- -- -- 3,482,344
Unrealized gain on available for
sale securities -- -- -- -- -- 32,671 32,671
Exercise of employee stock options 681 65,592 -- -- -- -- 66,273
Stock split 93,671 (93,671) -- -- -- -- --
Net earnings (RESTATED) -- -- 491,454 -- -- -- 491,454
---------- ------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT JANUARY 31, 1997
(RESTATED) 187,792 7,054,370 9,081,783 (1,547,251) (100,000) 95,628 14,772,322
Unrealized gain on available for
sale securities -- -- -- -- -- 10,253 10,253
Exercise of employee stock options 19,267 1,399,004 -- (80) -- -- 1,418,191
Remeasurement of employee stock
options -- 433,126 -- -- -- -- 433,126
Tax benefit due to exercise of
nonqualified options -- 769,988 -- -- -- -- 769,988
Repayment of shareholder receivable -- -- -- -- 100,000 -- 100,000
Net earnings -- -- 1,094,001 -- -- -- 1,094,001
---------- ------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT JANUARY 31, 1998 $ 207,059 $ 9,656,488 $ 10,175,784 $ (1,547,331) $ -- $ 105,881 $18,597,881
========== ============ ============ ============ ============ ============ ============
See notes to consolidated financial statements.
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1998, 1997 (RESTATED) AND 1996
- ------------------------------------------------------------------------------------------------------------
1998 1997 1996
(As Restated,
See Note 14)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,094,001 $ 491,454 $ 1,554,589
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 2,027,557 1,381,931 1,026,102
Provision for doubtful accounts 416,713 950,495 820,131
Tax benefit of options exercised 769,988 -- --
Noncash compensation expense 569,391 3,539,563 68,815
Deferred income taxes 648,544 (1,070,460) 139,800
Gain on disposal of property and
equipment (4,852) -- --
Change in assets and liabilities:
(Increase) decrease in assets:
Trade accounts receivable (6,830,049) (6,142,229) (3,622,415)
Prepaid expenses and other current
assets (1,914,484) (190,249) 27,335
Other assets 84,360 (90,471) (53,499)
Increase (decrease) in liabilities:
Accounts payable 6,134,167 3,617,801 2,483,618
Other current and accrued
liabilities and salaries and wages
payable (592,746) 587,247 738,956
Other long-term liabilities 72,534 (54,522) 202,928
-------------- -------------- --------------
Net cash provided by operating
activities 2,475,124 3,020,560 3,386,360
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections on notes receivable -- -- 628,792
Proceeds from sales and maturities of
short-term investments available for sale 442,554 973,141 1,600,963
Purchase of investments available for sale -- (984,129) (581,517)
Purchases of property and equipment (3,267,833) (6,397,259) (3,027,719)
Proceeds from sale of fixed assets 10,920 53,759 --
Payments for deferred line installation
costs (122,939) (127,488) (111,283)
Issuance of notes to employees -- (136,706) (115,000)
Collection on notes receivable from
employees 232,499 3,898 32,500
-------------- -------------- --------------
Net cash used in investing
activities (2,704,799) (6,614,784) (1,573,264)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised 1,418,191 66,273 15,927
Bank borrowings -- 2,000,000 --
Additional borrowings 770,000 940,000 490
Repayment on bank borrowings (1,130,799) -- --
-------------- -------------- --------------
Net cash provided by financing
activities 1,057,392 3,006,273 16,417
-------------- -------------- --------------
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1998, 1997 (RESTATED) AND 1996
- ------------------------------------------------------------------------------------------------------------
1998 1997 1996
(As Restated,
See Note 14)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ 827,717 $ (587,951) $ 1,829,513
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 2,589,187 3,177,138 1,347,625
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,416,904 $ 2,589,187 $ 3,177,138
============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 187,211 $ 64,761 $ 3,854
Income taxes $ 752,761 $ 1,511,149 $ 560,000
See notes to consolidated financial statements.
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
1. NATURE OF OPERATIONS
Total-Tel USA Communications, Inc. ("Total-Tel"), with its wholly-
owned subsidiaries Total-Tel, Inc., Total-Tel USA, Inc., Total-Tel
Southeast Inc., Total-Tel Carrier Services, Inc., Total-Tel
Sarasota, Inc., and Total-Tel Services (collectively, the "Company")
operates as a switch based resale common carrier providing twenty-
four hour, seven day a week, domestic and international long
distance telecommunications service to customers throughout the
United States. The Company's principal customers are primarily
businesses and other common carriers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include the accounts of Total-Tel USA Communications, Inc. and its
subsidiaries, all of which are wholly-owned. All intercompany
transactions and balances have been eliminated in the consolidated
financial statements.
Property and Equipment - Property and equipment are stated at cost.
Depreciation and amortization is being provided by use of the
straight-line method over the estimated useful lives of the related
assets. Leasehold improvements are amortized over the shorter of
the term of the lease or the useful lives of the asset.
The estimated useful lives of the principal classes of assets are as
follows:
Classification Years
Machinery and equipment 5 - 10
Office furniture, fixtures and equipment 7 - 10
Vehicles 3 - 5
Leasehold improvements 2 - 10
Computer equipment and software 5 - 7
Deferred Line Installation Costs - The Company defers charges from
other common carriers which cover the cost of installing telephone
transmission facilities (lines). Amortization of these costs is
provided using the straight-line method over the estimated life
(five years) of the lines.
Use of Estimates - The Company's financial statements include the
use of estimates and assumptions which have been developed by
management based on available facts and information. Actual results
could differ from those estimates.
Concentrations of Credit Risk - The Company sells its
telecommunications services and products to customers operating
primarily in the northeastern region of the United States. The
Company performs ongoing credit evaluations of its customers as it
generally does not require collateral. Allowances are maintained
for potential credit losses and such losses have been within
management's expectations.
Sales by Category - The Company's operations are conducted within
one business segment, the providing of long distance
telecommunications to business customers (retail) and other carriers
(wholesale). Sales by category for the fiscal years ended January
31, 1998, 1997 and 1996 are as follows:
1998 1997 1996
Retail $ 65,304,679 $ 57,896,644 $ 46,289,295
Wholesale 57,981,349 31,429,277 3,584,182
-------------- -------------- --------------
$ 123,286,028 $ 89,325,921 $ 49,873,477
============== ============== ==============
Earnings per Share - The Company adopted SFAS No. 128 "Earnings per
Share," in the fourth quarter of Fiscal 1998. The Statement
establishes standards for computing basic earnings per share, which
is represented by net earnings available to common shareholders
divided by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or stock options
were exercised or converted into common stock during the period, if
dilutive (see Note 12). Earnings per share amounts for prior years
have been restated to reflect this revised standard.
Stock Split - On July 1, 1996, the Company distributed 1,873,420
shares of common stock in connection with a 2 for 1 stock split of
all outstanding shares as of June 15, 1996. All per share and
number of shares data have been restated to reflect this stock
split.
Cash and Cash Equivalents - The Company considers all highly liquid
investments purchased with an original maturity of three months or
less to be cash equivalents. Cash and cash equivalents consist of
cash on hand, demand deposits and money market accounts.
Fair Value of Financial Instruments - The estimated fair value of
publicly traded financial instruments is determined by the Company
using quoted market prices, dealer quotes and prices obtained from
independent third parties. For financial instruments not publicly
traded, fair values are estimated based on values obtained from
independent third parties or quoted market prices of comparable
instruments. However, judgment is required to interpret market data
to develop the estimates of fair value. Accordingly, the estimates
are not necessarily indicative of the amounts that could be realized
in a current market exchange.
The carrying values and fair values of financial instruments are as follows:
1998 1997
- -----------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- -----------------------------------------------------------------------------------------------------------------
Assets:
Investments Available For Sale $ 578,293 $ 578,293 $ 1,010,594 $ 1,010,594
Liabilities:
Debt 2,579,201 2,579,201 2,940,000 2,940,000
Reclassifications - Certain reclassifications have been made to prior year financial statements to conform to
classifications used in the current year.
New Accounting Pronouncements - The Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," in 1997. These statements may impact the
disclosures made in future financial statements of the Company.
3. INVESTMENT SECURITIES
Investments available for sale consist of:
1998 1997
----------------------------------------------- -----------------------------------------------
Gross Unrealized Gross Unrealized
------------------------ Market ------------------------ Market
Cost Gain Loss Value Cost Gain Loss Value
Municipal
bonds and notes $ 50,000 $ 8 $ -- $ 50,008 $ 477,227 $ 1,887 $ -- $ 479,114
Mutual funds 281,991 1,104 -- 283,095 277,299 10,260 -- 287,559
Common stock 70,700 174,490 -- 245,190 70,700 173,221 -- 243,921
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 402,691 $ 175,602 $ -- $ 578,293 $ 825,226 $ 185,368 $ -- $1,010,594
========== ========== ========== ========== ========== ========== ========== ==========
Maturity dates of municipal bonds and notes as of January 31, 1998 are as follows:
Maturing Within Cost Market Value
1 year $ 25,000 $ 25,008
After 1 year through 5 years 25,000 25,000
----------- -----------
$ 50,000 $ 50,008
=========== ===========
4. PROPERTY AND EQUIPMENT
Property and equipment consists of:
1998 1997
Machinery and equipment $12,027,693 $ 7,243,651
Office furniture, fixtures and equipment 1,703,657 1,257,440
Leasehold improvements 914,205 305,812
Vehicles 192,954 152,583
Computer equipment and software 3,220,808 2,420,830
Leasehold improvements in progress 205,644 260,578
Machinery and equipment in progress 100,000 3,585,205
----------- -----------
18,364,961 15,226,099
Less accumulated depreciation and amortization 5,959,037 4,160,410
----------- -----------
$12,405,924 $11,065,689
=========== ===========
Depreciation and amortization expense related to property and equipment for the years ended January 31, 1998, 1997 and
1996 was $1,921,530, $1,288,816 and $940,853, respectively.
5. INCOME TAXES
The provision for income taxes includes the following:
1998 1997 1996
(RESTATED)
Federal:
Current $ 60,000 $ 1,078,000 $ 663,000
Deferred 517,544 (824,160) 95,400
State income taxes:
Current 22,000 278,000 150,000
Deferred 131,000 (246,300) 44,400
--------- ----------- ---------
$ 730,544 $ 285,540 $ 952,800
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes. The income tax effects of significant items comprising
the Company's net deferred tax liability are as follows:
1998 1997
(RESTATED)
Current Long-term Current Long-term
Deferred tax assets:
Allowance for doubtful accounts $ 151,256 $ -- $ 196,800 $ --
Accrued compensation expense -- 1,275,096 -- 1,452,460
Unamortized lease incentive -- 132,701 -- 103,500
--------- ----------- --------- ----------
Total deferred tax assets 151,256 1,407,797 196,800 1,555,960
--------- ----------- --------- ----------
Deferred tax liabilities:
Difference between book and tax basis
of property and equipment -- (1,388,568) -- (890,181)
Unrealized gains on securities
available for sale -- (69,720) -- (63,620)
--------- ----------- --------- ----------
Total deferred tax liabilities -- (1,458,288) -- (953,801)
--------- ----------- --------- ----------
Net deferred tax asset (liability) $ 151,256 $ (50,491) $ 196,800 $9,602,159
--------- ----------- --------- ----------
A reconciliation from the U.S. statutory tax rate of 34% to the
effective tax rate for income taxes on the consolidated statements
of earnings is as follows:
1998 1997 1996
(RESTATED)
Computed expense at statutory rates $ 620,345 $ 264,178 $ 852,500
(Reductions) increase in taxes resulting from:
Tax-exempt interest income (14,300) (16,000) (23,200)
State taxes, net of federal income tax benefit 118,000 28,300 128,300
Insurance proceeds on officer's death (114,400) - -
Other 120,899 9,062 (4,800)
--------- --------- ---------
Actual expense $ 730,544 $ 285,540 $ 952,800
========= ========= =========
6. LEASE COMMITMENTS
The Company rents various facilities under lease agreements classified
as operating leases. Several of the underlying agreements contains
certain incentives eliminating payments at the inception of the lease.
Lease incentives are amortized on a straight-line basis over the
entire lease term. Under terms of these leases, the Company is
required to pay its proportionate share of increases in real estate
taxes, operating expenses and other related costs.
In 1993, the Company leased warehouse space in Belleville, New Jersey
from a partnership in which two of the partners are directors and
major shareholders of the Company. During the fiscal years ended
January 31, 1998, 1997 and 1996, the Company paid rent of $60,450,
$59,760 and $59,670, respectively, to the partnership. The annual
rent for this premise is $58,560 for the first three years and
$63,885 for years four and five and is included in the table of
future minimum rentals shown below.
Future minimum annual rentals on these leases as of January 31,
1998 are as follows:
Year Ending
January 31,
1999 $ 1,286,101
2000 1,195,018
2001 1,219,107
2002 1,219,107
2003 756,986
2004 and thereafter 2,590,786
-----------
$ 8,267,105
===========
Rental expense for the years ended January 31, 1998, 1997 and 1996
was approximately $1,047,000, $626,600 and $517,600, respectively.
7. EMPLOYEE BENEFIT PLANS
The Company has established a savings incentive plan for
substantially all employees of the Company which is qualified under
section 401(k) of the Internal Revenue Code. The savings plan
provides for contributions to an independent trustee by both the
Company and its participating employees. Under the plan, employees
may contribute up to 15% of their pretax base pay. Effective
January 1, 1996, the Company increased its matching contribution to
50% of the first 6% of participant contributions. Participants vest
immediately in their own contributions and over a period of six
years for the Company's contributions. Company contributions were
approximately $165,000, $111,000 and $41,000 for the years ended
January 31, 1998, 1997 and 1996, respectively.
8. STOCK OPTION PLAN
The Company has two stock option plans authorizing the granting of
either Incentive Stock Options or Nonqualified Stock Options. The
1987 Stock Option Plan provides for the issuance of an aggregate of
664,900 shares of the Company's Common Stock for options granted
under the Plan. The 1996 Stock Option Plan, which was approved by
the shareholders and adopted by the Company on October 10, 1996,
provides for the issuance of an aggregate of 300,000 shares of the
Company's Common Stock for options granted under the Plan.
Incentive Stock Options granted must have an exercise price equal to
the fair market value of the Company's Common Stock at the time the
option is granted, except that the price shall be at least 110 percent
of the fair market value where the option is granted to an employee
who owns more than 10 percent of the combined voting power of all
classes of the Company's voting stock. Nonqualified Stock Options
granted must have an exercise price equal to at least 50 percent of
the fair market value of the Company's Common Stock at the time the
option is granted. Incentive Stock Options may be granted only to
employees. Nonqualified Stock Options may be granted to employees as
well as directors, independent contractors and agents, as determined
by the Board of Directors. All options available to be granted under
the 1987 Plan were granted prior to September 1, 1997. All options
available to be granted under the 1996 Plan, totaling 104,125 at
January 31, 1998, must be granted by October 10, 2006. The options
currently outstanding have terms that expire between five to ten
years from the date of grant and vest over a period of three to four
years from the date of grant.
Information regarding options under the 1987 Plan is as follows:
Weighted
Option Average
Price Exercise
Per Share Outstanding Exercisable Price
January 31, 1995 balance $ 1.03 - 9.63 634,900 378,718 $ 3.57
Granted $ 7.99 - 8.63 33,000 -- $ 8.32
Became Exercisable $ 1.03 - 9.63 -- 269,582 --
Exercised $ 1.99 (8,000) (8,000) $ 1.99
Cancelled $ 8.75 (17,000) (17,000) $ 8.75
----------------- ----------------- ----------------- -----------------
January 31, 1996 balance $ 1.03 - 9.63 642,900 623,300 $ 3.70
----------------- ----------------- ----------------- -----------------
Granted $ 9.50 22,000 -- $ 9.50
Became Exercisable -- -- 18,100 --
Exercised $ 1.99 - 6.57 (18,228) (18,228) $ 3.27
----------------- ----------------- ----------------- -----------------
January 31, 1997 $ 1.03 - 9.63 646,672 623,172 $ 3.91
----------------- ----------------- ----------------- -----------------
Became Exercisable -- -- 23,500 --
Exercised $ 1.03 - 9.50 (361,272) (361,272) $ 3.22
Cancelled $ 5.63 - 9.50 (6,000) (6,000) $ 7.70
----------------- ----------------- ----------------- -----------------
January 31, 1998 balance $ 1.03 - 9.63 279,400 279,400 $ 4.72
================= ================= ================= =================
Information regarding options under the 1996 plan is as follows:
Weighted
Option Average
Price Exercise
Per Share Outstanding Exercisable Price
January 31, 1997 balance -- -- -- --
Granted $ 14.50 - 20.00 232,000 $ 16.81
Became Exercisable $ 14.50 - 20.00 -- 33,625 --
Exercised $ 14.50 (10,875) (10,875) $ 14.50
Cancelled $ 14.50 (36,125) (875) $ 14.50
----------------- ----------------- ----------------- -----------------
January 31, 1998 balance $ 14.50-20.00 185,000 21,875 $ 17.40
================= ================= ================= =================
The following table summarizes information about options outstanding under the 1987 and 1996 plans:
Options Outstanding Options Exercisable
------------------------------------ ------------------------------------
Weighted-
Average Weighted- Weighted-
Range of Number of Remaining Average Number of Average
Exercise Shares Contractual Exercise Shares Exercise
Prices Outstanding Life Price Outstanding Price
$1.03 - 9.63 279,400 2.77 years $ 4.72 279,400 $ 4.72
$14.50 -20.00 185,000 3.17 years $ 17.40 21,875 $ 14.50
------------- ------------- ------------- ------------- ------------- -------------
$1.03 - 20.00 464,400 2.93 years $ 9.77 301,275 $ 5.43
------------- ------------- ------------- ------------- ------------- -------------
Compensation expense related to the nonqualified stock options was $136,265, $57,219 and $68,815 for the years ended
January 31, 1998, 1997 and 1996, respectively.
Compensation expense related to the remeasurement of nonqualified and incentive stock options was $433,126,
$3,482,344 and $0 for the years ended January 31, 1998, 1997 and 1996, respectively.
The Company has adopted the disclosure-only provision of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation." Had compensation cost for the Company's plans been determined based on the
fair value at the grant date for awards in the fiscal years ended January 31, 1998, 1997 and 1996, consistent with the
provisions of SFAS No. 123, the Company's net earnings and basic and diluted earnings per share would have been
reduced to the pro forma amounts indicated below:
1998 1997 1996
(As Restated,
See Note 14)
Net earnings - as reported $ 1,094,001 $ 491,454 $ 1,554,589
Net earnings (loss) - pro forma 931,066 (52,536) 1,544,510
Basic earnings per share - as reported 0.35 0.17 0.53
Basic earnings (loss) per share - pro forma 0.30 (0.02) 0.53
Diluted earnings per share - as reported 0.32 0.15 0.48
Diluted earnings (loss) per share - pro forma 0.27 (0.02) 0.47
The fair value of each option grant is estimated based on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for grants in fiscal 1998, 1997 and 1996: dividend yield
of 0.00% for the three years; expected volatility of 67.82%, 33.00% and 33.00%, respectively; risk-free interest rate
of 6.53%, 6.72% and 6.72%, respectively; and expected lives of 5 years for each of the three years.
9. NOTES RECEIVABLE FROM SHAREHOLDER
In 1993, the Company made a $25,000 noninterest bearing, unsecured
loan to an executive employee and shareholder of the Company. In
1995, the Company made two additional unsecured loans to the same
employees in the amounts of $55,000 and $60,000, with interest at
the prime rate published in the Wall Street Journal, and 9% per
annum, respectively. In 1996, the three notes, together with unpaid
interest, were combined into one note with a principal balance of
$117,281. The note bears interest at 8% per annum and is payable in
semi-monthly installments for seven-and-one-half years, commencing
February 7, 1996. These three notes were repaid with interest in
January, 1998.
In 1993, the Company made a separate $100,000 unsecured loan to the
above mentioned employee for the purchase of the Company's common
stock. This note is shown as a reduction in shareholder's equity as
of January 31, 1997. This note was repaid in full as of January 31,
1998.
10. LONG-TERM DEBT
On August 23, 1996, the Company entered into an Equipment Facility
and Revolving Credit Agreement (the "Facility") with a major New
Jersey bank. This Facility provides the Company with an unsecured
line of credit of $4,000,000 and a $6,000,000 facility for the
purchase of machinery and equipment, primarily switching equipment,
and is secured by the Company's machinery and equipment.
The Company had drawn down $2,000,000 of the $6,000,000 Facility in
the prior year. In the current year, the Company converted the balance
to a term loan payable in monthly installments of $55,923 including
principal and interest payable over a term of 60 months. The
remaining balance on this note as of January 31, 1998 was $2,579,201,
of which $487,000 was classified as current.
The Company has utilized $100,000 of the unsecured line of credit
for the issuance of a letter of credit.
The interest rate for borrowings under the Facility is at the bank's
prime rate or, at the Company's option, 225 basis points above the
LIBOR rate. The Company is currently paying 7.71% on the balance.
The Facility requires the Company to meet certain covenants. Among
the covenants contained in the Facility are ratios and balances as
to minimum tangible net worth, current ratio, debt to net worth and
fixed charge coverage (all as defined). Other covenants include the
level of capital expenditures, acquisitions of capital stock, the
incurrence of new long-term indebtedness (as defined), and new liens
on assets, as well as the maintenance of certain other ratios. At
January 31, 1998 and 1997, the Company was in compliance with all
covenants of the facility.
On March 16, 1998, the Company entered into an Amended and Restated
Equipment Facility and Revolving Credit Agreement (the "Amended
Facility") with the same bank. This Amended Facility increases the
unsecured line of credit to $8,000,000 and the Facility for the
purchase of machinery and equipment to $5,000,000.
Scheduled maturities of notes payable during the next five years and
thereafter are as follows:
Years Ending
January 31,
1999 $ 487,000
2000 526,361
2001 568,653
2002 615,113
2003 382,074
2004 and thereafter --
------------
$ 2,579,201
============
11. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a law suit, filed by one of its
customers for alleged breach of contract, seeks compensatory and
punitive damages of $1,300,000. The Company believes that the suit
is completely without merit and intends to vigorously defend it.
However the outcome cannot be determined at this time.
12. EARNINGS PER SHARE
Basic earnings per share was computed by dividing net earnings by
the weighted average number of shares of common stock outstanding
during each year. Diluted earnings per share was computed on the
assumption that all stock options converted or exercised during each
year or outstanding at the end of each year were converted at the
beginning of each year or at the date of issuance or grant, if
dilutive.
The reconciliation of the earnings and common shares included in the computation of basic earnings per common share and
diluted earnings per common share for the years ended January 31, 1998, 1997 and 1996 is as follows:
1998 1997 1996
Earnings Shares Per-Share Earnings Shares Per-Share Earnings Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Net Earnings $ 1,094,001 $ 491,454 $ 1,554,589
----------- ----------- -----------
Basic Earnings
Per Share: 1,094,001 3,106,702 $ 0.35 491,454 2,941,330 $ 0.17 1,554,589 2,908,702 $ 0.53
Effect of Dilutive
Securities:
Stock Options 314,473 427,931 354,187
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
Diluted Earnings
Per Share $ 1,094,001 3,421,175 $ 0.32 $ 491,454 3,369,261 $ 0.15 $ 1,554,589 3,262,889 $ 0.48
=========== =========== =========== =========== =========== =========== =========== =========== ===========
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Amounts in thousands except per share data.
April 30, July 31, October 31, January 31,
1995 1995 1995 1996
Revenues $ 10,516 $ 11,620 $ 13,454 $ 14,283
Operating income 569 410 948 382
Net earnings 366 246 594 349
Basic earnings per common share 0.13 0.08 0.20 0.12
Diluted earnings per common share 0.11 0.08 0.18 0.11
April 30, July 31, October 31, January 31,
1996 1996 1996 1997
(restated)
Revenues $ 17,370 $ 23,118 $ 23,948 $ 24,890
Operating income (loss) 807 1,251 1,311 (2,716)
Net earnings (loss) 503 781 810 (1,602)
Basic earnings (loss) per common share 0.17 0.27 0.28 (0.55)
Diluted earnings (loss) per common share 0.15 0.23 0.24 (0.55)
April 30, July 31, October 31, January 31,
1997 1997 1997 1998
Revenues $ 26,333 $ 36,152 $ 29,919 $ 30,882
Operating income (loss) 1,048 480 577 (557)
Net earnings (loss) 623 258 316 (103)
Basic earnings (loss) per common share 0.20 0.08 0.10 (0.03)
Diluted earnings (loss) per common share 0.18 0.08 0.09 (0.03)
14. RESTATEMENT
Subsequent to the issuance of the January 31, 1997 financial statements,
the Company's management determined that an additional $3,482,344 in
compensation expense should have been recorded in connection with the an
extension of the exercise period of certain stock options that were granted
to certain employees in 1992. These options were due to expire in 1997 and
were extended, in January of 1997, for an additional five year period. As a
result, the financial statements were restated from amounts previously
reported to recognize the additional compensation expense and its effect
on the income tax provision and deferred taxes.
The effect of the restatement is as follows:
As
For the year ended Previously
January 31, 1997 Reported As restated
Consolidated Balance Sheet:
Current Deferred income tax asset $ 263,600 $ 196,800
Long term deferred income tax asset -- 602,159
Long term deferred income tax liability 850,301 --
Additional paid in capital 3,572,026 7,054,370
Retained earnings 11,178,467 9,081,783
Consolidated Statement of Earnings:
Stock compensation expense 57,219 3,539,563
Net earnings 2,588,138 491,454
Income tax provision 1,671,200 285,540
Basic earnings per common share $ 0.88 $ 0.17
Diluted earnings per common share $ 0.75 $ 0.15
15. SUBSEQUENT EVENTS
On March 31, 1998, the Board of Directors of the Company (the
"Board") adopted a Shareholder Rights Plan and declared a dividend
of one common share purchase right ("Right") for each share of
common stock of the Company outstanding on April 13, 1998. Until it
is announced that a person or group has acquired 20% or more of the
outstanding common stock of the Company ("Acquiring Person") or has
commenced a tender offer that could result in such person or group
owning 10% or more of such common stock, the Rights will initially
be redeemeable for $0.01 each, will be evidenced solely by the
Company's stock certificates, will automatically trade with the
Company's common stock and will not be exercisable. Following any
such announcement, separate Rights certificates would be
distributed, with each Right entitling its holder to purchase common
stock of the Company for an exercise price of $125, subject to
adjustment, as more fully described below.
Upon announcement that any person or group has become an Acquiring
Person and unless the Board acts to redeem the Rights, then ten
business days after such announcement (the "Flip-in Date"), each
Right (other than Rights beneficially owned by an Acquiring Person
or transferee thereof, which Rights become void) will entitle the
holder to purchase, for the $125 exercise price, a number of shares
of the Company's common stock having an aggregate market value of
$250. In addition, if, after the Acquiring Person gains control of
the Board, the Company is involved in a merger with any person or
sells more than 50% of its assets or earning power to any person (or
has entered into an agreement to do either of the foregoing), and,
in the case of a merger, an Acquiring Person would receive different
treatment than other stockholders, each Right would entitle its
holder to purchase, for the $125 exercise price, a number of shares
of common stock of such other person having an aggregate market
value of $250. If any person or group acquires between 10% and 50%
of the Company's common stock, the Board may, at its option, require
the Rights to be exchanged for common stock of the Company. The
Rights generally may be redeemed by the Board for $0.01 per Right
prior to the Flip-in Date.
******
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(CONSOLIDATED)
- --------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------------------------------------------
Additions
--------------------
Charged to
Balance at Charged to Other Balance
Beginning Cost and Accounts Deductions- at End of
Description of Period Expenses Describe Charge Offs Period
YEAR ENDED JANUARY 31,
1998:
Reserves and allowances
deducted from asset accounts:
Allowance for uncollectible
accounts $ 1,053,670 $416,713 $ -- $603,962 $866,421
YEAR ENDED JANUARY 31,
1997:
Reserves and allowances
deducted from asset accounts:
Allowance for uncollectible
accounts $ 831,538 $950,495 $ -- $728,363 $1,053,670
YEAR ENDED JANUARY 31,
1996:
Reserves and allowances
deducted from asset accounts:
Allowance for uncollectible
accounts $ 492,235 $820,131 $ -- $480,828 $831,538
Total-Tel 10K.edg Page 52 To Total-Tel