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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, 2000.
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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 ________.
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 .
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 CLOVE ROAD, LITTLE FALLS, NEW JERSEY 07424
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(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
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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. [X]
Aggregate market value (based upon a $10.00 closing price) of the voting stock
held by nonaffiliates of the Registrant as of April 26, 2000: $27,951,780.
Number of shares of Common Stock outstanding on April 26, 2000: 7,944,071
Documents Incorporated By Reference:
None
PART I
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
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Certain matters discussed in this Annual Report on Form 10-K are
"forward-looking statements" intended to qualify for the safe harbor from
liability provided 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 Registrant "believes",
"anticipates", "expects", or words of similar import. Similarly, statements
which describe the Registrant'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 Registrant undertakes no
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances.
ITEM 1. Business
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GENERAL
Total-Tel USA Communications, Inc. ("TotalTel", the "Registrant" or the
"Company") is a leading regional facilities-based long distance
telecommunications and internet services provider servicing both the commercial
and wholesale marketplace. The Registrant's retail segment operates principally
in the Northeast, primarily servicing small and medium-sized businesses. The
Registrant's products and services include a broad range of voice, data and
Internet solutions. The wholesale division provides domestic and international
termination services to carriers worldwide at competitive rates. The Registrant
currently owns and operates two long distance switches, in New York City and
Newark, New Jersey. In addition, the Registrant currently owns and operates two
carrier grade routers, a remote access server and an email server located in New
York City and Northern New Jersey for its internet service offerings. TotalTel
has a Network Operations Center ("NOC") in Northern New Jersey, to monitor and
control its New Jersey network and to coordinate its various services.
Total-Tel processes approximately 95% of all its call volume through
its own facilities. The Registrant uses proven technology to provide customized
telecommunications solutions to its customers.
In the retail market, the Registrant has segmented potential customers
and tailored its service offerings, sales, marketing approach and network
development to provide service in a cost-effective manner. The Registrant
believes its customer service to be one of its principal competitive advantages.
The Registrant applies a dedicated team approach to soliciting and servicing its
clients, with substantial involvement of sales, customer service and technical
personnel in all aspects of customer relations. The Registrant intends to
continue to focus its efforts on small to medium-sized customers with sales of
$1 million to $60 million and monthly communications bills that range from $500
to $30,000. The Registrant's focus on customer service has also enabled it to
attract larger customers.
For Fiscal 2000, Total-Tel had gross revenues of approximately $140
million, derived approximately 50% from wholesale and 50% from commercial
services. For Fiscal 1999, the Registrant's gross revenues were approximately
$137 million. The Registrant's commercial sales activities have been
concentrated in Northern New Jersey and New York City, where, the Registrant
believes, approximately half of all United States multinational corporations
have headquarters. Based on industry sources, this area is believed to represent
40% of the total United States telecommunications market. For the near term, at
least, Total-Tel intends to focus its efforts on further penetrating commercial
users of its services in the Northeast, from the Washington, D.C. market through
Boston, Massachusetts, and to augment the services offered to its customers.
The Registrant's principal executive offices are located at Overlook at
Great Notch, 150 Clove Road, Little Falls, New Jersey 07424, and its telephone
number is (973) 812-1100. The Registrant was incorporated in 1959 as Faradyne
Electronics Corp. In November 1991, the Registrant changed its name from
Faradyne Electronics Corp. to Total-Tel USA Communications, Inc.
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INDUSTRY OVERVIEW
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HISTORY AND INDUSTRY DEVELOPMENT
Prior to 1984, AT&T dominated both the local exchange and long distance
marketplaces by owning the operating entities that provided both local exchange
and long distance services to most of the United States population. Although
long distance competition began to emerge in the late 1970s, the critical event
triggering the growth of long distance competition was the breakup of AT&T and
the separation of its local and long distance businesses as mandated by the
Modified Final Judgment (the "MFJ") relating to the breakup of AT&T (the "MFJ").
To foster competition in the long distance market, the MFJ prohibited AT&T's
divested local exchange businesses, the Regional Bell Operating Companies
("RBOCs"), from acting as single-source providers of telecommunications
services.
Although the MFJ established the preconditions for competition in the
market for long distance services in 1984, the market for local exchange
services has until recently virtually been closed to competition and has largely
been dominated by regulated monopolies. Efforts to open the local exchange
market began in the late 1980s on a state-by-state basis.
The Telecommunications Act of 1996, (the "1996 Act") is considered to
be the most comprehensive reform of the nation's telecommunications laws and
affects the development of competition for local telecommunications services.
Specifically, certain provisions of the 1996 Act provide for (i) the removal of
legal barriers for entry into the local telecommunications services market; (ii)
the interconnection of the Incumbent Local Exchange Carrier (the "ILEC") network
with competitors' networks; (iii) the establishment of procedures and
requirements to be followed by the RBOCs, including the requirement that RBOCs
offer local services for resale as a precondition to their entering into the
long distance and telecommunications equipment manufacturing markets; and (iv)
the relaxation of the regulation of certain telecommunications services provided
by Local Exchange Carriers ("LEC") and others.
The continuing deregulation of the telecommunications industry and
technological change have resulted in an increasingly information-intensive
business environment. Regulatory, technological, marketing and competitive
trends have expanded substantially the Registrant's opportunities in the
converging voice and data communications services markets. For example,
technological advances, including rapid growth of the Internet, the increased
use of packet switching technology for voice communications, and the growth of
multimedia applications, are expected to result in substantial growth in the
high-speed data services market.
This new market opportunity should permit Competitive Local Exchange
Carriers ("CLECs") with operating and marketing expertise to offer a full range
of telecommunications services, including local and long distance calling,
toll-free calling, custom calling features, data services, and Internet access
and services. Telecommunications companies with an established base of long
distance customers may have an opportunity to sell additional services to such
customers.
The Registrant believes that small and medium-sized businesses have
historically been under served with respect to customer service and support. The
Registrant has observed that RBOCs and the Tier I carriers (carriers with annual
revenues in excess of $5 billion), primarily concentrate their sales and
marketing efforts on residential and large business customers. Thus, the
Registrant also believes there is a significant market opportunity with respect
to small and medium-sized businesses to which customer service may be a
significant part of their buying decision.
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NETWORK
The Registrant's strategy has been to develop a geographic
concentration of revenue-producing customers through the sale of
telecommunications services in areas where it has installed switching platforms.
CURRENT NETWORK
Switches. Currently, the Registrant operates an advanced
telecommunications network that includes two DSC switches, located in New York
City and Newark, New Jersey. The Registrant has installed DSC DEX 600 switches
in Newark and a DEX600E switch in New York, which provides interexchange
switching capabilities and is currently being used as the Registrant's
international gateway switching platform.
During Fiscal 2000, the Registrant billed approximately 1.25 billion
minutes, with approximately 95% of its minutes over its own switches. The
Registrant believes that increasing the traffic carried on its own network would
improve operating margins.
International. The Registrant is interconnected with a number of United
States and foreign wholesale international carriers through its New York switch.
The purpose of connecting to a variety of carriers is to provide
state-of-the-art, lowest-cost routing and network reliability. These
interconnected international carriers are also a source of wholesale
international traffic and revenue.
Internet. Currently, the Registrant owns and operates an IP (Internet
Protocol) Network that includes two Cisco 7500 routers, located in New York
City. The Registrant owns and operates an Ascend TNT remote access server (RAS)
located in New York also. The RAS provides dial-up Internet access services.
Through a association with NorthPoint, a wholesale Digital Subscriber Lines
("DSL"), CLEC, the Registrant offers DSL internet service in the Philadelphia,
New York, New Jersey and Connecticut markets.
Other Features. The Registrant is interconnected by SS7 out-of-band
digital signaling throughout its network. The SS7 signaling system reduces
connect time delays, thereby enhancing overall network efficiencies.
Additionally, the SS7 technology is designed to permit the anticipated expansion
of the Registrant's Advanced Intelligent Network ("AIN") capabilities throughout
its network. The Registrant's advanced switching platform would enable it to (i)
deploy features and functions quickly throughout its entire network, (ii) expand
switch capacity in a cost-effective manner, and (iii) lower maintenance costs
through reduced training and spare parts requirements.
Security and Reliability. The Registrant has a NOC in Northern New
Jersey, which monitors and controls the Registrant's network and coordinates its
various services from a central location, increasing the security, reliability
and efficiency of the Registrant's operations. Centralized electronic monitoring
and control of the Registrant's network allows the Registrant to avoid
duplication of this function in each switch site. The NOC also helps reduce the
Registrant's per-customer monitoring and customer service costs. In addition,
the Registrant's network employs an "authorized access" architecture. Unlike
many telecommunications companies, which allow universal access to their
network, the Registrant utilizes an automatic number identification security
screening architecture which ensures only the ANIs of those users who have
subscribed to the Registrant's services and have satisfied the Registrant's
credit and provisioning criteria have access to the network. The Registrant
believes that this architecture provides the Registrant the ability to better
control bad debt and fraud in a manner that is invisible and nonintrusive to the
customer. This architecture also allows the Registrant to better manage network
capacity, as unauthorized and unplanned users cannot access the network.
PRINCIPAL PRODUCTS AND SERVICES
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PRODUCT AND SERVICE OFFERINGS
The Registrant offers retail telecommunications services primarily to
small and medium-sized businesses. The Registrant's retail service offerings
currently include long distance and toll-free services (both with and without an
AIN), multiple access options, calling card, data, Internet access DSL, email,
facsimile, directory assistance and teleconferencing services. The Registrant is
considering plans to provide local exchange service, enhanced data and Internet
services, and additional AIN features. The Registrant's wholesale services
include domestic and international termination and transport services to
domestic and international telecommunications carriers.
CURRENT SERVICES
Retail Services. The Registrant provides retail telecommunications
services to over 14,000 commercial customers, primarily small and medium-sized
businesses located in the Northeastern region of the United States. The
Registrant sells retail services through its direct retail sales force and
independent marketing representatives. Retail commercial communications services
accounted for approximately 50% of the Registrant's Fiscal 2000
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revenues, and produced revenues of approximately $69,023,000 in Fiscal 2000 and
$72,556,000 in Fiscal 1999. Retail revenues fell in fiscal 2000 due to continued
decreases in price from the ever increasing competition within the industry. The
decreasing prices more than offset any volume gains that the Registrant
experienced in fiscal 2000. While the Registrant believes that minutes of use
will continue to increase, as the worldwide demand for communications services
increases, it also believes that the intense competition for those minutes from
other telecommunications providers will continue to create a trend towards
downward pressures on price. As both trends continue the Registrant believes
that it will be able to attract additional volume, but will also realize
significant price decreases that may adversely affect operations.
The Registrant's retail services include the following:
LONG DISTANCE: The Registrant offers a full range of switched and
dedicated domestic and international long distance services, including
"1+" outbound service in all 50 states along with global termination to
over 200 countries. Long distance services include intra-LATA,
inter-LATA, and worldwide international services. Long distance
features include both verified and non-verified accounting codes,
station-to-station calling, third-party calling, directory assistance,
and operator-assisted calling.
TOLL-FREE SERVICES: The Registrant offers a full range of switched and
dedicated domestic toll-free services, including toll-free origination
in all 50 states, international toll-free origination from over 30
countries, and toll-free directory assistance. AIN enhanced toll-free
services include the following features: Command Routing, Dialed Number
Identification Service Area Code/Exchange Routing, Real Time Automatic
Number Identification Delivery, Day-of-Year Routing, Day-of-Week
Routing, Time-of-Day Routing, Percentage Allocation Routing, PIN
protected 800 services, integrated voice response services, and store
locator services.
ACCESS OPTIONS: The Registrant offers its long distance and toll-free
customers multiple access options including dedicated access at DS0,
DS1, and DS3 speed(s) and switched access.
CALLING CARD AND SERVICES: The Registrant offers nationwide switched
access customized calling card services. Customers have the option of
calling cards, which are personalized, branded or generic.
INTERNET: The Registrant currently offers high-quality, dedicated DSL
and dial-up Internet access, email, IP addressing and Domain Name
Services.
DATA SERVICES: The Registrant offers advanced data transmission
services, including private line and Frame Relay services. Data
services have multiple access options, including dedicated access at
DS0, DS1, and DS3 speed(s) and switched access.
CUSTOMER MANAGEMENT CONTROL FEATURES: All of the Registrant's customers
have the option of customized management reporting features, including
interstate/intrastate area code summaries, international destination
matrix, daily usage summaries, state summaries, time of day summaries,
duration distribution matrix, exception reporting of long duration
calls, and incomplete and blocked call reporting.
Wholesale Services. The Registrant offers the following wholesale services:
domestic and international termination, switch ports, collocation facilities and
transport services to a broad spectrum of domestic and international carriers.
The Registrant offers international wholesale termination and transport services
primarily to domestic and international telecommunications carriers. Once the
Registrant interconnects with a carrier customer, the carrier may utilize the
Registrant on an as-needed basis, depending upon the pricing offered by the
Registrant and its competitors, as well as capacity. The Registrant has been
tested and approved as an authorized carrier for, and included in the routing
tables of all of its long distance and international carrier customers.
Wholesale revenues were approximately $70,737,000 and $64,727,000 during Fiscal
2000 and Fiscal 1999, respectively.
CUSTOMER BASE
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TELECOMMUNICATIONS SERVICES MARKET
Overview of the United States Market. The United States market for
telecommunications services can be divided into three basic sectors: long
distance services, local exchange services and Internet access services
Long Distance Services. A long distance telephone call can be
envisioned as consisting of three segments. Starting with the originating
customer, the call travels along a local exchange network to a long distance
carrier's point of presence ("POP"). At the POP, the call is combined with other
calls and sent along a long distance network to a POP on the long distance
carrier's network near where the call will terminate. The call is
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then sent from this POP along a local network to the terminating customer. Long
distance carriers provide only the connection between the two local networks;
and, unless the long distance carrier is a local service provider, pay access
charges to LECs for originating and terminating calls.
Local Exchange Services. A local call is one that does not require the
services of a long distance carrier. In general, the local exchange carrier
connects end-user customers within a LATA and also provides the local access
(ingress and egress) of most long distance calls.
Internet Service. Internet services are generally provided in at least
two distinct segments. A local network connection is required from the Internet
Service Provider ("ISP") customer to the ISP's local facilities. For large,
communication-intensive users and for content providers, the connections are
typically unswitched, dedicated connections provided by LECs, Intelligent Call
Processing ("ICP"), or other providers, either as independent service providers
or, in some cases, by a carrier that is both a CLEC and an ISP. For residential
and small and medium-sized business users, these connections are generally
Public Switched Telephone Network ("PSTN") connections obtained on a dial-up
access basis as a local exchange telephone call. Once a local connection is made
to the ISP's local facilities, information can be transmitted and obtained over
a packet-switched IP data network, which may consist of segments provided by
many interconnected networks operated by a number of ISPs. The collection of
interconnected networks makes up the Internet. A key feature of Internet
architecture and packet switching is that a single dedicated channel between
communication points is never established, which distinguishes Internet-based
services from the PSTN.
International Service. A typical international long distance call
originates on a local exchange network or private line and is carried to the
international gateway switch of a long distance carrier. The call is then
transported along a fiber optic cable or a satellite connection to an
international gateway switch in the terminating country and, finally, to another
local exchange network or private line where the call is terminated. Generally,
only a small number of carriers are licensed by a foreign country for
international long distance and, in many countries, only the Post Telephone &
Telegraph administration ("PTT") is licensed or authorized to provide
international long distance service. Any carrier which desires to transport
switched calls to or from a particular country must, in addition to obtaining a
license or other permission (if required), must enter into operating agreements
or other arrangements with the PTT or another international carrier in that
country or lease capacity from a carrier which already has such arrangements.
MARKET OPPORTUNITIES
As a result of the 1996 Act and other federal, state, and international
initiatives, numerous telecommunications markets have been opened to
competition. In addition, the increasing globalization of the world economy,
along with increased reliance on data transmission and Internet access, has
expanded traditional telecommunications markets. The Registrant has targeted its
services principally to small and medium-sized businesses based upon its belief
that such customers are not aggressively targeted by Tier I providers and are
underserved with respect to customer service and support.
6
COMPETITION
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OVERVIEW
The Registrant operates in a highly competitive industry and estimates
that it has no greater than a 1% market share in the market in which it
operates. The Registrant expects that competition will continue to intensify in
the future due to regulatory changes, including the continued implementation of
the 1996 Act, and the increase in the size, resources, and number of market
participants. In each of its markets, the Registrant will face competition from
larger, better capitalized Tier I and Tier II providers and ILECs and CLECs.
While new business opportunities may be made available to the Registrant through
the 1996 Act and other federal and state regulatory initiatives, regulators are
likely to provide the ILECs with an increased degree of flexibility with regard
to pricing of their services as competition increases.
Competition for the Registrant's products and services is based on
price, quality, the ability to bundle services, brand equity, name recognition,
network reliability, service features, billing services, perceived quality and
responsiveness to customers' needs. While the Registrant believes that it
currently has certain advantages relating to price, quality, customer service
and responsiveness to customer needs, there is no assurance that the Registrant
will be able to maintain these advantages or obtain additional advantages. A
continuing trend toward business combinations and alliances in the
telecommunications industry may create significant new competitors to the
Registrant. Many of the Registrant's existing and potential competitors have
financial, technical, and other resources significantly greater than those of
the Registrant. In addition, in December, 1997, the FCC issued rules to
implement the provisions of the World Trade Organization Agreement on Basic
Telecommunications, which was drafted to liberalize restrictions on foreign
ownership of domestic telecommunications companies and to allow foreign
telecommunications companies to enter domestic markets. The new FCC rules went
into effect in February, 1998 and are expected to make it substantially easier
for many non-United States telecommunications companies to enter the United
States market, thus further increasing the number of competitors. The new rules
will also give non-United States individuals and corporations greater ability to
invest in United States telecommunications companies, thus increasing the
financial and technical resources potentially available to existing and
potential competitors as well as Registrant.
LONG DISTANCE MARKET
The long distance telecommunications industry is highly competitive and
affected by the introduction of new services by, and the market activities of,
major industry participants. The Registrant competes against various national
and regional long distance carriers, including both facilities-based providers
and switchless resellers offering essentially the same services as the
Registrant. In addition, significant competition is expected to be provided by
ILECs including, when authorized, RBOCs. The Registrant's success will depend
upon its ability to provide high-quality services at prices competitive with, or
lower than, those charged by its competitors. In addition, a high level of
customer attrition or "churn" has characterized the long distance industry. Such
attrition is attributable to a variety of factors, including initiatives of
competitors as they engage in advertising campaigns, marketing programs, and
provide cash payments or other incentives. End users are often not obligated to
purchase any minimum usage amount and can discontinue service without penalty at
any time. While the Registrant believes its customer turnover rate is lower than
that of many of its competitors, the Registrant's revenue has been, and is
expected to continue to be, affected by churn.
Tier I providers and other carriers have implemented new price plans
aimed at residential customers with significantly simplified rate structures,
which may have the impact of lowering overall long distance prices. There can
also be no assurance that long distance carriers will not make similar offerings
available to the small to medium-sized businesses that the Registrant primarily
serves. While the Registrant believes small and medium-sized business customers
are not aggressively targeted by large long distance providers, such as the Tier
I providers, there can be no assurance the Registrant's customers and potential
customers will not be targeted by these or other providers in the future.
Additional pricing pressure may come from IP transport, which is a developing
use of packet-switched technology that can transmit voice communications at a
cost that may be below that of traditional circuit-switched long distance
service. While IP transport is not yet available in all areas, requires the
dialing of additional digits, and generally produces sound quality inferior to
traditional long distance service, it could eventually be perceived as a
substitute for traditional long distance service and put pricing pressure on
long distance rates. Any reduction in long distance prices may have a material
adverse effect on the Registrant's business, financial condition and results of
operations.
Some of the Registrant's principal competitors are also major suppliers
of services to the Registrant. The Registrant both links its switching equipment
with transmission facilities and services purchased or leased from these
suppliers, and also resells services obtained from these suppliers. There can be
no assurance that these suppliers will continue to offer services to the
Registrant at competitive rates or on attractive terms, if at all, and any
failure to do so could have a material adverse effect on the Registrant.
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LOCAL EXCHANGE MARKET
Under the 1996 Act and related federal and state regulatory
initiatives, barriers to local exchange competition are being removed. In local
telecommunication markets, the Registrant's primary competitor would be the ILEC
serving each geographic area. ILECs are established providers of local telephone
services to all or virtually all telephone subscribers within their respective
service areas. ILECs also have long-standing relationships with regulatory
authorities at the federal and state levels. While recent FCC administrative
decisions and initiatives provide increased business opportunities to voice,
data and Internet-service providers, they also provide the ILECs with increased
pricing flexibility for their private line, special access and switched access
services. In addition, with respect to competitive access services, the FCC
recently proposed a rule which would provide for increased ILEC pricing
flexibility and deregulation for such access services, either automatically or
after certain competitive levels are reached. If the ILECs are allowed
additional flexibility by regulators to offer discounts to large customers
through contract tariffs, decide to engage in aggressive volume and term
discount pricing practices for their customers, or seek to charge competitors
excessive fees for interconnection to their networks, the revenue of competitors
to the ILECs could be materially adversely affected. If future regulatory
decisions afford the ILECs increased access services, pricing flexibility or
other regulatory relief, such decisions could also have a material adverse
affect on competitors to the ILECs.
The Registrant also would face competition or prospective competition
in local markets from other carriers, many of which have significantly greater
financial resources than the Registrant. For example, the Tier I providers have
begun to offer local telecommunications services in major domestic markets using
their own facilities or by resale of the ILECs' or other providers' services. In
addition to these long-distance service providers, entities which currently
offer or are potentially capable of offering local switched services include
companies which have previously operated as Competitive Access Provider ("CAP"),
cable television companies, electric utilities, microwave carriers, wireless
telephone system operators, and large customers that build private networks.
These entities, upon entering into appropriate interconnection agreements or
resale agreements with ILECs, could offer single-source local and long distance
services, similar to those offered or proposed to be offered by the Registrant.
YEAR 2000 MATTERS
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In the Registrant's previous filings with the Securities and Exchange Commission
on Forms 10-Q, 10-K and 10K/A, extensive descriptions of the Registrant's Year
2000 (Y2K) initiatives were presented. Nothing has come to the Registrant's
attention that would cause it to believe that its Y2K compliance effort was not
successful. While the Registrant will continue to monitor for Y2K related
problems, to date no significant Y2K issues have been encountered and the
Registrant does not currently anticipate incurring additional expenses to
address Y2K related issues.
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
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OVERVIEW
The Registrant's services are subject to regulation by federal, state,
and local governmental agencies. The FCC exercises jurisdiction over all
facilities and services of telecommunications common carriers to the extent
those facilities are used to provide, originate or terminate interstate or
international communications. State regulatory agencies retain jurisdiction over
carriers' facilities and services to the extent they are used to originate or
terminate intrastate communications. Municipalities and other local government
agencies may require carriers to obtain licenses or franchises regulating use of
public rights-of-way necessary to install and operate their networks. The
networks are also subject to numerous local regulations such as building codes,
franchises, and rights of way licensing requirements. Many of the regulations
issued by these regulatory bodies may be subject to judicial review, the results
of which the Registrant is unable to predict.
FEDERAL REGULATIONS - THE 1996 ACT
Statutory Requirements. The 1996 Act requires all Local Exchange
Carriers ("LECs") (including Incumbent Local Exchange Carriers "ILECs" and
Competitive Local Exchange Carriers "CLECs") (i) not to prohibit or unduly
restrict resale of their services; (ii) to provide local number portability;
(iii) to provide dialing parity and nondiscriminatory access to telephone
numbers, operator services, directory assistance, and directory listings; (iv)
to afford access to poles, ducts, conduits, and rights-of-way; and (v) to
establish reciprocal compensation
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arrangements for the transport and termination of local telecommunications
traffic. It also requires ILECs to negotiate local interconnection agreements in
good faith and to provide interconnection (a) for the transmission and routing
of telephone exchange service and exchange access, (b) at any technically
feasible point within the ILEC's network, (c) which is at least equal in quality
to that provided by the ILEC to itself, its affiliates, or any other party to
which the ILEC provides interconnection, and (d) at rates and terms and
conditions which are just, reasonable and nondiscriminatory. ILECs also are
required under the 1996 Act to provide nondiscriminatory access to network
elements on an unbundled basis at any technically feasible point, to offer their
local telephone services for resale at wholesale rates, and to facilitate
collocation of equipment necessary for competitors to interconnect with or
access Unbundled Network Elements ("UNEs").
The 1996 Act also eliminates the existing AT&T antitrust consent
decree, which barred the provision of long distance services and manufacturing
by the Regional Bell Operating Companies (RBOCs). In addition, the 1996 Act
requires RBOCs to comply with certain safeguards and offer interconnection which
satisfies a prescribed 14-point competitive checklist before RBOCs are permitted
to provide in-region inter-LATA services. These safeguards are designed to
ensure that the RBOC's competitors have access to local exchange and exchange
access services on nondiscriminatory terms and that the subscribers of regulated
non-competitive RBOC services do not subsidize their provision of competitive
services. The safeguards are also intended to promote competition by preventing
RBOCs from using their market power in local exchange services to obtain an
anti-competitive advantage in the provision of other services. RBOCs have the
ability to provide out-of-region long-distance services and, if they obtain
authorization and under prescribed circumstances, may provide additional
in-region long-distance services. In December 1999, the FCC granted Bell
Atlantic's application to offer in-region long distance services in New York,
marking the first time since the breakup of AT&T that an RBOC has been able to
provide its customers with both local and long distance service.
The 1996 Act also granted important regulatory relief to industry
segments which compete with CLECs. ILECs were given substantial new pricing
flexibility. RBOCs were also granted new rights to provide certain cable TV
services. Inter Exchange Carriers ("IXCs") were permitted to construct their own
local facilities and/or resell local services. State laws may no longer require
CATVs to obtain a franchise before offering telecommunications services nor
permit CATVs' franchise fees to be based on their telecommunications revenue. In
addition, under the 1996 Act all utility holding companies are permitted to
diversify into telecommunications services through separate subsidiaries.
FCC Rules Implementing the Local Competition Provisions of the 1996
Act. In August 1996, the FCC released a First Report and Order, a Second Report
and Order and a Memorandum Opinion and Order (combined, the "Interconnection
Orders") which established a framework of minimum, national rules enabling state
Public Utility Commissions ("PUCs") and Public Service Commissions ("PSCs"), and
the FCC to begin implementing many of the local competition provisions of the
1996 Act. In its Interconnection Orders, the FCC prescribed certain minimum
points of interconnection necessary to permit competing carriers to choose the
most efficient points at which to interconnect with the ILECs' networks. The FCC
also adopted a minimum list of UNEs that ILECs must make available to
competitors upon request and a methodology for states to use in establishing
rates for interconnection and the purchase of UNEs. The FCC also adopted a
methodology for States to use when applying the 1996 Act "avoided cost standard"
for setting wholesale prices with respect to retail services.
The U.S. Supreme Court affirmed the authority of the FCC to establish
rules governing interconnection. We believe that additional disputes regarding
interconnection issues and other related FCC actions are likely. In particular,
the Supreme Court remanded to the FCC issues regarding what UNEs the FCC will
require ILECs to make available to competitors. In November 1999, the FCC
released a decision modifying the list of UNEs which all ILECs must offer to
other carriers. The Eighth Circuit decisions and their reversal by the Supreme
Court continue to cause uncertainty about the rules governing the pricing, terms
and conditions of interconnection agreements. The Supreme Court's ruling and
further proceedings on remand (either at the Eighth Circuit or the FCC) may
affect the scope of the PUCs' and PSCs' authority to conduct arbitration
proceedings or to implement or enforce interconnection agreements. The ruling
could also result in new or additional rules being promulgated by the FCC. Given
the ongoing uncertainty surrounding the effect of the Eighth Circuit decisions
and the recent decision of the Supreme Court reversing them, the Registrant may
not be able to obtain or enforce interconnection terms acceptable to it or that
are consistent with its business plans.
OTHER FEDERAL REGULATIONS
In general, the FCC has a policy of encouraging the entry of new
competitors in the telecommunications industry and preventing anti-competitive
practices. Therefore, the FCC has established different levels of regulation for
dominant carriers and non-dominant carriers. For purposes of domestic common
carrier telecommunications regulation, large ILECs are currently considered
dominant carriers, while CLECs are considered non-dominant carriers.
TARIFFS. As a non-dominant carrier, the Registrant may install and
operate facilities for the transmission of domestic interstate
communications without prior FCC authorization. Services of
non-dominant carriers have been subject to relatively limited
regulation by the FCC, primarily consisting of the filing of
tariffs and periodic reports. However, non-dominant carriers like
the
9
Registrant must offer interstate services on a nondiscriminatory
basis, at just and reasonable rates, and remain subject to FCC
complaint procedures. With the exception of informational tariffs
for operator-assisted services and tariffs for interexchange
casual calling services, the FCC has ruled that IXCs must cancel
their tariffs for domestic interstate interexchange services.
Tariffs remain required for international services. Pursuant to
these FCC requirements, the Registrant has filed and maintains
tariffs for its interstate services with the FCC. All of the
interstate access and retail "basis" services (as defined by the
FCC) provided by the Registrant are described therein. "Enhanced"
services (as defined by the FCC) need not be tariffed. The
Registrant believes that its proposed enhanced voice and Internet
services are "enhanced" services which need not be tariffed.
However, the FCC is reexamining the "enhanced" definition as it
relates to IP transport and the Registrant cannot predict whether
the FCC will change the classification of such services.
INTERNATIONAL SERVICES. Non-dominant carriers such as the
Registrant are required to obtain FCC authorization pursuant to
Section 214 of the Communications Act and file tariffs before
providing international communication services. The Registrant has
obtained authority from the FCC to engage in business as a resale
and facilities-based international carrier to provide voice and
data communications services between United States and all foreign
points.
ILEC PRICE CAP REGULATION REFORM. In 1991, the FCC replaced
traditional rate of return regulation for large ILECs with price
cap regulation. Under price caps, ILECs can raise prices for
certain services by only a small percentage each year. In
addition, there are constraints on the pricing of ILEC services
which are competitive with those of CLECs. In September 1995, the
FCC proposed a three-stage plan which would substantially reduce
ILEC price cap regulation as local markets become increasingly
competitive and, ultimately, would result in granting ILECs
nondominant status. Adoption of the FCC's proposal to reduce
significantly its regulation of ILEC pricing would significantly
enhance the ability of ILECs to compete against the Registrant and
could have a material adverse effect on the Registrant. The FCC
released an order in December, 1996 that adopted certain of these
proposals, including the elimination of the lower service band
index limits on price reductions within the access service
category. The FCC's December 1996 order also eased the
requirements necessary for the introduction of new services by
ILECs. In May, 1997, the FCC took further action updating and
reforming its price cap plan for the ILECs. Among other things,
the changes require price cap LECs to reduce their price cap
indices by 6.5 percent annually, less an adjustment for inflation.
The FCC also eliminated rules that require ILECs earning more than
certain specified rates of return to "share" portions of the
excess with their access customers during the next year in the
form of lower access rates. In August, 1999, the FCC again took
action designed to grant greater flexibility to price cap LECs as
competition develops. These reforms should facilitate the removal
of services from price cap regulation as competition develops in
the marketplace. The order granted immediate pricing flexibility
to price cap LECs in the form of streamlined introduction of new
services, geographic deaveraging of rates for services in the
trunking basket, and removal, upon implementation of toll dialing
parity, of certain interstate interexchange services from price
cap regulation. These actions could have a significant impact on
the interstate access prices charged by the ILECs with which the
Registrant expects to compete.
ACCESS CHARGES. Over the past several years, the FCC has granted
ILECs significant flexibility in their pricing of interstate
special and switched access services. Under this pricing scheme,
ILECs may establish pricing zones based on access traffic density
and charge different prices for each zone. The Registrant
anticipates that this pricing flexibility should result in ILECs
lowering their prices in high traffic density areas, the probable
area of competition with the Registrant. The Registrant also
anticipates that the FCC will grant ILECs increasing pricing
flexibility as the number of interconnections and competitors
increases. In May, 1997, the FCC took action to reform the current
interstate access charge system. The FCC adopted an order which
makes various reforms to existing rate structures for interstate
access designed to move access charges, over time, to more
economically efficient rate levels and structures. The FCC
recently granted LECs additional pricing flexibility. As such, the
carriers may offer volume discounts that may benefit larger long
distance carriers.
The FCC has also implemented changes in interstate access rules
that result in restructuring of the access charge system and
changes in access charge rate levels. As of January 1998, access
charges incurred by the Registrant are being passed on to end
users. In May 1999, the U.S. Court of Appeals (D.C. Circuit) sent
the access rate formula back to the FCC for further explanation
regarding how certain factors were calculated. These and related
actions may change access rates. If the formula is upheld, and
access rates are reduced, the result will be a lower cost of
providing long distance service, especially to business customers.
The impact of these new changes will not be known until they are
fully implemented over the next several years. In a related
proceeding, the FCC has adopted changes to the methodology by
which access has been used in part to
10
subsidize universal telephone service and other public policy
goals. Telecommunications providers like us pay fees calculated as
a percentage of revenue to support these goals. The full
implications of these changes remains uncertain and subject to
change.
PICC. As part of Access Reform mandated in the Telecommunications
Act of 1996, beginning in 1998 local phone companies were
permitted to assess the Pre-subscribed Interexchange Carrier
Charge, also known as "PICC." The "PICC" is a monthly per line
cost charged by the local telephone company to each long distance
carrier for every customer phone line that is pre-subscribed to
that carrier. These charges are passed on to the end users.
UNIVERSAL SERVICE REFORM. In May 1997, the FCC released an order
which reforms the current system of interstate universal service
support and implements the universal service provisions of the
1996 Act. The FCC established a set of policies and rules designed
to ensure that low-income consumers and consumers who live in
rural, insular and high-cost areas receive a defined set of local
telecommunications services at affordable rates. This was to be
accomplished in part through expansion of direct consumer subsidy
programs and in part by ensuring that rural, small and high-cost
LECs continue to receive universal service subsidy support. The
FCC also created new programs to subsidize connection of eligible
schools, libraries and rural health care providers to
telecommunications networks. These programs were to be funded by
assessment of eligible revenue of nearly all providers of
interstate telecommunications carriers, including the Registrant.
The Registrant, like other telecommunications carriers providing
interstate telecommunications services, is required to contribute
a portion of its end-user telecommunications revenue to fund
universal service programs. These contributions became due
beginning in 1998 for all providers of interstate
telecommunications services. Such contributions were to be
assessed based on intrastate, interstate and international end
user telecommunications revenue. Contribution factors vary
quarterly and carriers, including the Registrant, are billed each
month. In addition, many state regulatory agencies have instituted
proceedings to revise state universal fund contribution
requirements, which will vary from state to state. Recently, the
U.S. Court of Appeals for the Fifth Circuit rejected the FCC's
effort to base contributions in part on intrastate revenues. The
FCC's universal service program may be altered as a result of
appeals, agency reconsiderations of its actions, or future
Congressional legislation.
Pursuant to the Universal Service Order, all carriers are required
to submit a Universal Service Fund worksheet. The Registrant has
filed its Universal Service Fund worksheet. The amounts remitted
to the Universal Service Fund may be billed to the Registrant's
customers. If the Registrant does not bill these amounts to its
customers, its profit margin may be less than if it had elected to
do so. However, if the Registrant elects to bill these amounts to
its customers, customers may reduce their use of the Registrant's
services, or elect to use the services provided by the
Registrant's competitors, which may have a material adverse effect
upon the Registrant's business, financial condition, or results of
operations. The Registrant is eligible to qualify as a recipient
of universal service support if it elects to provide
facilities-based service to areas designated for universal service
support and if it complies with federal and state regulatory
requirements to be an eligible telecommunications carrier.
In October 1999, the FCC adopted a new high-cost universal service
support mechanism for non-rural carriers. The new mechanism is
based on the forward-looking costs of providing supported services
as determined by the Commission's cost model. The forward-looking
support mechanism provides support to non-rural carriers in those
states that have a statewide average forward-looking cost per line
greater than the national benchmark, which is set at 135 percent
of the national average forward-looking cost per line. The FCC's
decisions regarding universal service could have a significant
impact on future operations of the Registrant.
COLLOCATION. In March 1999, the FCC released its Collocation Order
which requires ILECs to permit CLECs to collocate any equipment
used for interconnection or access to unbundled network elements
even if that equipment includes switching or enhanced service
functions. Among other things, the Collocation Order also
prohibits ILECs from placing any limits on the use of switching or
enhanced features for collocated equipment, and requires ILECs to
make cageless collocation available and permit CLECs to construct
their own cross-connect facilities.
In March 2000, the U.S. Court of Appeals for the District of
Columbia Circuit vacated limited portions of the Collocation
Order, holding certain definitions contained in FCC rules were
impermissibly broad. The court remanded the Collocation Order in
part for further FCC consideration of these issues. The FCC will
be instituting proceedings to comply with the court's remand.
LINE SHARING. In November 1999, the FCC adopted a new order
requiring ILECs to provide line sharing, which will allow CLECs to
offer data services over the same line the consumer uses for voice
11
services without the CLECs being required to offer the voice
services. State commissions have been authorized to establish the
prices to the CLECs for such services. The decision has been
appealed.
State Regulation
The Registrant believes that most, if not all, states in which it may
operate as a local telecommunications provider, require certification
or other authorization to offer intrastate services. Many of the states
in which the Registrant may operate are in the process of addressing
issues relating to the regulation of CLECs.
In some states, existing state statutes, regulations or regulatory
policy may preclude some or all forms of local service competition. However,
Section 253 of the 1996 Act prohibits states and localities from adopting or
imposing any legal requirement which may prohibit, or have the effect of
prohibiting, the ability of any entity to provide any interstate or intrastate
telecommunications service. The FCC has the authority to preempt any such state
or local requirements to the extent necessary to enforce the 1996 Act's open
market entry requirements. States and localities may continue to regulate the
provision of interstate communications services and require carriers to obtain
certificates or licenses before providing service, if such requirements do not
constitute prohibitive barriers to market entry.
Some states in which the Registrant operates are considering
legislation which could impede efforts by new entrants in the local services
market to compete effectively with ILECs. For example, some state PSCs and PUCs
are currently considering actions to preserve universal service and promote the
public interest. Such actions may impose conditions on the certificate issued to
an operating Registrant which would require it to offer service on a
geographically widespread basis through (i) the construction of facilities to
serve all residents and business customers in such areas, (ii) the acquisition
from other carriers of network facilities required to provide such service, or
(iii) the resale of other carriers' services. The Registrant believes that state
PSCs and PUCs have limited authority to impose such requirements under the 1996
Act. The imposition of such conditions by state PUCs, however, could increase
the cost to operating companies of providing local exchange services or
otherwise affect an operating company's flexibility to offer services.
The Registrant has intrastate authority for the provision of resold
interexchange services through certification or registration in every state
where it is required. The Registrant has CLEC certifications pending in several
states. There can be no assurance that the Registrant will receive the
authorizations it may seek in the future to the extent it expands into other
states or seeks to provide additional services. In most states, the Registrant
is required to file tariffs setting forth the terms, conditions and prices for
services which are classified as intrastate.
Local Interconnection. The 1996 Act imposes a duty upon all ILECs to
negotiate in good faith with potential interconnectors to provide
interconnection to the ILEC networks, exchange local traffic, make UNEs
available and permit resale of most local services. If negotiations do not
succeed, the Registrant has a right to seek state PUC or PSC arbitration of any
unresolved issues. The Registrant has begun the process of negotiating
interconnection arrangements in several states in its targeted region.
Arbitration decisions involving interconnection arrangements in several states
have been challenged in lawsuits filed in U.S. District Court by the affected
ILECs
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
would require any material capital expenditure.
PERSONNEL
---------
As of the date of this Report, the Registrant and its subsidiaries
employed 243 full-time and part-time employees in its long distance
telecommunication service, of whom 84 were engaged in sales activities, 22 in
customer service and support, 54 in technical and field services, 25 in data
processing, and 58 in general and administrative activities. The Registrant also
utilizes the services of approximately 220 independent sales agents. The
Registrant considers its relations with its employees to be satisfactory.
ITEM 2. Properties
----------
On November 15, 1993, and December 28, 1993, the Registrant entered
into leases for an aggregate of approximately 3,500 square feet of space at 744
Broad Street, Newark, New Jersey, for its upgraded switching equipment. The
lease ran from January 1, 1994 through December 31, 1998, with an option to
renew the lease through August 31, 2002, which has been exercised. The annual
rental of $54,720 also requires the tenant to pay a proportionate share of any
increase in the "Consumer Price Index", U. S. City Average over the base year.
12
On December 1, 1993, the Registrant entered into a five-year lease,
which expired on November 30, 1998, for approximately 20,000 square feet of
space from a partnership in which two of the partners were directors and major
shareholders of the Registrant. Both of the partners are no longer directors.
The lease was amended on August 31, 1999, whereby the space was reduced to
12,295 square feet at an annual rate of $47,980. The lease provides a 120 day
written notice by either party to terminate. 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, the Registrant 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.
There is an option for renewal, which can be renewed twice for five years each.
On January 30, 1997, the Registrant 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 was $357,760 per annum from July 1, 1997 through
February 14, 1998, is $366,800 per annum from February 15, 1998 through August
14, 2000, and will be $382,720 per annum from August 15, 2000 through August 14,
2002. In addition, the Registrant is obligated for its proportionate share of
increases in real estate taxes and operating expenses over the base year. There
is an option for renewal, which provides that the lease can be renewed twice for
five years each upon nine months notice.
On November 1, 1996, the Registrant 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 March 1,
1997. 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 Registrant 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 (63) 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 Registrant 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 is approximately $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 Registrant is
liable for its proportionate share of increases in real estate taxes and
operating expenses over the base year. The Registrant sublet this space on
January 1, 2000 for the balance of its term, to another tenant at an annual rate
of approximately $106,618, subject to adjustments.
On September 1, 1998, the Registrant entered into a five year lease,
commencing September 1, 1998 leasing 3,008 square feet of space at 500 Cypress
Creek Road, Fort Lauderdale, Florida. Rental payments were $48,128 per annum
from September 1, 1998 to August 31, 1999, $50,554 from September 1, 1999 to
August 31, 2000, $53,061 from September 1, 2000 to August 31, 2001, $55,708 from
September 1, 2001 to August 31, 2002 and $58,506 from September 1, 2002 to
August 31, 2003. The lease requires the payment of the tenant's proportional
share of increased operating expenses and real estate taxes over the base year.
In January, 2000 the Registrant entered into a modification of the lease whereby
the space was reduced to 1,200 square feet. Rental payments have been modified
to be $20,160 from February 15, 2000 to February 14, 2001, $21,168 from February
15, 2001 to February 14, 2002, $22,224 from February 15, 2002 to February 14,
2003 and $23,340 from February 15, 2003 to February 14, 2004. The Registrant has
recently sublet this space to another tenant.
On August 20, 1999, the Registrant entered into a three year lease,
commencing August 20, 1999 leasing 2,770 square feet of space at 20 Crossways
Park North, Woodbury, New York. Rental payments were $62,235 per annum from
October 1, 1999 to August 31, 2000, and are $64,818 from September 1, 2000 to
August 31, 2001 and $67,422 from September 1, 2001 to August 31, 2002. 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 17, 1999, the Registrant entered into a three year lease,
commencing November 17, 1999 leasing 2,186 square feet of space at One Landmark
Square, Stamford, Connecticut. Rental payments are $50,278 per annum from
November 17,1999 to November 16,2000, are $51,371 from November 17,2000 to
November 16, 2001, and $52,464 from November 17, 2000 to November 16,2002. There
is an option to renew once for three
13
years, with nine months prior written notice. The lease requires the payment of
the tenant's proportional share of increased operating expenses and real estate
taxes over the base year.
On October 11, 1999, the Registrant entered into a three year lease,
commencing October 11,1999 leasing 1,926 square feet of space at 1810 Chapel
Avenue West, Cherry Hill, New Jersey. Rental payments are $38,520 per annum from
October 11,1999 to October 31,2002. There is an option to renew once for three
years, with nine months prior written notice. The lease requires the payment of
the tenant's proportional share of increased operating expenses and real estate
taxes 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 $45,346 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.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of Fiscal 2000.
(THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK)
14
PART II
ITEM 5. Market for Registrant's Common Stock and Related Security Holder Matters
------------------------------------------------------------------------
COMMON STOCK
The Registrant's authorized capital stock consists solely of 20,000,000
shares of Common Stock. An increase in the number of authorized shares to
50,000,000 was approved at the Shareholder's Meeting held on February 23, 2000.
Holders of the Registrant's Common Stock are entitled to receive such dividends,
if any, as may be declared from time to time by the Board of Directors in its
discretion from funds legally available therefor. Each holder of Common Stock is
entitled to one vote for each share held. There is no right to cumulative
voting. Upon liquidation, dissolution, or winding up of the Registrant, the
holders of Common Stock are entitled to receive a pro rata share of all
remaining assets available for distribution to stockholders. The Common Stock
has no pre-emptive or other subscription rights, and there are no conversion or
redemption rights with respect to such shares.
Effective 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. Effective on July 15, 1998, the
Registrant distributed 4,207,887 shares of Common Stock in connection with a
2-for-1 stock split of all outstanding shares as of June 30, 1998. As of the
date of this report, there were 9,489,324 shares of Common Stock issued and
outstanding, inclusive of 600,000 shares held by the Registrant's ESOP which the
Registrant is seeking to cancel, held by 740 persons, as reported by the
Registrant's transfer agent.
PRICE RANGE OF THE COMMON STOCK
The Registrant's Common Stock is traded in the over-the-counter market
on the NASDAQ National Market System under the Symbol TELU. The following table
sets forth, for the quarterly fiscal periods indicated, the high and low closing
sales prices for the Registrant's Common Stock in such market, as reported by
the National Association of Securities Dealers, Inc.
FISCAL 2000 HIGH LOW
----------- ---- ---
February 1 thru April 30 19 15/16 16
May 1 thru July 31 18 3/4 11 1/2
August 1 thru October 31 14 5/8 10 15/16
November 1 thru January 31, 2000 15 3/4 12
FISCAL 1999
-----------
February 1 thru April 30 21 3/4 14 5/8
May 1 thru July 31 24 1/2 18 3/4
August 1 thru October 31 23 14 3/4
November 1 thru January 31,1999 22 14 7/16
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.
15
ITEM 6. Selected Financial Data
-----------------------
(In thousands except per share amounts)
Year ended January 31,
---------------------------------------------------------------------------
RESULTS OF OPERATIONS: 2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Net sales $ 139,760 $ 137,283 $ 123,286 $ 89,326 $ 49,873
(Loss) earnings from
continuing operations $ (9,414) $ (3,418) $ 1,094 $ 492 1,555
Net (Loss) earnings $ (9,414) $ (3,418) $ 1,094 $ 492 $ 1,555
Weighted average
common shares
outstanding (a)
Basic 7,069 6,818 6,213 5,883 5,818
Diluted 7,069 6,818 6,842 6,739 6,526
(Loss) earnings per common and
common equivalent shares
Basic (Loss) earnings per share $ (1.33) $ (0.50) $ 0.18 $ 0.08 $ 0.27
Diluted (Loss) earnings per
share $ (1.33) $ (0.50) $ 0.16 $ 0.07 $ 0.24
Cash dividends per
common share None None None None None
Additions to property
& equipment $ 3,019 $ 4,727 $ 3,268 $ 6,397 $ 3,028
Depreciation and
amortization $ 2,985 $ 2,785 $ 2,028 $ 1,382 $ 1,026
FINANCIAL POSITION:
Working Capital $ 1,222 $ 1,261 $ 7,936 $ 5,419 $ 4,799
Property and equipment - net $ 13,317 $ 14,473 $ 12,406 $ 11,066 $ 6,011
Total assets $ 45,184 $ 45,692 $ 40,245 $ 31,029 $ 20,520
Long-term debt $ 997 $ 1,566 $ 2,092 $ 2,940 $ --
Shareholders' Equity $ 14,007 $ 16,442 $ 18,598 $ 14,772 $ 10,700
Common shares
outstanding (a) 7,944 7,605 6,679 5,891 5,854
(a) All per share amounts have been restated to reflect the 2 for 1 stock split
distributed July 1, 1996, and the 2 for 1 stock split distributed on
July 15, 1998.
16
ITEM 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
----------------------
The following discussion is presented to assist in assessing the
changes in financial condition and performance of the Registrant for the fiscal
year ended January 1, 1998 (Fiscal 1998), January 31, 1999 (Fiscal 1999) and
January 31, 2000 (Fiscal 2000). The following information should be read in
conjunction with the financial statements and related notes and other detailed
information regarding the Registrant included elsewhere in this report and
should not be construed to imply management's belief that the results, causes,
or trends presented will necessarily continue in the future. Certain information
contained below and elsewhere in this , including information with respect to
the Registrant's plans and strategy for its business, are "forward-looking
statements."
OVERVIEW
The Registrant is a leading regional facilities-based ICP servicing
both the commercial and wholesale marketplace. Total-Tel is an established
company that has been in existence since 1959. The Registrant began offering
interexchange telecommunications services in January, 1983. Gross revenues have
increased from approximately $50 million in the Fiscal year ended January 31,
1996 (Fiscal 1996) to approximately $140 million for Fiscal 2000. This growth
has been achieved through internal efforts, and not as a result of acquisitions.
The Registrant currently owns and operates two long-distance switches,
in New York City and Newark, New Jersey. The Registrant also has a NOC that
monitors and controls its network. The Registrant sells its services through
three sales groups: a field retail sales force, independent agent sales force,
and a wholesale sales team.
The Registrant's principal expenses consist of cost of sales and
selling, general and administrative (S,G&A) expenses. Cost of sales consist of
access fees, line installation expenses, switch expenses, NOC expenses,
depreciation, transport expenses, and local and long-distance expenses. S, G & A
expenses are comprised of selling and marketing costs, and general and
administrative costs.
RESULTS OF OPERATIONS
---------------------
FISCAL 2000 AS COMPARED TO FISCAL 1999
--------------------------------------
REVENUES
Net sales of telecommunications services and systems for the fiscal
year ended January 31, 2000 were approximately $139,760,000, an increase of
approximately $2,478,000, or 1.8% over the approximately $137,283,000 of net
sales in Fiscal 1999. These revenues were comprised of retail sales of
approximately $69,023,000 and wholesales revenues of approximately $70,737,000.
The Registrant billed approximately 1,242,942,000 minutes in Fiscal 2000 as
compared to approximately 978,971,000 minutes in Fiscal 1999, an increase of
263,971,000 minutes or 27.0%. Due to the competitive nature of the long distance
communications industry, the average price for a minute of both retail and
wholesale traffic continued to decrease. In Fiscal 2000, this decrease was
approximately 20%.
Net retail sales for Fiscal 2000 were approximately $69,023,000, a
decrease of approximately $3,533,000, or 4.9%, over the approximately
$72,556,000 billed in Fiscal 1999. Retail billed minutes were approximately
680,714,000, an increase of approximately 51,934,000 minutes, or 8.3%, over the
retail minutes of approximately 628,780,000 billed in Fiscal 1999. The average
price per minute has decreased approximately 12.2% as the industry continues to
experience decreased price per minute of usage.
Net wholesale (carrier) sales for Fiscal 2000 were approximately
$70,737,000, an increase of approximately $6,010,000, or 9.3%, over the
approximately $64,727,000 billed in Fiscal 1999. Billed wholesale minutes
amounted to approximately 562,227,000, an increase of approximately 212,036,000
minutes, or 60.5%, over the billed wholesale minutes of approximately
350,191,000 billed in Fiscal 1999. The sales mix continues to move toward higher
priced international traffic, from the lower priced domestic traffic.
International carrier traffic increased 184,428,000 minutes or approximately
94.5% to approximately 379,692,000 minutes. Domestic minutes increased
approximately 27,608,000 or approximately 17.8% to approximately 182,535,000
minutes. The wholesale price per minute fell 32.2% due to the continuing
competition in the industry, a trend which the Registrant believes will
continue.
COST OF SALES
Cost of sales for Fiscal 2000 were approximately $112,794,000, an
increase of approximately $1,294,000, or 1.2%, over the approximately
$111,500,000 of cost of sales in Fiscal 1999. Included in cost of sales are
direct line costs, usage charges and the direct costs of the Registrant's
switches and Network Operating Center
17
("NOC"). The increase in cost of sales was primarily due to the increased amount
of retail sales minute volume, of approximately $3,824,000 and an increase in
wholesale cost of sales of approximately $3,500,000 offset by cost reductions
due to increased network efficiencies and competitive pricing of approximately
$5,240,000. The net increase in direct line and usage costs was offset by
reductions in the operating expenses of the switches and NOC: the close out of
the Miami switch, a decrease of approximately $227,000; decrease in salary,
wages and fringe benefits of approximately $525,000; decreased recruiting
expense of approximately $74,000 and decreased consulting expenses of
approximately $127,000 were offset, in part, by increases in equipment repairs
of approximately $80,000 and general operating expenses of approximately
$82,000.
SELLING, GENERAL AND ADMINISTRATIVE:
Selling, general and administrative expenses for Fiscal 2000 decreased
to approximately $27,990,000, a decrease of approximately $922,000, or 3.2%,
over the approximate $28,912,000 in Fiscal 1999. This decrease was primarily due
to a reduction in legal expenses of approximately $1,517,000 resulting from the
settlement of litigation; a decrease in consulting fees of approximately
$504,000; a decrease in data processing services of approximately $230,000
resulting from bringing the billing system in house; a reduction of travel
expenses of approximately $188,000 and a net decrease in spending on other
expenses such as office expenses, meetings contributions, telephone of
approximately $85,000. These decreases were offset by Increased spending on
salaries and wages of approximately $641,000 for the additional sales staff
needed to compete in the Northeast region; additional salary and wage expense of
approximately $267,000 resulting from an approximate 4.6% salary increases in
Fiscal 2000; increased fringe benefit and payroll taxes of approximately
$125,000 paralleling the increased salaries and wages; additional recruiting
expense of approximately $100,000 spent on hiring new sales and technical
personnel; an increase in depreciation and amortization expense of approximately
$278,000 related to the new ISP equipment and sales offices and additions in the
bad debt provision of approximately $196,000.
RESTRUCTURING EXPENSE
During the fourth quarter of Fiscal 1999, the Company recorded a
restructuring charge of approximately $2,368,000 related to the adoption by the
Company of a formal plan for restructuring its focus of operations. The
restructuring was adopted in an effort to concentrate the Company's efforts on
the Northeastern United States market. Elements of the Company's restructuring
plan included eliminating sales offices in Florida, Atlanta, Georgia, Washington
D.C. and the United Kingdom as well as the Miami switch.
The write downs incurred in connection with the restructuring included
a charge of approximately $1,280,000 associated with the planned disposal of the
Miami switch and switch site, a charge of approximately $723,000 associated with
the termination costs to reduce employee headcount and sales offices. A charge
of approximately $265,000 for the cost associated with the balance on the Fort
Lauderdale lease, and a charge of approximately $100,000 to write off line
installation costs associated with the Florida network. In the fiscal year
ending January 31, 1999, amounts paid included approximately $240,000 for
severance and termination costs. The balance of approximately $2,128,000 was
included on the consolidated balance sheet at January 31, 1999 as accrued
restructuring costs.
For Fiscal 2000, amounts applied against the accrual consisted of
approximately $1,280,000 for the write down of the Miami switch; approximately
$99,000 for the line installation costs; approximately $51,000 for payments made
on the Fort Lauderdale lease; approximately $327,000 for severance payments and
approximately $40,000 for payments made to shut down the U.K. operation.
Approximately $319,000 of the accrual was reversed in the Fiscal 2000. This
amount included an approximately $97,000 reduction in the severance accrual; a
reduction of approximately $20,000 for fringe benefits and an approximately
$202,000 reduction in the accrual on the Fort Lauderdale lease, due to revisions
in the lease.
STOCK COMPENSATION EXPENSE
Stock compensation expenses for Fiscal 2000 decreased to approximately
$204,000, a decrease of approximately $220,000, or 51.9%, from the approximately
$424,000 charged in Fiscal 1999. This decrease is due to the cancellation of
certain shares of Common Stock granted in prior years to employees who were
terminated in Fiscal 2000.
OTHER COMPENSATION
On September 21, 1999, the Registrant entered into an agreement with
Warren Feldman, Chairman of the Board of Directors and a shareholder of the
Registrant. As part of this agreement, a lump sum payment in the then amount of
$900,000 was made to Mr. Feldman in settlement of his employment agreement. The
Registrant paid $650,000 and Mr. Walt Anderson, a major shareholder, paid
$250,000. Mr. Feldman's Employment Agreement was to have been in effect until
December 31, 2001. The Registrant expensed the $900,000 in Fiscal 2000 with the
$250,000 being accounted for as a capital contribution.
Simultaneously, Revision LLC and Mr. Walt Anderson ("Revision/
Anderson") and the Registrant entered into Put Option agreements with Warren
Feldman, Sol Feldman ("the Feldmans") and Leon Genet, ("Genet") a director
of the Registrant. These Put Option agreements allowed the Feldmans and
Genet the right to sell their shares of the Registrant to Revision/Anderson at a
price of $16.00 per share and obligated Revision/Anderson to purchase the
18
shares during an exercise period beginning on December 11, 1999 and ending on
February 10, 2000. Revision/Anderson purchased a portion of these shares in
January 2000. The Registrant has no obligation to purchase any shares from the
Feldmans or Genet. The closing market price of the Registrant's shares on
September 21, 1999, the date of the agreements, was $12.25, and the total number
of shares covered by the agreements was 1,208,137. Using a binomial valuation
model with an interest rate of 5% and a volatility rate of 50%, the fair value
of the Put Option agreements was determined to be $4.03 per share or $4,870,554.
The Registrant accounted for this non-cash transaction as a charge to expense
and a credit to paid-in capital during Fiscal 2000.
OTHER INCOME AND EXPENSE
Total other income and expense for Fiscal 2000 decreased approximately
$93,000. The components of other income and expense are interest expense,
interest income and other items. Interest income increased approximately $21,000
and interest expense decreased approximately $39,000. This was offset by reduced
other income of approximately $153,000, resulting from the elimination of
certain prepaid calling card activity in Fiscal 1999.
The net loss for Fiscal 2000 of approximately $9,414,000 represents an
increase in net loss of approximately $5,996,000 over the net loss of
approximately $3,418,000 reported in Fiscal 1999. The primary cause for the
additional loss was the other compensation expense of approximately $5,771,000
for the Warren Feldman settlement, of which approximately $5,121,000 was for
non-cash items. An income tax provision caused by a valuation allowance on the
net deferred tax asset increased income tax expense to approximately $2,704,000;
an increase of approximately $5,145,000 over the Fiscal 1999 benefit amount of
$2,441,000. Other income and expense decreased approximately $93,000.This was
offset by an increase in gross margin of approximately $1,184,000; savings in
selling, general and administrative expense of approximately $922,000; the
change in restructuring expense of approximately $2,687,000 and decrease in
stock compensation expense of approximately $220,000. For the foregoing reasons,
a loss per share of $1.33 (basic) was realized in Fiscal 2000, an increase in
the loss of $0.83 per common share (basic and diluted) from the loss per share
(basic and diluted) $0.50 posted in Fiscal 1999.
FISCAL 1999 AS COMPARED TO FISCAL 1998
--------------------------------------
REVENUES
Net sales of telecommunications services and systems for Fiscal 1999
were approximately $137,283,000, an increase of approximately $13,997,000, or
11.4% over the approximately $123,286,000 of net sales in Fiscal 1998. These
revenues were comprised of retail sales of approximately $72,556,000 and
wholesales revenues of approximately $64,727,000. The Registrant billed
approximately 978,971,000 minutes in Fiscal 1999 as compared to approximately
862,479,000 minutes in Fiscal 1998, an increase of 116,492,000 minutes or 13.5%.
Due to the competitive nature of the long distance communications industry, the
average price for a minute of domestic retail traffic continued to decrease. In
Fiscal 1999, this decrease was approximately 4%.
Net retail sales for Fiscal 1999 were approximately $72,556,000, an
increase of approximately $7,251,000, or 11.1%, over the approximately
$65,305,000 billed in Fiscal 1998. Retail billed minutes were approximately
628,780,000, an increase of approximately 64,866,000 minutes, or 11.5%, over the
retail minutes of approximately 564,914,000 billed in Fiscal 1998.
Net wholesale (carrier) sales for Fiscal 1999 were approximately
$64,727,000, an increase of approximately $6,746,000, or 11.6%, over the
approximately $57,981,000 billed in Fiscal 1998. Billed wholesale minutes
amounted to approximately 350,191,000, an increase of approximately 52,625,000
minutes, or 17.7%, over the billed wholesale minutes of approximately
297,566,000 billed in Fiscal 1998. There was a change in the sales mix from the
lower priced domestic traffic to higher priced international traffic.
International carrier traffic increased 86,719,000 minutes or approximately
79.9% to approximately 195,264,000 minutes. Domestic minutes decreased
approximately 34,093,000 or approximately 18.0% to approximately 154,927,000
minutes.
COST OF SALES
Cost of sales for Fiscal 1999 were approximately $111,500,000, an
increase of approximately $12,414,000, or 12.5%, over the approximately
$99,086,000 of cost of sales in Fiscal 1998. Included in cost of sales are
direct line costs, usage charges and the direct costs of the Registrant's
switches and Network Operating Center ("NOC"). The increase in cost of sales was
primarily due to sales volume increases, accounting for approximately
$10,667,000 of the total increase. Cost reductions due to access reform and
gained network efficiencies of approximately $800,000 were offset by the higher
price paid for the change in the carrier sales mix to higher cost wholesale
international traffic of approximately $800,000. The balance of the increase in
cost of sales was due to the addition of the Miami switch, approximately
$392,000; increase in salary, wages and fringe benefits of approximately
$936,000; increased depreciation expense of $444,000; increased recruiting
expense of approximately $102,000; increased consulting expenses of
approximately $127,000; and increases in other operations expenses of
approximately $50,000. These increases were offset by the elimination of the
services department that offered telephone equipment for sale. This saved
approximately $304,000 in costs. The increases
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in salaries and wages, recruiting and consulting were the result of the planned
expansion into the national market. As a result of management changes made late
in Fiscal 1999, a planned expansion has been curtailed and the expenses incurred
in Fiscal 1999 have been substantially reduced.
SELLING, GENERAL AND ADMINISTRATIVE:
Selling, general and administrative expenses for Fiscal 1999 increased
to approximately $28,912,000, an increase of approximately $6,829,000, or 30.9%,
over the approximately $22,083,000 in Fiscal 1998. This increase was primarily
due to expenses incurred in anticipation of the planned expansion of Registrant
into new markets and the "Revision" litigation. These expenses were one-time
charges to Registrant, and are not expected to be continued in the next fiscal
year. Among these charges, the legal expense related to the recently settled
"Revision" litigation amounted to approximately $1,700,000. Increased expenses
relating to the expansion plans included the cost of new sales offices and
recruiting costs in Florida, Georgia, Washington D.C., Boston and the United
Kingdom of approximately $895,000; increased consulting fees incurred to rebuild
the infrastructure of the registrant of approximately $506,000; recruiting fees
of approximately $198,000 incurred in hiring additional support staff. Increased
spending in Fiscal 1999 over Fiscal 1998 included increased salaries, wages and
fringe benefits of approximately $717,000; increased depreciation expense of
approximately $156,000; increased building rent of approximately $190,000;
increased utilities, telephone and insurance costs of approximately $122,000; an
increase in annual accounting services of approximately $86,000; increased
advertising and promotion of approximately $615,000; increased commission
expense, related to the increased sales volumes, of approximately $817,000;
increased cost of equipment rentals of approximately $111,000; increased travel
and entertainment expense of approximately $115,000; an increase in the amount
of donations to charitable causes of approximately $70,000: an increase in the
reserve for bad debts of approximately $462,000; and increases in other expenses
of approximately $69,000. Since the end of Fiscal 1999, the Registrant has
curtailed its expansion plans and taken steps to roll back to eliminate most of
the salaried positions created in Fiscal 1999.
RESTRUCTURING EXPENSE
During the fourth quarter of fiscal 1999, the Registrant recorded a
restructuring charge of approximately $2,368,000 related to the adoption by the
Registrant of a formal action plan for restructuring its focus of operations.
The restructuring was adopted in an effort to concentrate the Registrant's
efforts on the Northeastern United States market. Elements of the Registrant's
restructuring plan include eliminating the sales offices in Florida, Atlanta,
Georgia, Washington D.C. and the United Kingdom, as well as the Miami switch.
Asset write downs incurred in connection with the restructuring
included a charge of approximately $1,300,000 associated with the planned
disposal of the Miami switch and switch site, a charge of approximately $703,000
associated with the termination costs to reduce employee headcount and sales
offices, a charge of approximately $265,000 for the cost associated with the
balance of the Fort Lauderdale lease, and a charge of approximately $100,000 to
write off line installation costs associated with the Florida network.
STOCK COMPENSATION EXPENSE
Stock Compensation expenses for Fiscal 1999 decreased to approximately
$424,000, a decrease of approximately $145,000, or 25.5%, from the approximately
$569,000 charged in Fiscal 1998. This decrease is due to the cancellation of
certain shares of Common Stock granted in prior years to employees who were
terminated in the fiscal year ended January 31, 1999.
OTHER INCOME AND EXPENSE
Total other income and expense for Fiscal 1999 decreased to
approximately $62,000, a decrease of approximately $215,000, or 77.6%, from the
approximately $277,000 experienced in Fiscal 1998. Included in other income for
Fiscal 1998 was a one-time gain from insurance proceeds paid upon the death of a
former officer of Registrant. Interest income and interest expense, which are
two of the components included relatively constant from year to year.
Net loss for Fiscal 1999 of approximately $3,418,000 represents a
decrease of approximately $4,512,000 from the net income of approximately
$1,094,000 reported in Fiscal 1998. Despite an increase of approximately
$1,583,000 in gross margin to approximately $25,783,000, the added expense of
the Revision litigation, approximately $1,700,000; and the expenses relating to
the proposed national expansion of the Registrant (including new sales offices,
consulting, recruiting and headcount additions) totaling approximately
$4,500,000, were the main factors in the reduction of earnings. The recent
changes in the management of the Registrant have brought about an elimination of
a substantial portion of these expenses. For the foregoing reasons, a loss per
share of $0.50 (basic) was realized in Fiscal 1999, a decrease of $0.68 per
common share (basic) from the earnings per share (basic) $0.18 posted in Fiscal
1998.
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LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At January 31, 2000, the Registrant had working capital of
approximately $1,222,000 as compared to approximately $1,261,000 at January 31,
1999, a decrease of $39,000. The decrease in working capital in Fiscal 2000 was
primarily attributable to an increase in accounts receivable of approximately
$4,930,000; recognition of charges against the restructuring reserve of
approximately $2,116,000; and an increase in prepaid expenses and other current
assets of approximately $668,000. This was offset by a decrease in cash and cash
equivalents of approximately $1,677,000; an increase in accounts payable and
accrued liabilities of approximately $4,614,000; a reduction in the deferred tax
asset of approximately $1,420,000 and an increase in the current portion of long
term debt of approximately $42,000. The current ratio of 1.0 to 1, remained
equivalent to the 1.0 to 1 ratio experienced in Fiscal 1999. The Registrant
continues to maintain a strong liquid position with cash and cash equivalents
and investments available for sale of approximately $4,924,000 representing
16.5% of current liabilities.
The cash flow statement of the Registrant for Fiscal 2000 indicated a
decrease in cash and cash equivalents of approximately $1,677,000. Non-cash
adjustments (depreciation, amortization, reserve for bad debt, restructuring,
non-cash compensation expense of approximately $11,786,000 and net changes in
assets and liabilities of approximately $2,311,000 added back to the net loss of
approximately $9,414,000 resulted in net cash provided by operations of
approximately $61,000. Cash used in investing activities amounted to
approximately $3,013,000, of which approximately $3,019,000 were used for the
purchase of capital additions and approximately $55,000 was used for the
purchase of additional circuits to build out the network. These additions were
partially offset by net repayments on notes receivable of approximately $45,000
and proceeds from the sale of fixed assets of approximately $17,000. The cash
flow from financial activities of approximately $1,272,000 consisted primarily
cash received from the exercise of stock options of approximately $1,799,000 and
offset by the repayment of bank borrowings of approximately $527,000.
CAPITAL EXPENDITURES
--------------------
Capital expenditures for Fiscal 2000 totaled approximately $3,019,000
and were financed from funds provided from Registrant's working capital and cash
derived from operations. The capital expenditures were used for the addition of
the IP network, approximately $663,000; upgrades to the Registrant's switches
and switch sites of approximately $842,000; software and hardware upgrades to
the Registrant's computer network of approximately $710,000; the addition of
Oracle financial and sales compensation systems of approximately $358,000;
hardware and software necessary to bring the billing system in house of
approximately $196,000 and furniture, fixtures and equipment for new sales
offices of approximately $250,000.
Capital expenditures for Fiscal 2001 are estimated at approximately
$4,100,000 and are expected to be financed from funds provided from existing
working capital, operations, vendor financing and a guarantee from Gold and
Appel, an affiliate of Mr. Anderson. Included in the capital expenditures are
approximately $2,900,000 for the upgrade of the current switch network and
approximately $1,200,000 for improvements to the Registrant's data processing
systems.
The Registrant has an Equipment Facility and Revolving Credit
Arrangement with a major New Jersey bank. The Registrant entered into
modifications of the arrangement in March 1998 and November 1998. The amended
and restated Equipment Facility and Revolving Credit agreement allowed for an
unsecured line of credit of $5,000,000 and $10,000,000 for the purchase of
machinery and equipment. The $10,000,000 facility for equipment was terminated
on April 30, 1999, in exchange for a waiver from the bank releasing the
Registrant from certain covenants. At January 31, 2000, the Registrant had bank
borrowings of $1,565,824.
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 7A. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Market risk represents the risk of changes in value of a financial
instrument, derivative or non-derivative, caused by fluctuations in interest
rates, foreign exchange rates and equity prices. The
21
Registrant's cash and investments exceed long-term debt; therefore, the exposure
to interest rate risk relates primarily to the marketable securities held by the
Registrant. The Registrant only invests in instruments with high credit quality
where a secondary market exists. The Company does not hold any derivatives
related to its interest rate exposure. The Company also maintains long-term debt
at fixed rates. Due to the nature and amounts of the Registrant's note payable,
an immediate 10% change in interest rates would not have a material effect in
the Registrant's results of operations over the next fiscal year. The
Registrant's exposure to adverse changes in foreign exchange rates is also
immaterial to the consolidated statements as a whole.
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.
(THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK)
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PART III
ITEM 10. Directors and Executive Officers of the Registrant
The directors and officers of the Registrant are as follows:
Name Age Position
- - ----- ---- --------
Walt Anderson 45 Chairman of the Board
Leon Genet 69 Director
Henry Luken 39 Director
Jay J. Miller 67 Director
Dennis Spina 53 Director
Sal Quadrino 53 Vice President, Acting Chief Operating Officer and
Chief Financial Officer
Thomas P. Gunning 62 Treasurer and Secretary
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. Walt Anderson was elected a Director of the Registrant in February,
1999. He has been Manager of Revision LLC from June 1998 to the present;
President and Chairman of Entree International Ltd. (Financial Consulting
Services) from July, 1997 to the present; Chairman of Teleport UK Ltd.
(Satellite Communications) from May, 1996 to the present; Chairman of Espirit
Telecom Group plc. (Telecom Services) from October, 1992 to November, 1998 and
President and Chairman, Mid Atlantic Telecom (Telecom Services), from May, 1984
to December, 1993. Mr. Anderson is also a director of American Technology Labs
(Network Equipment), Aquarius Holdings Ltd. (Water Transport Systems), Cis-Lunar
Development (Diving Equipment), Rotary Rocket Corp. (Space Transportation
Systems), Net-Tel Holdings (Telecom Services), US WATS (Telecom Services) and
Chairman of World Exchange Corp. (Telcom Services)
Mr. Leon Genet has served as a Director since October, 1996. For more
than the past five years, he has been a partner in Genet Realty, a commercial
and industrial real estate brokerage firm. 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 the Registrant on the same basis as other independent sales
representatives. See "Certain Relationships and Related Transactions".
Mr. Henry G. Luken, III was elected a Director of the Registrant in
February, 1999. Currently he is President of Mont Lake Properties, Inc., a real
estate development firm; a director of ACNTV, a home shopping company selling
through TV; Managing Agent of Henry IV LLC, an aircraft sales company. A
co-founder of Telco-EIC, he served as Chief Executive Officer and Treasurer from
July, 1993 to April, 1996, and Chairman from July, 1993 to October, 1997. Mr.
Luken has also served as Chairman of Tel-Labs, Inc. a telecommunications billing
firm ("Tel-Labs") since 1991, and as Chairman of Telco Development Group, Inc.,
a computer systems firm owned by Mr. Luken, since 1987, both of which entities
he founded.
Jay J. Miller, Esq. has served as a Director since 1983. He has been a
practicing attorney for more than 35 years in New York. He is Chairman of the
Board of AmTrust Pacific Ltd., a New Zealand real estate company. Mr. Miller has
performed legal services on behalf of the Registrant. See "Certain Relationships
and Related Transactions."
Mr. Dennis Spina was elected a Director, President and Chief Operating
Officer of the Registrant in February, 1999. In July 1999, Mr. Spina was
appointed Chief Executive Officer of the Registrant. Mr. Spina has resigned from
his position as President and Chief Executive Officer on March 17, 2000. He is
also a founder and President of Simex SA, a Mexican company engaged in office
cleaning services. He had been Vice Chairman and President of Internet Services,
RCN (telecommunications) from February, 1998 to December, 1998; Chief Executive
Officer, Erols Internet, Inc. (Internet Service Provider) from August, 1996 to
February, 1998 (Erols was acquired by RCN); Independent Consultant in the
service and distribution industry from January, 1996 to July, 1996; President
and Chief Executive Officer, International Service Systems (janitorial and
energy management) from November, 1994 to December, 1995; President and Chief
Executive Officer of Suburban Propane, Inc. (division of Hanson PLC) from
August, 1990 to October, 1994.
23
Salvatore M. Quadrino was appointed Vice President and Chief Financial
Officer of The Registrant in May, 1999. Prior to coming to TotalTel, he was
Executive Vice President and Chief Administrative Officer of RCN, Inc. from
February, 1998. He previously served as Vice President, Treasurer and Chief
Financial Officer of Erol's Internet, Inc. from September, 1997 to February,
1998. (Erols was acquired by RCN); From October, 1996 to August, 1997, he worked
as an independent financial consultant in the service and distribution industry.
From October, 1994 to September, 1996, he served as President and Chief
Executive Officer of Suburban Propane, a division of Hanson PLC, which conducted
its initial public offering in March, 1996, and from March to October, 1996, he
served as a member of Suburban Propane's Board of Supervisors. Mr. Quadrino
served as Vice President and Chief Financial Officer of Suburban Propane from
October, 1990 to September, 1994, and as Vice President, Chief Financial Officer
and Treasurer of Petrolane from August, 1990 until its sale in July, 1993. Mr.
Quadrino is a Certified Public Accountant.
Thomas P. Gunning was appointed Vice President - Secretary / Treasurer
of the Registrant in May 1999. He was appointed Chief Financial Officer in
September, 1994 and served in that capacity until May 0f 1999. He was appointed
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 firms.
BOARD OF DIRECTORS
The Company's Board of Directors currently consists of five persons,
one of whom was a member of management until his resignation as a President and
Chief Executive Officer on March 17, 2000 and four of whom are non-management
directors. During the fiscal year ended January 31, 2000, the Board held nine
meetings, each of which was attended by all of the directors then serving.
The Company's Board of Directors has Audit and Compensation Committees,
but does not have a Nominating Committee or a committee performing a similar
function. The Audit Committee currently consists of two non-management
directors, Messrs. Walt Anderson and Leon Genet. The Committee reviews, analyzes
and may make recommendations to the Board of Directors with respect to the
Company's financial statements and controls. The Committee has met and intends
to meet from time to time with the Company's independent public accountants to
monitor their activities. The Compensation Committee consists of Messrs. Henry
Luken and Jay J. Miller and is charged with reviewing and recommending the
compensation and benefits payable to the Company's senior executives.
(THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK)
24
ITEM 11. Executive Compensation
(a) The following table sets forth the compensation which the Registrant
paid during the fiscal years ended January 31, 2000, 1999, and 1998 to the Chief
Executive, and 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. 2000 $168,269 (2) $900,000 (3) $ 16,191 (4)
Feldman 1999 $221,154 (2) $260,785 $ 8,735 (5)
Chairman and 1998 $287,115 (2) $350,000 $ 15,325 (6)
Chief Executive
Officer (1)
Dennis Spina 2000 $305,769 $ 2,857 (7)
President and
Chief Executive
Officer (8)
Sal Quadrino 2000 $137,307
Vice President
and Chief Financial
Officer (9)
Thomas P. 2000 $140,000 $ 11,179 (10)
Gunning 1999 $124,230 $ 2,000 $ 10,161 (11)
Vice President, 1998 $ 116,600 $ 4,000 $ 8,265 (12)
Treasurer and
Secretary
(1) Resigned from his position on October 7, 1999.
(2) Does not include an annual director's fee of $15,000.
(3) See ITEM 11-c - Other compensation
(4) The amounts shown represent the Registrant's contribution under its 401
(K) Deferred Compensation and Retirement Savings Plan of $5,048 and
$3,143 for the use of a Registrant vehicle for non-business purposes
and $8,000 term life insurance premiums.
(5) The amounts shown represent the Registrant's contribution under its 401
(K) Deferred Compensation and Retirement Savings Plan of $5,026 and
$3,429 for the use of a Registrant vehicle for non-business purposes
and $280 term life insurance premiums.
(6) 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 Registrant vehicle for non-business purposes
and $8,280 term life insurance premiums.
(7) The amount shown represents $2,857 for the use of a Registrant vehicle
for non-business purposes.
(8) Resigned from his position on March 17, 2000.
(9) Mr. Quadrino joined the Registrant on April 20, 1999
(10) The amount shown represent the Registrant's contribution under its 401
(K) Deferred compensation and Retirement Savings Plan of $4,200 and
$2,179 for the use of a Registrant vehicle for non-business purposes
and $4,800 term life insurance premiums.
25
(11) The amount shown represent the Registrant's contribution under its 401
(K) Deferred compensation and Retirement Savings Plan of $3,837 and
$1,524 for the use of a Registrant vehicle for non-business purposes
and $4,800 term life insurance premiums.
(12) 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 Registrant vehicle for non-business purposes
and $3,404 term life insurance premiums.
(b) Compensation Pursuant to Plans
In October, 1987, the Registrant adopted its 1987 Stock Option Plan, in
October, 1996, adopted its 1996 Stock Option Plan and in February, 2000,adopted
its 1999 Equity Incentive Plan (the "Option Plans"). The Option 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, while non-qualified options may also be granted under the Option
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 employees.
The Option Plans may be administered by the Compensation Committee of
the Registrant's Board of Directors. The Registrant has reserved 1,329,800
shares of Common Stock under the 1987 Option Plan, 600,000 shares of Common
Stock under the 1996 Option Plan and 750,000 shares of Common Stock under its
1999 Equity Incentive Plan for issuance to employees, officers, directors and
consultants of the Registrant. The shares underlying the options granted prior
to July 15, 1994 have been adjusted for a 10% stock dividend. The shares
underlying the options granted prior to July 1, 1996 have been adjusted to
reflect a 2-for-1 stock split, and options granted prior to July 1, 1998 have
been adjusted to reflect a 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 Option Plans must be granted within 10 years from the
effective date of the respective Option Plan. Incentive stock options granted
under the Option Plans cannot be exercised later than 10 years from the date of
grant. Options granted under the Option Plans 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 option which expires unexercised or that terminates upon an
employee's ceasing to be employed by the Registrant become available again for
issuance under the Option Plans.
(THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK)
26
OPTION 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 Base Expiration
Name Granted(#)(1) Fiscal Year Price Date 5% ($) 10% ($)
- - ------------------------------------------------------------------------------------------------------------
Dennis Spina 144,000 15.22% $19.00 February 3, 2002 $431,262 $905,616 (1)
Dennis Spina 144,000 15.22% $19.00 February 3, 2002 $431,262 $905,616 (2)
Salvatore Quadrino 50,000 5.29% $19.00 May 5, 2004 $204,731 $440,895 (3)
Salvatore Quadrino 50,000 5.29% $16.00 January 12, 2005 $172,405 $371,280 (4)
Thomas P. Gunning 10,000 1.06% $19.00 March 16, 2004 $ 40,946 $ 88,179 (5)
(1) Stock option granted under the 1996 Plan. Vesting in six equal installments,
commencing six months from date of grant, with the exercise price increasing 6%
as to each installment.
(2) Stock option granted under the 1999 Plan. Vesting in six equal installments,
commencing six months from date of grant, with the exercise price increasing 6%
as to each installment.
(3) Stock option granted under the 1996 Plan. Vesting in four equal
installments, commencing one year from date of grant, with the exercise price
increasing 6% as to each installment.
(4) Stock option granted under the 1999 Plan. Vesting in four equal
installments, commencing one year from date of grant, with the exercise price
increasing 6% as to each installment.
(5) Stock option granted under the 1999 Plan. Vesting in four equal
installments, commencing one year from date of grant, with the exercise price
increasing 6% as to each installment.
On February 23, 2000, the Board of Directors approved the repricing of all
options with an exercise price greater than $14.25 to $14.25
The unvested portion of Dennis Spina's options was terminated with his
resignation on March 17, 2000.
Aggregated Options/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
Number of
Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End (#)
Shares
Acquired Value
Name on Exercise(#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- - -----------------------------------------------------------------------------------------------------------------------
Warren Feldman 261,000 $2,334,051 - - - -
Dennis Spina (1) - - 48,000 240,000 - -
Salvatore Quadrino (1) - - - 100,000 - -
Thomas Gunning (2) 12,000 $ 123,000 33,000 12,000 $461,887 -
(1) The unexercisable options held by Messrs. Spina and Quadrino are at
an exercise price ranging from $16.00 to $21.50, which is greater
than the fair market value of $14.75 at January 31, 2000.
(2) The unexercisable options to purchase 12,000 shares were at an
exercise price greater than fair market value of $14.25 at January
31, 2000.
27
(c) Other Compensation
On September 21, 1999 the Registrant entered into an agreement with
Warren Feldman, Chairman of the Board of Directors and a shareholder of the
Registrant. As part of this agreement, a lump sum in the then amount of $900,000
was paid to Mr. Feldman in settlement of his employment agreement. The
Registrant paid $650,000 and Mr. Walt Anderson, a major shareholder, paid
$250,000. Mr. Feldman's Employment Agreement was to have been in effect until
December 31, 2001. The Registrant expensed the $900,000 in Fiscal 2000 with the
$250,000 being accounted for as a capital contribution.
Simultaneously Revision LLC and Mr. Walt Anderson ("Revision/Anderson")
and the Registrant entered into put option agreements with Warren Feldman, Sol
Feldman ("the Feldmans") and Leon Genet, ("Genet") a director of the Registrant.
These Put Option agreements allow the Feldmans and Genet the right to sell their
shares of the Registrant to Revision/Anderson at a price of $16.00 per share and
obligate Revision/Anderson to purchase the shares during an exercise period
beginning on December 11, 1999 and ending on February 10, 2000. The Registrant
has no obligation to purchase any shares from the Feldmans or Genet. The closing
market price of the Registrant's shares on September 21, 1999, the date of the
agreements, was $12.25, and the total number of shares covered by the agreements
was 1,208,137. Using a binomial valuation model with an interest rate of 5% and
a volatility rate of 50%, the fair value of the Put agreements was determined to
be $4.03 per share or $4,870,554. The Registrant accounted for this non-cash
transaction as a charge to expense and a credit to paid-in capital during the
third quarter of Fiscal 2000.
(d) Compensation of Directors
Certain directors of the Registrant receive $15,000 per year
for services in such capacity.
(e) Employment Contracts,Termination of Employment and Change of
Control Arrangements
None.
28
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Set forth below is certain information concerning persons who were
known by the Company to own beneficially or of record more than 5% of the issued
and outstanding shares of Common Stock of the Company as of April 26, 2000.
Name and Address Number of Shares Percentage
of Beneficial Owner Owned (1) of Class
- - ------------------- --------------- ----------
Walt Anderson 3,603,104 (2)(3)(4) 45.4%
c/o 1023 31st Street, NW
Suite 300
Washington, D.C. 20007
Revision LLC 3,595,804 (2)(3)(4) 45.3%
c/o 1023 31st Street, NW
Suite 300
Washington, D.C. 20007
Total-Tel USA Communications, Inc. 600,000 (5) 7.6%
Employee Stock Ownership Plan
150 Clove Road
Little Falls, NJ 07424
Michael A. Karp 424,954 5.3%
3416 Sansom Street
Philadelphia, PA 19104
Thomas Cirrito 504,694 (6) 6.3%
7716 Carlton Place
Mc Lean, VA 22102
(1) Except as otherwise set forth in the footnotes to this table, all
shares are beneficially owned and sole investment and voting power is
held by the persons named, to the best of the Company's knowledge.
(2) 3,595,804 of such shares are owned of record by Revision LLC. As the
sole manager and holder of 100% of the voting membership interests in
Revision LLC, Mr. Anderson has the sole power to vote and dispose of
such shares. Accordingly, Mr. Anderson may be deemed the beneficial
owner of such shares.
(3) Does not include 686,629 shares of Common Stock owned by the Foundation
for International Non-Governmental Development of Space, of which Mr.
Anderson is the President and a director. Mr. Anderson disclaims
beneficial ownership of such shares. Mr. Anderson and Revision LLC are
no longer subject to certain restrictions on the purchase of additional
shares.
(4) Mr. Walt Anderson and Revision LLC are parties to a Put Option
Agreement with Warren Feldman and his father, Solomon Feldman, which
entitles such persons and certain of their related parties to sell to
Revision LLC 315,796 shares of Common Stock. Mr. Anderson and Revision
LLC also are parties to a Put Option Agreement with Leon Genet that
entitles Mr. Genet to sell to Revision LLC 104,320 shares of Common
Stock. The rights of Mr. Feldman and Mr. Genet under their respective
Put Agreements must be exercised prior to February 10, 2000. Neither
Mr. Anderson nor Revision LLC has any right to require any party to
sell Common Stock to it pursuant to such Put Agreements, and Mr.
Anderson and Revision LLC therefore do not beneficially own the Common
Stock subject to sale pursuant to either of the Put Agreements. In
January 2000 Revision/Anderson purchased a portion of these shares.
(5) See the discussion of the Employee Stock Ownership Plan in Item 11-b
Compensation Pursuant to Plans.
(6) Atocha LP, of which Mr. Cerrito is general partner, owns 484,694 of
these shares.
29
(b) Security Ownership of Management
The following table sets forth as of April 26, 2000, information
concerning the beneficial ownership of Common Stock by each director of
the Company, each nominee for election as a director and all directors
and officers of the Company as a group:
Name of Beneficial Number of Shares Percentage
Owner Owned (1) of Class
- - ------------------ ---------------- ----------
Walt Anderson 3,603,104 (2)(3)(4) 44.6%
Revision LLC 3,595,804 (2)(3)(4) 44.5%
Leon Genet 41,120 (4) 0.5%
Henry Luken 196,835 2.4%
Jay J. Miller 400 (6)
Dennis Spina 98,005 (5) 1.2%
All directors and officers
as a group (7 in number) 4,006,764 49.5%
(1) All shares are beneficially owned and sole investment and voting power
is held by the persons named above.
(2) 3,595,804 of such shares are beneficially owned by Revision LLC. As the
sole manager and holder of 100% of the voting membership interests in
Revision LLC, Mr. Anderson has the sole power to vote and dispose of
such shares. Accordingly, Mr. Anderson may be deemed the beneficial
owner of such shares.
(3) Does not include 686,629 shares of Common Stock owned by the Foundation
for International Non-Governmental Development of Space, of which Mr.
Anderson is the President and a director. Mr. Anderson disclaims
beneficial ownership of such shares. Mr. Anderson and Revision, LLC are
subject to certain restrictions on the purchase of additional shares.
(4) Mr. Walt Anderson and Revision LLC are parties to Put Agreement with
Warren Feldman and his father, Solomon Feldman, which currently
entitles such persons and certain of their related parties to sell to
Revision LLC 315,796 shares of Common Stock. Mr. Anderson and Revision
LLC also are parties to Put Agreement with Leon Genet that entitles Mr.
Genet to sell to Revision LLC 104,320 shares of Common Stock. The
rights of Mr. Feldman and Mr. Genet under their respective Put
Agreements must be exercised prior to February 10, 2000. Neither Mr.
Anderson nor Revision LLC has any right to require any party to sell
Common Stock to it pursuant to such Put Agreements, and Mr. Anderson
and Revision LLC therefore do not beneficially own the Common Stock
subject to sale pursuant to either of the Put Agreements.
(5) Includes options to purchase 96,000 shares of the Common Stock which
are exercisable currently or within 60 days hereof, the issuance of
one-half of which is subject to the approval of the 1999 Equity
Incentive Plan at the Meeting.
(6) Less than 1%.
30
(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 Registrant leased warehouse space in
Belleville, New Jersey, from a partnership in which two former directors and
major shareholders were partners. During the fiscal year ended January 31, 2000,
the Registrant paid rent of $62,848 to the partnership. The lease expired on
November 30, 1998 and has been renewed on a month to month basis at an annual
rate of $47,980, subject to 120-day prior written termination notice
requirement. Registrant believes such premises are leased on terms not less
favorable to Registrant than in an arm's length transaction.
Jay J. Miller, a Director of the Registrant, has provided various legal
services for the Registrant during Fiscal 2000. In Fiscal 2000, the Registrant
has paid $158,755 to Mr, Miller for services rendered and accrued for in Fiscal
1999 As of January 31, 2000 the Registrant had invoices payable to Mr. Miller
totaling $284,295. The Registrant believes that Mr. Miller's fees were
reasonable for the services performed and were no less favorable to the
Registrant than could have been obtained from an unrelated third party.
Leon Genet, a Director of the Registrant, has provided agent services
for Total-Tel through his wholly-owned Registrant, LPJ, Inc. During Fiscal 2000,
LPJ, Inc. was paid commissions of $123,418. The commissions paid to LPJ, Inc.
were computed on the same basis as other agents retained by the Registrant.
Walt Anderson, a Director of the Registrant, sits on the Board of
Directors' for several of the Registrant's competitors, as described in ITEM 10.
The Registrant both purchases and sells services from US Wats and
CTS/Worldexchange. Sales to US Wats and CTS/Worldexchange in Fiscal 2000 were
approximately $681,000 and $4,360,000, respectively. Purchases from US Wats and
CTS/Worldexchange were approximately $291,000 and $2,646,000, respectively. All
transactions were based on competitive terms obtained at an arm's length basis.
(THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK)
31
TOTAL-TEL USA COMMUNICATIONS, INC.
AND SUBSIDIARIES
ITEM 14. Exhibits and Financial Statements Schedule Years Ended January 31,
2000, 1999, and 1998
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, 2000
and 1999 F-2
Consolidated statements of (loss) earnings and
comprehensive (loss) income - years
ended January 31, 2000, 1999 and 1998 F-3
Consolidated statements of shareholders' equity -
years ended January 31, 2000, 1999, 1998 F-4
Consolidated statements of cash flows - years
ended January 31, 2000, 1999, 1998 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, 2000, 1999 and 1998
II VALUATION AND QUALIFYING ACCOUNTS (Consolidated) F-24
***************
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)
32
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 twenty-seventh day
of April, 2000
TOTAL-TEL USA COMMUNICATIONS, INC.
(Registrant)
By: /S/ Walt Anderson
----------------------------
Walt Anderson
Chairman of the Board
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/ Walt Anderson Chairman of the Board April 27, 2000
- - -------------------------
Walt Anderson
/S/ Leon Genet Director April 27, 2000
- - -------------------------
Leon Genet
/S/ Jay J. Miller Director April 27, 2000
- - -------------------------
Jay J. Miller
/S/ Henry G. Luken III Director April 27, 2000
- - -------------------------
Henry G. Luken III
/S/ Dennis Spina Director April 27, 2000
- - -------------------------
Dennis Spina
/S/ Salvatore M. Quadrino Vice President, Acting Chief April 27, 2000
- - ------------------------- Operating Officer, Chief Financial
Salvatore M. Quadrino Officer and Principal Accounting Officer
/S/ Thomas P. Gunning Vice President, Treasurer and April 27, 2000
- - ------------------------- Secretary
Thomas P. Gunning
33
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Total-Tel USA Communications, Inc.
150 Clove Road
Little Falls, New Jersey 07424
We have audited the accompanying consolidated balance sheets of Total-Tel USA
Communications, Inc. and subsidiaries as of January 31, 2000 and 1999, and the
related consolidated statements of (loss) earnings and comprehensive (loss)
income, shareholders' equity, and cash flows for each of the three years in the
period ended January 31, 2000. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 2000 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.
DELOITTE & TOUCHE LLP
New York, New York
April 17, 2000
(April 25, 2000 as to Note 18)
F-1
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2000 AND 1999
- - ---------------------------------------------------------------------------------------------------------------
ASSETS 2000 1999
CURRENT ASSETS:
Cash and cash equivalents $ 4,374,479 $ 6,051,892
Investments available for sale 549,580 549,612
Trade accounts receivable (net of allowance for doubtful accounts
of $1,827,260 and $1,230,483 in 2000 and 1999, respectively) 23,662,457 18,732,480
Deferred income taxes -- 1,419,642
Prepaid expenses and other current assets 2,565,031 1,896,612
------------ ------------
Total current assets 31,151,547 28,650,238
------------ ------------
PROPERTY AND EQUIPMENT - Net 13,316,655 14,473,261
------------ ------------
OTHER ASSETS:
Deferred line installation costs (net of accumulated amortization
of $634,123 and $521,914 in 2000 and 1999, respectively) 280,281 447,226
Other assets 435,639 488,175
Deferred income taxes -- 1,633,238
------------ ------------
Total other assets 715,920 2,568,639
------------ ------------
$ 45,184,122 $ 45,692,138
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 24,802,097 $ 20,699,873
Other current and accrued liabilities 3,073,937 3,037,255
Accrued restructuring costs 11,995 2,128,000
Salaries and wages payable 1,472,766 998,081
Current portion of long-term debt 568,653 526,361
------------ ------------
Total current liabilities 29,929,448 27,389,570
------------ ------------
OTHER LONG-TERM LIABILITIES 250,532 294,500
------------ ------------
LONG-TERM DEBT 997,171 1,565,884
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 14)
SHAREHOLDERS' EQUITY:
Common stock, par value $.05 per share; authorized
20,000,000 shares in 2000 and 1999, issued
9,489,324 shares in 2000 and, 9,114,774 in 1999 474,466 455,739
Additional paid-in capital 29,710,494 22,809,518
Retained (deficit) earnings (2,656,215) 6,757,987
------------ ------------
27,528,745 30,023,244
Unearned ESOP Shares (12,225,000) (12,225,000)
Treasury stock - at cost - 1,545,253 shares in 2000 and 1,509,870 shares in 1999 (1,458,550) (1,456,781)
Accumulated other comprehensive income 161,776 100,721
------------ ------------
Total shareholders' equity 14,006,971 16,442,184
------------ ------------
$ 45,184,122 $ 45,692,138
============ ============
See notes to consolidated financial statements
F-2
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF (LOSS) EARNINGS AND COMPREHENSIVE (LOSS) INCOME
YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
- - ---------------------------------------------------------------------------------------------------------------
2000 1999 1998
NET SALES $ 139,760,497 $ 137,282,870 $ 123,286,028
------------- ------------- -------------
COSTS AND EXPENSES:
Cost of sales 112,794,378 111,500,082 99,086,234
Selling, general and administrative 27,990,145 28,912,440 22,082,829
Restructuring charge (318,879) 2,367,910 --
Other compensation (Note 12) 5,770,554 -- --
Stock compensation 204,015 423,588 569,391
------------- ------------- -------------
Total costs and expenses 146,440,213 143,204,020 121,738,454
------------- ------------- -------------
OPERATING (LOSS) INCOME (6,679,716) (5,921,150) 1,547,574
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 115,119 93,708 101,865
Other income 1,105 154,491 358,729
Interest expense (147,092) (186,095) (183,623)
------------- ------------- -------------
Total other (expense) income (30,868) 62,104 276,971
------------- ------------- -------------
(LOSS) EARNINGS BEFORE INCOME TAXES (6,710,584) (5,859,046) 1,824,545
INCOME TAX PROVISION (BENEFIT) 2,703,618 (2,441,249) 730,544
------------- ------------- -------------
NET (LOSS) EARNINGS (9,414,202) (3,417,797) 1,094,001
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Unrealized holding gain (loss) 61,055 (5,160) 10,253
------------- ------------- -------------
COMPREHENSIVE (LOSS) INCOME $ (9,353,147) $ (3,422,957) $ 1,104,254
============= ============= =============
BASIC (LOSS) EARNINGS PER COMMON SHARE $(1.33) $(0.50) $0.18
====== ====== =====
DILUTED (LOSS) EARNINGS PER COMMON SHARE $(1.33) $(0.50) $0.16
====== ====== =====
See notes to consolidated financial statements.
F-3
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
- - ---------------------------------------------------------------------------------------------------------------
ADDITIONAL RECEIVABLE
COMMON PAID-IN RETAINED TREASURY FROM
STOCK CAPITAL EARNINGS STOCK SHAREHOLDER
BALANCE AT JANUARY 31, 1997 $ 187,792 $ 7,054,370 $ 9,081,783 $ (1,547,251) $ (100,000)
Unrealized holding gain -- -- -- -- --
Exercise of employee stock options 19,267 1,399,004 -- (80) --
Remeasurement of employee stock options -- 433,126 -- -- --
Tax benefit due to exercise of nonqualified
stock options -- 769,988 -- -- --
Repayment of shareholder receivable -- -- -- -- 100,000
Net earnings -- -- 1,094,001 -- --
------------ ------------ ------------ ------------ ------------
BALANCE AT JANUARY 31, 1998 207,059 9,656,488 10,175,784 (1,547,331) --
July 15, 1998 stock split 207,059 (207,059) -- -- --
------------ ------------ ------------ ------------ ------------
ADJUSTED BALANCE AT
JANUARY 31, 1998 414,118 9,449,429 10,175,784 (1,547,331) --
Unrealized holding loss -- -- -- -- --
Exercise of employee stock options 11,621 850,130 -- -- --
Issuance of employees stock grants -- 109,136 -- 90,550 --
Tax benefit due to exercise of nonqualified
stock options -- 205,823 -- -- --
Adoption of employee stock ownership plan 30,000 12,195,000 -- -- --
Net loss -- -- (3,417,797) -- --
------------ ------------ ------------ ------------ ------------
BALANCE AT JANUARY 31, 1999 455,739 22,809,518 6,757,987 (1,456,781) --
Unrealized holding gain -- -- -- -- --
Exercise of employee stock options / grants 18,727 1,780,422 -- -- --
Capital contribution (NOTE 12) 250,000
Put Agreement (NOTE 12) 4,870,554
Forfeiture of stock grants -- -- (1,769) --
Net loss -- -- (9,414,202) -- --
------------ ------------ ------------ ------------ ------------
BALANCE AT JANUARY 31, 2000 $ 474,466 $ 29,710,494 $ (2,656,215) $ (1,458,550) $ --
============ ============ ============ ============ ============
ACCUMULATED
UNEARNED OTHER
ESOP COMPREHENSIVE
SHARES INCOME TOTAL
BALANCE AT JANUARY 31, 1997 $ -- $ 95,628 $ 14,772,322
Unrealized holding gain -- 10,253 10,253
Exercise of employee stock options -- -- 1,418,191
Remeasurement of employee stock options -- -- 433,126
Tax benefit due to exercise of nonqualified
stock options -- -- 769,988
Repayment of shareholder receivable -- -- 100,000
Net earnings -- -- 1,094,001
------------ --------- ------------
BALANCE AT JANUARY 31, 1998 -- 105,881 18,597,881
July 15, 1998 stock split -- -- --
------------ --------- ------------
ADJUSTED BALANCE AT
JANUARY 31, 1998 -- 105,881 18,597,881
Unrealized holding loss -- (5,160) (5,160)
Exercise of employee stock options -- -- 861,751
Issuance of employees stock grants -- -- 199,686
Tax benefit due to exercise of nonqualified
stock options -- -- 205,823
Adoption of employee stock ownership plan (12,225,000) -- --
Net loss -- -- (3,417,797)
------------ --------- ------------
BALANCE AT JANUARY 31, 1999 (12,225,000) 100,721 16,442,184
Unrealized holding gain -- 61,055 61,055
Exercise of employee stock options / grants -- -- 1,799,149
Capital contribution (NOTE 12) 250,000
Put Agreement (NOTE 12) 4,870,554
Forfeiture of stock grants -- -- (1,769)
Net loss -- -- (9,414,202)
------------ --------- ------------
BALANCE AT JANUARY 31, 2000 $(12,225,000) $ 161,776 $ 14,006,971
============ ========= ============
See notes to consolidated financial statements.
F-4
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 2000, 1999 and 1998
- - ---------------------------------------------------------------------------------------------------------------
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings $(9,414,202) $(3,417,797) $ 1,094,001
Adjustments to reconcile net (loss) earnings to net
cash provided by operating activities:
Depreciation and amortization 2,985,359 2,784,883 2,027,557
Provision for doubtful accounts 1,074,916 878,628 416,713
Tax benefit of options exercised -- 205,823 769,988
Noncash stock compensation expense 5,324,569 423,588 569,391
Deferred income taxes 2,703,618 (2,952,266) 648,544
Restructuring (credit) charge, net of cash paid (318,879) 2,128,000 --
Loss (gain) on disposal of property and equipment 16,236 (4,852)
Change in assets and liabilities:
(Increase) decrease in assets:
Trade accounts receivable (6,004,893) 735,880 (6,830,049)
Prepaid expenses and other current assets (305,546) 696,497 (1,914,484)
Other assets 52,536 (55,900) 84,360
Increase (decrease) in liabilities:
Accounts payable 4,102,224 4,343,446 6,134,167
Other current and accrued liabilities and
salaries and wages payable and accrued
restructuring costs (110,787) 1,282,261 (592,746)
Other long-term liabilities (43,968) (37,254) 72,534
----------- ----------- -----------
Net cash provided by operating activities 61,183 7,015,789 2,475,124
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of short-term
investments available for sale -- 23,521 442,554
Purchases of property and equipment (3,018,710) (4,727,130) (3,267,833)
Proceeds from sale of property and equipment 17,216 7,147 10,920
Payments for deferred line installation costs (55,232) (281,008) (122,939)
Issuance of notes -- (406,100) --
Collections on notes receivable -- 406,100 --
Collection on notes receivable from employees 45,402 22,188 232,499
----------- ----------- -----------
Net cash used in investing activities (3,011,324) (4,955,282) (2,704,799)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised 1,799,149 1,061,437 1,418,191
Additional borrowings -- -- 770,000
Repayment on bank borrowings (526,421) (486,956) (1,130,799)
----------- ----------- -----------
Net cash provided by financing activities 1,272,728 574,481 1,057,392
----------- ----------- -----------
(Continued)
F-5
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
- - -----------------------------------------------------------------------------------
2000 1999 1998
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS $(1,677,413) $ 2,634,988 $ 827,717
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 6,051,892 3,416,904 2,589,187
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 4,374,479 $ 6,051,892 $ 3,416,904
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 147,092 $ 186,901 $ 187,211
=========== =========== ===========
Income taxes $ -- $ 66,603 $ 752,761
=========== =========== ===========
(Concluded)
See notes to consolidated financial statements.
F-6
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
- - -------------------------------------------------------------------------------
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, Inc. (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.
REVENUE RECOGNITION - The Company's revenues are recognized in the period
in which the service is provided, based on the number of minutes of
telecommunications traffic carried, times a rate per minute.
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 preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported period. Actual results
could differ from those estimates.
F-7
CONCENTRATIONS OF CREDIT RISK - The Company sells its telecommunications
services and products primarily to small to medium size businesses. 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.
EARNINGS PER SHARE - Basic earnings per share is represented by net
earnings (loss) 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 15).
STOCK SPLIT - On July 15, 1998, the Company distributed 4,207,887 shares
of common stock in connection with a 2 for 1 stock split in the form of a
stock dividend of all outstanding shares as of June 30, 1998 (including
approximately 66,700 shares attributable to stock options exercised during
1999 prior to the split). All per share and number of shares data have
been restated to reflect these stock splits.
AUTHORIZED COMMON STOCK - On February 23, 2000, the Company's shareholders
approved an increase in the number of authorized shares of Common Stock
from 20,000,000 to 50,000,000 shares
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 - For cash and cash equivalents, the
carrying value is a reasonable estimate of its fair value. 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. The fair value
of the debt was determined based on interest rates that are currently
available to the Company for issuance of debt with similar terms and
remaining maturities for debt issues that are not traded on quoted market
prices. 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:
2000 1999
----------------------------- ------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
Assets:
Cash and cash equivalents $4,374,479 $4,374,479 $6,051,892 $6,051,892
Investments available for sale 549,580 549,580 549,612 549,612
Liabilities:
Debt 1,565,824 1,565,824 2,092,245 2,092,245
F-8
LONG-LIVED ASSETS - The Company accounts for the impairment of long-lived
assets and for long-lived assets to be disposed of by evaluating the
carrying value of its long-lived assets in relation to the operating
performance and future undiscounted cash flows of the underlying
businesses when indications of impairment are present. Long-lived assets
to be disposed of, if any, are evaluated in relation to the net realizable
value.
NEW ACCOUNTING PRONOUNCEMENTS - The Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," in June 1998 was amended by SFAS No. 137 and is effective for
fiscal years beginning after June 2000. This statement establishes
accounting and reporting standards for derivative instruments, including
certain instruments embedded in other contracts, and hedging activities.
Management does not believe that this pronouncement will have any material
impact on the financial position and results of operations of the Company
as it does not engage in these activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements", which must be adopted by March 31, 2000. At this time,
management has not determined the effect, if any, that the implementation
of SAB 101 will have on the Company's financial position and results of
operations.
3. SEGMENT REPORTING
The Company sells telecommunication services to two distinct segments: a
retail segment, consisting primarily of small to medium size businesses
within the Northeastern United States, and a wholesale segment, with sales
to other telecommunications carriers throughout North America and Europe.
In addition to direct costs, each segment is allocated a proportion of the
Company's operating expenses, including utilization of its switch and
facilities. The allocation of expenses is based upon the minutes of use
flowing through the Company's switching network. There are no intersegment
sales. Assets are held at the consolidated level and are not allocable to
the operating segments. The Company evaluates performance on operating
results of the two business segments. The other compensation expense of
$5,770,554 has been allocated to the segments based on the percentage of
sales.
Summarized financial information concerning the Company's reportable
segments is shown in the following table.
F-9
RETAIL WHOLESALE TOTAL
2000
Net Sales $ 69,023,194 $ 70,737,303 $ 139,760,497
Gross margin 20,712,262 6,253,857 26,966,119
Operating (loss) income before other compensation (3,905,664) 2,996,502 (909,162)
Operating (loss) income after other compensation (6,760,900) 81,184 (6,679,716)
1999
Net Sales $ 72,555,692 $ 64,727,178 $ 137,282,870
Gross margin 22,143,818 3,638,970 25,782,788
Operating income (loss) (4,985,480) (935,670) (5,921,150)
1998
Net Sales $ 65,304,679 $ 57,981,349 $ 123,286,028
Gross margin 21,300,071 2,899,723 24,199,794
Operating income (loss) 1,820,306 (272,732) 1,547,574
4. INVESTMENT SECURITIES
Investments available for sale consist of:
2000 1999
-------------------------------------------- ---------------------------------------------
GROSS UNREALIZED MARKET GROSS UNREALIZED MARKET
---------------------- ---------------------
COST GAIN LOSS VALUE COST GAIN LOSS VALUE
Bonds $ 25,000 $ -- $ -- $ 25,000 $ 25,000 $ -- $ -- $ 25,000
Mutual funds 292,104 7,226 $284,878 286,900 2,400 -- 289,300
Common stock 70,700 169,002 -- 239,702 70,700 164,612 -- 235,312
-------- -------- -------- -------- -------- -------- ------- --------
$387,804 $169,002 $ 7,226 $549,580 $382,600 $167,012 $ -- $549,612
======== ======== ======== ======== ======== ======== ======= ========
The deferred tax on the net unrealized gains at January 31, 2000, and 1999
were $0 and $66,291, respectively; resulting in net amounts of $161,776
and $100,721 in Accumulated Other Comprehensive Income.
Maturity dates of the bond as of January 31, 2000 is as follows:
MATURING WITHIN COST MARKET VALUE
After 1 year through 5 years $ 25,000 $ 25,000
-------- --------
$ 25,000 $ 25,000
======== ========
F-10
5. PROPERTY AND EQUIPMENT
Property and equipment consists of:
2000 1999
Machinery and equipment $13,795,682 $14,646,464
Office furniture, fixtures and equipment 2,362,982 1,883,903
Leasehold improvements 1,203,042 1,158,427
Vehicles 200,317 224,282
Computer equipment and software 5,578,022 3,870,049
Leasehold improvements in progress 149,725 --
Machinery and equipment in progress 1,314,602 1,272,650
----------- -----------
24,604,372 23,055,775
Less accumulated depreciation and amortization 11,287,717 8,582,514
----------- -----------
$13,316,655 $14,473,261
=========== ===========
Depreciation and amortization expense related to property and equipment
for the years ended January 31, 2000, 1999 and 1998 was $2,862,151,
$2,652,796, and $1,921,530, respectively.
6. INCOME TAXES
The provision (benefit) for income taxes includes the following:
2000 1999 1998
Federal:
Current $ -- $ 276,691 $ 60,000
Deferred 1,893,850 (2,190,605) 517,544
State income taxes:
Current -- 234,326 22,000
Deferred 809,768 (761,661) 131,000
----------- ----------- -----------
$ 2,703,618 $(2,441,249) $ 730,544
=========== =========== ===========
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. Valuation
allowances are provided against assets which are not likely to be
realized.
F-11
The income tax effects of significant items comprising the Company's net
deferred tax asset (liability) are as follows:
2000 1999
CURRENT LONG-TERM CURRENT LONG-TERM
Deferred tax assets:
Allowance for doubtful accounts $ 363,930 $ -- $ 296,423 $ --
Accrued compensation expense -- 587,176 -- 1,276,044
Unamortized lease incentive -- 100,060 -- 117,623
Restructuring reserve 4,910 -- 849,924 --
Accrued expenses 112,920 -- 273,295 --
Net operating loss carryforward -- 3,805,318 -- 1,577,970
Put agreement -- 512,688 --
Alternative minimum tax credit -- 172,589 -- 593,944
----------- ----------- ----------- -----------
Total gross deferred tax assets 481,760 5,177,831 1,419,642 3,565,581
Less: Valuation allowance (481,760) (3,221,121) -- --
----------- ----------- ----------- -----------
Total net deferred tax asset -- 1,956,710 1,419,642 3,565,581
Deferred tax liabilities:
Property and equipment -- (1,892,100) -- (1,865,639)
Other -- (64,610) -- (66,704)
----------- ----------- ----------- -----------
Total deferred tax liabilities -- (1,956,710) -- (1,932,343)
----------- ----------- ----------- -----------
Net deferred tax asset (liability) $ -- $ -- $ 1,419,642 $ 1,633,238
=========== =========== =========== ===========
F-12
A reconciliation from the U.S. statutory tax rate of 34% to the effective
tax rate for income taxes on the consolidated statements of (loss)
earnings is as follows:
2000 1999 1998
Computed expense at statutory rates $(2,281,599) $(1,992,076) $ 620,345
(Reductions) increase in taxes resulting from:
Tax-exempt interest income (3,320) (4,776) (14,300)
State taxes (benefit), net of federal
income tax benefit (191,230) (350,215) 118,000
Insurance proceeds on officer's death -- -- (114,400)
Put agreement 1,219,549 -- --
Valuation allowance 3,702,881 -- --
Other 257,337 (94,182) 120,899
----------- ----------- -----------
Actual (benefit) expense $ 2,703,618 $(2,441,249) $ 730,544
=========== =========== ===========
At January 31, 2000, for Federal income tax purposes, the Company had net
operating loss carryforwards of approximately $8.3 million which will
begin to expire in stages in the year 2020, and alternative minimum tax
credit carryforwards of approximately $173,000. The alternative minimum
tax credit does not expire.
7. 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.
The Company leases warehouse space in Belleville, New Jersey from a
partnership in which two of the partners were directors and major
shareholders of the Company. Both partners are no longer directors. During
the fiscal years ended January 31, 2000, 1999 and 1998, the Company paid
rent of $62,848, $65,482, and $60,450, respectively to the partnership.
The lease expired on November 30, 1998, and has been renewed subject to
termination with a 120-days prior written notice by either party. The
lease was amended on August 31, 1999 at an annual rate of $47,980.
F-13
Future minimum annual rentals on these leases as of January 31, 2000 are
as follows:
YEAR ENDING
JANUARY 31,
2001 $ 1,549,914
2002 1,584,002
2003 1,077,409
2004 363,167
2005 330,640
2006 and thereafter 2,117,671
-----------
$ 7,022,803
===========
Rental expense for the years ended January 31, 2000, 1999 and 1998 was
approximately $1,377,000, $1,615,000, and $1,047,000, respectively.
8. 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. The Company matches 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 $125,000, $192,000, and $165,000, for the years ended
January 31, 2000, 1999 and 1998, respectively.
9. STOCK OPTION PLANS
The Company has three stock option plans authorizing the granting of
either Incentive Stock Options or Nonqualified Stock Options. The 1987
Stock Option Plan (the "1987 Plan") provided for the issuance of an
aggregate of not more than 1,329,800 shares of the Company's Common Stock.
The 1996 Stock Option Plan (the "1996 Plan") provides for the issuance of
an aggregate of not more than 600,000 shares of the Company's Common
Stock. The 1999 Equity Incentive Plan (the "1999 Plan") provides for the
issuance of an aggregate of not more than 750,000 shares of the Company's
Common Stock.
Incentive Stock Options granted pursuant to the Plans 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% of the fair market value where the option is granted to an
employee who owns more than 10% of the combined voting power of all
classes of the Company's voting stock. Nonqualified Stock Options granted
pursuant to the Plans must have an exercise price equal to at least 50% 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 58,750 at January 31, 2000, must be granted
by October 10, 2006. All options available to be granted under the 1999
Plan, totaling 229,000 at January 31, 2000, must be granted by February
23, 2009. At January 31, 2000 shares under the 1999 Plan had not been
registered by the Company. The options currently outstanding have
F-14
terms that expire between five and ten years from the date of grant and
vest over a period of three to four years from the date of the grant.
Information regarding options under the 1987 Plan is as follows:
WEIGHTED
OPTION AVERAGE
PRICE EXERCISE
PER SHARE OUTSTANDING EXERCISABLE PRICE
January 31, 1997 balance $0.51 - $4.81 1,293,344 1,246,344 $1.96
------------- --------- --------- -----
Became Exercisable -- -- 47,000 --
Exercised $0.51 - $4.75 (722,544) (722,544) $1.61
Cancelled $2.82 - $4.75 (12,000) (12,000) $3.85
------------- --------- --------- -----
January 31, 1998 balance $0.51 - $4.81 558,800 558,800 $2.36
Exercised $1.36 - $4.75 (248,800) (248,800) $3.17
------------- --------- --------- -----
January 31, 1999 balance $0.51 - $4.81 310,000 310,000 $1.77
Exercised $0.51 - $4.81 (211,000) (211,000) $2.25
------------- --------- --------- -----
January 31, 2000 balance $0.51 - $1.00 99,000 99,000 $0.75
============= ========= ========= =====
F-15
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 $7.25 - $10.00 464,000 -- $ 8.41
Became Exercisable $7.25 - $10.00 -- 67,250 --
Exercised $7.25 (21,750) (21,750) $ 7.25
Cancelled $7.25 (72,250) (1,750) $ 7.25
-------------- --------- ------- ------
January 31, 1998 balance $7.25 - $10.00 370,000 43,750 $ 8.70
-------------- --------- ------- ------
Granted $14.63- $21.50 263,900 -- $17.18
Became Exercisable $7.25 - $10.00 -- 141,250 $ 8.03
Exercised $7.25 (10,000) (10,000) $ 7.25
Cancelled $7.25 - $21.50 (281,800) -- $12.64
-------------- --------- ------- ------
January 31, 1999 balance $7.25 - $21.50 342,100 175,000 $ 8.00
Granted $19.00 261,500 -- $19.00
Became Exercisable $14.63- $21.50 -- 87,683 $17.70
Exercised $7.25 - $14.63 (165,500) (165,500) $ 7.91
Cancelled $7.25 - $21.50 (94,100) -- $16.84
-------------- --------- ------- ------
January 31, 2000 balance $10.00- $21.50 344,000 97,183 $18.00
============== ========= ======== ======
Information regarding options under the 1999 Plan is as follows:
WEIGHTED
OPTION AVERAGE
PRICE EXERCISE
PER SHARE OUTSTANDING EXERCISABLE PRICE
January 31, 1999 balance $ -- -- -- $ --
------------- --------- -------- ------
Granted $16.00-$19.00 684,500 -- $17.58
Became Exercisable $19.00 -- 48,000 $19.00
Cancelled $16.00-$19.00 (163,500) -- $17.41
------------- --------- -------- ------
January 31, 2000 balance $16.00-$19.00 521,000 48,000 $17.63
============= ========= ======== ======
F-16
The following table summarizes information about options outstanding as of
January 31, 2000 under the 1987, 1996 and 1999 Plans:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- --------------------------
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE SHARES CONTRACTUAL EXERCISE SHARES EXERCISE
PRICES OUTSTANDING LIFE PRICE OUTSTANDING PRICE
$ 0.51 - $ 1.00 99,000 1.09 years $ 0.75 99,000 $ 0.75
$10.00 15,000 1.59 years $10.00 15,000 $10.00
$14.63 - $16.00 295,100 3.43 years $15.71 22,900 $14.63
$18.25 - $21.50 554,900 3.04 years $19.07 107,283 $19.09
------- ------ ------- ------
$ 0.51 - $21.50 964,000 3.06 years $16.03 244,183 $10.68
======= ====== ======= ======
Compensation expense related to the Nonqualified Stock Options was $0,
$6,006, $136,265 for the years ended January 31, 2000, 1999 and 1998,
respectively.
Compensation expense related to the remeasurement of Nonqualified and
Incentive Stock Options was $0, $0, and $433,126 for the years ended
January 31, 2000, 1999 and 1998, respectively.
The Company has adopted the disclosure-only provision of SFAS 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, 2000, 1999 and 1998,
consistent with the provisions of SFAS No. 123, the incremental effect on
the Company's net (loss) earnings and basic and diluted earnings per share
would have been $715,391, $0.10 and $0.10 for 2000; $280,260, $0.04 and
$0.04 for 1999 and $162,935, $0.03 and $0.02 for 1998.
The fair value of the option grants 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 2000, 1999 and
1998: dividend yield of 0.00% for the three years; expected volatility of
46.11%, 64.00% and 67.82%, respectively; risk-free interest rate of 6.02%,
5.29% and 6.53% respectively; and expected lives of 3 to 5 years for each
of the three years.
On February 23, 2000, the Board of Directors passed a resolution allowing
the Company to re-price all outstanding options granted under the 1996
Plan and the 1999 Plan. All Outstanding options at prices ranging from
$14.63 to $21.50 per share were re-priced to $14.25 per share. All other
terms and conditions, including vesting periods remain unchanged.
10. STOCK GRANTS
The Company, at the discretion of the Board of Directors, awards from time
to time to management personnel shares of its Common Stock at par value.
These shares vest over a period of three to five years. The Company
awarded 1,000 shares, 220,850 shares, and 30,000 shares of its Common
Stock and recorded compensation expense of $204,015, $417,582 and $122,625
for the years ended January 31, 2000, 1999 and 1998, respectively.
Shares cancelled by the Company due to termination or resignation of the
recipients for the years ended January 31, 2000, 1999 and 1998 totaled
35,383, 111,900 and 1,800, which amounts have been excluded from the above
compensation expense.
F-17
11. 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 provided 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 telecommunications 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 in the fiscal year
ended January 31, 1997. In the fiscal year ended January 31, 1998, the
Company converted the balance to a term loan (the "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 term loan as of
January 31, 2000 was $1,565,824, of which $568,653 was classified as
current. The interest rate on the term loan is 7.71%. The term loan is
secured by the assets of the Company.
During 2000, the Company had its bank extend a letter of credit in favor
of its landlord for a deposit on a lease totaling $89,440.
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.
On November 1, 1998, the Company entered into an Amendment to the Amended
and Restated Credit Agreement (the "Second Amended Facility") with the
same bank. This Amendment increased the Facility for the purchase of
machinery and equipment to $10,000,000 and decreased the unsecured line of
credit to $5,000,000. The Company currently has no amounts borrowed under
the Second Amended Facility. The interest under the Second Amended
Facility is at the bank's prime rate or, at the Company's option, 225
basis points above the LIBOR rate.
The Second Amended Facility requires the Company to meet certain
covenants. Among the covenants contained in the Second Amended Facility
are ratios and balances as to minimum tangible net worth, current ratio,
debt to net worth, debt service coverage, 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, 1999, the Company was
not in compliance with the covenants of the Second Amended Facility
concerning minimum tangible networth and debt service coverage. On April
30, 1999, the Company obtained a waiver on the covenants in default from
the bank and in connection therewith, the $10 million facility for the
purchase of machinery and equipment was terminated. At January 31, 2000,
the Company was not in compliance with the covenants of the Second Amended
Facility concerning minimum tangible net worth and the Debt to Equity
ratio (see Note 18).
F-18
Scheduled maturities of notes payable during the next five years and
thereafter are as follows:
YEARS ENDING
JANUARY 31,
2001 $ 568,653
2002 615,053
2003 382,118
----------
$1,565,824
==========
12. OTHER COMPENSATION
On September 21, 1999, the Company entered into an agreement with Warren
Feldman, Chairman of the Board of Directors and a shareholder of the Company. As
part of this agreement, a lump sum in the amount of $900,000 was paid to Mr.
Feldman in settlement of his employment agreement. The Company paid $650,000 and
Mr. Walt Anderson, a major shareholder, paid $250,000. Mr. Feldman's Employment
Agreement would have been in effect until December 31, 2001. The Company
expensed the $900,000 with the $250,000 being accounted for as a capital
contribution.
Simultaneously Revision LLC and Mr. Walt Anderson ("Revision/Anderson") and the
Company entered into put option agreements with Warren Feldman, Sol Feldman
("the Feldmans") and Leon Genet, ("Genet") a director of the Company. These Put
Option agreements allow the Feldmans and Genet the right to sell their shares of
the Company to Revision/Anderson at a price of $16.00 per share and obligate
Revision/Anderson to purchase the shares during an exercise period beginning on
December 11, 1999 and ending on February 10, 2000. The Company has no obligation
to purchase any shares from the Feldmans or Genet. The closing market price of
the Company's shares on September 21, 1999, the date of the agreements, was
$12.25, and the total number of shares covered by the agreements was 1,208,137.
Using a binomial valuation model with an interest rate of 5% and a volatility
rate of 50%, the fair value of the Put Option agreements was determined to be
approximately $4.03 per share or $4,870,554. The Company accounted for this
non-cash transaction as a charge to expense and a credit to paid-in capital
during the current fiscal year.
13. RESTRUCTURING
During the fourth quarter of fiscal 1999, the Company recorded a restructuring
charge of approximately $2,368,000 related to the adoption by the Company of a
formal plan for restructuring its focus of operations. The restructuring was
adopted in an effort to concentrate the Company's efforts on the Northeastern
United States market. Elements of the Company's restructuring plan included
eliminating the sales offices in Florida, Atlanta, Georgia, Washington D.C. and
the United Kingdom as well as the Miami switch.
The write downs incurred in connection with the restructuring included a charge
of approximately $1,280,000 associated with the planned disposal of the Miami
switch and switch site, a charge of approximately $723,000 associated with the
termination costs to reduce employee headcount and sales offices. A charge of
approximately $265,000 for the cost associated with the balance on the Fort
Lauderdale lease, and a charge of approximately $100,000 to write off line
installation costs associated with the Florida network. In the fiscal year
ending January 31, 1999, amounts paid included approximately $240,000 for
severance and termination costs. The balance of approximately $2,128,000 was
included on the balance sheet at January 31, 1999 as accrued restructuring
costs.
F-19
The January 31, 1999 reserve included an amount of approximately $1,280,000 for
the abandonment of the Miami switch (total book value of approximately
$1,713,000 less the fair value of approximately $433,000). The fair value of the
switch equipment retained was based on the best estimates of the replacement
cost of the switch hardware which could be used in the Companies other switch
sites. Also included in the reserve were amounts for the severance of
approximately 25 employees of approximately $427,000, a reserve for the balance
of amounts due on the Fort Lauderdale lease of approximately $265,000, a reserve
to close the UK office of approximately $57,000 and line installation costs of
approximately $99,000.
The balance in the reserve at January 31, 2000, of approximately $12,000,
consists of the settlement of the lease in Fort Lauderdale Florida. For the
fiscal year ending January 31, 2000 amounts aggregating approximately $1,797,000
applied against the accrual consisted of approximately $1,280,000 for the write
down of the Miami switch, approximately $99,000 for the line installation costs,
approximately $51,000 for payments made on the Fort Lauderdale lease,
approximately $327,000 for severance payments and approximately $40,000 for
payments made to shut down the U.K. operation. Additionally, an aggregate of
approximately $319,000 which is reflected as a credit through the restructuring
charge line in the fiscal 2000 consolidated financial statements consisted of
approximately $97,000 reduction in the severence accrual, approximately $20,000
for the reduction of the fringe benefit accrual and $202,000 reduction in the
accrual on the Fort Lauderdale lease, due to revisions in the lease. The
salvageable components of the switch were relocated to the company's New York
City switch in the third quarter of fiscal 2000.
14. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a law suit, filed by one of its customers for
alleged breach of contract, which seeks compensatory and punitive damages of
$1,300,000. The Company believes that the suit is without merit and intends to
vigorously defend it. However, the outcome cannot be determined at this time.
The Company is involved in various legal and administrative actions arising in
the normal course of business. While the resolution of any such actions may have
an impact on the financial results for the period in which it is resolved, the
Company believes that the ultimate disposition of these matters will not have a
material adverse effect upon its consolidated results of operations, cash flows
or financial position.
The Company has commitments with several vendors for the purchase of
telecommunications services.
15. EARNINGS PER SHARE
Basic earnings per share was computed by dividing net (loss) earnings by the
weighted average number of shares of common stock outstanding during each year.
Diluted (loss) 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.
F-20
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, 2000, 1999 and 1998 is as
follows:
2000 1999
------------------------------------------- ------------------------------------------
EARNINGS SHARES PER-SHARE EARNINGS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
Net (Loss) Earnings $(9,414,202) $(3,417,797)
----------- -----------
Basic (Loss) Earnings
Per Share: $(9,414,202) 7,068,875 $ (1.33) (3,417,797) 6,817,701 $(0.50)
Effect of Dilutive
Securities:
Stock Options -- --
----------- --------- ------- ----------- --------- ------
Diluted (Loss) Earnings
Per Share $(9,414,202) 7,068,875 $ (1.33) $(3,417,797) 6,817,701 $(0.50)
=========== ========= ======= =========== ========= ======
1998
------------------------------------------
EARNINGS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
Net (Loss) Earnings $1,094,001
----------
Basic (Loss) Earnings
Per Share: 1,094,001 6,213,404 $0.18
Effect of Dilutive
Securities:
Stock Options 628,946
---------- --------- -----
Diluted (Loss) Earnings
Per Share $1,094,001 6,842,350 $0.16
========== ========= =====
Outstanding stock options to purchase shares of Common stock were not
included in the computation of diluted earnings per share for the fiscal
years ended January 31, 2000 and 1999 because to do so would have been
antidilutive. For 1998 there were no items whose effect would have been
antidulitive.
F-21
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Amounts in thousands except per share data.
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1997 1997 1997 1998
Net sales $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 0.10 0.04 0.05 (0.02)
Diluted earnings (loss) per common share 0.09 0.04 0.05 (0.02)
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1998 1998 1998 1999
Net sales $31,882 $33,556 $41,260 $30,585
Operating income (loss) 411 368 (1,504) (5,196)
Net earnings (loss) 263 277 (927) (3,031)
Basic earnings (loss) per common share 0.04 0.04 (0.12) (0.44)
Diluted earnings (loss) per common share 0.03 0.04 (0.12) (0.44)
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1999 1999 1999 2000
Net sales $33,530 $36,617 $36,988 $32,625
Operating income (loss) 519 590 (5,954) (1,834)
Net earnings (loss) 296 339 (5,539) (4,510)
Basic earnings (loss) per common share 0.04 0.05 (0.77) (0.63)
Diluted earnings (loss) per common share 0.04 0.05 (0.77) (0.63)
17. EMPLOYEE STOCK OWNERSHIP PLAN
On September 1, 1998, the Company established the Total-Tel USA
Communications, Inc. Employee Stock Ownership Plan (the "ESOP Plan").
Concurrently with the establishment of the nonleveraged ESOP Plan, the
Company contributed 600,000 shares of its Common Stock to the ESOP Plan.
The common shares were recorded at fair value at the date contributed to
the ESOP, totaling approximately $12.3 million, with an offset to Unearned
ESOP Shares in the Statement of Shareholders' Equity. The ESOP Plan is
administered through a trust by a trustee designated by the Board of
Directors. No shares have been allocated from the ESOP Plan as of January
31, 2000.
In February 1999, the Company's Board of Directors authorized the
termination of the ESOP Plan. On November 26, 1999 the Company filed a
request for a determination letter with the Internal Revenue Service
("IRS"). Upon IRS approval, the ESOP will be terminated.
F-22
18. SUBSEQUENT EVENT
On April 25, 2000 the Company obtained a waiver on the covenants in
default from the bank in connection with the Second Amended Facility
******
F-23
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 CHARGED TO
BALANCE AT (CREDITED) TO OTHER BALANCE
BEGINNING COST AND ACCOUNTS- DEDUCTIONS- AT END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
YEAR ENDED JANUARY 31,
2000:
Reserves and allowances
deducted from asset accounts:
Allowance for uncollectible
accounts $ 1,230,483 $ 1,074,916 $ -- $ 478,139 $ 1,827,260
Valuation reserve on deferred tax asset $ 3,702,881 $ 3,702,881
Allowances not deducted:
Restructuring reserve $ 2,128,000 $ (318,879) $ -- $ 1,797,126 $ 11,995
YEAR ENDED JANUARY 31,
1999:
Reserves and allowances
deducted from asset accounts:
Allowance for uncollectible
accounts $ 866,421 $ 878,628 $ -- $ 514,566 $ 1,230,483
Allowances not deducted:
Restructuring reserve $ -- $ 2,367,910 $ -- $ 239,910 $ 2,128,000
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
F-24
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, 1991. Incorporated by
reference to Exhibit 3 (c) to Registrant's Annual Report on Form
10-K for the year ended January 31, 1992.
(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 Registrant and Mansol Ceramics Registrant,
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 Registrant 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, 1982.
(10)(b) Extension Agreement re: Lease of premises at 140 Little Street
dated October 31, 1974. Incorporated by reference to Exhibit 10
(b) to Registrant's Annual Report on Form 10-K for the year ended
January 31, 1981.
(10)(c) Lease of premises at 471 Cortland Street, Belleville, New Jersey,
between Birnfeld Associates and Mansol Ceramics Registrant, 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 Registrant and United Jersey Bank in the
principal amount of $1,192,320. Incorporated by reference to
Exhibit 10 (e) to Registrants Annual Reporton Form 10-K for the
year ended January 31, 1983.
(10)(e)(ii) Installment Note and Equipment Loan and Security Agreement of
Mansol Ceramics Registrant 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 Registrant 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, 1986.
Exhibit No. Description of Document
- - ----------- ------------------------
(10)(h) Master Lease Agreement between Mansol Ceramics Registrant and
Fidelcor Services, Inc. dated December 30, 1985. Incorporated by
reference to Exhibit 10 (h) to Registrant's Annual Report on Form
10-K for the year ended January 31, 1986.
(10)(i) Deed, Mortgage and Mortgage Note between William and Fred
Schneper as Grantees and Borrowers and Mansol Ceramics Registrant
as Grantor and Lender, dated July 26, 1985 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, 1986.
(10)(j) Lease of premises at 140 Little Street, Belleville, New Jersey,
between Mansol Realty Association and Mansol Ceramics Registrant,
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, 1987.
(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, 1995.
(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 Registrant 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, 1988. (See also Exhibit 10 (f)).
(10)(m) Agreement, dated June 13, 1989, between Mansol Ceramics
Registrant 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
Registrant (Mortgagee) dated August 1, 1990, extending the term
of the Note and Mortgage and modifying the interest provision.
(10)(o) Asset Purchase Agreement between Registrant, Mansol Ceramics
Registrant and Mansol Industries Inc. dated May 22, 1990,
including Subordinated Term Promissory Note and Security
Agreement, covering sale of assets and business of Manufacturing
Division of Mansol Ceramics Registrant. Incorporated by reference
to Exhibits 1, 2 and 3 to Registrant's Current Report on Form 8-K
dated May 22, 1990.
(10)(p) Modification of Loan between Mansol Industries, Inc. (borrower)
and Mansol Ceramics Registrant (Lender) dated January 31, 1992,
allowing for the deferral of the principal for twelve months
through and including the period ending June 22, 1992 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, 1992.
(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
Registrant 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 Registrant 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, 1995.
(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 Registrant, L. P., successor to the Prudential
Insurance Registrant 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 Registrant, L. P., successor to the Prudential
Insurance Registrant 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, 1997.
(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
Registrant 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. Incorporated by reference to Form 10K for the year ended
January 31, 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.
Incorporated by reference to Form 10K for the year ended
January 31, 1997.
(10)(AE) Amendment to the Amended Facility and Revolving Credit Agreement
dated November 1, 1998 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.
Incorporated by reference to Form 10K for the year ended January
1, 1999.
Exhibit No. Description of Document
- - ----------- ------------------------
(10)(AF) Lease of premises of 20 Crossways Park North, Woodbury, New York,
between TotalTel, Inc. and Industrial and Research Associates
Company, dated August 20, 1999.
(10)(AG) Lease of premises of One Landmark Square, Stamford, Connecticut.
between TotalTel, Inc. and Reckson Operating Partnership, LLP,
dated November 17, 1999.
(10)(AH) Lease of premises of 1810 Chapel Avenue West, Cherry Hill, New
Jersey between TotalTel, Inc. and Commerce Center Holdings, Inc.,
dated December 6, 1999.
(10)(AI) The 1999 Equity Incentive Plan. Incorporated by reference to the
Registrant's Proxy Statement relating to its 1999 Annual
Shareholder Meeting.
(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.
(23) Consent of Deloite and Touche, LLP
(27) Financial Data Schedules.
STATEMENT OF DIFFERENCES
------------------------
The section symbol shall be expressed as.................................. 'SS'
The degree symbol shall be expressed as................................... [d]