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DRAFT
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
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, 1999.
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.
__________________________________
(Exact name of Registrant as specified in its charter)
New Jersey. 22-1656895.
____________ ________________
(State or other jurisdiction of (I.R.S. Identification No.)
Employer incorporation or
organization)
150 Clove Road, Little Falls, New Jersey 07424
______________________________________________
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (973) 812-1100
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.05 par value per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value (based upon a $17.63 closing price) of the voting
stock held by nonaffiliates of the Registrant as of April 30, 1999:
$54,075,159.
Number of shares of Common Stock outstanding on April 30, 1999:(7,604,904)
Documents Incorporated By Reference:
None
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
Certain matters discussed in this Annual Report on Form 10-K are
"forward-looking statements" intended to qualify for the safe 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
General
Total-Tel USA Communications, Inc. ("TotalTel", the "Registrant" or the
"Company") is a leading regional facilities-based long distance
telecommunications 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 three long distance switches, in New
York City, Newark, New Jersey and Miami, Florida, and has a Network
Operations Center ("NOC") in Northern New Jersey, to monitor and control
its New Jersey network and to coordinate its various services. As a result
of the restructuring plan initiatiated in the fourth quarter of fiscal
1999, the switch in Miami is being eliminated. (See ITEM 7 - Overview.)
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
long distance bills which typically range from $500 to $30,000. The
Registrant's focus on customer service has also enabled it to reach larger
customers.
For Fiscal 1999, Total-Tel had gross revenues of approximately $137
million, derived approximately 50% each from wholesale and commercial
services. For Fiscal 1998, the Registrant's gross revenues were
approximately $123 million. This growth has been achieved through internal
efforts and not as a result of acquisitions. 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. In addition, this market area is
an important international gateway, generating a significant amount of
international telephone traffic. This is evidenced by the Registrant's
Fiscal 1999 revenues, which were derived approximately 50% each from
international and domestic traffic. For the near term, at least, Total-Tel
intends to focus its efforts on further penetrating commercial users of
its services in the Northeast, particularly in the Metropolitan New York
area, 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.
INDUSTRY OVERVIEW
History and Industry Development
Domestic. 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 Access Providers
("CAPs") 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 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.
International. International telecommunications involves the transmission
of voice and data information from the domestic telephone network of one
country to that of another. The Registrant believes that international
telecommunications is one of the fastest growing and most profitable
segments of the telecommunications industry. The international
telecommunications industry has been undergoing rapid change due to
deregulation, the construction of additional infrastructure, and the
introduction of new technologies, which has resulted in increased
competition and demand for telecommunications services worldwide.
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 which includes three DSC switches. The
Registrant's existing switches are located in New York, Newark, and Miami.
The Registrant has installed DSC DEX 600 switches in Newark and Miami 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. As a result of the restructuring plan
initiatiated in the fourth quarter of fiscal 1999, the switch in Miami is
being eliminated. (See ITEM 7 - Overview.)
During Fiscal 1999, the Registrant billed approximately 980 million
minutes, or approximately 95% of its total 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.
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 region. 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 which 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
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 and services, facsimile, and teleconferencing services.
The Registrant plans to add local exchange service, enhanced data and
Internet access and 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 53% of the
Registrant's Fiscal 1999 revenues, and produced revenues of approximately
$72,556,000 in Fiscal 1999 and $65,305,000 in Fiscal 1998. 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. In Fiscal 1998, the Registrant began
offering integrated voice and data access via the same network facility.
* Calling Card and Services: The Registrant offers nationwide switched
access customized calling card and prepaid card services. Customers have
the option of calling cards which are personalized, branded or generic.
* Internet: The Registrant currently offers high-quality, dedicated
Internet access, IP registration 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.
CUSTOMER BASE
Commercial Customers
The Registrant provides retail telecommunications services to over 14,000
commercial customers, primarily in the Northeastern United States.
Approximately 53% of the Registrant's Fiscal 1999 revenues were derived
from the sale of services to the retail segment. Retail revenues were
approximately $72,556,000 and $65,305,000 in Fiscal 1999 and Fiscal 1998,
respectively.
Wholesale Customers
The Registrant provides wholesale telecommunications services to various
national and international telecommunications carriers. Approximately 47%
of the Registrant's Fiscal 1999 revenues were derived from domestic and
international wholesale services. Wholesale revenues were approximately
$64,727,000 and $57,981,000 during Fiscal 1999 and Fiscal 1998,
respectively.
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
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 portion 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), 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.
COMPETITION
Overview
The Registrant operates in a highly competitive industry and estimates
that it has no greater than a 1% market share in any 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, reputation, 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, the long distance industry is characterized by a
high level of customer attrition or "churn." Such attrition is
attributable to a variety of factors, including initiatives of competitors
as they engage in advertising campaigns, marketing programs, and cash
payments and 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.
The 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 which can transmit voice
communications at a cost which 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.
One of the Registrant's principal competitors, MCI/WorldCom, is also a
major supplier of services to the Registrant. The Registrant both links
its switching equipment with transmission facilities and services
purchased or leased from MCI/WorldCom, and resells services obtained from
MCI/WorldCom. There can be no assurance that MCI/WorldCom 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.
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 each 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 who 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.
In addition, a continuing trend towards business combinations and
alliances in the telecommunications industry may create significant new
competitors to the Registrant. Many of these combined entities will have
resources far greater than those of the Registrant. These combined
entities may provide a bundled package of telecommunications products,
including local and long distance telephony, that is in direct competition
with the products offered or proposed to be offered by the Registrant, and
may be capable of offering these products sooner and at more competitive
rates than the Registrant. The Registrant does not currently offer local
telephone services, but is considering entry into this market to better
serve its existing customers and provide a one-stop service for customers,
in its targeted market; namely, small to medium sized businesses.
YEAR 2000 MATTERS
As is the case with most other companies using computers in their
operations, the Registrant is in the process of addressing the year 2000
(Y2K) issues. The Registrant believes it has a solid plan in place.
Modifications, such as software and hardware upgrades have been scheduled
or are under development/deployment for all Information Technology ("IT")
and non-IT systems. Specifically, the Registrant's review of its year 2000
compliance included the Registrant's electronic data processing equipment,
including all switches, digital cross connects, and other date sensitive
processor associated with the Registrant's telecommunications network,
back office, and billing and collection systems. Any required
modifications would be addressed concurrently with another project to
enhance the Registrant's billing system and should be completed by the
third quarter of 1999. The total cost for the upgrades and management
overhead is estimated to be approximately $750,000, which has been
included in the Registrant's budget.
Despite the foregoing efforts and expenditures, there can be no assurance
that the Registrant will be able to identify all year 2000 issues in its
IT and non-IT systems in advance of their occurrence or that the
Registrant will be able to successfully remedy any such issues.
Additionally, to the extent that the Registrant's suppliers or customers
fail to address year 2000 issues in a timely and effective manner, the
Registrant's ability to provide uninterrupted, reliable service to
customers serviced through its networks may be adversely affected. In an
effort to assess the foregoing risk, the Registrant has been surveying all
of its material customers and suppliers as to their current state of year
2000 compliance. Based on the survey results, the Registrant believes they
are taking the steps necessary to ensure their readiness.
The profitability and stability of the Registrant's customers may be
adversely affected by year 2000 issues not related to their relationships
with the Registrant. The expenses or liabilities to which the Registrant
may become subject as a result of any year 2000 issues, or the impact of
year 2000 issues on the ability of existing or future customers to do
business with the Registrant cannot be precisely determined, but could
have a material adverse effect on the Registrant's business, operating
results and financial condition.
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
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.
The 1996 Act
Statutory Requirements. The 1996 Act requires all LECs (including ILECs
and 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 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 UNEs.
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.
The 1996 Act also granted important regulatory relief to industry segments
which compete with CLECs. ILECs were given substantial new pricing
flexibility. 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.
RBOCs also were granted new rights to provide certain cable TV services.
Inter Exchange Carriers ("IXC") were permitted to construct their own
local facilities and/or resell local services. State laws no longer may
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.
On August 8, 1996, the FCC released a First Report and Order, a Second
Report and Order and a Memorandum Opinion and Order in its CC Docket 96-98
(combined, the "Interconnection Orders") which established a framework of
minimum, national rules enabling state Public Utility Commissions
"("PUC"s) 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 unbundled network elements 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 unbundled network elements. 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.
Section 706 Forbearance. Section 706 of the 1996 Act gives the FCC the
right to forebear from regulating a market if the FCC concludes that such
forbearance is necessary to encourage the rapid deployment of advanced
telecommunications capability. Section 706 has not been used to date, but
in January 1998, Bell Atlantic filed a petition under Section 706 seeking
to have the FCC deregulate entirely the provision of packet-switched
telecommunications services. Similar petitions were later filed by the
Alliance for Public Technology and US West Inc. (currently Media One Group
Inc.), and other ILECs are expected to file similar petitions in the near
future. If these petitions are granted, RBOCs would be free to provide a
bundled package of intrastate and interstate data and Internet services
similar to those the Registrant intends to offer. Such an FCC decision
could have a material adverse effect on the Registrant.
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 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 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. On September 14,
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 on December 24, 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. On May 7, 1997, the FCC took
further action in its CC Docket No. 94-1 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. These actions would 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 few 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. On May 7, 1997, the FCC took action in its CC Docket No. 96-262
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.
* Universal Service Reform. On May 8, 1997, the FCC released an order in
its CC Docket No. 96-45, 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 which provide
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
are assessed based on intrastate, interstate and international end user
telecommunications revenue. Contribution factors vary quarterly and
carriers, including the Registrant, are billed each month. Contribution
factors for the first three quarters of 1998 have been determined by the
FCC as follows: first quarter, second quarter, and third quarter factors
are 3.19%, 3.14%, and 3.08% respectively, for the high cost and low income
funds (interstate and international end-user telecommunications revenue)
and 0.72%, 076%, and 0.75%, respectively, for the schools, libraries and
rural health funds (intrastate, interstate and international end-user
communications revenue). In addition, many state regulatory agencies have
instituted proceedings to revise state universal fund contribution
requirements, which will vary from state to state. Several parties have
appealed the FCC's May 8th order, and these appeals have been consolidated
in the U.S. Court of Appeals for the Fifth Circuit. The Registrant cannot
predict the outcome of these proceedings. In addition, a number of
telecommunications companies have filed a petition for a stay with the
FCC, which is currently pending.
Pursuant to the Universal Service Order, all carriers were required to
submit a Universal Service Fund worksheet in September, 1997. 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. The FCC's decisions in CC Docket No.
96-45 could have a significant impact on future operations of the
Registrant.
Current Registrant Certifications. The Registrant has received Section 214
authorization from the FCC allowing it to engage in business as a resale
and facilities-based international carrier.
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
Unbundled Network Elements ("UNE') available and permit resale of most
local services. If negotiations do not succeed, the Registrant has a right
to seek state PUC 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 United States 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 249 full-time and part-time employees in its long distance
telecommunication service, of whom 52 were engaged in sales activities, 27
in customer service and support, 67 in technical and field services, 30 in
data processing, and 73 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. This option 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.
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. One of the partners is no longer a
director. The lease has been renewed on a month to month basis at an
annual rate of $73,467.75. The lease has a 120 day prior 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.
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.
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
February 1, 1998. Rental payments are $133,184 per annum for the first
five years after commencement, $166,480 per annum for the next five years,
and $183,128 per annum for five years and ten months. The lease requires
the payment of the tenant's proportional share of increased operating
expenses and real estate taxes over the base year.
On November 8, 1996, a subsidiary of the 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 fee is $106,618, with an annual adjustment based on the Revised
Urban Wage Earners and Clerical Workers Index, capped at a maximum of 3%
increase over the prior years rental payment. In addition, the Registrant
is liable for its proportionate share of increases in real estate taxes
and operating expenses over the base year. Due to the recent restructuring
(See ITEM 7 -Overview), the Registrant is eliminating the Miami switch,
and is seeking a sub-tenant or early termination of this lease.
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 are $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. Due to the recent restructuring
(See ITEM 7 -Overview), the Registrant is eliminating the Fort Lauderdale
sales office and is seeking a sub-tenant or early termination of this
lease.
Certain of the leases contain options to renew for various periods at
rentals to be determined by the then prevailing fair market rental rates
for similar real estate in the area.
ITEM 3. Pending Legal Proceedings
The Registrant brought suit in Civil Court of the City of New York, County
of New York against a customer, Community Network Services, Inc. d/b/a
Telecommunity, for the recovery of an account receivable of $37,917 plus
interest, attorneys fees and damages. Defendant asserted a counter claim
against the Registrant in the Supreme Court of the State of New York,
County of New York alleging breach of contract and seeks compensatory and
punitive damages of $1,300,000. The Registrant believes the counter suit
is without merit and is vigorously defending this action.
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 1999.
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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. 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, subject to any prior dividend rights of holders of
Preferred Stock. 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, subject to any prior
liquidation rights of holders of Preferred Stock, 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 9,122,774
shares of Common Stock issued and outstanding, held by 788 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.
Closing sale prices prior to July 1, 1998 have been adjusted to reflect a
2-for-1 stock split effective July 15, 1998.
FISCAL 1999 HIGH LOW
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
FISCAL 1998
February 1 thru April 30 9 1/8 5 1/2
May 1 thru July 31 12 3/4 6 13/16
August 1 thru October 31 15 1/8 9
November 1 thru January
31,1998 16 1/2 12 5/8
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.
ITEM 6. Selected Financial Data
(In thousands except per share amounts)
Year ended January 31,.
RESULTS OF OPERATIONS: 1999 1998 1997 1996 1995
__________ _________ ________ _________ ________
Net sales $ 137,283 $ 123,286 $ 89,326 $ 49,873 $ 29,817
Net (Loss) earnings $ (3,418) $ 1,094 $ 492 $ 1,555 $ 1,100
Average common shares
outstanding (a)
Basic 6,818 6,213 5,883 5,818 6,516
Diluted 6,818 6,842 6,739 6,526 6,516
(Loss) earnings per common
and common equivalent
shares
Basic (Loss) earnings per
share $ (0.50) $ 0.18 $ 0.08 $ 0.27 $ 0.17
Diluted (Loss) earnings
per share $ (0.50) $ 0.16 $ 0.07 $ 0.24 $ 0.17
Cash dividends per
common share None None None None None
Additions to property
& equipment $ 4,727 $ 3,268 $6,397 $ 3,028 $ 2,268
Depreciation and
amortization $ 2,785 $ 2,028 $ 1,382 $ 1,026 $ 663
FINANCIAL POSITION
Working Capital $ 1,261 $ 7,936 $ 5,419 $ 4,799 $ 5,031
Property and equipment -
net $ 14,473 $ 12,406 $11,066 $ 6,011 $ 3,924
Total assets $ 45,692 $ 40,245 $31,029 $20,520 $15,110
Long-term debt $ 1,566 $ 2,092 $ 2,940 $ -- $ --
Shareholders' Equity $ 16,442 $ 18,598 $14,772 $10,700 $ 9,093
Common shares
outstanding (a) 7,605 6,679 5,891 5,854 5,800
(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.
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, 1997 ("Fiscal 1997"), January 31, 1998 (Fiscal
1998) and January 31, 1999 (Fiscal 1999). 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 which has been in existence since 1959. The Registrant began
offering interexchange telecommunications services in January, 1983. Gross
revenues have increased from approximately $30 million in the Fiscal year
ended January 31, 1995 ("Fiscal 1995") to approximately $137 million for
Fiscal 1999. This growth has been achieved through internal efforts, and
not as a result of acquisitions.
The Registrant currently owns three long-distance switches, in New York,
Newark, and Miami. 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 the wholesale sales force.
With the management changes made in the fourth quarter of 1999, the focus
of the Registrant was changed from national expansion to focus on further
penetration into the Northeastern, USA market. This decision led to a
restructuring of the Registrant's business, eliminating the sales offices
in Florida, Georgia, Washington D.C. and the United Kingdom, as well as
the switch in Miami, Florida. This restructuring also led to the
elimination of the expenses related to the national expansion. The
Registrant has recorded expenses of $2,368,000 to cover the costs related
to the restructuring.
The Registrant's principal expenses consist of: direct cost of sales,
operating costs, and depreciation. Direct cost of sales consist of access
fees, line installation expenses, switch expenses, transport expenses, and
local and long-distance expenses. Operating costs are comprised of the NOC
expenses, selling and marketing costs, and general and administrative
costs.
RESULTS OF OPERATIONS
FISCAL 1999 AS COMPARED TO FISCAL 1998
Revenues
Net sales of telecommunications services and systems for the fiscal year
ended January 31, 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 63,866,000
minutes, or 11.3%, 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 which offered
telephone equipment for sale. This saved approximately $304,000 in costs.
The increases 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
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-down 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 the fiscal year ended January 31, 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.
FISCAL 1998 AS COMPARED TO FISCAL 1997
Net sales of telecommunications services and systems in Fiscal 1998 were
$123,286,028 as compared to $89,325,921 in Fiscal 1997, representing
approximately a $33,960,000 increase, or 38%.
The continued growth in revenues in Fiscal 1998 is largely attributable to
the rapid expansion of the Registrant's sales to other carriers along with
aggressive internal sales and marketing efforts. The Registrant completed
the installation of its upgraded DEX 600 switch at its new facility in
Newark, New Jersey in the second quarter of Fiscal 1995, which increased
transmission capabilities significantly and was designated to allow for
substantial future expansion.
The Registrant also completed installation of a DEX 600E MEGAHUB switch at
its new facility in New York City which should double the Registrant's
current revenue capacity. This facility became operational in July, 1997.
The Registrant is currently in the process of bringing on line a DEX 600E
MEGAHUB switch at its facility in Miami, Florida. This site will increase
revenue capacity for the Eastern Seaboard as well as serve as an
international gateway to South America. This site should be operational in
the second quarter of Fiscal 1999.
TotalTel had operating income of $1,547,574 in Fiscal 1998 and operating
income of $653,241 in Fiscal 1997. The operating income represents the
income before interest income, interest expense, other income, other
expense and provision for income taxes.
For Fiscal 1998, the Registrant billed approximately 862,479,000 minutes
of calls as compared to approximately 616,990,000 minutes of calls for the
prior fiscal year, an increase of approximately 245,489,000 minutes or
39.8%.
Cost of sales includes line costs, operations costs and purchase of phone
systems for resale. Cost of sales for Fiscal 1998 increased approximately
$32,257,000 or 48.3% as compared to the prior fiscal year. This increase was
unfavorable in relation to the 38.0% increase in sales volume for the period
and is attributable to having a higher mix of lower margin wholesale sales and
competitive pricing pressure in the industry. Line costs for Fiscal 1998 were
$94,492,000, an increase of $30,657,000 or 48.0% over the prior year. The
increase in line cost, was attributable primarily to the substantially
increased sales volume of the Registrant. The balance of cost of sales
was for phone system sales. The operating expense components are switch
and field technician salaries, utilities, rent and depreciation which
totaled $4,142,000 for Fiscal 1998, an increase of $1,148,000 or 38.3%.
This increase was primarily due to the additions of the New York switch
and a new Network Operations Center.
Selling, general and administrative expenses increased approximately
$3,779,000 or 20.6% for Fiscal 1998 as compared to the prior fiscal year.
The increase was primarily due to increased salaries of $3,282,626 or
49.9%, increased commissions of $839,000 or 18.4%. The increase in
salaries results from the buildup of infrastructure in Product
Development, MIS, Customer Service, and Sales. The buildup is to serve the
anticipated growth. The substantial increase in commission, is directly
attributable to the sales volume growth.
Stock compensation expense decreased approximately $2,970,000. In Fiscal
1997, options to purchase 218,000 shares of common stock had their
expiration dates extended to January 17, 2002. This caused a non-cash
charge of approximately $3,482,000. In 1998, stock options to purchase
only 16,500 stock options were remeasured giving rise to a $433,000
expense item.
Other income of $359,000 consists of insurance proceeds upon the death of
a former officer and director of the Registrant.
Interest income for Fiscal 1998 decreased approximately $39,000 as
compared to Fiscal 1997 primarily due to a reduction in the funds
available for investment.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1999, the Registrant had working capital of approximately
$1,261,000 as compared to approximately $7,936,000 at January 31, 1998, a
decrease of $6,675,000. The decrease in working capital in fiscal 1999 was
primarily attributable to a decrease in accounts receivable (net of
doubtful accounts) of approximately $1,615,000, a decrease in prepaid and
other current assets of approximately $696,000, a decrease of
approximately $22,000 in notes receivable, an increase in accounts
payable of approximately $4,343,000, an increase in other accrued
liabilities of $1,706,000, a restructuring reserve of approximately
$2,128,000 and an increase in the current portion of long term debt of
approximately $39,000. This decrease was partially offset by an increase
in cash and cash equivalents of approximately $2,635,000 and an increase
in deferred income taxes of approximately $1,268,000. The current ratio of
1.0 to 1, decreased from the 1.4 to 1 ratio experienced in fiscal 1998.
The Registrant continues to maintain a strong liquid position with cash
and cash equivalents and investments available for sale of approximately
$6,602,000 representing 24.1% of current liabilities.
The cash flow statement of the Registrant for Fiscal 1998 indicated an
increase in cash and cash equivalents of approximately $2,635,000.
Non-cash adjustments (depreciation, amortization, reserve for bad debt
deferred income taxes and non-cash compensation expense) of approximately
$3,469,000 and net changes in assets and liabilities of approximately
$6,965,000 added back to the net loss of approximately $3,418,000 provided
net cash from operations of approximately $7,016,000. Cash used in
investing activities amounted to approximately $4,955,000, of which
approximately $4,727,000 were used for the purchase of capital additions
and approximately $281,000 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 $22,000 and
proceeds from the sale of securities and fixed assets of approximately
$30,000. The cash flow from financial activities of approximately
$574,000 consisted primarily cash received from the exercise of stock
options of approximately $1,061,000 offset by the repayment of bank
borrowings of approximately $487,000.
CAPITAL EXPENDITURES
Capital expenditures for Fiscal 1999 totaled approximately $4,727,000 and
were financed from funds provided from Registrant's working capital and
cash derived from operations. The capital expenditures were used for the
installation of a switch site in Miami, approximately $2,100,000; LAN/WAN
software and hardware upgrades, $794,000; various improvements to current
switch operations, $1,766,000; with the balance of the expenditures used
for leasehold improvements in the Great Notch office.
The Registrant has an Equipment Facility and Revolving Credit Arrangement
with a major New Jersey bank. The Registrant entered into a modification
of the agreement in March, 1998 and November, 1998. The amended and
restated Equipment Facility and Revolving Credit agreement allows for an
unsecured line of credit of $5,000,000 and $10,000,000 for the purchase of
machinery and equipment. At January 31, 1999, the Registrant had bank
borrowings of $2,092,245. The $10,000,000 facility for equipment has been
terminated in exchange for a waiver from the bank releasing the
registrant from certain covenants. For further details, see Note 11 to
the Consolidated Financial Statements.
Inflation
Since inflation has slowed in recent years, the Registrant does not
believe that its business has been materially affected by the relatively
modest rate of price increases in the economy. The Registrant continues to
seek improvements in operations and efficiency through capital
expenditures. Expenditures to improve the signaling system, information
systems and the local area network are expected to result in operating
costs savings which could partially offset any cost increases which may
occur in the future.
ENVIRONMENTAL MATTERS
The Registrant is not a party to any legal proceedings or the subject of
any claim regarding environmental matters generally incidental to its
business. In the opinion of Management, compliance with the present
environmental protection laws should not have a material adverse effect on
the financial condition of the Registrant
ITEM 7A. Quantitative and Qualitatiave 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 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.
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 Director
Warren H. Feldman 43 Chairman of the Board and
Chief Executive Officer
Leon Genet 67 Director
Henry Luken 39 Director
Jay J. Miller 66 Director
Dennis Spina 53 President, Chief Operating
Officer and Director
Thomas P. Gunning 61 Chief Financial Officer, Vice President
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
September, 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) and US WATS (Telecom Services).
Mr. Warren H. Feldman has served as a Director of the Registrant since
April, 1987 and Chairman of the Board since September, 1993. He has served
as President and Chief Executive Officer of the Registrant since
September, 1992. From January, 1986 until September, 1992, he served as
Vice President - Regulatory Affairs of the Registrant, and from 1984 until
January, 1986 as the General Manager of its Total-Tel USA division and
General Counsel of the Registrant. He was elected President of the
Total-Tel USA Division in October, 1988.
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. Mr. Miller is a
Director of Edison Control Corporation, a manufacturer of pipe, fittings,
and accessories for concrete pumping equipment. 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. 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.
Thomas P. Gunning was appointed Chief Financial Officer in September, 1994
and Secretary of the Registrant in January, 1995. He has served as
Controller of the Registrant since September, 1992. He is a Certified
Public Accountant licensed by the States of New York and New Jersey. From
1989 until joining the Registrant, Mr. Gunning was the Senior Audit
Manager at Rosenberg Selsman & Company, a certified public accounting
firm. From 1976 to 1989, he was Chief Financial Officer of Flyfaire,
Incorporated, a travel wholesale operator. Prior to such time, Mr. Gunning
held various positions in both public and private accounting firms.
Board of Directors
The Registrant's Board of Directors currently consists of six persons, two
of whom are members of management and four of whom are non-management
directors. During the fiscal year ended January 31, 1999, the Board held
six meetings which were attended by all of the directors then serving.
The Registrant'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 Registrant's financial statements and
controls. The Committee has met and intends to meet from time to time with
the Registrant'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 Registrant's senior executives.
Messrs. Warren Feldman and Dennis Spina are ex-officio members of the
Compensation Committee.
ITEM 11. Executive Compensation
a) The following table sets forth the compensation which the Registrant
paid during the fiscal years ended January 31, l999, 1998, 1997 to the
Chief Executive, and each Executive Officer of the Registrant whose
aggregate remuneration exceeded $100,000.
Summary Compensation Table
Name and Fiscal Year Annual Compensation Other Compenation
Principal Ended Annual Awards All Other
Position January 31 Salary ($) Bonus(s) Options (#) Compensation($)
Warren H. 1999 $221,154 (1) $260,785 $ 8,735 (2)
Feldman 1998 $287,115 (1) $350,000 $15,325 (3)
Chairman and 1997 $315,000 (1) $295,000 $ 7,025 (4)
Chief Executive
Officer
Thomas P. 1999 $124,230 $ 2,000 $10,161 (5)
Gunning 1998 $116,600 $ 4,000 $ 8,265 (6)
Vice President, 1997 $ 95,231 $ 6,000 $ 6,560 (7)
Treasurer and
Secretary
David Hess 1999 $232,693 $229,167 $ 20,000 (9) $19,107 (11)
President & 1998 $264,615 $176,773 $115,008 (10) $ 8,655 (12)
Chief Operating
Officer of
Total Tel, Inc. (8)
(1) Does not include an annual director's fee of $15,000.
(2) 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.
(3) 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.
(4) The amounts shown represents the Registrant's contribution under its
401 (K) Deferred Compensation and Retirement Savings Plan of $4,668 and
$2,357 for the use of a Registrant vehicle for non-business purposes.
(5) 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.
(6) 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.
(7) The amount shown represent the Registrant's contribution under its 401
(K) Deferred compensation and Retirement Savings Plan of $3,110 and $1,179
for the use of a Registrant vehicle for non-business purposes and $2,271
term life insurance premiums.
(8) Resigned as an officer of the Registrant on January 31, 1999
(9) Settlement of amounts owed.
(10) The amount shown represents commissions paid to Mr. Hess in his
capacity as Vice President of Total-Tel Carrier Services, Inc., a
subsidiary of Registrant.
(11) The amount shown represents the Registrant's contribution under its
401 (K) Deferred compensation and Retirement Savings Plan of $5,573 and
$726 for the use of a Registrant vehicle for non-business purposes and
$12,808 term life insurance premiums.
(12) The amount shown represents the Registrant's contribution under its
401 (K) Deferred compensation and Retirement Savings Plan of $5,795, and
$2,860 term life insurance premiums.
(b) Compensation Pursuant to Plans
In October, 1987, the Registrant adopted its 1987 Stock Option Plan and in
October, 1996, adopted its 1996 Stock Option 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 and 600,000 shares of
Common Stock under the 1996 Option 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 once again for
issuance under the Option Plans.
OPTION GRANTS IN LAST FISCAL YEAR
Options /SAR Grants in last Fiscal Year Potential realizable Value
at Assumed Annual rates
of stock
Appreciation for
Option term
Individual Grants
__________________________________________________________________________________________________
Number of
Securities % of Total
Underlying Options/SARs
options / Granted to
SARs Employees in Exercise or Base Expiration
Name Granted (#)(1) Fiscal Year Price Date 5% ($) 10% ($)
__________________________________________________________________________________________________
Thomas P. Gunning 2,000 .27% $ 21.50 August 6, 2003 $ 9,267 $ 19,956
(1) Stock option granted under the 1996 Plan. One fifth of the new options
are exercisable on each of the first, second, third, fourth and fifth
anniversary dates of the original grant.
Aggregated Options/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
Value of Number of Securities
Unexercised in-the-Money Underlying Unexercised
Options/SARs at Options/SARs at
FY-End (#) FY-End (#)
Shares
Acquired Value
Name on Exercise(#) Realized ($) Exercisable Unexercisable Exercisable
Unexercisable
__________________________________________________________________________________________________
Warren Feldman 77,000 $1,435,000 261,000 -- $3,767,371
David Hess 50,000 $ 759,375 65,000 -- 630,000
Thomas Gunning (1) -- -- 45,000 2,000 $733,137
(1) The options to purchase 2,000 shares were at an exercise price greater
than fair market value at January 31, 1999.
(c) Other Compensation
None.
(d) Compensation of Directors
Each director of the Registrant receives $15,000 per year for services in
such capacity.
(e) Termination of Employment and Change of Control Arrangements
None.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Set forth below is certain information concerning persons who were known
by the Registrant to own beneficially or of record more than 5% of the
issued and outstanding shares of Common Stock of the Registrant as of
April 29, 1999.
Name and Address Number of Shares Percentage
of Beneficial Owner Owned (1) of Class
Warren H. Feldman, Esq. 789,938 (2)(3) 10.1%
150 Clove Road
Little Falls, NJ 07424
Walt Anderson 3,057,634 (4)(5) 40.1%
c/o Swidler Berlin
Shereff Friedman, LLC
3000 K Street, NW, Suite 300
Washington, D.C. 20007
Revision LLC 3,057,434 40.1%
c/o Swidler Berlin
Shereff Friedman, LLC
3000 K Street, NW, Suite 300
Washington, D.C. 20007
Total-Tel USA
Communications, Inc.. 600,000 7.9%
Employee Stock Ownership Plan
150 Clove Road
Little Falls, NJ 07424
Michael A. Karp 424,954 5.6%
3416 Sansom Street
Philadelphia, PA 19104
Thomas Cirrito 504,694(6) 6.6%
6429 Georgetown Pike
McLean, VA 22101
(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 Registrant's knowledge.
(2) Includes options to purchase 261,000 shares of the Registrant's Common
Stock which are exercisable currently or within 60 days of the date hereof.
(3) Does not include 4,000 shares of Common Stock owned by Mr. Feldman's
children, as to which he disclaims beneficial ownership.
(4) 3,057,434 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.
(5) Does not include 94,930 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
pursuant to a Settlement Agreement between such parties and the
Registrant.. (See "Settlement of Litigation.")
(6) Atocha LP, of which Mr. Cerrito is general partner, owns 484,694 of
these shares.
(b) Security Ownership of Management
The following table sets forth as of April 29, 1999 information concerning
the beneficial ownership of outstanding shares of Common Stock of the
Registrant by each director of the Registrant, and all directors and
officers of the Registrant as a group:
Name of Beneficial Number of Shares Percentage
Owner Owned (1) of Class
__________________________________________________________
Walt Anderson 3,057,634 (2)(3) 40.1%
Revision LLC 3,057,434 40.1%
Warren H. Feldman 789,938 (4) 10.0%
Leon Genet 91,120 1.2%
Henry Luken 164,653 2.2%
Jay J. Miller 400 (5)
Dennis Spina 5 (5)
All directors and officers
as a group (7 in number) 4,154,550 (2)(3) 52.4%
(1) All shares are beneficially owned and sole investment and voting power
is held by the persons named above.
(2) 3,057,434 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 94,930 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. See "Settlement
of Litigation."
(4) Includes options to purchase 261,000 shares of the Registrant's Common
Stock which are exercisable currently or within 60 days hereof.
(5) Less than 1%.
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 directors and major
shareholders are partners and a former director and major shareholder is
also a partner. During the fiscal year ended January 31, 1999, the
Registrant paid rent of $65,482.12 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 $73,467.75, 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 1999. As of January 31, 1999 the
Registrant had invoices payable to Mr. Miller totaling $158,755. 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
1999, LPJ, Inc. was paid commissions of $117,136. 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, 1999
were approximately $722,000 and $2,128,000, respectively. Purchases from
US Wats and CTS/Worldexchange were approximately $443,000 and $1,938,000,
respectively. All transactions were based on competitive terms obtained at
an arm's length basis.
As set forth in Note 10 to the Consolidated Financial Statements, the
Registrant from time to time has made loans to former executive employees
and shareholders of the Registrant. Two of the executive employees are no
longer employed by the Registrant.
(THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK)
TOTAL-TEL USA COMMUNICATIONS, INC.
AND SUBSIDIARIES
ITEM 14. Exhibits and Financial Statements Schedule Years Ended January
31, 1998, 1997, and 1996
INDEX
(a)(1) Financial Statements: The following consolidated financial statements
of Total-Tel USA Communications, Inc. and subsidiaries are included at the
end of this Report:
Consolidated Financial
Statements: Page
_________________________ _______
Independent auditors' report
Consolidated balance sheets - January 31, 1999
and 1998 F-2
Consolidated statements of (loss) earnings and comprehensive
(loss) income - years ended January 31, 1999, 1998
and 1997 F-3
Consolidated statements of shareholder's equity -
years ended January 31,
1999, 1998, 1997 F-4
Consolidated statements of cash flows - years
ended January 31, 1999,
1998, 1997 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, 1999, 1998 and 1997
II Valuation and Qualifying Accounts (Consolidated) F-20
***************
Schedules other than those listed above are omitted because they are not
required, not applicable or the information has been otherwise supplied.
(THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK)
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the
__th day of ___, 1999
TOTAL-TEL USA COMMUNICATIONS, INC.
(Registrant)
By:_/S/ Warren H. Feldman_____
Warren H. Feldman
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
____________________ ________________________ ____________
/S/ Walter Anderson Director May 3, 1999
____________________
Walter Anderson
/S/ Warren H. Feldman Chairman of the Board, May 3, 1999
____________________
Warren H. Feldman Chief Executive Officer
and Director
/S/ Leon Genet Director May 3, 1999
____________________
Leon Genet
/S/ Thomas P. Gunning Vice President, Treasurer, May 3, 1999
____________________
Thomas P. Gunning Secretary and Principal
Accounting Officer
/S/ Henry Luken Director May 3, 1999
____________________
Henry Luken
/S/ Jay J. Miller Director May 3, 1999
____________________
Jay J. Miller
EXHIBIT NO. DESCRIPTION OF DOCUMENT
(3)(a) Certificate of Incorporation, as amended. Incorporated by reference
to Exhibits 2-A, 2-B, 2-C and 2-D to Registration Statement No. 2-15546
and Registrant's proxy statement relating to its 1987 Annual Stockholder's
Meeting.
(3)(b) By-Laws of Registrant. Incorporated by reference to Exhibit A to
Registrant's Annual Report on Form 10-K for the year ended January 31, 1972.
(3)(c) Amended Certificate of Incorporation to change the name of the
Corporation from Faradyne Electronics Corp. to Total-Tel USA Communications,
Inc., dated November 4, l991. Incorporated by reference to Exhibit 3 (c)
to Registrant's Annual Report on Form 10-K for the year ended
January 31, l992.
(3)(d) By-Law Amendments incorporated by reference to Form 8K filed on
April 7, 1998.
(3)(e) Shareholder Rights Plan filed by reference to Form 8K, on April 12,
1998. Terminated on January 15, 1999 on Form 15 filed with the SEC.
(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, l982.
(10)(b) Extension Agreement re: Lease of premises at 140 Little Street
dated October 31, l974. Incorporated by reference to Exhibit 10 (b)
to Registrant's Annual Report on Form 10-K for the year ended
January 31, l981.
(10)(c) Lease of premises at 471 Cortland Street, Belleville, New Jersey,
between Birnfeld Associates and Mansol Ceramics 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 Report on Form 10-K for the year ended January 31, 1983.
(10)(e)(ii) Installment Note and Equipment Loan and Security Agreement
of Mansol Ceramics 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, l986.
Exhibit No. DESCRIPTION OF DOCUMENT
(10)(h) Master Lease Agreeme