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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 14(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Quarterly period ended October 31, 1997
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(b) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________
Commission file number 0-21913
GROUP LONG DISTANCE, INC.
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(Name of Small Business Issuer in Its Charter)
Florida 65-0213198
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1451 West Cypress Creek Road, Suite 200,
Fort Lauderdale, FL 33309
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(Address of Principal Executive Offices)
(954) 771-9696
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(Issuer's Telephone Number, Including Area Code)
Check whether the Issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 past 90 days.
Yes |X| No |_|
The number of shares of Common Stock, no par value, outstanding as of December
12, 1997 was 3,502,870.
The number of Redeemable Warrants outstanding as of December 12, 1997 was
1,437,500.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
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<PAGE>
GROUP LONG DISTANCE, INC. AND SUBSIDIARIES
INDEX
Page Number
-----------
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of October 31, 1997
(unaudited) and April 30, 1997............................... 1
Unaudited Consolidated Statements of Operations
for the six months ended October 31, 1997 and 1996........... 2
Unaudited Consolidated Statements of Cash Flows
for the six months ended October 31, 1997 and 1996........... 3
Unaudited Notes to Consolidated Financial Statements......... 4
Item 2. Management's Discussion and Analysis or Plan of
Operation.................................................... 7
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings............................................13
Item 6. Exhibits and Reports on Form 8-K.............................13
SIGNATURES....................................................................14
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Group Long Distance, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
October 31, 1997 (Unaudited) and April 30, 1997
ASSETS October 31, 1997 April 30, 1997
---------------- --------------
(Unaudited)
Current assets
Cash $ 398,597 $1,977,546
Accounts receivable less allowances 14,042,678 3,493,154
for doubtful accounts of $1,413,000
and $620,000 at October 31, 1997 and
April 30, 1997, respectively
Note receivable - related party 18,128 32,261
Deferred tax assets 250,129 233,300
Prepaid expenses and other 13,582,812 642,333
current assets
------------- ------------
28,292,344 6,378,594
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Prepaid expenses, net of current portion 2,990,000 --
Property and equipment, net 198,259 347,615
Customer and acquisition costs, net 1,767,128 2,291,221
Deferred tax assets 513,384 416,600
Other assets 26,556 37,236
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Total assets $33,787,671 $9,471,266
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit 82,000 --
Accounts payable $24,314,172 4,272,880
Income taxes payable 2,841,699 --
Accrued expenses and other liabilities 762,925 790,739
Current portion of long-term debt 646,141 1,698,966
------------- ------------
28,646,937 6,762,585
Long-term debt, net of current portion -- 1,072,307
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Total liabilities 28,646,937 7,834,892
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Stockholders' equity -- --
Preferred stock, no par value, 2,000,000
shares authorized; no shares issued and
outstanding
Common stock, no par value, 12,000,000 -- --
12,000,000 shares authorized; 3,502,870
and 3,462,354 shares issued and
outstanding as of October 31, 1997 and
April 30, 1997, respectively
Additional paid-in capital 5,913,988 5,848,819
Accumulated deficit (773,254) (4,212,445)
------------- ------------
Total stockholders' equity 5,140,734 1,636,374
------------- ------------
Total liabilities and $33,787,671 $9,471,266
stockholders' equity
============= ============
The accompanying notes are an integral part of these statements.
1
<PAGE>
Group Long Distance, Inc. and Subsidiaries
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six months ended October 31, 1997 and 1996
Six Months Three Months
Ended Ended
October 31 October 31
1997 1996 1997 1996
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Sales 25,478,448 11,983,983 16,413,450 6,271,795
Cost of Sales 18,222,422 8,508,949 11,261,234 4,475,807
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Gross Profit 7,256,026 3,475,034 5,152,216 1,795,988
Other Income, net 13,417,657 13,417,657
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Income from operations 20,673,683 3,475,034 18,569,873 1,795,988
Selling, general and
administrative expenses 3,900,391 2,193,421 2,711,824 1,098,449
Marketing Expenses 9,097,351 7,407,351
Depreciation and amortization 1,314,745 905,955 681,461 530,665
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Earnings from operations 6,361,196 375,658 7,769,237 166,874
Interest expense, net 195,286 201,101 162,790 119,875
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Earnings before income taxes 6,165,910 174,557 7,606,447 46,999
Income tax expense 2,726,719 107,489 2,823,503 45,496
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Net earnings $ 3,439,191 $67,068 $4,782,944 $1,503
==============================================
Earnings per common and common
equivalent share $0.99 $0.03 $1.37 $0.00
==============================================
The accompanying notes are an integral part of these statements.
2
<PAGE>
Group Long Distance, Inc. and Subsidiaries
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended October 31, 1997 and 1996
1997 1996
---- ----
Cash flows from operating activities
Net earnings $3,439,191 $67,068
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation and amortization 1,314,745 905,955
Provision for bad debts 1,519,848 356,199
Changes in assets and liabilities
(Increase) in accounts receivable (12,069,372) (1,728,532)
Decrease in notes receivable 14,133 25,921
(Increase) in deferred tax asset (113,613) (63,778)
(Increase) in prepaid expenses and (13,067,979) (282,789)
other current assets
(Increase) in prepaid expenses, net (2,990,000) -
of current portion
Increase in accounts payable 19,976,800 1,138,719
Increase in income taxes payable 2,841,699 -
Increase in accrued expenses and other 300 236,296
liabilities
---------- ---------
Net cash provided by operating 865,752 655,059
activities
---------- ---------
Cash flows from investing activities
Acquisitions of property and equipment 86,207 (161,753)
Acquisitions of Tel-Save common stock (5,495,760) -
Acquisitions of customer bases (600,000) (5,517,491)
Decrease in other assets 10,680 (37,570)
---------- ---------
Net cash used in investing (5,998,873) (5,716,814)
activities ---------- ---------
Cash flows from financing activities
Net borrowings under line of credit 82,000 100,000
agreement
Proceeds from loan originations - 5,478,619
Principal repayments of long-term debt (3,118,537) (216,079)
Proceeds from the sale of common stock 65,169 -
and warrants
Proceeds from sale of Tel-Save common 26,622,553 -
stock
Repayment of marketing expenses (13,068,899) -
Repayment of ETI notes payable. (7,000,000) -
Principal repayments of capital lease (15,609) (5,380)
obligations
Principal repayments on line of credit (12,505) (10,252)
Offering costs incurred - (175,072)
Net cash provided by financing ---------- ---------
activities 3,554,172 5,171,836
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Net (decrease) in cash (1,578,949) 110,081
Cash at beginning of year 1,977,546 78,767
--------- ---------
Cash at end of period $398,597 $188,848
========= =========
Noncash investing and financing activity:
The Company acquired a customer base partially with common stock with a
value of $1,085,000.
The accompanying notes are an integral part of these statements.
3
<PAGE>
Group Long Distance, Inc. and Subsidiaries
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with the generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for fair presentation have been included. Operating results
for the six months ended October 31, 1997 are not necessarily indicative of the
results that may be expected for the year ending April 30, 1998.
The balance sheet at April 30, 1997 has been derived from the audited financial
statements at that date, but does not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. For further information, refer to the audited financial statements
and footnotes thereto included in the Form 10-KSB filed by the Company for the
year ended April 30, 1997.
NOTE B - FORMATION AND OPERATIONS OF THE COMPANY
In November 1995, Group Long Distance, Inc. (the "Company") (which was
originally incorporated in July 1990) merged into Second ITC Corporation, the
surviving corporation, whose name was changed to Group Long Distance, Inc. The
existing stockholders of Group Long Distance, Inc. retained 94% of the issued
and outstanding stock of the merged company. For accounting purposes, the
acquisition has been treated as a recapitalization of Group Long Distance, Inc.
with Group Long Distance, Inc. as the acquired company (reverse acquisition),
and the financial statements of Group Long Distance, Inc. are considered to be
the financial statements of the Company. Historical stockholders' equity of
Group Long Distance, Inc. prior to the merger has been retroactively restated.
Group Long Distance, Inc is a long distance telecommunications provider. The
Company utilizes special network service contracts through major national long
distance telecommunications carriers to provide its customers with products and
services which include basic "1 plus" and "800" long distance services, as well
as local, Internet, e-mail and data services and prepaid calling cards. As a
nonfacilities based reseller of long distance telecommunication services, the
Company utilizes service contracts to provide its customers with switched,
dedicated and private line services to various long distance telecommunications
networks such as Tel-Save, Inc. ("Tel-Save") and WorldCom/LDDS Inc. The Company
is dependent on a limited number of long distance carriers and numerous regional
and local telephone companies to provide its services and products. The majority
of the Company's revenues are derived from calls routed through Tel-Save.
NOTE C - SALE OF TEL-SAVE HOLDINGS, INC. COMMON STOCK
On October 17, 1997, Group Long Distance, Inc. completed the private sale of
1,347,000 shares of common stock of Tel-Save Holdings, Inc. ("Tel-Save"), at
approximately $19.76 per share, for gross proceeds to the Company of
approximately $26.6 million (excluding taxes and transaction costs). The
purchaser of the 1,347,000 shares of Tel-Save common stock was the Anschutz
Family Investment Company LLC, a Colorado limited liability company.
4
<PAGE>
As previously reported, the Company had acquired warrants to purchase 1,347,000
shares of Tel-Save, at $4.08 per share ("the Warrants"), in connection with its
August 11, 1997 acquisition of Eastern Telecommunications Incorporated ("ETI").
The $8.313 million purchase price for ETI consisted of two $3.5 million notes,
the assumption of approximately $1.2 million of certain of ETI's liabilities and
the payment of closing costs in the amount of $113,000.
In August 1997, the Company exercised one of the Warrants and purchased 600,000
shares of common stock at the aggregate exercise price of $2,448,000. In October
1997, the Company exercised the remaining Warrant and purchased 747,000 shares
of common stock at an aggregate exercise price of $3,047,760.
Proceeds from the sale of the Tel-Save shares were used to retire the aggregate
principal amount of $7,000,000 in notes (plus accrued interest) due in
connection with the ETI acquisition, together with certain related closing
costs. The balance of the proceeds from the sale of the Tel-Save shares was used
to pay down debt and accounts payable owed to Tel-Save, including payment of the
balance of the loan outstanding to Tel-Save in connection with the July 1996
acquisition of all of the common stock of Aventures-in-Telecom ("AIT") and
marketing expenses incurred in connection with the Company's telemarketing
efforts during the first half of fiscal year 1998.
NOTE D - INCREASE IN PREPAID EXPENSES AND ACCOUNTS PAYABLE
For the six months ended October 31, 1997, the Company incurred $23,920,000 in
marketing expenses which has resulted in approximately 360,000 new orders. The
Company is provisioning (activating new customers) on the Tel-Save
One-Better-Net ("OBN"). During the six months ended October 31, 1997, these new
customers were provisioned on OBN and accounted for approximately $15.6 million
of revenues and approximately $11.5 million for the three months ended October
31, 1997. These expenses are being expensed 75% in the current fiscal year and
25% in the subsequent year. This allocation represents a change in estimate from
the first quarter of fiscal year 1998 in that the percentage was increased from
50% to 75%. The current quarterly results therefore reflect such change in
estimate for the six months ended October 31, 1997. This allocation approximates
the Company's estimate of the time in which such telemarketing expenses should
correspond with the anticipated revenues from such marketing efforts. $7,670,000
of such telemarketing expenses were allocated for the six months ended October
31, 1997, and $5,980,000 for the three months ended October 31, 1997. In
addition, the Company incurred further marketing expenses of $1,427,351 which
were expensed in full during the three months ended October 31, 1997. The
Company curtailed telemarketing efforts during the three months period ended
October 31, 1997 and does not expect to incur expenses of this magnitude in the
remaining two quarters of fiscal year 1998.
NOTE E - PROCEEDS FROM PUBLIC OFFERING
On March 24, 1997, the Company completed an underwritten public offering (the
"Offering") whereby 1,250,000 shares of its Common Stock, no par value (the
"Common Stock"), and warrants to purchase 1,437,500 shares of Common Stock (the
"Redeemable Warrants") were sold. Of the Redeemable Warrants sold, warrants to
purchase 187,500 shares of Common Stock were sold pursuant to the underwriters'
over-allotment option. Of the approximately $3.9 million of net proceeds,
approximately $1.4 million of the proceeds remained available to the Company at
April 30, 1997. During the three months ended July 31, 1997, the Company used
the $1.4 million balance of proceeds for working capital and general business
purposes, including marketing and sales expenses.
NOTE F - COMMITMENTS AND CONTINGENCIES
Reference is made to Note I - Commitments and Contingencies to the Company's
Financial Statements for the year ended April 30, 1997, which is incorporated
herein in its entirety except to the litigation discussed below, which is
restated in its entirety except as amended to reflect recent developments.
5
<PAGE>
The Company owes AT&T $547,500 under a previously executed settlement agreement
relating to certain billing disputes. The Company is a defendant in a civil
action styled AT&T Corp. v. Group Long Distance, Inc., Civil Action No. 97-2226
(NAP), pending in the United States District Court for the District of New
Jersey. In this action brought in April 1997, AT&T seeks $612,324 and attorneys'
fees as damages for breach of a settlement agreement entered into between AT&T
and the Company in 1993. AT&T also seeks to recover this $612,324 under a
separate claim for unpaid tariff charges. The Company has answered the complaint
and asserted certain counterclaims. These counterclaims include claims for
rescission of the settlement agreement as well as for damages in contract, in
tort and pursuant to the Federal Communications Act. The Company vigorously
plans to litigate this matter. A scheduling conference was held on October 6,
1997, and the period for initial disclosure closed on December 6, 1997. A
further scheduling conference has been set for March 6, 1998. While the Company
cannot predict with certainty the outcome of this litigation, the Company's
results of operation or cash flow in a particular quarterly or annual period
could be materially affected by protracted litigation or an unfavorable
decision.
The Company is from time to time the subject of complaints or litigation in the
ordinary course of its business. Except as disclosed, the Company believes that
such lawsuits, claims and other legal matters to which it has become subject are
not material to the Company's financial condition or results of operations, but
an existing or future lawsuit or claim resulting in an unfavorable outcome to
the Company could have a material adverse effect on the Company's financial
condition and results of operations.
6
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis of significant factors affecting the
Company's operating results and liquidity and capital resources should be read
in conjunction with the accompanying financial statements and related notes.
This Report on Form 10-QSB contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Additional
written and oral forward-looking statements may be made by the Company from time
to time in Securities and Exchange Commission ("SEC") filings and otherwise. The
Company cautions readers that results predicted by forward-looking statements,
including, without limitation, those relating to the Company's future business
prospects, revenues, working capital, liquidity, capital needs, interest costs,
and income are subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward-looking
statements, due to the following factors, among other risks and factors
identified herein and from time to time in the Company's filings with the SEC.
Overview
Group Long Distance, Inc. (the "Company") is a long distance
telecommunications provider. The Company utilizes special network service
contracts through major national long distance telecommunications carriers to
provide its customers with products and services which include basic "1 plus"
and "800" long distance services, as well as local, Internet, e-mail and data
services and prepaid calling cards. As a nonfacilities based reseller of long
distance telecommunication services, the Company utilizes service contracts to
provide its customers with switched, dedicated and private line services to
various long distance telecommunications networks such as Tel-Save, Inc.
("Tel-Save") and WorldCom/LDDS Inc ("WorldCom"). The Company is dependent on a
limited number of long distance carriers and numerous regional and local
telephone companies to provide its services and products. The majority of the
Company's revenues are derived from calls routed through Tel-Save.
To obtain favorable rates from its carriers, the Company has committed
to purchase certain minimum volumes of long distance services during stated
periods, whether or not such volumes are used. Certain of the Company's network
service agreements contain provisions for guaranteed monthly volume and network
usage which is the basis for determining volume discounts and other special
billing features. If the Company is unable to achieve the guaranteed monthly
volume, the agreements provide for various surcharges. Failure to satisfy volume
purchase commitments or price increases by carriers could materially adversely
affect the Company's future operating results. The Company periodically
renegotiates its volume commitments with its carriers.
In October 1997, the Company outsourced its back office operations,
which included collections, customer service and provisioning, reducing its
workforce from 26 to 5 employees. The effect of this action was to significantly
reduce overhead costs and with the direct intention of improving customer
service.
The Company relies on the marketing of its services, which is currently
performed by independent telemarketers, to generate a significant portion of its
revenues. The Company has significantly increased its use of telemarketers, and
anticipates that it will become increasingly dependent upon these independent
telemarketers to market its services.
The Company's ability to continue and to expand its operations is
dependent upon the Company's ability to maintain satisfactory relationships with
existing carriers and independent telemarketers and establish relationships with
additional carriers and independent telemarketers.
For the six months ended October 31, 1997, the Company incurred
$23,920,000 in telemarketing expenses which has resulted in approximately
360,000 new orders. The Company is provisioning (activating new customers) on
the Tel-Save One-Better-Net ("OBN"). During the six months ended October 31,
1997, these new customers were provisioned on the OBN and accounted for
approximately $15.6 million of revenues and approximately $11.5 million for the
three months ended October 31, 1997. These expenses are being expensed 75% in
7
<PAGE>
the current fiscal year and 25% in the subsequent year. This allocation
represents a change in estimate from the first quarter of fiscal year 1998 in
that the percentage was increased from 50% to 75%. The current quarterly results
therefore reflect such change in estimate for the six months ended October 31,
1997. This allocation approximates the Company's estimate of the time in which
such telemarketing expenses should correspond with the anticipated revenues from
such marketing efforts. $7,670,000 of such telemarketing expenses were allocated
for the six months ended October 31, 1997, and $5,980,000 for the three months
ended October 31, 1997. In addition, the Company incurred further marketing
expenses of $1,427,351 which were expensed in full during the three months ended
October 31, 1997. The Company curtailed telemarketing efforts at the end of the
three month period ended October 31, 1997 and does not expect to incur expenses
of this magnitude in the remaining two quarters of fiscal year 1998.
In an effort to improve efficiencies, the Company has commenced "LEC
billing" arrangements with the Regional Bell Operating Companies and local
exchange carriers ("LEC"). This is expected to improve billing efficiencies and
increase collections and customer retention, however, there can be no assurance
that such efficiences or increased collections will occur.
The Company's operating results are significantly affected by customer
attrition rates. The Company believes that a high level of customer attrition in
the industry is primarily a result of national advertising campaigns,
telemarketing programs and customer incentives provided by major competitors, as
well as the termination of service for non-payment.
There can be no assurance that assumed attrition rates underlying the
Company's amortization schedule will prove to be accurate or that customer
attrition rates will not increase in the future. Any significant increase in
customer attrition rates resulting in increased amortization expense will
continue to have a material adverse effect on the Company's operating results.
In the event that attrition rates increase as a result of increased competition,
the purchase of poorly performing customer bases or the inability to manage the
existing customer base, the Company may continue to incur charges that result in
losses.
The Company operates in a highly fragmented segment of the
telecommunications industry and has historically expanded its operations through
the acquisition of customer bases. The Company regularly evaluates possible
acquisition opportunities and may seek to acquire smaller resellers and customer
bases in order to expand the distribution of its services and products and its
geographic markets. On August 11, 1997, the Company acquired all the issued and
outstanding capital stock of Eastern Telecommunications Incorporated, a New
York-based reseller of long-distance services. Except as otherwise disclosed
herein, the Company has no plans, agreements, commitments, understandings or
arrangements with respect to any acquisition. There can be no assurance that the
Company will ultimately effect any acquisition, that the Company will not
experience increased customer attrition as a result of any acquisition, that the
Company be able to successfully integrate into its operations any business or
customer base which it may acquire, or that the Company will be able to service
any debt or other obligations incurred in connection with such acquisition.
The Company intends to actively pursue a strategy of continued growth
and will seek to expand the distribution of its services and products and
maximize penetration of new and existing geographic markets. The Company intends
to expand its marketing activities by increasing the use of independent
telemarketers. The Company will also continue to (i) develop strategic marketing
relationships, (ii) regularly evaluate possible acquisition opportunities, and
(iii) improve operating and network efficiencies. The Company's ability to
achieve these objectives will be affected by, and to a certain extent dependent
on, many factors that are beyond the control of the Company. Thus, no assurance
can be given that such objectives can be or will be achieved.
8
<PAGE>
Other Matters
The Company has to date been approved to resell local exchange
telecommunications services to both residential and business customers in twenty
two (22) states. Local services will be an adjunct to the intrastate
interexchange services that the company currently provides.
Results of Operations
The following table sets forth for the periods indicated the
percentages of total sales represented by certain items reflected in the
Company's consolidated statements of operations:
Six months ended Three months ended
October 31, October 31,
-----------------------------------------
1997 1996 1997 1996
-----------------------------------------
Sales 100% 100% 100% 100%
Cost of Sales 72 71 69 71
Gross profit 28 29 31 29
Other Income, net 53 - 82
Selling, general and administrative 15 18 17 18
expense
Marketing expenses 36 - 45
Depreciation and amortization 5 8 4 8
expense
Interest expense, net * 2 * 3
Earnings before income taxes 24 1 46 *
Income tax expense 11 * 17 *
Net earnings 13 * 29 *
- ----------
* Less than 1 percent
Comparison of Six months ended October 31, 1997 to Six months ended
October 31, 1996 and of Three months ended October 31, 1997 to Three months
ended October 31, 1996.
Sales. The Company's sales were $25,478,448 for the six months ended
October 31, 1997 compared to $11,983,983 for the six months ended October 31,
1996, an increase of $13,494,465 or 113%. Sales for the three months ended
October 31, 1997 and October 31, 1996 were $16,413,450 and $6,271,795,
respectively. The increased sales were primarily the result of the Company's
telemarketing efforts which added approximately $15.6 million of additional
sales in the six months ended October 31, 1997, and approximately $11.5 million
of additional sales in the three months ended October 31, 1997.
Cost of Sales. Cost of sales was $18,222,422 for the six months ended
October 31, 1997 compared to $8,508,949 for the six months ended October 31,
1996, an increase of $9,713,473 or 114%. As a percentage of sales, cost of sales
was 72% and 71% for the six months ended October 31, 1997 and October 31, 1996,
respectively. Cost of sales for the three months ended October 31, 1997 and
October 31, 1996 were $11,261,234 and $4,475,807, respectively. The increase in
cost of sales was due to the increase in sales that resulted from the
telemarketing efforts of the Company in the first and second quarters of the
current fiscal year. Gross profit was $7,256,026 for the six months ended
October 31, 1997 compared to $3,475,034 for the six months ended October 31,
1996, an increase of $3,780,992 or 109%. As a percentage of sales, gross profit
was 28% and 29% for the six months ended October 31, 1997 and October 31, 1996,
respectively. Gross profit was $5,152,216 for the three months ended October 31,
1997 compared to $1,795,988 for the three months ended October 31, 1996, an
increase of $3,356,228 or 187%. The increase in gross profit in the six month
period ended October 31, 1997 was due to the increased sales as a result of the
Company's telemarketing efforts.
9
<PAGE>
Other Income, Net. Other Income was a direct result of the profit on
sale of Tel-Save stock was $13,417,657 (excluding taxation) for the six months
ended October 31, 1997. This profit on sale arose as a result of the private
sale of 1,347,000 shares of common stock of Tel-Save Holdings, Inc.
("Tel-Save"), at approximately $19.76 per share, for gross proceeds to the
Company of approximately $26.6 million. The Company had acquired warrants to
purchase 1,347,000 shares of Tel-Save, at an average exercise price of $4.08 per
share in connection with its August 11, 1997 acquisition of Eastern
Telecommunications Incorporated ("ETI").
Selling, General and Administrative Expense. Selling, general and
administrative expenses ("SG&A") were $3,900,391 for the six months ended
October 31, 1997 compared to $2,193,421 for the six months ended October 31,
1996, an increase of $1,706,970 or 78%. This increase in SG&A was due to
increased sales, which was offset by improved operating efficiencies and a
reduction in staff as compared to the six months ended October 31, 1996.
Selling, general and administrative expenses were $2,711,824 for the three
months ended October 31, 1997 compared to $1,098,449 for the three months ended
October 31, 1996. As a percentage of sales, SG&A for the six months ended
October 31, 1997 and 1996 was approximately 15% and 18%, respectively. This
decrease was due to the increase in sales without a significant change in
expenditure.
Marketing Expenses. Marketing expenses were $9,097,351 for the six
months ended October 31, 1997. These expenses were incurred as a result of
increased telemarketing efforts in the six months ended October 31, 1997 and
which resulted in increased sales of approximately $15.6 million for the
corresponding period. Marketing expenses were $7,407,351 for the three months
ended October 31, 1997. The Company did not incur any such telemarketing
expenses during the comparable periods in 1996.
Depreciation and Amortization Expense. Depreciation and amortization
expense was $1,314,745 for the six months ended October 31, 1997 compared to
$905,955 for the six months ended October 31, 1996, an increase of $408,790. The
increase in depreciation and amortization was attributable to the Company's
change in the estimated rate of amortization in the third quarter of fiscal year
1997 of the AIT customer base due to significant customer attrition.
Depreciation and amortization expense was $681,461 for the three months ended
October 31, 1997 compared to $530,665 for the three months ended October 31,
1996. As a percentage of sales, depreciation and amortization expense was
approximately 5% and 8% for the six months ended October 31, 1997 and October
31, 1996, respectively.
Interest Expense Net. Interest expense (net) for the six months ended
October 31, 1997 was $195,286 compared to $201,101 for the six months ended
October 31, 1996, a decrease of $5,815. This interest expense was primarily due
to the $5,521,230 loan from Tel-Save in July 1996 which was primarily used to
complete the AIT acquisition (the "AIT Loan"). The outstanding loan balance was
repaid in full in October 1997 with the proceeds from the sale of the Tel-Save
common stock acquired as part of the purchase of ETI.
Income Taxes. Income tax expense for the six months ended October 31,
1997 was $2,726,719 compared to $107,489 for the six months ended October 31,
1996. The increase in the income tax expense was a result of the profit on the
sale of the Tel-Save common stock acquired as part of the purchase of ETI,
partially offset by the marketing expenses incurred as a result of the
telemarketing efforts in the six months ended October 31, 1997.
Net Earnings. The Company had net earnings of $3,439,191, or $0.99 per
share, for the six months ended October 31, 1997, as compared to net earnings of
$67,068, or $.03 per share, for the six months ended October 31, 1996. The
increase in net earnings was as a result of the sale of the Tel-save common
stock and increased sales through telemarketing efforts to attract new
customers.
10
<PAGE>
Liquidity and Capital Resources
The Company's primary cash requirements have been to fund the
acquisition of customer bases and increased levels of accounts receivable which
have required substantial working capital. The Company has historically
satisfied its working capital requirements principally through cash flow from
operations and borrowings.
At October 31, 1997, the Company had a working capital deficit of
$354,593, as compared to working capital deficit of $383,991 at April 30, 1997.
The decrease in the working capital deficit was primarily attributable to the
sale of the Tel-Save common shares. Proceeds from the sale of shares were used
to retire the aggregate $7,000,000 in notes ( and accrued interest) due in
connection with the ETI acquisition, together with certain related closing
costs. The balance of the proceeds from the sale of the shares was used to pay
down debt and accounts payable owed to Tel-Save, including payment of the
balance of the loan outstanding to Tel-Save in connection with the July 1996
acquisition of all of the common stock of Aventures-in -Telecom ("AIT") and
marketing expenses incurred in connection with the Company's telemarketing
efforts during the first half of it's 1998 fiscal year.
Net cash provided by operating activities was $865,752 for the six
months ended October 31, 1997 as compared to cash provided by operating
activities of $655,059 for the six months ended October 31, 1996. The increase
in cash used in operating activities is primarily attributable to an increase in
accounts receivable, an increase in prepaid expenses as a result of marketing
expenses incurred through telemarketing efforts and an increase in accounts
payable. Net cash used in investing activities was $5,998,873 for the six months
ended October 31, 1997, as compared to cash used in operating activities of
$5,716,814 for the six months ended October 31, 1996. The increase in cash used
in investing activities for the six months ended October 31, 1996 was
attributable primarily to the ETI acquisition. Net cash provided by financing
activities was $3,554,172 for the six months ended October 31, 1997 as compared
to net cash provided by financing activities for the six months ended October
31, 1996 of $5,171,836. The increase in cash provided by financing activities is
primarily attributable to the proceeds from the sale of the Tel-Save common
stock for the six months ended October 31, 1996. An aggregate of 35,752 options
of common stock were exercised during the six months ended October 31, 1997. At
October 31, 1997, the Company had cash of $398,597.
On March 24, 1997, the Company commenced an underwritten public
offering (the "Offering") whereby 1,250,000 shares of its Common Stock, no par
value (the "Common Stock"), and warrants to purchase 1,437,500 shares of Common
Stock (the "Redeemable Warrants") were sold. Of the Redeemable Warrants sold,
warrants to purchase 187,500 shares of Common Stock were sold pursuant to the
underwriters' over-allotment option. Of the approximately $3.9 million of net
proceeds, approximately $1.4 million of the proceeds remained available to the
Company at April 30, 1997. During the six months ended October 31, 1997, the
Company used the $1.4 million balance of proceeds for working capital and
general business purposes, including marketing and sales expenses.
Proceeds from loans and lines of credit totaled $82,000 during the six
months ended October 31, 1997 and $5,578,619 during the same period in 1996. The
Company repaid the balance of the loan outstanding to Tel-Save in connection
with the July 1996 acquisition of Adventures-in-Telecom. During the six months
ended October 31, 1997 the Company repaid $13,068,899 of the marketing expenses
incurred as a result of the Company's recent telemarketing efforts.
In May 1996, the Company entered into an agreement with Gateway
American Bank of Florida ("Gateway") pursuant to which it borrowed $50,000 of
which $14,578 was outstanding at October 31, 1997, compared to $27,083 at April
30, 1997. The loan bears interest at the prime rate plus 2% and matures on May
2, 1998. In August 1996, the Company entered into an agreement with Gateway
which, as amended as of February 1997, provides for a line of credit of up to
$150,000, bearing interest at the prime rate plus 1% and which terminates on
September 5, 1997. Repayment of the loan and the line of credit is secured by
all of the Company's equipment, machinery, furniture and general intangibles and
is personally guaranteed by Gerald M. Dunne, Jr., President and Chief Executive
Officer of the Company. As of October 31, 1997, $82,000 was outstanding under
this line of credit.
11
<PAGE>
In September 1995, the Company issued a promissory note to John L.
Tomlinson, a director of the Company, and Philip C. Cezeaux, an unaffiliated
third party in the aggregate principal amount of $100,000. The interest rate on
the promissory note adjusts semi-annually based on the prime rate plus 2% and
principal and interest are payable in equal monthly installments of $2,600 until
September 1999. At October 31, 1997, $52,599 was outstanding under such note,
compared to $66,968 at April 30, 1997. As an inducement for the loan, the
Company issued options to Messrs. Tomlinson and Cezeaux to purchase 47,635 of
Common Stock at a price of $3.15 per share. At September 30, 1997, Messrs.
Tomlinson and Cezeaux exercised 16,700 of these options at $3.15 per share. The
balance of the options therefore expired at September 30, 1997.
In July 1996, Global Telecom Network, Inc., a company controlled by
Gerald M. Dunne, Sr., the father of Gerald M. Dunne, Jr. President and Chief
Executive Officer of the Company, converted accounts payable to the Company into
a promissory note in the principal amount of $182,050 bearing interest at a rate
of 15% per annum. The outstanding balance of the note was repaid in full on
December 8, 1997.
At October 31, 1997, the Company's allowance for doubtful accounts was
approximately $1,413,000 after certain write-offs during the quarter as compared
to approximately $620,000 at April 30, 1997, which the Company believes is
currently adequate for the size and nature of its receivables. Nevertheless,
delays in collection or uncollectibility of accounts receivable could continue
to have a material adverse effect on the Company's liquidity and working capital
position and could require the Company to continually increase its allowance for
doubtful accounts. Bad debt expense accounted for 6% of the Company's revenues
for the six months ended October 31, 1997 and 3% for the six months ended
October 31, 1996.
The Company's capital requirements have been and will continue to be
significant. Historically, the Company has been dependent on financing to fund
its cash requirements. Based on the Company's currently proposed plans and
assumptions relating to its operations, the Company believes its available cash,
and projected cash flow from operations, will be sufficient to satisfy its
contemplated cash requirements for the fiscal year ending April 30, 1998. The
Company may seek, however, additional debt or equity financing to fund its
continuing expansion through acquisitions. In the event that the Company's plans
change, its assumptions change or prove to be inaccurate or if the proceeds of
the offering or project cash flow prove to be insufficient to fund operations
(due to unanticipated expenses, operating difficulties or otherwise), the
Company would be required to seek additional financing earlier than anticipated
or curtail its operations.
Effects of Inflation
The Company does not believe that inflation has had a significant
impact on its operations for the six months ended October 31, 1997 and the six
months ended October 31, 1996.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Part 1, Item 3. Legal Proceedings, of the Company's Annual
Report on Form 10-KSB for the year ended April 30, 1997 which is incorporated
herein in its entirety except to the litigation discussed below, which is
restated in its entirety except as amended to reflect recent developments.
The Company is a defendant in a civil action styled AT&T Corp. v. Group
Long Distance, Inc., Civil Action No. 97-2226 (NAP), pending in the United
States District Court for the District of New Jersey. In this action brought in
April 1997, AT&T seeks $612,324 and attorneys' fees as damages for breach of a
settlement agreement entered into between AT&T and the Company in 1993. AT&T
also seeks to recover this $612,324 under a separate claim for unpaid tariff
charges. The Company has answered the complaint and asserted certain
counterclaims. These counterclaims include claims for rescission of the
settlement agreement as well as for damages in contract, in tort and pursuant to
the Federal Communications Act. The Company vigorously plans to litigate this
matter. A scheduling conference was held on October 6, 1997, and the period for
initial disclosure closed on December 3, 1997. A further scheduling conference
has been set for March 6, 1998. While the Company cannot predict with certainty
the outcome of this litigation, the Company's results of operation or cash flow
in a particular quarterly or annual period could be materially affected by
protracted litigation or an unfavorable decision.
The Company is from time to time the subject of complaints or
litigation in the ordinary course of its business. Except as disclosed, the
Company believes that such lawsuits, claims and other legal matters to which it
has become subject are not material to the Company's financial condition or
results of operations, but an existing or future lawsuit or claim resulting in
an unfavorable outcome to the Company could have a material adverse effect on
the Company's financial condition and results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
1. Form 8-K was filed on August 22, 1997 which relates to the
acquisition of the Company of Eastern Telecommunications Incorporated ("ETI") on
August 11, 1997.
2. Form 8-K/A was filed on October 27, 1997 which related to
pro-forma financial statements of the Company and ETI.
3. Form 8-K was filed on October 31, 1997 which related to the
sale of 1,347,000 shares of common stock of Tel-Save Holdings, Inc. acquired in
connection with the acquisition of ETI on August 11, 1997.
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GROUP LONG DISTANCE, INC.
Date December 15, 1997 By: /s/ Gerald M. Dunne, Jr.
------------------------------
Chairman, Chief Executive Officer
and President.
(Principal Executive Officer)
Date December 15, 1997 By: /s/ Peter J. Russo
------------------------------
Chief Financial Officer
(Principal Financial Officer)
Date December 15, 1997 By: /s/ Sam D. Hitner
------------------------------
Controller and Company Secretary
(Principal Accounting Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GROUP LONG DISTANCE, INC. FINANCIAL STATEMENTS ENDED OCTOBER 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<NAME> GROUP LONG DISTANCE, INC.
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