<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________________________________________
Commission file number 0-20913
---------------------------------------------------------
TELEPORT COMMUNICATIONS GROUP INC.
----------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-317139
- --------------------------------------------------------------------------------
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
437 RIDGE ROAD, EXECUTIVE BUILDING 3, DAYTON, NEW JERSEY 08810
---------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(908) 392-2000
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 ____
----
Number of outstanding shares of Registrant's Common Stock as of May 5, 1997:
37,594,682 shares of Class A Common Stock and 127,274,632 shares of Class B
Common Stock.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
1997 1996
---------- ----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 155,590 $ 277,540
---------- ----------
Marketable securities 410,758 440,806
---------- ----------
Accounts receivable:
Trade-net of allowance for 63,725 46,325
doubtful accounts ($6,307 in
1997 and $5,989 in 1996)
Related parties 4,544 4,191
Miscellaneous-net of allowance
for doubtful accounts ($1,763
in 1997 and $1,406 in 1996) 5,655 6,795
---------- ----------
Accounts receivable-net 73,924 57,311
---------- ----------
Prepaid expenses 13,659 9,531
---------- ----------
Other current assets 3,454 2,373
---------- ----------
Total current assets 657,385 787,561
---------- ----------
Fixed assets-at cost:
Communications network 1,324,928 1,211,922
Other 114,210 92,307
---------- ----------
1,439,138 1,304,229
Less accumulated depreciation and
amortization (265,443) (236,967)
---------- ----------
Fixed assets-net 1,173,695 1,067,262
---------- ----------
Investment in and advances to
unconsolidated affiliates 14,101 126,561
---------- ----------
Goodwill-net of accumulated amortization 268,389 57,764
---------- ----------
Other assets 17,977 10,949
---------- ----------
Total assets $2,131,547 $2,050,097
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities ($1,667 in 1997 and
$1,079 in 1996 with related
parties) $ 177,483 $ 215,808
Current portion of capital lease
obligations ($20,063 in 1997 and
$21,139 in 1996 with related parties) 23,502 24,063
Other current liabilities 5,459 2,365
---------- ----------
Total current liabilities 206,444 242,236
---------- ----------
Capital lease obligations ($25,317 in
1997 and $28,716 in 1996 with related
parties) 31,661 34,489
TCI note-subordinated (including
accrued interest of $1,513 in 1997 and
$1,007 in 1996) 27,513 27,007
Long-term bank debt 52,575 -
Senior Notes 300,000 300,000
Senior Discount Notes 677,911 659,567
Unamortized notes costs (25,085) (25,761)
Other liabilities 14,903 15,689
---------- ----------
Total liabilities 1,285,922 1,253,227
---------- ----------
Stockholders' equity:
Common Stock, Class A $.01 par
value: 450,000,000 shares
authorized, 37,586,067 shares
issued and outstanding at March
31, 1997; and 28,668,400 shares
issued and outstanding at
December 31, 1996 377 287
Common Stock, Class B $.01 par
value: 300,000,000 shares
authorized, 139,250,370 shares
issued and 127,274,632 shares
outstanding at March 31, 1997
and 139,250,370 shares
outstanding at December 31, 1996 1,353 1,393
Additional paid-in capital 1,291,109 1,197,252
Unrealized loss on marketable
securities (149) (25)
Accumulated deficit (326,040) (281,012)
---------- ----------
966,650 917,895
---------- ----------
Less cost of Class B Common Stock held
in treasury, 7,975,738 shares at March
31, 1997 and December 31, 1996 (121,025) (121,025)
---------- ----------
Total stockholders' equity 845,625 796,870
---------- ----------
Total liabilities and stockholders'
equity $2,131,547 $2,050,097
========== ==========
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
----------------------------
CONSOLIDATED COMBINED
1997 1996
--------------- -----------
Revenues:
Telecommunications services $ 96,844 $ 39,553
Management and royalty fees from
affiliates - 10,882
------------ -----------
Total revenues 96,844 50,435
------------ -----------
Expenses:
Operating 57,337 28,915
Selling, general and administrative 33,371 13,803
Depreciation and amortization 29,756 12,849
------------ -----------
Total expenses 120,464 55,567
------------ -----------
Operating loss (23,620) (5,132)
------------ -----------
Interest:
Interest income 11,290 1,190
Interest expense ($1,474 and
$5,353 for the three months
ended March 31, 1997 and
1996, respectively with related
parties) (29,508) (8,148)
------------ -----------
Total interest (18,218) (6,958)
------------ -----------
Loss before minority interest, equity
in losses of unconsolidated affiliates
and income tax provision (41,838) (12,090)
Minority interest - 150
Equity in losses of unconsolidated
affiliates (2,590) (6,528)
------------ -----------
Loss before income tax provision (44,428) (18,468)
Income tax provision (600) (225)
------------ -----------
Net loss $ (45,028) $ (18,693)
============ ===========
Loss per share $(.28) $( .27)
============ ===========
Weighted average number of shares
outstanding 161,665,547 70,000,140
============ ===========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNREALIZED
ADDITIONAL LOSS ON
CLASS A CLASS B PAID-IN MARKETABLE ACCUMULATED
COMMON STOCK COMMON STOCK CAPITAL SECURITIES DEFICIT TREASURY STOCK
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $287 $1,393 $1,197,252 $(25) $(281,012) $ (121,025)
Issuance of 60,584 shares
of Class A Common
Stock upon exercise of
options 1 - 421 - - -
Issuance of 2,100,000
shares of Class A
Common Stock to purchase
CERFnet Services, Inc. 21 - 47,386 - - -
Issuance of 2,757,083
shares of Class A
Common Stock to purchase
controlling interest
in Eastern TeleLogic
Corporation 28 - 46,050 - - -
Conversion of 4,000,000
shares of Class B
Common Stock to Class A
Common Stock 40 (40) - - - -
Unrealized loss on
marketable securities - - - (124) - -
Net loss - - - - (45,028) -
-------------------------------------------------------------------------------------------
Balance at March 31, 1997 $377 $1,353 $1,291,109 $(149) $(326,040) $(121,025)
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
--------------
<S> <C>
Balance at January 1, 1997 $ 796,870
Issuance of 60,584 shares
of Class A Common
Stock upon exercise of
options 422
Issuance of 2,100,000
shares of Class A
Common Stock to purchase
CERFnet Services, Inc. 47,407
Issuance of 2,757,083
shares of Class A
Common Stock to purchase
controlling interest
in Eastern TeleLogic
Corporation 46,078
Conversion of 4,000,000
shares of Class B
Common Stock to Class A
Common Stock -
Unrealized loss on
marketable securities (124)
Net loss (45,028)
---------
Balance at March 31, 1997 $ 845,625
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
----------------------------
CONSOLIDATED COMBINED
1997 1996
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (45,028) $(18,693)
Adjustments to reconcile net loss to
net cash used for operating
activities, net of effects of
acquisitions:
Depreciation and amortization 29,756 12,849
Amortization of notes costs 676 -
Equity in losses of
unconsolidated affiliates 2,590 6,528
Amortization of deferred
credits (906) (561)
Provision for losses on
accounts receivable 969 428
Accretion of discount on
Senior Discount Notes 18,344 -
Accretion of TCI note 506 -
Minority interest - (150)
(Increase) decrease in operating
assets and increase (decrease) in
operating liabilities:
Due to (from) related parties - 2,549
Accounts receivable (14,947) 269
Other assets (11,058) (1,149)
Accounts payable and accrued
liabilities (55,710) (4,186)
Deferred credits 7,923 437
--------- --------
Net cash used for operating
activities (66,885) (1,679)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (70,720) (31,093)
Investment in unconsolidated
affiliates (7,466) (25,523)
Due from related parties - (3,950)
Proceeds from sales and maturities
of marketable securities, net of
purchases 29,924 -
Cash paid for acquisitions, net of (2,331) -
cash acquired --------- --------
Net cash used for
investing activities (50,593) (60,566)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt - 67,500
Principal payments on capital leases (4,894) (900)
Capital contributions from minority
partners - 588
Proceeds from the exercise of
employee stock options 422 -
--------- --------
Net cash (used for)
provided by financing
activities (4,472) 67,188
--------- --------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (121,950) 4,943
CASH AND CASH EQUIVALENTS, JANUARY 1 277,540 11,862
--------- --------
CASH AND CASH EQUIVALENTS, MARCH 31 $ 155,590 $ 16,805
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION -
Cash paid during the period for
interest $ 17,017 $ 1,653
========= ========
The accompanying notes are an integral part of these financial statements
5
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS - CONTINUED
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONSOLIDATED COMBINED
1997 1996
-------------------------
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
In February 1997, TCG purchased all of
the assets and liabilities of CERFnet
Services, Inc. for TCG's Class A
Common Stock:
Fair value of 2,100,000 Class A Common
Stock $ 47,407 $ -
Fair value of net assets acquired (2,980) -
-------- -----
Goodwill recorded $ 44,427 $ -
======== =====
In March 1997, TCG purchased all of the
assets and liabilities of Eastern
TeleLogic Corporation for TCG's Class
A Common Stock:
Fair value of 2,757,083 Class A Common
Stock $ 46,078 $ -
Fair value of net liabilities acquired 121,232 -
-------- -----
Goodwill recorded $167,310 $ -
======== =====
Fixed assets acquired under capital
leases $ 84 $ 60
======== =====
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
1. BASIS OF PRESENTATION
In the opinion of the management of Teleport Communications Group Inc.
(together with its wholly-owned subsidiaries "TCG" or the "Company"), the
accompanying consolidated financial statements contain all adjustments,
consisting of only normal recurring adjustments, necessary to present fairly the
Company's financial position as of March 31, 1997 and the Company's results of
operations and cash flows for the three months then ended.
The results of operations for the three months ended March 31, 1997, are
not necessarily indicative of the results expected for the full year.
2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of TCG's wholly-
owned subsidiaries at March 31, 1997. The statements of operations and cash
flows include equity in the losses of BizTel, Inc. for three months and of
Eastern TeleLogic Corporation for two months (See Note 5 - Acquisitions). As of
December 31, 1996, the consolidated balance sheet includes the accounts of TCG
and all wholly-owned subsidiaries. The 1996 combined statements of operations
and of cash flows include equity in losses of unconsolidated affiliates for all
the Local Market Partnerships except for TCG St. Louis which was consolidated.
(See Note 4 - Reorganization).
All material intercompany transactions and balances have been eliminated in
consolidation. Certain information and footnote disclosure normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These financial statements and notes
should be read in conjunction with the financial statements of Teleport
Communications Group Inc. and subsidiaries included as part of TCG's Form 10-K
for the year ended December 31, 1996 and TCG's Registration Statements on Form
S-1 (File Nos. 333-3850 and 333-3984).
Earnings per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128. "Earnings per
Share". This statement is effective for financial statements issued for periods
ending after December 15, 1997. Management has evaluated the effect on its
financial reporting from the adoption of this statement and does not believe it
to be significant.
3. OFFERINGS
On June 27, 1996, TCG issued 27,025,000 shares of Class A Common Stock which
resulted in gross proceeds of approximately $432.4 million (the "Stock
Offering"), and $300 million of 9 7/8% Senior Notes and $1,073 million of
Senior Discount Notes (the "Notes Offerings" and collectively, with the Stock
Offering, the "Offerings") as part of an initial public offering. The Notes
Offerings resulted in aggregate gross proceeds of $925 million. The gross
proceeds of the Offerings (approximately $1.3 billion) were received by TCG on
July 2, 1996. TCG also recognized a liability of approximately $46.8 million
which was paid to the Underwriters on July 2, 1996. In July 1996, the Company
utilized a portion of the net proceeds of the Offerings to (i) repay $250
million of bank indebtedness plus accrued interest and (ii) purchase 7,975,738
shares of Class B Common Stock owned by Continental Cablevision, Inc. for $16.00
per share, less related expenses, for a net cost of $121 million. In addition,
a portion of the proceeds was used to loan approximately $115 million to its
affiliate Comcast CAP of Philadelphia, Inc., ("Comcast CAP"), as part of the
first step in TCG's acquisition of Eastern TeleLogic Corporation. The remaining
funds will be used to expand and develop existing and new networks, to make
acquisitions and for general corporate and working capital purposes.
7
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
FOR THE THREE MONTHS ENDED MARCH 31, 1997
4. REORGANIZATION
Prior to the Offerings, the Company was owned by subsidiaries of Cox
Communications, Inc. ("Cox") (approximately 30%), TCI Communications, Inc.
("TCI") (approximately 30%), Comcast Corporation ("Comcast") (approximately 20%)
and Continental Cablevision, Inc. ("Continental") (approximately 20%)
(collectively the "Cable Stockholders"). The business was operated through TCG,
and beginning in 1992, TCG Partners, which is a New York general partnership
owned prior to the Reorganization by the Cable Stockholders in the same
percentages as TCG. TCG Partners was formed to invest, with TCG, the Cable
Stockholders and other cable operators, in 14 partnerships (the "Local Market
Partnerships") to develop and operate local telecommunications networks. The
Local Market Partnerships were owned by TCG, and/or TCG Partners, and certain of
the Cable Stockholders which have cable operations in the particular markets
addressed by the Local Market Partnerships and, in some cases, other cable
operators in such markets. To simplify this complex ownership structure, TCG
and the Cable Stockholders agreed to consolidate the ownership of TCG Partners
and of the Local Market Partnerships as wholly-owned subsidiaries of TCG. As
part of this process, certain of the other cable operators agreed to sell their
interests in the Local Market Partnerships to TCG directly or through a Cable
Stockholder.
Reorganization Transactions Consummated Prior to or in Connection with the
Offerings
On May 13, 1996, in connection with the Reorganization, TCG purchased the
partnership interest of Hyperion Telecommunications, Inc. of Florida in TCG
South Florida for $11,618,000.
In consideration of the transfer by each of the Cable Stockholders of its
respective interests in TCG Partners and the Local Market Partnerships and the
contribution to TCG of $269 million of indebtedness plus accrued interest from
the Cable Stockholders (except that TCI retained $26 million subordinated note
of TCG), the Company issued, immediately prior to the Offerings, 69,250,230
additional shares of Class B Common Stock to the Cable Stockholders.
Pursuant to the Reorganization, TCG Partners and the Local Market Partnerships
became wholly-owned subsidiaries of TCG.
Reorganization Transactions After the Offerings
On July 2, 1996, TCG issued 576,263 shares of Class A Common Stock to the
unaffiliated minority partners of TCG Detroit in consideration for the transfer
to TCG of the remaining partnership interests in TCG Detroit.
In addition, on December 26, 1996, TCI was issued (i) 638,862 shares of Class
A Common Stock in consideration for the transfer on such date to TCG of the
partnership interests which TCI had acquired from MicroNet, Inc. in TCG San
Francisco and (ii) 372,666 shares of Class A Common Stock in consideration for
the transfer on such date to TCG of the partnership interests which TCI had
acquired from Intermedia Partners in TCG San Francisco. As a result, as of
December 26, 1996, all of the Local Market Partnerships had become wholly-owned
subsidiaries of TCG.
As of March 31, 1997, TCI, Cox, Comcast and Continental owned 38.33%,
30.71%, 20.13% and 10.83%, respectively, of the Company's Class B Common Stock,
representing 37.30%, 29.83%, 19.76% and 10.52%, respectively, of the combined
voting power of the Company's Common Stock. TCG is owned 30.2%, 23.71%, 17.21%,
8.36% and 20.52% by TCI, Cox, Comcast, Continental and public shareholders,
respectively.
8
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
FOR THE THREE MONTHS ENDED MARCH 31, 1997
Unaudited financial information for the three months ended March 31, 1997 and
unaudited pro forma financial information for the three months ended March 31,
1996, as if the Reorganization had occurred January 1, 1996, is as follows (in
thousands, except share amounts):
THREE MONTHS ENDED
MARCH 31,
---------
ACTUAL PRO FORMA
1997 1996
---- ----
Revenues $ 96,844 $ 58,122
-------------- ------------
Expenses:
Operating 57,337 36,471
Selling, general and administrative 33,371 20,674
Depreciation and amortization 29,756 21,282
-------------- ------------
Total expenses 120,464 78,427
-------------- ------------
Operating loss (23,620) (20,305)
Interest:
Interest income 11,290 981
Interest expense (29,508) (5,489)
-------------- ------------
Total interest (18,218) (4,508)
-------------- ------------
Loss before minority interest, equity
in losses of unconsolidated affiliates
and income tax provision (41,838) (24,813)
Minority interest - 1,015
Equity in losses of unconsolidated
affiliates (2,590) (305)
-------------- -----------
Loss before provision for income taxes (44,428) (24,103)
Income tax provision (600) (225)
-------------- -----------
Net loss $ (45,028) $ (24,328)
============== ===========
Loss per share $(.28) $(.18)
============== ===========
Weighted average number of shares
outstanding 161,665,547 131,850,895
============== ===========
Pro forma adjustments include the reversal of TCG's equity in the losses of
13 Local Market Partnerships for the three months ended March 31, 1996, as well
as amortization of the goodwill which was recorded upon closing of the
transactions and the reduction of interest expense from the conversion of
subordinated debt to parents to equity. The pro forma financial information
presented above is not necessarily indicative of the operating results which
would have been achieved had the transactions occurred at the beginning of the
periods presented or of the results to be achieved in the future.
5. ACQUISITIONS
CERFnet Services, Inc.
On February 4, 1997, the Company acquired from General Atomics all the
outstanding capital stock of CERFnet Services, Inc. (''CERFnet''), a leading
regional provider of Internet-related services to businesses, including dial-up
and dedicated Internet access, World Wide Web hosting, and colocation services
and Internet training. TCG issued to General Atomics, CERFnet's former
controlling stockholder, 2,100,000 shares of its Class A Common Stock and
granted to General Atomics certain registration rights with respect to such
shares of Class A Common Stock.
The goodwill recorded with this investment, which represented the excess of
the Company's investment over the underlying net assets of CERFnet, was
approximately $44.4 million. Such amount is being amortized over 20
9
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
FOR THE THREE MONTHS ENDED MARCH 31, 1997
years and is reported in the statement of operations in depreciation and
amortization expense. Amortization of the CERFnet goodwill for the three months
ended March 31, 1997 was approximately $.3 million.
It is TCG's intention, to more fully evaluate the acquired assets and
liabilities, and as a result, the allocation of the acquisition costs among the
tangible and intangible assets acquired with CERFnet may change.
Eastern TeleLogic Corporation
Effective as of March 1, 1997, TCG completed its previously announced
acquisition of Eastern TeleLogic Corporation ("ETC"). In the first of two
steps, on October 25, 1996, employees of ETC exercised their stock options and
then ETC redeemed the shares of its stock, (approximately 47%) not held by
Comcast CAP of Philadelphia Inc. ("Comcast CAP"), a corporation owned 51% by
Comcast and 49% by TCG. Comcast CAP borrowed at a market interest rate
approximately $115 million from TCG as a short-term loan and, in turn, loaned
this amount to ETC to effect the redemption. In the second step, TCG acquired
Comcast's 51% stock interest in Comcast CAP in exchange for 2,757,083 shares of
the Company's Class A Common Stock, resulting in ETC becoming a wholly-owned
subsidiary of TCG. TCG has assumed approximately $57 million of ETC debt and
other obligations.
The goodwill recorded with this investment, which represented the excess of
the Company's investment over the underlying net assets of ETC, was
approximately $167.3 million. Such amount is being amortized over 20 years and
is reported in the statement of operations. Amortization expense related to such
goodwill for the three months ended March 31, 1997 was $1.4 million.
It is TCG's intention, to more fully evaluate the acquired assets and
liabilities, and as a result, the allocation of the acquisition costs among the
tangible and intangible assets acquired of ETC may change.
As part of the acquisition, TCG assumed ETC's credit facility. This
facility, which ETC entered into in October 1995, is a $60 million credit
facility (the "ETC Facility") with certain banks. Initial borrowings under the
Facility of $37 million were principally used to repay existing long-term debt,
leases and certain subordinated convertible demand promissory notes. The
Facility provides for interest based upon either the base rate, or London
Interbank Offered Rate ("LIBOR"), adjusted, as defined in the ETC Facility
(7.2710% at March 31, 1997), which is payable quarterly. The balance outstanding
is due on September 30, 1998.
Borrowings under the ETC Facility are collateralized by substantially all of
ETC's assets and outstanding common stock. In addition, the ETC Facility
contains certain restrictive covenants which, among other things, require the
ETC to maintain certain debt service coverage ratios and limit the payment of
dividends and capital expenditures. In addition, ETC is required to pay 3/8%
per year on the available portion of the ETC Facility. The total outstanding
balance at March 31, 1997, was $52.6 million.
Unaudited pro forma financial information for the three months ended March 31,
1997 and 1996 as if the Reorganization and the acquisition of ETC and CERFnet
had occurred at the beginning of each of the respective periods, is as follows
(in thousands, except share amounts):
1997 1996
-------------- ------------
Revenue $ 103,033 $ 65,060
Net loss $ (45,196) $ (24,479)
Loss per share $ (.27) $ (.18)
Weighted average number of shares
outstanding 164,833,603 136,707,978
10
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
FOR THE THREE MONTHS ENDED MARCH 31, 1997
Pro forma adjustments include the reversal of TCG's equity in the losses of
the 13 Local Market Partnerships and ETC for the three months ended March 31,
1997 and 1996, as well as amortization of the goodwill recorded upon close of
the transaction and the reduction of interest expense from the conversion of
subordinated debt to parents to equity. It is TCG's intention, subsequent to
the acquisition, to more fully evaluate the acquired assets and, as a result,
the allocation of the acquisition costs among the tangible and intangible assets
acquired may change. The pro forma financial information presented above is not
necessarily indicative of the operating results which would have been achieved
had the transactions occurred at the beginning of the periods presented or of
the results to be achieved in the future.
BizTel Communications, Inc.
February 29, 1996, the Company acquired a minority investment in BizTel
Communications, Inc. ("BizTel"), which holds Federal Communications Commission
("FCC") licenses to provide telecommunications services utilizing 38 GHz digital
milliwave transmission in 160 geographic areas, which have a population of
approximately 184 million people, and include more than 90 of the 100 largest
metropolitan markets and all markets where TCG operates. BizTel also has
applications for 44 additional licenses pending FCC approval in geographic areas
which have a population of an additional 31 million people. BizTel's 38 GHz
milliwave services can be used by TCG to economically connect customers to the
Company's fiber optic networks, to provide network redundancy, diverse routing
or quick temporary installations and to provide stand-alone facilities where the
Company does not have fiber optic networks. On February 28, 1997, TCG obtained
an option, effective July 15, 1997, to acquire the remaining equity interest in
BizTel in exchange for the issuance of 1,667,631 shares of the Company's Class A
Common Stock. The Company also granted a reciprocal option to such majority
owners, also effective July 15, 1997, to put the remaining equity interest in
BizTel to TCG in exchange for the issuance of such shares of Class A Common
Stock. The closing of this purchase is subject to regulatory approvals,
including approval of the FCC.
The goodwill recorded with this investment, which represented the excess of
the Company's investment over the underlying net assets of BizTel, was
approximately $7,378,000. Such amount is being amortized over 20 years
beginning March 1996 and is reported in the statement of operations in equity in
losses of unconsolidated affiliates. Amortization expense related to such
goodwill for the three months ended March 31, 1997, was $92,000.
6. COMMITMENT AND CONTINGENCIES
In April 1997 a complaint was filed against the Company by two former
customers of the Company and an alleged class purporting to consist of investors
in one of the customers, alleging fraud, breach of contract and misappropriation
of property. Although the Company has not yet answered to the complaint, the
Company believes that the allegations are without merit and that it possesses
meritorious counterclaims for damages arising from breach of contract. The
Company additionally believes that any costs arising from this lawsuit will not
have a material adverse effect on its financial condition, results of operations
or cash flows.
7. SUBSEQUENT EVENT
In April 1997 the Company entered into a Master Communications Services
Agreement with At Home Corporation ("At Home"), an affiliate. The Agreement
provides for both promotional and standard pricing over a five year term and
provides At Home with the option to colocate certain of its equipment in
Company premises in which event At Home incurs certain obligations to use the
Company's services. The Company believes that the Internet services being or to
be offered by At Home may compete with services being or to be offered by the
Company through its CERFnet subsidiary. (See Note 5 - Acquisitions) The
Company believes that the terms, taken as a whole, of the above transaction were
no less favorable to the Company than could have been obtained from unaffiliated
parties.
11
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Revenue
Total revenues increased to $96.8 million for the three months ended March 31,
1997 from $50.4 million for the similar period in 1996, representing an increase
of $46.4 million, or 92%. Pursuant to the Reorganization, TCG consolidated the
financial statements of the Local Market Partnerships, which accounts for 39% of
total revenue for the three months ended March 31, 1997. Telecommunications
services revenue increased to $96.8 million for the three months ended March 31,
1997, from $39.6 million for the three months ended March 31, 1996, representing
an increase of $57.2 million, or 144%. The increases in revenue occurred in
every revenue category, most significantly switched services. This increase in
revenues is also a result of increased market penetration primarily in TCG's
existing markets as well as expansion into new markets. Total revenues for the
quarter ended March 31, 1997, include $5.1 million attributable to ETC and
CERFnet, which were acquired by TCG during the quarter and consolidated with TCG
from the date of acquisition.
On a pro forma basis, had telecommunications services revenue generated by
unconsolidated Local Market Partnerships been included in the prior period's
financial statements, total revenues would have increased to $96.8 million for
the three months ended March 31, 1997 from $58.1 million for the three months
ended March 31, 1996, reflecting an increase of $38.7 million, or 67%. This
revenue growth is a direct result of increased market penetration of all
telecommunications service offerings in existing markets and the addition of new
markets. Annualized monthly recurring revenue increased to approximately $412.7
million for the month of March 31, 1997, from $223.2 million on a pro forma
basis for the comparable period in 1996, an increase of $189.5 million, or 85%.
Monthly recurring revenue represents monthly service charges billable to
telecommunications services customers for the month indicated, but excludes non-
recurring revenues for certain one-time services, such as installation fees or
equipment charges.
Switched services revenue increased 83%, for the three months ended March 31,
1997 from pro forma switched services revenue for the similar period in 1996.
Switched services revenue represented 42% and on a pro forma basis 38% of total
revenue for the three months ended March 31, 1997 and 1996, respectively.
Increased monthly dedicated services revenue, as well as sales growth in
enhanced switched services products to new customers, also contributed to
overall revenue growth. Dedicated services revenue increased 51% for the three
months ended March 31, 1997, from pro forma dedicated services revenue for the
similar period in 1996.
Management fees are directly related to operating and administrative support
services provided by TCG to the Local Market Partnerships. The royalty fees
were charged to the Local Market Partnerships based on revenue. As a result of
the Reorganization, management and royalty fees from the Local Market
Partnerships are no longer reflected as revenue for the three months ended March
31, 1997, due to the consolidation of the Local Market Partnerships.
Operating Expenses
TCG, in order to be consistent with industry standards, has reclassified
certain compensation and overhead expenses, related to engineering, customer
service and new technology, from selling, general and administrative to
operating expenses. Operating expenses increased to $57.3 million for the three
months ended March 31, 1997, from $28.9 million for the three months ended March
31, 1996, an increase of $28.4 million, or 98%. Pursuant to the
Reorganization, TCG has consolidated the financial statements of the Local
Market Partnerships, which accounts for 38% of the total operating expenses for
the three months ended March 31, 1997. The remaining increases are directly
related to the costs associated with the expansion of TCG's networks. These
expenses include costs specifically associated with network operations including
compensation costs for technical personnel, access, rights-of-way, node, rent
and maintenance expenses. Offsetting these expense increases are reductions in
expenses due to renegotiation of interconnection agreements with incumbent local
exchange carriers. Operating expenses increased to $57.3 million for the three
months ended March 31, 1997, from $36.5 million on a pro forma basis for the
three months ended March 31, 1996, an increase of $20.8 million, or 57%.
Operating expenses were
12
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- CONTINUED
approximately 59% of revenue for the three months ended March 31, 1997, and 63%
of revenue on a pro forma basis for the three months ended March 31, 1996.
Selling, General and Administrative Expenses
TCG, in order to be consistent with industry standards, has reclassified
certain compensation and overhead expenses related to engineering, customer
service and new technology, from selling, general and administrative to
operating expenses. Selling, general and administrative expenses increased to
$33.4 million for the three months ended March 31, 1997, from $13.8 million for
the three months ended March 31, 1996, an increase of $19.6 million, or 142%.
Pursuant to the Reorganization, TCG has consolidated the financial statements of
the Local Market Partnerships, which accounts for 53% of the total selling,
general and administrative expenses for the three months ended March 31, 1997.
The remaining increase is attributable to the costs required to maintain an
infrastructure which supports the continued expansion of the Company's networks
and the introduction of new services. These costs include compensation,
occupancy, insurance, professional fees, and sales and marketing expenses.
Selling, general and administrative expenses increased to $33.4 million for the
three months ended March 31, 1997, from $20.7 million on a pro forma basis for
the three months ended March 31, 1996, an increase of $12.7 million, or 61%.
Selling, general and administrative expenses were approximately 34% of revenue
for the three months ended March 31, 1997 and 36% of revenue on a pro forma
basis for the three months ended March 31, 1996.
EBITDA
EBITDA (earnings before interest, taxes, depreciation, amortization, minority
interest and equity in losses of unconsolidated affiliates) decreased to $6.1
million for the three months ended March 31, 1997, from $7.7 million for the
three months ended March 31, 1996, a decrease of $1.6 million. Pursuant to the
Reorganization, TCG has consolidated the financial statements of the Local
Market Partnerships, which accounts for 25% of total EBITDA. EBITDA increased
to $6.1 million for the three months ended March 31, 1997, from $1.0 million on
a pro forma basis for the three months ended March 31, 1996, an increase of $5.1
million. The Local Market Partnerships, which are included in the pro forma
financial data to reflect the Reorganization, have negative EBITDA due to the
start-up or rapid expansion of the networks of such Local Market Partnerships.
Depreciation and Amortization Expense
Depreciation and amortization expense increased to $29.8 million for the three
months ended March 31, 1997, from $12.8 million for the three months ended March
31, 1996, an increase of $17.0 million, or 133%. This increase is primarily
attributable to increased depreciation related to the expansion of the Company's
local telecommunications networks throughout the country and increased
amortization of goodwill related to various 1996 and 1997 acquisitions.
Depreciation and amortization expense increased to $29.8 million for the three
months ended March 31, 1997, from $21.3 million on a pro forma basis for the
three months ended March 31, 1996, an increase of $8.5 million, or 40%.
Interest Income
Interest income increased to $11.3 million for the three months ended March
31, 1997, from $1.2 million for the three months ended March 31, 1996, an
increase of $10.1 million. This increase is attributable to interest earned on
the cash and cash equivalents and marketable securities that resulted from the
proceeds of the Offerings.
Interest Expense
Interest expense increased to $29.5 million for the three months ended March
31, 1997, from $8.1 million for the three months ended March 31, 1996, an
increase of $21.4 million. This increase resulted from interest on the
Company's Senior Notes, Senior Discount Notes, and a subordinated note to a
related party issued on June 27, 1996, partially offset by the absence of
interest for the three months ended March 31, 1997 on the Revolving Credit
Agreement, a loan agreement which TCG entered into on May 22, 1995 with Toronto
Dominion (Texas) Inc., as
13
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- CONTINUED
administrative agent, Chemical Bank, as documentation agent, and the Banks
(as defined in the Revolving Credit Agreement) and borrowings under a loan
facility with the Cable Stockholders.
Equity in Losses of Unconsolidated Affiliates
Equity in losses of unconsolidated affiliates decreased to $2.6 million for
the three months ended March 31, 1997 from $6.5 million for the three months
ended March 31, 1996, a decrease of $3.9 million. This decrease resulted from
the consolidation of the Local Market Partnerships.
Net Loss
The Company's results for the three months ended March 31, 1997, reflected a
net loss of $45.0 million, compared to a net loss of $18.7 million for the three
months ended March 31, 1996, an increase of $26.3 million. This increase in net
loss is attributable to the factors discussed above. Net loss increased to
$45.0 million for the three months ended March 31, 1997 from $24.3 million on a
pro forma basis for the three months ended March 31, 1996, an increase of $20.7
million.
LIQUIDITY AND CAPITAL RESOURCES
TCG had total assets of approximately $2.1 billion as of March 31, 1997 and
December 31, 1996. The Company's current assets of approximately $657.4 million
exceed current liabilities of $206.4 million, providing working capital of
approximately $451.0 million. Network and equipment, net of depreciation, as of
March 31, 1997, aggregated approximately $1.2 billion.
TCG has invested the proceeds from the Offerings in marketable securities such
as Treasury bills and commercial paper. TCG will utilize the remaining proceeds
to expand its networks, for acquisitions and to provide funds for working
capital.
Effective as of March 1, 1997, TCG completed its previously announced
acquisition of ETC for 2,757,083 shares of its Class A Common Stock. ETC is the
leading competitive local exchange carrier in Philadelphia, Pennsylvania and in
the neighboring cities of Camden, New Jersey and Wilmington, Delaware. In the
first of two steps, on October 25, 1996, employees of ETC exercised their stock
options and then ETC redeemed the shares (approximately 47%) not held by Comcast
CAP of Philadelphia, Inc. ("Comcast CAP"), a corporation owned 51% by Comcast
Corporation and 49% by TCG. Comcast CAP borrowed at a market interest rate
approximately $115 million from TCG as a short-term loan and, in turn, loaned
this amount to ETC to effect the redemption. In the second step, TCG acquired
Comcast's 51% stock interest in Comcast CAP in exchange for 2,757,083 shares of
the Company's Class A Common Stock, resulting in ETC becoming a wholly-owned
subsidiary of TCG. The acquisition of ETC provides TCG with access to the
Philadelphia market, the nations fifth largest market, and will allow TCG to
establish contiguous network between Boston and Washington D.C. ETC operates a
Class 5 digital telephone switch on its 525 mile fiber optic network with
connects to more than 360 buildings.
TCG has a $250 million available under its revolving credit agreement, all
of which is currently available. In addition, as part of the acquisition, TCG
assumed ETC's credit facility. This facility, which ETC entered into in October
1995, is a $60 million credit facility (the "ETC Facility") with certain banks.
Initial borrowings under the ETC Facility of $37 million were principally used
to repay existing long-term debt, leases and certain subordinated convertible
demand promissory notes. The Facility provides for interest based upon either
the base rate, or London Interbank Offered Rate ("LIBOR"), adjusted as defined
in the ETC Facility (7.2710% at March 31, 1997), which is payable quarterly. The
balance outstanding is due on September 30, 1998.
Borrowings under the ETC Facility are collateralized by substantially all of
ETC's assets and outstanding common stock. In addition, the ETC Facility
contains certain restrictive covenants which, among other things, require
ETC to maintain certain debt service coverage ratios and limit the payment of
dividends and capital expenditures. In addition, ETC is required to pay 3/8%
per year on the available portion of the ETC Facility. The total outstanding
balance at March 31, 1997, was $52.6 million.
14
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- CONTINUED
On February 4, 1997, the Company acquired from General Atomics all the
outstanding capital stock of CERFnet Services, Inc. (''CERFnet''), a leading
regional provider of Internet-related services to businesses, including dial-up
and dedicated Internet access, World Wide Web hosting, and colocation services
and Internet training. TCG issued to General Atomics, CERFnet's former
controlling stockholder, 2,100,000 shares of its Class A Common Stock and
granted to General Atomics certain registration rights with respect to such
shares of Class A Common Stock.
February 29, 1996, the Company acquired a minority investment in BizTel
Communications, Inc. ("BizTel"), which holds Federal Communications Commission
("FCC") licenses to provide telecommunications services utilizing 38 GHz digital
milliwave transmission in 160 geographic areas, which have a population of
approximately 185 million people, and include more than 80 of the 100 largest
metropolitan markets and all markets where TCG operates. On February 28, 1997,
TCG obtained an option, effective July 15, 1997, to acquire the remaining equity
interest in BizTel in exchange for the issuance of 1,667,631 shares of the
Company's Class A Common Stock. The Company also granted a reciprocal option to
such majority owners, also effective July 15, 1997, to put the remaining equity
interest in BizTel to TCG in exchange for the issuance of such shares of Class A
Common Stock.
The Company has incurred significant net operating losses resulting from the
development and operation of new networks which TCG expects will continue as it
expands its networks. Persistent demands from TCG's customers for capital
intensive local services drives the development, construction and expansion of
its networks. While cash provided by operations may be sufficient to fund
modest incremental growth it may not be sufficient to fund the extensive
expansion and development of networks as currently planned.
Net cash (used for) provided by financing activities for the three months
ended March 31, 1997 and 1996, was ($4.5) million and $67.2 million,
respectively, comprised primarily of principal payments on capital leases for
the three months ended March 31, 1997 and borrowings under the Revolving Credit
Agreement for the three months ended March 31, 1996. Net cash used for
operating activities was $66.9 million and $1.7 million for the three months
ended March 31, 1997 and 1996, respectively. Net cash used for investing
activities was $50.6 million and $60.6 million for the three months ended March
31, 1997 and 1996, respectively. As of March 31, 1997, cash and cash
equivalents were $155.6 million and marketable securities were $410.8 million.
TCG made capital expenditures of $70.7 million for the three months ended
March 31, 1997 and on a pro forma basis $54.1 million for the three months ended
March 31, 1996. The Company anticipates that capital expenditures will be
approximately $500 million in the aggregate in 1997, primarily for the
expansion, development and construction of its networks, the acquisition and
deployment of switches and the expansion of operating support systems.
The Company believes that the net proceeds from the Offerings and the amount
of credit available under the Revolving Credit Agreement and the ETC Facility
will be adequate for its 1997 funding requirements. The Company intends to
preserve financial flexibility in order to respond to the rapidly evolving
telecommunications marketplace. TCG will continue to take advantage of
favorable financing arrangements, including the sale of debt or equity
securities in the public markets, private placements, increasing the amount of
the existing credit facility or adding additional lines of credits.
The Company from time to time evaluates acquisitions and investments in light
of the Company's long range plans. The Company may have future opportunities
with certain of its Cable Stockholders to invest in additional markets as a
minority partner or shareholder as well as opportunities as a managing partner
or controlling shareholder in new or existing telecommunications ventures which
are consistent with the Company's business plans. The Company expects to
continue to build on its existing relationships with cable television providers
and other strategic customers, suppliers and telecommunications carriers. Such
acquisitions, investments and strategic arrangements, if available, could use a
material portion of the Company's financial resources and may accelerate the
need for raising additional capital in the future.
15
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- CONTINUED
Earnings before fixed charges were insufficient to cover fixed charges for the
three months ended March 31, 1997 and 1996, by $44.4 million and $18.6 million,
respectively. The Company's earnings would have been insufficient to cover
fixed charges by $44.4 million for the three months ended March 31, 1997 and by
$18.6 million on a pro forma basis for the three months ended March 31, 1996.
On August 8, 1996 the Federal Communications Commissions ("FCC") released both
a First Report and Order and a Second Report and Order the Memorandum Opinion
and Order in its CC Docket No. 96-98 (collectively, the "Interconnection
Orders"). The Interconnection Orders establish a framework of minimum national
rules designed to enable State Public Utility Commissions and the FCC to begin
implementing many of the local competition provisions of the 1996 Act. On
September 27, 1996, the FCC issued an Order on Reconsideration of the First
Report and Order in CC Docket No. 96-98, in which it added a non-usage
sensitive charge to the rate for unbundled switching and clarified that, as a
practical matter, an interexchange carrier may not lease unbundled switching for
the provision of exchange access service only. Although the new rules were
scheduled to become effective on September 30, 1996, numerous parties to the
rule making filed petitions for review of the Interconnection Orders, and the US
Court of Appeals for the Eighth Circuit on October 15, 1996 issued a stay of
certain provisions of the Orders pending resolution of the pending appeals. The
stay will defer effectiveness of the FCC's pricing rules and the "pick and
choose" rule, which allows competitive local exchange carriers to receive the
benefit of the most favorable provisions contained in an incumbent local
exchange carriers agreements with other carriers, until the Court of Appeals
issues a decision in the appeal. On November 12, 1996, the US Supreme Court
rejected applications to vacate the stay filed by the United States and
intervenors in support of the United States. The appeals of the FCC's First
Report and Order have been fully briefed, and oral argument occurred on January
17, 1997. Oral argument on petitions for review of the Second Interconnection
Order was heard on April 16, 1997. In addition, a number of parties have filed
petitions with the FCC, asking the FCC to reconsider and revise portions of the
Interconnection Orders. TCG is unable to predict whether the new rules and
policies described above will be further revised by the FCC on reconsideration
or set aside by the Court of Appeals, or whether another federal court would
find that some or all portions of the 1996 Act are unconstitutional.
On May 7, 1997, the FCC adopted an order that establishes a new, national
program to ensure universal telephone service and orders the reform of the
current regulatory regime for local exchange carrier price caps and access
charges. The access charge and price cap orders have not yet been released by
the FCC, and while the universal service order has been released, the Company
has not completed its analysis of that order. However, the Company does not
believe at this time that the rules adopted pursuant to the orders will have a
material adverse impact on its operations.
The matters discussed or incorporated by reference in this Form 10-Q contain
forward-looking statements, within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, which are inherently uncertain. Actual
results and events may differ significantly from those discussed in such
forward-looking statements. In addition to other information discussed herein,
factors that might cause or contribute to such differences include the risks and
uncertainties set forth under the caption "Risk Factors" in the Prospectuses,
dated as of June 27, 1996, relating to the Stock Offering and to the Notes
Offerings, respectively, included in the Company's Registration Statements on
Form S-1 (File Nos. 333-3850 and 333-3984) and the matters set forth in the
Company's 1996 Annual Report on Form 10-K.
EFFECTS OF RECENT ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128. "Earnings per
Share". This statement is effective for financial statements issued for periods
ending after December 15, 1997. Management has evaluated the effect on its
financial reporting from the adoption of this statement and does not believe it
to be significant.
16
<PAGE>
PART II
- OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
In April 1997 a complaint was filed against the Company in the Circuit Court
of Cook County, Illinois, Case No. 97L001928 by two former customers of the
Company and an alleged class purporting to consist of investors in one of the
customers, alleging fraud, breach of contract and misappropriation of property.
Although the Company has not yet responded to the complaint, the Company
believes that the allegations are without merit and that it possesses
meritorious counterclaims for damages arising from breach of contract. The
Company additionally believes that any costs arising from this lawsuit will not
have a material adverse effect on its financial condition, results of operations
or cash flows.
ITEM 2: CHANGES IN SECURITIES
Prior to the consummation of the Offerings, TCG amended its Amended and
Restated Certificate of Incorporation to change its authorized capital stock to
900 million shares, including 450 million shares of Class A Common Stock, $.01
par value per share, 300 million shares of Class B Common Stock, $.01 par value
per share and 150 million shares of preferred stock, $.01 par value per share.
As of March 31, 1997, there was no preferred stock outstanding and TCI, Cox,
Continental and Comcast owned of record all of the outstanding shares of Class B
Common Stock of 127,274,632. TCG has issued and outstanding 37,586,067 shares
of Class A Common Stock, as of such date.
Each share of Class A Common Stock entitles the holder to one vote and each
share of Class B common stock entitles the holder to 10 votes on each matter to
be voted upon by the holders of the Common Stock.
During the quarter ended March 31, 1997, TCG issued 4,857,083 shares of Class
A Common Stock in connection with the acquisition of CERFnet and ETC. Each
issuance was deemed exempt from the registration requirements of the Securities
Act of 1933, as amended, pursuant to Section 4 (2) as transactions not involving
a public offering.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits:
17
<PAGE>
Exhibit No.
- ------------------
*2.1 Reorganization Agreement, dated as of April 18, 1996
*3.6 Amended and Restated Certificates of Incorporation of TCG, as revised
*3.7 Amended and Restated By-laws of TCG, as revised
*4.2 Form of Amended and Restated Stockholders' Agreement (incorporated
by reference to Exhibit E of Exhibit 2.1 hereof)
*4.3 Form of Indenture between TCG and United States Trust Company of New
York, as Trustee, relating to the 11 1/8% Senior Discount Notes due
2007 of TCG
*4.4 Form of Indenture between TCG and United States Trust Company
of New York, as Trustee, relating to 9 7/8% Senior Notes due 2006 of TCG
*4.5 Form of Stock Certificate for Teleport Communications Group, Inc.
*10.1 New York Franchise Agreement, dated May 2, 1994, as amended
*10.2 Participation Agreement, dated May 15, 1984
*10.3 Agreement of Lease, dated May 15, 1984, as amended
*10.4 Keepwell Agreement, dated June 7, 1984, as amended
*10.5 Agreement of Lease with Teleport Associates, dated November 10, 1987
*10.6 Agreement of Sublease between Merrill Lynch/WFC/L, Inc. and TC Systems,
Inc. dated January 30, 1990
*10.7 Loan Agreement, dated May 5, 1993
*10.8 Amendment No. 1 to Loan Agreement, dated March 1, 1994
*10.9 Amendment No. 2 to Loan Agreement, dated October 23, 1994
*10.10 Amendment No. 3 to Loan Agreement, dated February 15, 1995
*10.11 Loan Agreement, dated May 22, 1995 and related documents
*10.12 Amendment No. 1 to Loan Agreement, dated May 31, 1996
*10.13 Teleport Communications Group Inc. 1992 Unit Appreciation Plan
*10.14 Teleport Communications Group Inc. 1993 Unit Appreciation Plan
*10.15 Teleport Communications Group Inc. 1993 Stock Option Plan, as amended
*10.16 Form of Teleport Communications Group Inc. Employee Stock Purchase Plan
*10.17 Deferred Compensation Plan of Teleport Communications Group Inc.
*10.18 Make-up Plan of Teleport Communications Group Inc. for the Retirement
Savings Plan
*10.19 Teleport Communications Group Inc. 1996 Equity Incentive Plan
*10.20 Robert Annunziata Employment Agreement, dated December 18, 1992,
as amended
*10.21 John A. Scarpati Employment Agreement, dated July 12, 1994, as amended
*10.22 Robert C. Atkinson Employment Agreement, dated July 12, 1994, as amended
*10.23 Stuart A. Mencher Employment Agreement, dated July 12, 1994, as amended
*10.24 Alf T. Hansen Employment Agreement, dated July 12, 1994, as amended
*10.25 Partnership Agreement of TCG Detroit, dated as of November 1, 1993
*10.26 Amended and Restated Partnership Agreement of TCG Los Angeles, dated
as of March 1, 1994
*10.27 Partnership Agreement of TCG Pittsburgh, dated as of March 1, 1994
*10.28 Partnership Agreement of TCG San Diego, dated as of June 1, 1994
*10.29 Partnership Agreement of TCG San Francisco, dated as of January 1,
1994, as amended
*10.30 Partnership Agreement of TCG Seattle, dated as of January 1, 1994,
as amended
*10.31 Agreement among Teleport Communications Group Inc. and Comcast
Corporation, dated April 18, 1996
*10.32 First Amendment to the Teleport Communications Group Inc. 1993 Stock
Option Plan
*10.33 Second Amendment to the Teleport Communications Group Inc. 1993 Stock
Option Plan
*10.34 Letter of Intent between Viacom Telecom, Inc. and Teleport
Communications Group Inc., dated as of May 30, 1996.
*10.35 Letter of Intent between Viacom Telecom, Inc. and Teleport
Communications Group Inc., dated as of May 30, 1996
*10.36 First Amendment to the Teleport Communications Group Inc. 1996 Equity
Incentive Plan
*10.37 Stockholders' Agreement of Comcast CAP of Philadelphia, Inc. dated as
of June 30, 1993
11.00 Computation of Loss Per Common Share
27.00 Financial Data Schedule
18
<PAGE>
*Incorporated by reference to the corresponding exhibit of TCG's Registration
Statements on Form S-1 (File Nos. 333-3850 and 333-3984)
B. Reports on Form 8-K:
The following reports on Form 8-K were filed during the Company's quarter
ended March 31, 1997.
An Item 5 report on Form 8-K, dated January 13, 1997, was filed reporting
registrant's plan to acquire CERFnet Services, Inc.
An Item 5 report on Form 8-K, dated February 4, 1997, was filed reporting
Registrant's completion of the acquisition of CERFnet Services, Inc.
An Item 5 report on Form 8-K, dated February 26, 1997, was filed reporting
Registrant's financial results for the fiscal quarter ended December 31, 1996.
An Item 5 report on Form 8-K, dated March 3, 1997, was filed reporting
Registrant's contemplation of second quarter financing of debt and Class A
Common Stock.
An Item 5 report on Form 8-K, dated March 7, 1997, was filed reporting
Registrant's plan to postpone debt and equity offering.
An Item 5 report on Form 8-K, dated March 11, 1997, was filed reporting
Registrant's agreement for the future acquisition of the remaining 50.1 percent
of BizTel Communications that it does not own.
An Item 2 report on Form 8-K, dated March 20, 1997, was filed reporting
Registrant's completion of its previously announced acquisition of Eastern
TeleLogic Corporation.
An Item 5 report on Form 8-K, dated April 29, 1997, was filed reporting
Registrant's financial results for the fiscal quarter ended March 31, 1997.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf of the
undersigned, thereunto duly authorized.
TELEPORT COMMUNICATIONS GROUP INC.
Dated: May 14, 1997
By: /s/ John A. Scarpati
--------------------
Name: John A. Scarpati
Title: Senior Vice President and Chief
Financial Officer
Dated: May 14, 1997 By: /s/ Maria Terranova-Evans
-------------------------
Name: Maria Terranova-Evans
Title: Vice President and Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT 11
TELEPORT COMMUNICATIONS GROUP INC.
COMPUTATION OF LOSS PER SHARE
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
THREE MONTHS ENDED
MARCH 31,
CONSOLIDATED COMBINED
1997 1996
------------- -------------
Net Loss $(45,028,000) $(18,693,000)
============ ============
Primary loss per common share:
Weighted average number of shares
outstanding 161,665,547 70,000,140
============ ============
Loss per share $ (0.28) $ (0.27)
============ ============
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 155,590
<SECURITIES> 410,758
<RECEIVABLES> 63,725
<ALLOWANCES> 6,307
<INVENTORY> 0
<CURRENT-ASSETS> 657,385
<PP&E> 1,439,138
<DEPRECIATION> 265,443
<TOTAL-ASSETS> 2,131,547
<CURRENT-LIABILITIES> 206,444
<BONDS> 1,035,502
0
0
<COMMON> 1,730
<OTHER-SE> 965,069
<TOTAL-LIABILITY-AND-EQUITY> 2,131,547
<SALES> 0
<TOTAL-REVENUES> 96,844
<CGS> 0
<TOTAL-COSTS> 57,337
<OTHER-EXPENSES> 29,756
<LOSS-PROVISION> 970
<INTEREST-EXPENSE> 29,508
<INCOME-PRETAX> (44,428)
<INCOME-TAX> 600
<INCOME-CONTINUING> (45,028)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (45,028)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
