UNITED STATES
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 June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission file number: 333-05857
---------------------------------------------------------
TELCO COMMUNICATIONS GROUP, INC.
(Exact name of registrant as specified in it charter)
---------------------------------------------------------
Virginia 54-1674283
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4219 Lafayette Center Drive, Chantilly, Virginia 20151-1209
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 631-5600
Indicate by check mark whether the registrant (1) had 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 No X
--- ---
(Company has been public for less than 90 days)
The number of outstanding shares of the registrant's Common Stock, no par
value, was 32,754,869 on August 31, 1996.
Exhibit Index on Page 15
<PAGE>
TELCO COMMUNICATIONS GROUP, INC.
FORM 10-Q
For the Quarter Ended June 30, 1996
Table of Contents
-----------------
Page
PART I - FINANCIAL INFORMATION Number
Item 1. Financial Statements
Consolidated Balance Sheets
as of June 30, 1996 and December 31, 1995 3
Consolidated Statements of Income
for the three and six months ended
June 30, 1996 and 1995 4
Consolidated Statement of Shareholders'
Equity for the six months ended
June 30, 1996 5
Consolidated Statements of Cash Flows
for the six months ended June 30,1996
and 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations 9
PART II - OTHER INFORMATION
Items 1 - 6 13
Signatures 14
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
TELCO COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31, June 30,
------------ --------
1995 1996
---- ----
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $937 $7,500
Accounts receivable 55,824 82,425
Prepaid income taxes 333 0
Deferred tax asset 885 697
Other 1,113 4,338
--------------------------------
Total current assets 59,092 94,960
--------------------------------
PROPERTY, PLANT AND EQUIPMENT
Leasehold Improvements 1,148 1,286
Network equipment 4,534 7,237
Office furniture and equipment 1,958 2,843
Network equipment under
capital lease 19,290 25,253
Network facilities under
development 4,074 1,603
Accumulated depreciation (3,478) (6,468)
----------------------------------
27,526 31,754
----------------------------------
OTHER ASSETS 506 39,482
----------------------------------
Total Assets $87,124 $166,196
----------------------------------
----------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Capital lease obligation,
current portion $2,973 $3,650
Excise taxes payable 1,289 1,800
Accounts payable 15,303 17,429
Accrued network access and
transmission expense 9,429 13,438
Other accrued expenses 1,322 7,242
Income taxes payable 0 230
Payable to related parties 414 427
---------------------------------
Total current liabilities 30,730 44,216
---------------------------------
LONG TERM LIABILITIES
Deferred taxes 1,353 1,958
Long- term debt 28,262 44,635
Capital leases obligations,
concurrent 13,176 13,899
----------------------------------
Total long-term liabilities 42,791 60,492
----------------------------------
MINORITY INTEREST 1,183 983
----------------------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock
(no par, 100,000 shares authorized
20,864,100 shares outstanding) 896 40,515
Additional paid-in capital-
accumulated deficit remaining upon
termination of S-corporation
election (1,247) (1,247)
Retained earnings 12,771 21,237
-----------------------------------
Total shareholders' equity 12,420 60,505
-----------------------------------
Total Liabilities and
Shareholders' equity $87,124 $166,196
-----------------------------------
-----------------------------------
</TABLE>
See accompanying notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
Three months Six months
ended June 30, ended June 30,
--------------------------- --------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues, net $47,318 $104,078 $92,595 $196,006
Cost of services 28,416 60,802 56,495 115,532
-------- --------- -------- --------
Gross margin 18,902 43,276 36,100 80,474
-------- --------- -------- --------
Operating expenses:
Selling, general
and administrative 11,692 31,539 21,877 59,402
Depreciation and
amortization 540 1,872 992 3,305
------ ------- ------- -------
Total operating expenses 12,232 33,411 22,869 62,707
------ ------- ------- -------
Operating income 6,670 9,865 13,231 17,767
------ ------- ------- -------
Interest expense 542 1,122 1,134 2,188
Other income 4 105 7 117
Income taxes 2,388 3,542 4,713 6,676
Minority interest 9 120 118 554
------ ------- ------- -------
Net income $3,735 $5,186 $7,273 $8,466
------ ------- ------- -------
------ ------- ------- -------
Net income per share $0.13 $0.18 $0.26 $0.30
------ ------- ------- ------
------ ------- ------- ------
Weighted average number
of shares outstanding 28,277 28,345 28,276 28,345
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
See accompanying notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(For the six months ended June 30, 1996
and the year ended December 31, 1995)
(in thousands)
Accumulated Deficit
Remaining Upon
Common Termination of Retained
Stock S-Corporation Election earnings
<S> <C> <C> <C>
BALANCE DECEMBER 31, 1994 $896 ($1,247) $2,006
Net income 10,765
------------------------------------------------
BALANCE DECEMBER 31, 1995 896 (1,247) 12,771
Issuance of common shares 1
Loan to option holder (286)
Proceeds from purchase
of subsidiary 39,962
Proceeds from exercise
of options 286
Costs of issuing stock (344)
Net income 8,466
--------------------------------------------------
BALANCE JUNE 30, 1996 $40,515 ($1,247) $21,237
--------------------------------------------------
--------------------------------------------------
</TABLE>
See accompanying notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
For the six months ending June 30,
1995 1996
---- ----
<S> <C> <C>
Cash Flow From (Used For) Operations:
Net income $7,273 $8,466
Adjustments to reconcile net
income to net cash from
(used for) operating activities:
Depreciation and amortization 992 3,294
Minority interest 118 554
Deferred income taxes (233) 604
Changes in current assets and
liabilities:
Trade accounts receivable (12,561) (26,601)
Prepaid and other assets 1,643 (2,944)
Accounts payable 2,914 1,100
Accrued expenses 1,590 10,122
Income taxes payable (1,857) 230
--------------------------------------
Net cash used for operating
activities (121) (5,175)
--------------------------------------
Cash Flows From (Used For)
Investing Activities:
Equipment purchases (5,396) (2,776)
Investments, net of cash acquired (344)
---------------------------------------
Net cash used for
investing activities (5,396) (3,120)
----------------------------------------
Cash Flows From (Used For) Financing
Activities:
Proceeds from long term borrowing 22,767 16,374
Payments on line of credit (15,367)
Payments on capital leases (377) (1,516)
----------------------------------------
Net cash from financing activities 7,023 14,858
----------------------------------------
Increase (decrease) in cash 1,506 6,563
Cash, beginning of the period 475 937
----------------------------------------
Cash, end of the period $1,981 $7,500
----------------------------------------
----------------------------------------
</TABLE>
See accompanying notes to Financial Statements.
<PAGE>
TELCO COMMUNICATIONS GROUP, INC.
Notes to Consolidated Financial Statements
NOTE 1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
- - ---------------------------------------------------------------
The interim consolidated financial statements included herein have
been prepared by Telco Communications Group, Inc. (the "Company"), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). All adjustments have been made to the accompanying interim
consolidated financial statements which are, in the opinion of the Company's
management, necessary for a fair presentation of the Company's financial
position, operating results, and cash flows for the periods presented. All
adjustments are of a normal recurring nature. Certain information footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. It is recommended that these interim
consolidated financial statements be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's
Registration Statement on Form S-1 (SEC File no. 333-05857), as filed with
the SEC in June 1996 (as amended) (the "Registration Statement").
NOTE 2. INITIAL PUBLIC OFFERING
- - ---------------------------------
The Registration Statement became effective on August 9, 1996.
NOTE 3. PURCHASE OF SUBSIDIARY
- - ---------------------------------
On April 1, 1996 the Company purchased the remaining 44.4% of Long Distance
Wholesale Club, a 55.6% owed subsidiary at that time.
NOTE 4. STATEMENT OF CASH FLOWS
- - ---------------------------------
Cash payments and non-cash activities during the six month periods indicated
were as follows:
1995 1996
---- ----
Cash payments for income taxes 5,959,618 5,919,814
Cash payments for interest 1,133,824 2,177,545
Non cash investing and financing
activities:
Assets acquired in connection
with acquisitions 16,640,421
Liabilities assumed in connection
with acquisitions 15,697,563
Common stock issued in connection
with acquisitions 120
Capital lease obligations
incurred 3,555,686 3,083,516
NOTE 5. OPTION EXERCISE
- - -------------------------
In June, 1996, Bryan K. Rachlin, the Company's Chief Operating Officer and
General Counsel exercised options for 649,198 shares. The Company received a
note for the option price of $285,647.
<PAGE>
NOTE 6. STOCK SPLIT
- - ---------------------
On June 12, 1996, the shareholders and directors executed a joint consent in
lieu of a meeting. That joint consent provided that effective immediately
prior to the completion of the Company's initial public offering, the Company
declared a 425 to 1 stock split to shareholders of record on that date (August
9, 1996). Per share amounts in the accompanying financial statements and
footnotes have been adjusted for the split. As discussed in the Registration
Statement and coincident with the public offering, the Company acquired 100%
of Tel Labs, Inc.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
FORWARD LOOKING INFORMATION
Statements in this report concerning future results, performance,
achievements, expectations or trends, if any, are forward-looking statements.
Actual results, performance, achievements, events or trends could differ
materially from those expressed or implied by such forward-looking statements
as a result of known and unknown risks, uncertainties and other factors
including those described below and those identified by the Company in the
Registration Statement.
INTRODUCTION
Telco Communications Group, Inc. ("Telco" or "the Company") is a
rapidly growing switch-based provider of domestic and
international long distance telecommunication services primarily to
residential customers in the United States. Substantially all of the
Company's customers access its network by dialing a unique CIC Code before
dialing the number they are calling. Using a CIC Code to access the Company's
network is known as "casual calling" or "dial around" because customers can use
the Company's services at any time without changing their existing long distance
carrier. The Company markets its long distance services under two brands, each
with a unique CIC Code: Dial & Save (CIC Code 10457) and the Long Distance
Wholesale Club (CIC Code 10297), and prices its services at a discount to the
basic "1 plus" rates offered by the three major long distance carriers: AT&T,
MCI and Sprint. During June 1996, the Company provided long distance services
to approximately 2.7 million customers (switched access lines) in 37 states and
the District of Columbia. The Company plans to expand its marketing efforts
in these states and to offer service in one additional New England and 10
additional western states during 1996.
Although casual calling has been in existence since the mid-1980s only
recently have companies such as Telco begun to aggressively pursue this market
opportunity. The Company markets its services primarily through direct mail
and inbound telesales and marketing, and believes that this marketing strategy
enables the Company to attract residential customers in a cost effective
manner. Because casual calling customers are not required to cancel or change
their presubscribed long distance carrier, the Company believes that
aggressive "win-back" and other customer acquisition programs prevalent in the
residential long distance market have a limited impact on the Company's
business.
The Company bills its casual calling customers through LEC billing and
collection agreements which enable the Company to place its charges on the
monthly local phone bills of its casual calling customers. The Company has
agreements with LECs, including all of the RBOCs, that cover approximately 96%
of the switched access lines in the United States. The Company believes that
these billing arrangements are the most effective mechanism for billing the
Company's residential customers, because of the convenience to its customers
of receiving one bill for both local and long distance service and the
benefits derived from the LECs' extensive collections infrastructure. The
Company's billing information systems and services are provided by Tel Labs,
Inc. ("Tel Labs"), a telecommunications billing company started in 1991 by
Telco's Chairman of the Board.
To increase its volume of call traffic, Telco has begun to sell its
excess daytime capacity on a wholesale basis to other long distance carriers
and has created a Commercial Division to target business customers. Because
the Company's existing customer base is primarily residential, the majority of
calls are handled during off-peak evening and weekend periods.
The Company's switch-based network currently consists of six DSC DEX
600S, 600 and 600E switches located in Washington, D.C.; Fort Lauderdale,
Florida; Davenport, Iowa: Chattanooga, Tennessee; and Austin, Texas with one
DEX 600E switch which recently became operational in Las Vegas, Nevada.
Additionally, the Company has made a commitment to install a DEX 600E switch
in the New York City metropolitan area during the first quarter of 1997.
In August 1996, a total of 6,325,000 shares of the Company's common stock
were sold in an initial public offering at $14 per share. Existing
<PAGE>
stockholders sold 1,644,000 shares, and 4,681,000 shares were sold by the
Company which resulted in net proceeds of approximately $61.1 million, before
deducting the expenses of the offering. Concurrent with the offering, the
Company acquired Tel Labs for 593,334 shares of the Company's common stock.
Tel Labs was owned by Henry G. Luken, III, the Company's Chairman of the
Board, Bryan K. Rachlin, the Company's Chief Operating Officer and General
Counsel, and two employees of Tel Labs.
Prior to April 1, 1996, LDWC was a 55.6%-owned subsidiary of the Company;
the remaining 44.4% was held by Thomas J. Cirrito, President of the Consumer
Division and a director of the Company, and two of his children. On April 1,
1996, the Company agreed to acquire the remaining 44.4% interest in LDWC in
exchange for the issuance of 5,102,125 shares of the Company's Common Stock.
In connection with the transaction, options issued pursuant to the LDWC stock
option plan were converted into options to purchase 291,842 shares of the
Company's Common Stock under the Company's Stock Option Plan.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
Revenues. Revenues increased 120%, or $56.8 million from $47.3 million
for the three months ended June 30, 1995 to $104.1 million for the three
months ended June 30, 1996. The increase in revenue was due to an increase in
billed customer minutes which resulted from both the casual calling and
wholesale distribution channels. The casual calling revenue growth was
largely the result of a significant increase in the amount of mail marketing
sent by the Company during the six months ended June 30, 1996. During the
three months ended June 30, 1996, the Company entered three new states with
the Long Distance Wholesale Club brand and no new states with the Dial & Save
brand. Additionally, during these periods, the Company introduced radio and
television advertising to augment its mail marketing in selected geographic
markets. Overall, billed minutes of use ("MOUs") increased 138% from 295.6
million for the three months ended June 30, 1995 to 703.1 million for the
three months ended June 30, 1996. The Company's revenue per MOU was $0.148
for the three months ended June 30, 1996, a decrease from $0.160 for the three
months ended June 30, 1995. The Company's offsets to revenues increased
during the three months ended June 30, 1996 compared to the three months ended
June 30, 1995 both as a percentage of revenue and in the aggregate due to
increased billed customer minutes and increases in allowances for bad debts
principally due to increases in revenues in geographic areas where LECs
require a higher holdback percentage.
Cost of Services. Cost of services increased 114%, or $32.4 million,
from $28.4 million for the three months ended June 30, 1995 to $60.8 million
for the three months ended June 30,1996, of which approximately $31.3 was due
to the recurring costs related to increased MOUs. The 138% quarterly increase
in MOUs was offset by a reduction in the cost of services per MOU from $0.096
for the three months ended June 30, 1995 to $0.086 for the three months ended
June 30,1996 which was largely the result of increased percentage of on-net
traffic and other network efficiencies. The installation expense component of
cost of services increased $1.1 million from $0.9 million for the three months
ended June 30, 1995 to $2.0 million for the three months ended June 30, 1996.
The vast majority of the one-time installation expenses associated with the
new Las Vegas switch were taken during the second quarter of 1996. As a
percentage of revenues, cost of services decreased from 60.0% for the three
months ended June 30, 1995 to 58.4% for the three months ended June 30, 1996.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 170%, or $19.8 million from $11.7 million
for the three months ended June 30, 1995 to $31.5 million for the three
months ended June 30,1996. Approximately $11.4 million of this increase was
attributable to an increase in marketing expenses as the Company increased by
approximately 122% the number of mail pieces sent and spent approximately $1.8
million in radio and television advertising. During the three months ended
June 30, 1996, the Company commenced its Commercial Sales Division which
includes the results of the previously-existing telesales function. Including
telesales, the division spent approximately $0.9 million in direct selling,
general and administrative expenses for the quarter ended June 30, 1996. The
remaining increases of approximately $7.5 million for the three months ended
June 30, 1996 were associated with increases in LEC billing, customer service,
data processing and general corporate overhead costs. As a percentage of
revenues, selling, general and administrative expenses
<PAGE>
increased from 24.7% for the three months ended June 30, 1995 to 30.3% for the
three months ended June 30, 1996.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased by $1.4 million from $0.5 million for the three months ended
June 30, 1995 to $1.9 million for the three months ended June 30, 1996.
Depreciation expense increases were primarily related to the expansion of the
Company's switch network and goodwill amortization expense increases were
associated with the acquisition of the remaining 44.4% of the Long Distance
Wholesale Club.
Interest Expense. Interest expense increased $0.6 million from $0.5
million for the three months ended June 30, 1995 to $1.1 million for the three
months ended June 30, 1996. This increase was due primarily to interest
expense associated with borrowings under the Credit Facility primarily to fund
working capital and increases in capital leases as a result of the expansion
of the Company's switch network.
Net income. Net income increased $1.5 million from $3.7 million for the
three months ended June 30, 1995 to $5.2 million for the three months ended
June 30, 1996.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Revenues. Revenues increased 112%, or $103.4 million from $92.6 million
for the six months ended June 30, 1995 to $196.0 million for the six months
ended June 30, 1996. The increase in revenue was due to an increase in billed
customer minutes which resulted from both the casual calling and wholesale
distribution channels. The casual calling revenue growth was largely the
result of a significant increase in the amount of mail marketing sent by the
Company during both the six months ended June 30, 1996 and the three months
ended December 31, 1995. During the six months ended June 30, 1996, the
Company entered 12 new states with the Dial & Save brand and 9 new states with
the Long Distance Wholesale Club brand. Additionally, during these periods,
the Company introduced radio and television advertising to augment its mail
marketing in selected geographic markets. Overall, MOUs increased 132% from
584.9 million for the six months ended June 30, 1995 to 1,356.2 million for
the six months ended June 30, 1996. The Company's revenue per MOU was $0.145
for the six months ended June 30, 1996, a decrease from $0.158 for the six
months ended June 30, 1995. The Company's offsets to revenues increased
during the six months ended June 30, 1996 compared to the six months ended
June 30, 1995 both as a percentage of revenue and in the aggregate due to
increased billed customer minutes and increases in allowances for bad debts
principally due to increases in revenues in geographic areas where LECs
require a higher holdback percentage.
Cost of Services. Cost of services increased 105%, or $59.0 million,
from $56.5 million for the six months ended June 30, 1995 to $115.5 million
for the six months ended June 30,1996, of which approximately $57.2 was due to
the recurring costs related to increased MOUs. The 132% increase in MOUs for
the six months ended June 30, 1996 was offset by a reduction in the cost of
services per MOU from $0.097 for the six months ended June 30, 1995 to $0.085
for the six months ended June 30,1996 which was largely the result of
increased percentage of on-net traffic and other network efficiencies. The
installation expense component of cost of services increased $1.8 million from
$1.3 million for the six months ended June 30, 1995 to $3.1 million for the
six months ended June 30, 1996. As a percentage of revenues, cost of
services decreased from 61.0% for the six months ended June 30, 1995 to 58.9%
for the six months ended June 30, 1996.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 172%, or $37.5 million from $21.9 million for
the six months ended June 30, 1995 to $59.4 million for the six months ended
June 30,1996. Approximately $20.6 million of this increase was attributable
to an increase in marketing expenses as the Company increased by
approximately 143% the number of mail pieces sent. The remaining increases of
approximately $16.9 million for the six months ended June 30, 1996 were
associated with increases in LEC billing, customer service, data processing
and general corporate overhead costs, including the start-up of the Commercial
Sales Division. As a percentage of revenues, selling, general and
administrative expenses increased from 23.6% for the six months ended June 30,
1995 to 30.3% for the six months ended June 30, 1996.
<PAGE>
Depreciation and Amortization Expense. Depreciation and amortization
expense increased by $2.3 million from $1.0 million for the six months ended
June 30, 1995 to $3.3 million for the six months ended June 30, 1996.
Depreciation expense increases were primarily related to the expansion of the
Company's switch network and goodwill amortization expense increases were
associated with the acquisition of the remaining 44.4% of the Long Distance
Wholesale Club.
Interest Expense. Interest expense increased $1.1 million from $1.1
million for the six months ended June 30, 1995 to $2.2 million for the six
months ended June 30, 1996. This increase was due primarily to interest
expense associated with borrowings under the Credit Facility primarily to fund
working capital and increases in capital leases as a result of the expansion
of the Company's switch network.
Net income. Net income increased $1.2 million from $7.3 million for the
six months ended June 30, 1995 to $8.5 million for the six months ended June
30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company conducts its operations through its direct and indirect
wholly owned subsidiaries. There are no restrictions on the movement of cash
within the consolidated group and the Company's discussion of its liquidity is
based on the consolidated group. The Company measures its liquidity based on
cash flow as reported in its Consolidated Statements of Cash Flows.
On August 9, 1996 the Company sold 4,681,000 shares (of which 825,000
were sold on August 26, 1996 in conjunction with the underwriters' exercise of
the over-allotment option) of its common stock in its initial public offering.
The net proceeds to the Company (before expenses) of $61.1 million were used
to repay existing indebtedness including capital lease obligations and the
outstanding balance on the Company's existing Credit Facility. The remaining
proceeds coupled with the Company's cash and borrowing capacity under the
Credit Facility will be used to fund working capital, capital expenditures and
for general corporate purposes.
Since commencing operations in 1993, the Company has experienced rapid
growth which has required substantial investments in working capital, capital
expenditures and mail marketing expenses. Additionally, the start up of the
Commercial Sales Division is expected to reduce the Company's consolidated net
income at least through 1997. The Company maintains a Credit Facility for
borrowings up to $65 million. Such borrowings are subject to a limitation of
85% of eligible accounts receivable and bear interest at LIBOR plus 2%, or at
the option of the Company, at the federal funds rate plus 0.5%, provided that
borrowings over $60 million bear interest at the higher of the prime rate or
the federal funds rate plus 0.5%.
Net cash used in operating activities increased $5.1 million from $0.1
million for the six months ended June 30, 1995 to $5.2 million for the six
months ended June 30, 1996. The increase was largely the result of a $28.6
million increase in working capital (net of the short term portion of the
Credit Facility) as a result of continued revenue growth, partially offset by
increases in net income. Net cash used in financing activities decreased $2.3
million from $5.4 million for the six months ended June 30, 1995 to $3.1
million for the six months ended June 30, 1996. The reduction is largely the
result of decreased spending on the deployment of the Company's national
switch-based transmission network. Net cash from investing activities
increased $7.8 million from $7.0 million for the six months ended June 30,
1995 to $14.9 million for the six months ended June 30, 1996. The increase
mainly constitutes increase borrowings under the Credit Facility and to a
lesser extent increases in capital lease obligations.
<PAGE>
PART II.OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
All matters discussed in the Registration Statement are hereby
incorporated by reference. The reader is directed to read the entire
Registration Statement, but with regard to this item the reader should read:
Litigation.
ITEM 2. CHANGES IN SECURITIES
All matters discussed in the Registration Statement are hereby
incorporated by reference. The reader is directed to read the entire
Registration Statement, but with regard to this item the reader should read:
Shares Eligible for Future Sale, The Reorganization, Stock Option Grants,
Option Exercises and Holdings, Amended and Restated 1994 Stock Option Plan,
Certain Transactions, and Description of Capital Stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
All matters discussed in the Registration Statement are hereby
incorporated by reference.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
See Exhibit Index.
B. REPORTS ON FORM 8-K
None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chantilly, State of
Virginia, on September 20, 1996.
Telco Communications Group, Inc.
/s/ Donald A. Burns
------------------------------------
Donald A. Burns, President &
Chief Executive Officer
/s/ Nicholas A. Merrick
-------------------------------------
Nicholas A. Merrick, Chief Financial
Officer
/s/ Janet D. Anastasi
--------------------------------------
Janet D. Anastasi, Vice President
& Corporate Controller
<PAGE>
TELCO COMMUNICATIONS GROUP, INC.
EXHIBIT INDEX
Exhibit
No. Description
- - -------- -----------
3.1 Restated Articles of Incorporation of the Registrant
incorporated by reference to Exhibit 3.1 to the
Registration Statement.
3.2 Amended and Restated Bylaws of the
Registrant incorporated by reference to
Exhibit 3.2 to the Registration Statement.
11.1 Computation of Earnings Per Common and
Common Equivalent Share
27.1 Financial Data Schedule
99.1 Press Release Dated August 14, 1996
EXHIBIT 11.1
<TABLE>
<CAPTION>
TELCO COMMUNICATIONS GROUP, INC.
SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE
WEIGHTED AVERAGE NUMBER OF SHARES
The weighted average number of shares of common stock and common stock
equivalents, after adjusting for the 425-to-1 stock split, was determined as
follows:
Outstanding options for common stock have been included in the calculations of
common and common equivalent shares outstanding using the treasury stock
method based on the initial public offering price of $14 per share as the
market price for all periods presented.
(in thousands, except per share data)
Three months Six months
ended June 30, ended June 30,
-------------------- -------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common Stock:
Shares outstanding
beginning of period 20,864 20,864 20,864 20,864
Shares issued during
period, net <FN1> 0 0 0 0
SEC SAB 83 shares<FN2> 5,889 5,889 5,889 5,889
--------- ------- ------- -------
26,753 26,753 26,753 26,753
Common Stock
Equivalents:
Options<FN3> 888 956 887 956
Warrants<FN4> 636 636 636 636
------- ------- ------- --------
1,524 1,592 1,523 1,592
Weighted average
number of shares 28,277 28,345 28,276 28,345
Net Income (loss) 3,735 5,186 7,273 8,466
Net Income (loss)
per share $ 0.13 $ 0.18 $ 0.26 $ 0.30
<FN1> Weighted average shares acquired, net of repurchase of shares
<FN2> Shares and employee options issued
June 14, 1995 to June 13, 1996 $ 7,094
Less shares reacquired under treasury stock method 1,205
--------
Net SAB 83 shares 5,889
--------
--------
<FN3> Options granted, less shares reacquired under treasury stock method,
on a weighted average basis
<FN4> Represents warrant held by Signet Media Capital Group to purchase
636,158 shares of common stock at a nominal exercise price.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<CASH> 936,771 7,500,017
<SECURITIES> 0 0
<RECEIVABLES> 59,595,401 89,789,287
<ALLOWANCES> 3,771,413 7,364,574
<INVENTORY> 0 0
<CURRENT-ASSETS> 59,091,410 94,959,221
<PP&E> 31,005,198 38,221,389
<DEPRECIATION> 3,478,485 6,467,856
<TOTAL-ASSETS> 87,123,970 166,195,130
<CURRENT-LIABILITIES> 30,730,420 44,215,423
<BONDS> 0 0
0 0
0 0
<COMMON> 25,000 40,514,716
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 87,123,970 166,195,130
<SALES> 215,375,486 196,005,908
<TOTAL-REVENUES> 215,375,486 196,005,908
<CGS> 133,727,834 115,531,505
<TOTAL-COSTS> 133,727,834 115,531,505
<OTHER-EXPENSES> 60,399,173 62,707,478
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,951,975 2,188,045
<INCOME-PRETAX> 19,342,442 15,142,606
<INCOME-TAX> 7,531,592 6,676,375
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,764,912 8,466,231
<EPS-PRIMARY> 161.91 .30
<EPS-DILUTED> 0 0
</TABLE>
TELCO COMMUNICATIONS GROUP FOR IMMEDIATE RELEASE
For More Information Contact:
-----------------------------
Nicholas A. Merrick, Chief
Financial Officer
Telco Communications Group, Inc.
(703) 631-5632
TELCO COMMUNICATIONS GROUP, INC.
ANNOUNCES SECOND QUARTER EARNINGS AND
THE CLOSING OF ITS INITIAL PUBLIC OFFERING
CHANTILLY, VA., August 14, 1996 - Telco Communications Group, Inc.
(NASDAQ: TCGX) announced results for its second quarter ended June 30, 1996.
Revenues for the quarter increased 120% to $104.1 million from $47.3 million
for the second quarter of 1995. Net income per share for the quarter rose to
$0.18, an increase of 38%, compared with $0.13 for the second quarter of 1995.
Revenues and net income per share for the six months ended June 30, 1996 were
$196.0 million and $0.30, respectively, versus $92.6 million and $0.26 for the
six months ended June 30, 1995.
The increase in revenue during the second quarter was due to an increase
in billed customer minutes, primarily related to the Company's Dial & Save and
Long Distance Wholesale Club residential products. Total billed minutes of
use were 703.1 million minutes for the second quarter of 1996, a 138% increase
versus 295.6 million minutes for the second quarter of 1995. The growth in
the residential business is largely the result of significant mail marketing
activities into existing markets coupled with the expansion of media
advertising. During the second quarter, the Company increased the number of
mail pieces sent by 122% versus the same period last year. Additionally, the
Company deployed its Las Vegas, Nevada switching facility in late June. The
vast majority of the one time installation expenses associated with the Las
Vegas switch were taken in the second quarter.
The Company also announced the closing of its initial public offering.
The Company sold 3,856,000 shares of common stock at $14.00 per share through
its underwriters led by Bear, Stearns & Co. Inc. and Salomon Brothers Inc.
Additionally, selling shareholders sold 1,644,000 shares bringing the total
size of the transaction to 5,500,000 shares. Net proceeds to the Company were
approximately $50.3 million. The common stock initially began trading on
Friday, August 9, 1996 on the NASDAQ National Market under the symbol TCGX.
Telco Communications Group, Inc. is a rapidly growing nationwide
switch-based provider of a full spectrum of long distance telecommunications
products and services targeting residential, commercial and carrier customers.
Telco markets its residential products and services primarily through its Dial
& Save and Long Distance Wholesale Club brand names. Telco markets its
commercial and carrier products through over 100 sales professionals located
in 17 regional sales offices in 11 states.
4219 Lafayette Center Drive, Chantilly, VA 20151
- Tel: (703) 631-5600 - Fax (703) 631-5688
<PAGE>
<TABLE>
<CAPTION>
TELCO COMMUNICATIONS GROUP, INC.
(dollar in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net $104,078 $ 47,318 $ 196,006 $ 92,595
Cost of services 60,802 28,416 115,532 56,495
--------- --------- --------- ---------
Gross Margin 43,276 18,902 80,474 36,100
Selling, general and
administrative expenses 31,539 11,691 59,402 21,877
Depreciations and
amortization 1,872 540 3,305 992
--------- -------- -------- --------
Operating income 9,865 6,670 17,767 13,231
Interest expense 1,122 542 2,188 1,134
Other income 105 4 117 7
Provision for income taxes 3,542 2,388 6,676 4,713
Minority interest 120 9 554 118
---------- -------- ------- -------
Net income $ 5,186 $ 3,735 $ 8,466 $ 7,273
---------- -------- ------- -------
---------- -------- ------- -------
Net income per share $ 0.18 $ 0.13 $ 0.30 $ 0.26
---------- -------- ------- --------
---------- -------- ------- --------
Weighted average number
of shares outstanding 28,345 28,277 28,345 28,276
OTHER OPERATING DATA:
Minutes of use (in thousands) 703,149 295,587 1,356,272 584,896
Revenue per minute of use $ 0.148 $ 0.160 $ 0.145 $ 0.158
Cost of services per minute
of use $ 0.086 $ 0.096 $ 0.085 $ 0.097
BALANCE SHEET DATA:
Cash and cash equivalents $ 7,500
Total assets 166,481
Total debt (including
capital lease obligations) 62,184
Minority interest 983
Shareholders' equity 60,790
For more information, please contact Nicholas A. Merrick, Chief Financial
Officer,
Telco Communications Group, Inc. at (703) 631-5632.
</TABLE>
