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 September 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: 0-28668
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TELCO COMMUNICATIONS GROUP, INC.
(Exact name of registrant as specified in its 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 filesuch reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of outstanding shares of the registrant's Common Stock, no par
value, was 32,754,869 on October 31, 1996.
Exhibit Index on Page 16
<PAGE>
TELCO COMMUNICATIONS GROUP, INC.
FORM 10-Q
For the Quarter Ended September 30, 1996
Table of Contents
-----------------
Page
Number
PART I - FINANCIAL INFORMATION -------
Item 1. Financial Statements 3
Consolidated Balance Sheets 3
as of September 30, 1996 and December 31, 1995
Consolidated Statements of Income 4
for the three and nine months ended
September 30, 1996 and 1995
Consolidated Statement of Shareholders' Equity 5
for the nine months ended September 30, 1996
Consolidated Statements of Cash Flows 6
for the nine months ended September 30, 1996
and 1995
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 14
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share data)
December 31, September 30,
------------ -------------
1995 1996
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $937 $10,581
Accounts receivable 55,824 89,370
Prepaid income taxes 333 -
Deferred tax asset 885 1,047
Other 1,113 6,473
-----------------------------------
Total current assets 59,092 107,471
-----------------------------------
PROPERTY, PLANT AND EQUIPMENT
Leasehold Improvements 1,148 1,830
Network equipment 4,534 32,783
Office furniture and equipment 1,958 3,897
Network equipment under capital lease 19,290 -
Network facilities under development 4,074 5,622
Office equipment under capital lease - 178
Accumulated depreciation (3,478) (8,376)
----------------------------------
27,526 35,934
----------------------------------
OTHER ASSETS 506 45,126
----------------------------------
Total Assets $87,124 $188,531
----------------------------------
----------------------------------
LIABILITES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Capital lease obligation, $2,973 $16
current portion
Excise taxes payable 1,289 3,080
Accounts payable 15,303 18,970
Accrued network access and 9,429 17,315
transmission expense
Other accrued expenses 1,322 11,095
Income taxes payable - 954
Payable to related parties 414 -
Deposits payable - 120
------------------------------------
Total current liabilities 30,730 51,550
------------------------------------
LONG TERM LIABILITIES
Deferred taxes 1,353 2,110
Long term debt 28,262 -
Capital leases obligations, 13,176 -
less current portion
------------------------------------
Total long term liabilities 42,791 2,110
------------------------------------
MINORITY INTEREST 1,183 -
------------------------------------
<PAGE>
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock
(no par value; 150,000,000 shares
authorized 32,754,869 shares
outstanding) 896 108,711
Additional paid in capital-
accumulated deficit remaining
upon termination of S-corporation
election (1,247) (1,247)
Unrealized gain on securities - 4
available for sale
Retained earnings 12,771 27,403
------------------------------------
Total Shareholders' equity 12,420 134,871
------------------------------------
Total Liabilities and $87,124 $188,531
Shareholders' equity ------------------------------------
------------------------------------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
Three months Nine months
ended September 30, ended September 30,
------------------------ ----------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues, net $58,341 $113,768 $150,936 $309,774
Cost of services 36,338 67,729 92,833 183,260
---------- ----------- ---------- ----------
Gross margin 22,003 46,039 58,103 126,514
---------- ----------- ---------- ----------
Operating expenses:
Selling, general 13,117 32,512 34,994 91,915
and administrative
Depreciation and 997 2,200 1,989 5,505
amortization ---------- ----------- ---------- ----------
Total operating expenses 14,114 34,712 36,983 97,420
---------- ----------- ---------- ----------
Operating income 7,889 11,327 21,120 29,094
---------- ----------- ---------- ----------
Interest expense 783 1,153 1,917 3,341
Other income (19) 374 (12) 491
Income taxes 2,760 4,247 7,473 10,923
Minority interest 560 135 678 689
---------- ----------- ---------- ----------
Net income $3,767 $6,166 $11,040 $14,632
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Net income per share $0.13 $0.20 $0.39 $0.50
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Weighted average number
of shares outstanding 28,290 31,274 28,280 29,321
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(For the nine months ended September 30, 1996
and the year ended December 31, 1995)
(in thousands)
Accumulated Deficit
Remaining Upon Unrealized Gain
Common Termination of on Securities Retained
Stock S-Corporation Election Held for Sale Earnings
<S> <C> <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 59,964 - - -
Loans to option
holders (584) - - -
Purchase of
subsidiary 47,725 - - -
Proceeds from
exercise of
options 710 - - -
Change in
unrealized gain
on securities
available for
sale - - 4 -
Net income - - - 14,632
--------------------------------------------------------------
BALANCE SEPTEMBER
30, 1996 $108,711 ($1,247) $4 $27,403
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
For the nine months ending September 30,
1995 1996
---- ----
<S> <C> <C>
Cash Flows From Operations:
Net income $11,040 $14,632
Adjustments to reconcile net
income to net cash from
(used for) operating activities:
Depreciation and amortization 1,989 5,505
Minority interest 678 1,872
Deferred income taxes (176) 595
Changes in current assets and
liabilities:
Trade accounts receivable (23,483) (33,546)
Prepaid and other assets 535 (5,797)
Accounts payable 10,900 5,044
Accrued expenses 515 17,659
Income taxes payable 25 954
Other liabilities - 120
-------------------------------------------
Net cash from operating
activities 2,023 7,038
-------------------------------------------
Cash Flows From (Used For)
Investing Activities:
Equipment purchases (10,775) (9,060)
-------------------------------------------
Net cash used for
investing activities (10,775) (9,060)
-------------------------------------------
Cash Flows From (Used For)
Financing Activities:
Proceeds from long term borrowing 24,689 -
Payments on line of credit (15,367) (28,262)
Payments on capital leases (1,005) (20,161)
Proceeds from short term debt 310 -
Proceeds from sale of stock - 59,964
Proceeds from exercise of options - 125
-------------------------------------------
Net cash from
financing activities 8,627 11,666
-------------------------------------------
Increase (decrease) in cash (125) 9,644
Cash, beginning of the period 475 937
-------------------------------------------
Cash, end of the period $350 $10,581
-------------------------------------------
-------------------------------------------
</TABLE>
See accompanying notes to Consolidated 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 (Registration No.
333-05857), as filed with the SEC in June 1996 (as amended) (the "Registration
Statement").
The results of operations for the three month and nine month periods ended
September 30, 1996 are not necessarily indicative of the results to be expected
for the full year.
NOTE 2. INITIAL PUBLIC OFFERING
- -----------------------------------
On August 9, 1996, a total of 6,325,000 shares of the Company's common
stock, no par value (the "Common Shares"), were sold in an initial public
offering ("IPO") at $14 per share. Stockholders sold 1,644,000 Common Shares and
4,681,000 were sold by the Company which resulted in net proceeds of
approximately $60.0 million after deducting the expenses of the offering.
NOTE 3. STATEMENT OF CASH FLOWS
- -----------------------------------
Cash payments and non-cash activities during the nine month periods
indicated were as follows:
1995 1996
---- ----
Cash payments for income taxes $ 7,206,720 $ 9,183,459
Cash payments for interest $ 1,916,853 $ 3,324,870
Non cash investing and financing
activities:
Assets acquired in connection
with acquisitions $ 18,543,864
Liabilities assumed in connection
with acquisitions $ 16,457,389
Capital lease obligations
incurred $ 10,044,800 $ 4,028,469
Conversion of short term
debt to equity $ 250,000
NOTE 4. OPTION EXERCISE
- ---------------------------
In August, 1996 an option holder exercised options for 169,575 Common
Shares. The Company received a note for the option price of $298,450.
NOTE 5. ACQUISITION
- -----------------------
Concurrent with the IPO the Company purchased 100% of Tel Labs, Inc. ("Tel
Labs"), a telecommunications billing company. The shareholders of Tel Labs
received 593,334 of the Company's Common Shares. Tel Labs shareholders included
Henry G. Luken, III, the Company's current Chairman of the Board, Bryan K.
Rachlin, the Company's current Chief Operating Officer and General Counsel, and
two employees of Tel Labs.
<PAGE>
NOTE 6. SHAREHOLDERS' EQUITY
- --------------------------------
The Company has stock option plans under which options to purchase Common
Shares may be granted to directors and key employees. Concurrent with the IPO,
the Company granted options to purchase 618,500 Common Shares. The Company also
issued options totaling 10,000 Common Shares between August 9 and September 30
and proposed to issue other options totaling 110,000 Common Shares subject to
the final approval of the Compensation Committee of the Board of Directors. The
option price for all options granted was the fair market value of the Common
Shares on the date of grant.
NOTE 7. INVESTMENTS IN MARKETABLE SECURITIES
- ------------------------------------------------
The Company classifies its marketable securities that have readily
determinable fair values as available for sale. These securities are reported at
fair value, and unrealized gains and losses are reported in shareholders'
equity, net of tax.
NOTE 8. 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 IPO, 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.
<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 "dial around" or "casual
calling" 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 ("LDWC") (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 September 1996,
the Company provided long distance services to approximately 2.7 million
customers (switched access lines) in 38 states and the District of Columbia. The
Company plans to expand its marketing efforts in these states and to offer
service in 10 additional western states during the remainder of 1996.
Although dial around has been in existence since the mid-1980s, only
recently have companies such as Telco aggressively pursued 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 dial around 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 local exchange
carrier ("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 Regional
Bell-Operating Companies, 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 daytime
capacity on a wholesale basis to other long distance carriers and in addition
has created a Commercial Sales Division to target business and carrier
customers. Because the Company's existing customer base is primarily
residential, the majority of calls are handled during off-peak evening and
weekend periods. As of September 30, 1996, the Commercial Sales Division had
opened 19 sales offices and employed approximately 176 sales personnel.
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 and 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
("Common Shares") were sold in an initial public offering ("IPO") at $14 per
share. Existing stockholders sold 1,644,000 Common Shares, and 4,681,000 Common
Shares were sold by the Company which resulted in net proceeds of approximately
$60.0 million, after deducting the expenses of the offering. Concurrent with the
offering, the Company acquired Tel Labs in exchange for 593,334 Common Shares of
the Company. 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 Common Shares of the Company. In
connection with the transaction, options issued pursuant to the LDWC stock
option plan were converted into options to purchase 291,842 Common Shares under
the Company's Stock Option Plan.
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1995
Revenues. Revenues increased 95%, or $55.5 million, from $58.3 million for
the three months ended September 30, 1995 to $113.8 million for the three months
ended September 30, 1996. The increase in revenue was due to an increase in
billed customer minutes which resulted from both the Company's Consumer and
Commercial Sales Division(s). Revenues for the Consumer Division for the three
months ended September 30, 1996 were $107.6 million, an increase of $53.8
million, or 100%, versus $53.8 million for the three months ended September 30,
1995. Consumer Division growth, primarily attributable to dial around revenues,
was largely the result of a significant increase in the amount of mail marketing
sent by the Company during the nine months ended September 30, 1996. During the
three months ended September 30, 1996, the Company entered eight new states with
the LDWC brand and one new state with the Dial & Save brand. The Commercial
Sales Division generated revenues of $5.9 million for the three months ended
September 30, 1996, which includes both direct and dealer revenue as well as
wholesale carrier revenue. Prior to the formation of the Commercial Sales
Division, the Company generated wholesale carrier revenues which totaled $3.9
million for the three months ended June 30, 1996. The Company generated $4.5
million in wholesale carrier revenue during the three months ended September 30,
1995. Also included in revenues for the three months ended September 30, 1996
was $0.3 million from Tel Labs, acquired concurrent with the completion of the
Company's IPO in August 1996.
Overall, billed minutes of use ("MOUs") increased 104% from 379.2 million
for the three months ended September 30, 1995 to 771.8 million for the three
months ended September 30, 1996. The Company's revenue per MOU was $0.147 for
the three months ended September 30, 1996, a decrease from $0.154 for the three
months ended September 30, 1995. The Company's offsets to revenues increased
during the three months ended September 30, 1996 compared to the three months
ended September 30, 1995 both as a percentage of revenue and in the aggregate
due to increased billed customer minutes and increases in revenue allowances,
principally due to increases in revenues in geographic areas where LECs require
a higher holdback percentage.
Cost of Services. Cost of services increased 87%, or $31.4 million, from
$36.3 million for the three months ended September 30, 1995 to $67.7 million for
the three months ended September 30, 1996. Approximately $32.3 of the cost of
services increase was due to the recurring costs related to increased MOUs, and
$0.1 million of the increase was the result of the inclusion of Tel Labs' cost
services, both of which were offset by a $1.0 million reduction in installation
expenses. The 104% quarterly increase in MOUs was offset by a reduction in the
cost of services per MOU from $0.096 for the three months ended September 30,
1995 to $0.088 for the three months ended September 30, 1996 which was largely
the result of an increased percentage of on-net traffic and other network
efficiencies. As a percentage of revenues, cost of services decreased from 62.3%
for the three months ended September 30, 1995 to 59.5% for the three months
ended September 30, 1996.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 148%, or $19.4 million from $13.1 million for
the three months ended September 30, 1995 to $32.5 million for the three months
ended September 30, 1996. Approximately $7.7 million of this increase was
attributable to an increase in Consumer Division marketing expenses as the
Company increased by approximately 279% the number of mail pieces sent. During
the three months ended September 30, 1996, the Commercial Sales Division spent
approximately $4.1 million in direct selling, general and administrative
expenses. The remaining increases of approximately $7.6 million for the three
months ended September 30, 1996 consisted of increased expenses associated with
LEC billing, customer service, data processing and general corporate overhead
costs. As a percentage of revenues, selling, general and administrative expenses
increased from 22.5% for the three months ended September 30, 1995 to 28.6% for
the three months ended September 30, 1996.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased by $1.2 million from $1.0 million for the three months ended
September 30, 1995 to $2.2 million for the three months ended September 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 LDWC and the
acquisition of Tel Labs.
Interest Expense. Interest expense increased $0.4 million from $0.8 million
for the three months ended September 30, 1995 to $1.2 million for the three
months ended September 30, 1996. This increase was due to approximately $0.4
million in penalties and interest relating to the early prepayment of capital
leases. The Company used the proceeds of the recently-completed IPO to repay
substantially all of its indebtedness including the credit facility and capital
leases.
Net income. Net income increased $2.4 million from $3.8 million for the
three months ended September 30, 1995 to $6.2 million for the three months ended
September 30, 1996.
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1995
Revenues. Revenues increased 105%, or $158.9 million from $150.9 million
for the three months ended September 30, 1995 to $309.8 million for the nine
months ended September 30, 1996. The increase in revenue was due to an increase
in billed customer minutes which resulted from both the Company's Consumer and
Commercial Sales Division(s). Revenues for the Consumer Division for the nine
months ended September 30, 1996 were $296.8 million, an increase of $152.1
million, or 105% versus $144.7 million for the nine months ended September 30,
1995. Consumer Division growth, primarily attributable to dial around revenues,
was largely the result of a significant increase in the amount of mail marketing
sent by the Company during the nine months ended September 30, 1996. During the
nine months ended September 30, 1996, the Company entered 17 new states with the
LDWC brand and 13 new states with the Dial & Save brand. The Commercial Sales
Division generated revenues of $5.9 million for the three months ended September
30, 1996, which includes both direct and dealer revenue as well as wholesale
carrier revenue. Prior to the formation of the Commercial Sales Division, the
Company generated wholesale carrier revenues which totaled $6.8 million for the
six months ended June 30, 1996. The Company generated $6.2 million in
wholesale carrier revenue for the nine months ended September 30, 1995. Also
included in revenues for the nine months ended September 30, 1996 was $0.3
million from Tel Labs, acquired commensurate with the completion of the
Company's IPO in August 1996.
Overall, billed minutes of use ("MOUs") increased 121% from 964.0 million
for the nine months ended September 30, 1995 to 2,128.1 million for the nine
months ended September 30, 1996. The Company's revenue per MOU was $0.146 for
the nine months ended September 30, 1996, a decrease from $0.157 for the nine
months ended September 30, 1995. The Company's offsets to revenues increased
during the nine months ended September 30, 1996 compared to the nine months
ended September 30, 1995 both as a percentage of revenue and in the aggregate
due to increased billed customer minutes and increases in revenue allowances,
principally due to increases in revenues in geographic areas where LECs require
a higher holdback percentage.
Cost of Services. Cost of services increased 98%, or $90.5 million, from
$92.8 million for the nine months ended September 30, 1995 to $183.3 million for
the nine months ended September 30,1996, of which approximately $89.6 million
was due to the recurring costs related to increased MOUs. The 121% increase in
MOUs for the nine months ended September 30, 1996 was offset by a reduction in
the cost of services per MOU from $0.096 for the nine months ended September 30,
1995 to $0.086 for the nine months ended September 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
$0.8 million from $2.4 million for the nine months ended September 30, 1995 to
$3.2 million for the nine months ended September 30, 1996. The Tel Labs cost of
services since the acquisition date included for the nine months ended September
30, 1996 was approximately $0.1 million. As a percentage of revenues, cost of
services decreased from 61.5% for the nine months ended September 30, 1995 to
59.2% for the nine months ended September 30, 1996.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 163%, or $56.9 million from $35.0 million for
the nine months ended September 30, 1995 to $91.9 million for the nine months
ended September 30, 1996. Approximately $28.2 million of this increase was
attributable to an increase in Consumer Division marketing expenses as the
Company increased by approximately 178% the number of mail pieces sent.
Increases of approximately $23.7 million for the nine months ended September 30,
1996 were increased expenses associated with LEC billing, customer service, data
processing and general corporate overhead costs. The Commercial Sales Division
which was started in May 1996 had direct selling, general and administrative
expenses of approximately $5.0 million for the nine months ending September 30,
1996. As a percentage of revenues, selling, general and administrative expenses
increased from 23.2% for the nine months ended September 30, 1995 to 29.7% for
the nine months ended September 30, 1996.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased by $3.5 million from $2.0 million for the nine months ended
September 30, 1995 to $5.5 million for the nine months ended September 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 LDWC and the
acquisition of Tel Labs.
Interest Expense. Interest expense increased $1.4 million from $1.9 million
for the nine months ended September 30, 1995 to $3.3 million for the nine months
ended September 30, 1996. Approximately $1.0 million of this increase was due 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. Approximately $0.4 million of this
increase was due to interest and penalties associated with the Company's
prepayment of capital leases.
Net income. Net income increased $3.6 million from $11.0 million for the
nine months ended September 30, 1995 to $14.6 million for the nine months ended
September 30, 1996.
<PAGE>
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 Common Shares (of which
825,000 shares were sold on August 26, 1996 in conjunction with the
underwriters' exercise of the over-allotment option) in its IPO. The net
proceeds to the Company (after expenses) of approximately $60.0 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 formation 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 from operating activities increased $5.0 million from $2.0 million
for the nine months ended September 30, 1995 to $7.0 million for the nine months
ended September 30, 1996. The increase was largely the result of increases in
working capital accounts as a result of continued revenue growth offset by
increases in net income and depreciation and amortization expense. Net cash used
for investing activities decreased $1.7 million from $10.8 million for the nine
months ended September 30, 1995 to $9.1 million for the nine months ended
September 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 financing activities increased $3.1 million from $8.6 million for the
nine months ended September 30, 1995 to $11.7 million for the nine months ended
September 30, 1996. This increase was the result of the receipt of proceeds from
the IPO offset by the use of proceeds from the IPO to reduce the debt
outstanding under Company's credit facility and 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
All matters discussed in the Registration Statement are hereby
incorporated by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
See Exhibit Index on page 16.
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 November 13, 1996.
Telco Communications Group, Inc.
By: /s/ Donald A. Burns
------------------------------------
Donald A. Burns, President &
Chief Executive Officer
By: /s/ Nicholas A. Merrick
------------------------------------
Nicholas A. Merrick, Chief Financial
Officer
By: /s/ Janet D. Anastasi
------------------------------------
Janet D. Anastasi, Vice President &
Corporate Controller
<PAGE>
TELCO COMMUNICATIONS GROUP, INC.
EXHIBIT INDEX
Exhibit
No. Description
- ------- -------------
3.1 Articles of Incorporation: Restated Articles
of Incorporation of the Registrant incorporated
by reference to Exhibit 3.1 to the Registration
Statement (Registration No. 333-05857).
3.2 Bylaws: Amended and Restated Bylaws of the
Registrant incorporated by reference to Exhibit
3.2 to the Registration Statement (Registration
No. 333-05857).
11.1 Computation of Earnings Per Common and Common
Equivalent Share
27.1 Financial Data Schedule
99.1 Press Release Dated October 29, 1996
<TABLE>
<CAPTION>
TELCO COMMUNICATIONS GROUP, INC.
SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE
WEIGHTED AVERAGE NUMBER OF COMMON 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:
For all periods presented prior to the initial public offering, outstanding
options for common stock granted within 12 months of the initial filing date of
the IPO 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.
(in thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
-------------------- -------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common Stock:
Shares outstanding
beginning of period 20,864 27,252 20,864 20,864
Shares issued during
period, net <F1> - 2,754 - 918
SEC SAB 83 shares <F2> 5,889 - 5,889 5,889
-------- --------- ------- -------
26,753 30,006 26,753 27,671
Common Stock
Equivalents:
Options<F3> 901 1,268 891 1,650
Warrants<F4> 636 - 636 -
-------- --------- ------- -------
1,537 1,268 1,527 1,650
Weighted average
number of shares 28,290 31,274 28,280 29,321
Net Income (loss) 3,767 6,166 11,040 14,632
Net Income (loss)
per share $ 0.13 $ 0.20 $ 0.39 $ 0.50
<FN>
<F1> Weighted average common shares acquired, net of repurchase of shares
<F2> Common 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 common shares 5,889
----------
----------
<F3> Options granted, less common shares reacquired under treasury stock
method, on a weighted average basis.
<F4> Represents warrant held by Signet Media Capital Group to purchase
636,158 common shares at a nominal exercise price, which were
exercised concurrent with the IPO.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 SEP-30-1996
<CASH> 936,771 10,581,476
<SECURITIES> 0 0
<RECEIVABLES> 59,595,401 99,417,716
<ALLOWANCES> 3,771,413 10,047,849
<INVENTORY> 0 0
<CURRENT-ASSETS> 59,091,410 107,471,870
<PP&E> 31,005,198 44,309,741
<DEPRECIATION> 3,478,485 8,376,376
<TOTAL-ASSETS> 87,123,970 188,531,291
<CURRENT-LIABILITIES> 30,730,420 51,550,160
<BONDS> 0 0
0 0
0 0
<COMMON> 896,079 108,710,405
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 87,123,970 188,531,291
<SALES> 215,375,486 309,774,224
<TOTAL-REVENUES> 215,375,486 309,774,224
<CGS> 133,727,834 183,260,490
<TOTAL-COSTS> 133,727,834 183,260,490
<OTHER-EXPENSES> 60,399,173 97,419,731
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,951,975 3,340,620
<INCOME-PRETAX> 19,342,442 25,555,407
<INCOME-TAX> 7,531,592 10,923,323
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,764,912 14,632,084
<EPS-PRIMARY> 161.91 .50
<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 RECORD THIRD QUARTER EARNINGS
CHANTILLY, Va. (October 29, 1996) - Telco Communications Group, Inc.
(Nasdaq/NM: TCGX) today announced record results for its third quarter ended
September 30, 1996. Revenues for the quarter increased 95% to $113.8 million
from $58.3 million for the third quarter of 1995. Net income was up 64% to $6.2
million, or $0.20 per share, compared with net income of $3.8 million, or $0.13
per share, for the third quarter of 1995. Net income for the third quarter of
1996 was reduced by approximately $0.01 per share as the result of expenses
relating to the prepayment of capital leases with the proceeds of the Company's
recently completed initial public offering.
For the nine months ended September 30, 1996, revenues rose 105% to $309.8
million compared with $150.9 million in the same period of last year. Net income
for the year-to-date period was up 33% to $14.6 million, or $0.50 per share,
compared with $11.0 million, or $0.39 per share, for the nine months ended
September 30, 1995.
The increase in revenue during the third quarter was due to an increase in
billed customer minutes from both the Company's Consumer and Commercial Sales
Divisions. Total billed customer minutes of use were 771.8 million minutes for
the third quarter of 1996, a 104% increase versus 379.2 million minutes for the
third quarter of 1995. The growth in the Consumer Division was largely the
result of increasing Dial Around revenues made possible by significant mail
marketing activities into existing markets.
Donald A. Burns, President and Chief Executive Officer of Telco, stated,
"Our Dial Around products posted outstanding growth during the third quarter
almost exclusively from markets already served. With the recent deployment of
our Las Vegas switch, we are now poised to enter the ten western states not
currently served by our Consumer Division. Our most recent switch addition in
Las Vegas now provides us with nationwide origination and termination
capabilities servicing both our Consumer Division and our recently inaugurated
Commercial Sales Division."
<PAGE>
TELCO Reports Third Quarter Results
Page 2
October 29, 1996
The Company's Commercial Sales Division, which was formed in April 1996,
provides telecommunications products and services to both commercial and carrier
customers. Since its introduction, the Commercial Sales Division has opened 19
sales offices employing approximately 176 sales personnel, all targeting
commercial and carrier customers on a pre subscribed basis. For the third
quarter of 1996, the Commercial Sales Division generated revenues of $5.9
million, which includes both direct and dealer revenue as well as wholesale
carrier revenue. For the second quarter of 1996, the Company generated $3.9
million in revenue exclusively from wholesale carrier customers and no
significant commercial revenue from either the direct or dealer sales channels.
"We are very pleased with the progress of the Commercial Sales Division, in
marketing to both commercial and carrier customers. Our underutilized daytime
network capacity, coupled with our billing and data processing expertise,
provides us with the opportunity to diversify our revenue sources and to add to
the continuing growth of the Company," Burns continued. "The Commercial Sales
Division's successful launch was highlighted by a product offering that was
well-received by prospective commercial and carrier customers, resulting in
revenue and expense levels that were in-line with budgetary targets."
In August, 1996, the Company completed its initial public offering raising
approximately $61.1 million in net proceeds. Burns noted that the Company's
resulting balance sheet provides a debt-free capital structure which is a
significant advantage in the highly competitive long distance industry.
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 approximately 176 sales professionals in 19
regional offices in 14 states.
<PAGE>
TELCO Reports Third Quarter Results
Page 3
October 29, 1996
<TABLE>
<CAPTION>
TELCO COMMUNICATIONS GROUP, INC.
UNAUDITED FINANCIAL HIGHLIGHTS
(In thousands, except per share and per minute amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net $113,768 $58,341 $309,774 $150,936
Cost of services 67,729 36,338 183,260 92,833
--------- --------- --------- ---------
Gross margin 46,039 22,003 126,514 58,103
Selling, general and
administrative expenses 32,512 13,117 91,915 34,994
Depreciation and
amortization 2,200 997 5,505 1,989
--------- --------- --------- ---------
Operating income 11,327 7,889 29,094 21,120
Interest expense 1,153 783 3,341 1,917
Other income 374 (19) 491 (12)
Provision for income taxes 4,247 2,760 10,923 7,473
Minority interest 135 560 689 678
--------- --------- --------- ---------
Net income $6,166 $3,767 $14,632 $11,040
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per share $0.20 $0.13 $0.50 $0.39
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number
of shares outstanding 31,274 28,290 29,321 28,280
OTHER OPERATING DATA:
Minutes of use (in thousands) 771,835 379,153 2,128,107 964,048
Revenue per minute of use $0.147 $0.154 $0.146 $0.157
Cost of services per minute
of use $0.088 $0.096 $0.086 $0.096
BALANCE SHEET DATA:
Cash and cash equivalents $10,581
Total assets 188,531
Total debt (including
capital lease obligations) 16
Shareholders' equity 134,871
</TABLE>
