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 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 __________ to _________
Commission file number: 0-28668
________________________________________________________________
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 file such 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 33,075,942 on May 1, 1997.
Exhibit Index on Page 17
<PAGE>
TELCO COMMUNICATIONS GROUP, INC.
FORM 10-Q
For the Quarter Ended March 31, 1997
Table of Contents
Page
PART I - FINANCIAL INFORMATION Number
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1997 3
and December 31, 1996
Consolidated Statements of Income for the three
months ended March 31, 1997 and 1996 4
Consolidated Statement of Shareholders' Equity for the
three months ended March 31, 1997 and the year 5
ended December 31, 1996
Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1996 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 13
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, March 31,
1996 1997
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 25,373 $ 27,322
Accounts receivable, trade (net of
allowances $7,972 and 89,114 98,525
$6,085, respectively)
Prepaid income taxes 2,394 --
Deferred tax asset 357 --
Other 8,947 8,219
------------------------------
Total current assets 126,185 134,066
--------------------------------
PROPERTY, PLANT AND EQUIPMENT
Leasehold improvements 2,189 2,304
Network equipment 34,749 36,002
Office furniture and equipment 5,474 6,626
Network facilities under development 7,375 7,929
Accumulated depreciation (10,121) (12,305)
------------------------------------
39,666 40,556
------------------------------------
OTHER ASSETS
Goodwill 43,663 43,233
Other assets 1,082 1,074
------------------------------------
44,745 44,307
====================================
Total assets $ 210,596 $ 218,929
====================================
LIABILITES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Capital lease obligation, current portion $ 681 $ 681
Excise taxes payable 3,103 1,946
Accounts payable 21,062 19,904
Accrued network access and transmission 21,450 21,253
expense
Other accrued expenses 12,670 15,365
Income taxes payable -- 471
Deferred taxes 1,225 1,225
-------------------------
Total current liabilities 60,191 60,845
-------------------------
LONG TERM LIABILITIES
Deferred taxes 2,065 2,643
Capital lease obligations, less current 2,620 2,514
portion
-------------------------
Total long term liabilities 4,685 5,157
-------------------------
<PAGE>
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY
Common stock (no par, 150,000,000 shares
authorized 33,062,662 shares outstanding) 111,309 111,751
Preferred stock (15,000,000 shares -- --
authorized, unissued)
Accumulated deficit (1,247) (1,247)
Unrealized gain (loss) on securities 10 (84)
available for sale
Retained earnings 35,648 42,507
--------------------------------
Total Shareholders' Equity 145,720 152,927
--------------------------------
Total Liabilities and Shareholders' Equity $ 210,596 $ 218,929
====================================
</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 ended March 31,
1996 1997
------ ------
<S> <C> <C>
Revenues, net $ 91,928 $ 122,853
Cost of services 54,730 72,419
-------------- --------------
Gross margin 37,198 50,434
-------------- --------------
Operating expenses:
Selling, general and administrative 27,863 37,170
Depreciation and amortization 1,433 2,614
-------------- --------------
Total operating expenses 29,296 39,784
-------------- --------------
Operating income 7,902 10,650
-------------- --------------
Interest expense 1,066 163
Other income (expense) 13 619
Income taxes 3,135 4,247
Minority interest 433 --
-------------- --------------
Net income $ 3,281 $ 6,859
============== ==============
Net income per common and
common equivalent share $ 0.12 $ 0.20
============== ==============
Average common and common
equivalent shares 28,345 34,233
============== ==============
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
[For the three months ended March 31, 1997 (unaudited)
and the year ended December 31, 1996]
(in thousands)
Accumulated Deficit
Remaining Upon Unrealized
Termination of Gain (Loss)
Common S-Corporation Retained on Securities
Stock Election Earnings Available for Sale
<S> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1995 $ 896 $ (1,247) $ 12,771 --
Issuance of common shares 59,912 -- -- --
Loans to option holders (584) -- -- --
Purchase of subsidiary 47,725 -- -- --
Proceeds from exercise
of options 840 -- -- --
Tax benefit from net
warrant activity 2,520 -- --
Change in unrealized gain
on securities available
for sale -- -- -- $ 10
Net income -- -- 22,877 --
---------------------------------------------------
BALANCE DECEMBER 31, 1996 $111,309 $ (1,247) $ 35,648 $ 10
Proceeds from exercise of options 442 -- -- --
Change in unrealized gain (loss) on -- -- -- (94)
securities available for sale
Net income -- -- 6,859 --
===================================================
BALANCE MARCH 31, 1997 $111,751 $ (1,247) $ 42,507 $ (84)
===================================================
</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 three months ended March 31,
1996 1997
------ ------
<S> <C> <C>
Cash Flows From (Used For) Operations:
Net income $ 3,281 $ 6,859
Adjustments to reconcile net income
to net cash from (used for)
operating activities:
Depreciation and amortization 1,433 2,614
Minority interest 433 --
Deferred income taxes 246 578
Changes in current assets and
liabilities:
Trade accounts receivable (20,175) (9,411)
Prepaid and other assets (188) 3,393
Accounts payable (2,577) (1,158)
Accrued expenses 8,188 1,341
Income taxes payable 2,394 471
--------------------------------
Net cash from (used for)
operating activities (6,965) 4,687
--------------------------------
Cash Flows Used For
Investing Activities:
Equipment purchases (2,253) (3,074)
--------------------------------
Net cash used for
investing activities (2,253) (3,074)
--------------------------------
Cash Flows From (Used For) Financing
Activities:
Proceeds from the line of credit 38,634 --
Payments on line of credit (28,262) --
Payments on capital leases (790) (106)
Proceeds from exercise of options -- 442
--------------------------------
Net cash from financing activities 9,582 336
--------------------------------
Increase in cash 364 1,949
Cash, beginning of the period 936 25,373
--------------------------------
Cash, end of the period $ 1,300 $ 27,322
================================
</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 the SEC's 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 contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
The results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results to be expected for the full year.
NOTE 2. STATEMENT OF CASH FLOWS
Cash payments and non-cash activities for the three months ended March 31, were
as follows:
1996 1997
------ ------
Cash payments for income taxes $ 177,330 $ 424,017
Cash payments for interest $ 1,060,692 $ 99,422
Non cash investing and
financing activities:
Capital lease obligations incurred $ 445,068 $ --
NOTE 3. CHANGE IN ACCOUNTING STANDARD
In February, 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share". This new standard
requires dual presentation of basic and diluted earnings per share ("EPS") on
the face of the earnings statement and requires a reconciliation of the
numerators and denominators of basic and diluted EPS calculations. This
statement will be effective for the Company's 1997 fiscal year. The Company's
current EPS calculation conforms to the diluted EPS presentation. Basic EPS is
not expected to be materially different from diluted EPS since potential common
shares in the form of stock options are not materially dilutive.
NOTE 4. SUBSEQUENT EVENTS
On April 15, 1997, the Company's existing credit facility was amended to
increase the maximum amount available for borrowing to $200 million, in
conjunction with the Company's acquisition of certain voice network assets (the
"New Credit Facility"). Borrowings under the New Credit Facility are subject to
various financial covenants and ratios.
On April 15, 1997, the Company purchased the voice networks of Advantis, a data
and voice network partnership of International Business Machines Corp. and
Sears, Roebuck and Co., for $170 million. The purchase includes service rights
to approximately 100,000 network miles of DS-3 fiber optic capacity (under a
long-term lease), five Nortel DMS 250 switches and other ancillary network
equipment. The Company financed the acquisition with existing cash and
approximately $146.0 million in debt borrowed under the Company's New Credit
Facility.
<PAGE>
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company is a party from time to time to litigation in the ordinary course of
business including employment related litigation. No provision has been
reflected in the accompanying financial statements for any litigation. Based
upon information presently available, management believes the final deposition
of these items will not have an adverse material effect on operations or the
financial position of the Company. For additional discussion, see Form 10-Q for
the quarter ended March 31, 1997, Part II Other Information, Item 1. Legal
Proceedings.
During 1996, the Company entered into employment and consulting agreements with
certain members of management. The agreements provide for the employees to
receive amounts not less than specified base annual salaries through the terms
of the agreements, which have terms of one to five years. Certain of the
contracts also include non-competition covenants and options to purchase shares
of the Company's common stock.
<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 in the Company's other filings with the Securities and
Exchange Commission.
INTRODUCTION
Telco Communications Group, Inc. and its wholly owned subsidiaries (collectively
"Telco" or the "Company") is a rapidly growing facilities-based provider of
domestic and international long distance telecommunication services to both
residential and commercial customers in the United States. The majority of the
Company's current revenue is generated by customers accessing the Telco network
by dialing a unique five digit Carrier Identification Code ("CIC") 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 presubscribed
long distance carrier. The Company markets its residential long distance
services through marketing subsidiaries 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 December 1996, the Company provided long distance services to
approximately 2.3 million customers (switched access lines) in 48 states and the
District of Columbia. All dial around operations are conducted through marketing
subsidiaries that are referred to collectively as the Consumer Division.
Consumer Division revenues were $105.4 million for the three months ended March
31, 1997, and accounted for approximately 85.8% of total revenues.
To increase its volume of call traffic, Telco has been marketing long distance
telecommunications products utilizing its daytime network capacity to commercial
and carrier customers through its Commercial Sales Division ("CSD"). 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 March 31, 1997,
CSD had opened 28 sales offices and employed approximately 300 sales personnel.
For the three months ended March 31, 1997, CSD revenues were $17.0 million, or
approximately 13.8% of total revenues.
The Company bills its dial around 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 substantially all 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 and acquired by the Company in
August 1996. Tel Labs revenues from third parties were $0.5 million, or 0.4% of
total revenues, for the three months ended March 31, 1997.
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; Austin, Texas and Las Vegas, Nevada.
Additionally, the Company is currently installing a DEX 600E switch in the New
York City metropolitan area and has taken receipt of an eighth switch to be
installed later in 1997 in a yet undetermined location.
On April 15, 1997, the Company completed its acquisition of the voice network
assets of Advantis for $170 million. The Advantis assets include approximately
100,000 network miles of DS-3 fiber optic capacity (under a long term lease),
five Nortel DMS 250 switches and other ancillary network equipment in 22
locations (including the five switch locations). The Company has received
commitments to lease portions of the network to third party customers under long
term agreements. The remaining capacity will either be leased to third parties
or be integrated into the Company's existing leased fiber optic capacity. The
Company intends to sell the five Nortel DMS 250 switches and all other equipment
in the five switch sites.
Future issues affecting the Company's operations for 1997 and beyond are as
follows:
Competitive Factors. The Company has observed new entrants and increased
competition in the Company's dial around segment. Additionally, although the
basic rates available to most residential customers increased during 1996, the
Company also has observed an increase in the number of promotional, discounted
calling plans available to long distance consumers.
Regulatory Changes. The operations of the Company will continue to be affected
by the ongoing events associated with the 1996 Telecommunications Act. Such
events include access charge reform which could change existing transmission
costs for both the Company and other long distance companies, the entrance of
the Regional Bell Operating Companies into the long distance marketplace and the
ability of long distance companies like Telco to begin marketing local telephone
services.
In conjunction with upcoming local competition, incumbent local phone companies
are not likely to provide billing services for customers presubscribed to the
competitive local phone companies. This would force the Company to either bill
the customer directly, enter into a billing and collection agreement with the
new local phone company or seek other alternatives.
Additionally, the Federal Communications Commission has mandated that by January
1, 1998, all telecommunications companies must migrate from their existing five
digit CIC codes (10+XXX) to seven digit CIC codes (10+10+XXX). This will require
a change in the dialing patterns of the Consumer Division customers in order to
utilize the Company's services, and the Company intends to integrate
re-education materials into its marketing activities for the remainder of the
year.
Availability of Transmission Facilities. The Company has observed a tightening
market in the availability of leased fiber optic facilities connecting the
Company's switches. The Company leases these facilities under multi-year
contracts primarily from three major vendors, and to date, has been able to
secure the necessary facilities. Although the Advantis voice network asset
acquisition provides the Company with a significant amount of captive fiber
optic capacity, the Company will continue to lease additional capacity from
third party providers.
Expansion of the Commercial Sales Division. The costs associated with the
Company's Commercial Sales Division are expected to reduce the Company's net
income at least through 1997. The Company expects that the revenue growth
associated with this division will represent a material portion of the overall
growth of the Company.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1996
Revenues. Revenues increased 34%, or $31.0 million, from $91.9 million, for the
three months ended March 31, 1996 to $122.9 million for the three months ended
March 31, 1997. The increase in revenue was due to an increase in billed
customer minutes in both the Company's Consumer and Commercial Sales Divisions.
Revenues for the Consumer Division for the three months ended March 31, 1997
were $105.4 million, an increase of $16.5 million, or 19%, versus $88.9 million
for the three months ended March 31, 1996. Consumer Division growth, primarily
attributable to dial around revenues, was largely the result of the Consumer
Division marketing activities for the three months ended March 31, 1997 combined
with the carryover customer base from 1996. During the three months ended March
31, 1997, the Consumer Division introduced a fee-based, 9.5 cent state-to-state
dial around product through the LDWC brand targeting heavy-volume residential
callers. To date, this new product has produced higher customer retention and
usage levels offset by lower initial response rates when compared against the
Company's non-fee products.
CSD generated revenues of $17.0 million for the three months ended March 31,
1997, which includes both direct and dealer revenue as well as wholesale carrier
revenue. Prior to the formation of CSD in June 1996, the Company generated
wholesale carrier revenues which totaled $3.0 million for the three months ended
March 31, 1996. The Company generated $9.3 million in CSD revenue during the
three months ended December 31, 1996. The revenue for CSD for the three months
ended March 31, 1997 represents a 467% and 83% increase versus the three month
periods ended March 31, 1996 and December 31, 1996, respectively. This growth is
attributable to the significant increase in the number of sales personnel and
other marketing efforts of CSD since its formation. Also included in revenues
for the three months ended March 31, 1997 was $0.5 million from Tel Labs, which
the Company acquired concurrently with the completion of the Company's initial
public offering ("IPO") in August 1996.
Overall, billed minutes of use ("MOUs") increased 41% from 653.1 million for the
three months ended March 31, 1996 to 922.2 million for the three months ended
March 31, 1997. The Company's revenue per MOU was $0.133 for the three months
ended March 31, 1997, a decrease from $0.141 for the three months ended March
31, 1996. This decrease is due to an increasing contribution of lower revenue
per minute products including carrier products and commercial products such as
800/888 service and dedicated T-1 service. The Company's offsets to revenues
decreased during the three months ended March 31, 1997 compared to the three
months ended March 31, 1996 both as a percentage of revenue and in the aggregate
due to decreased LEC holdbacks and a one time increase in the accrual for the
three month period ended March 31, 1996 in conjunction with the acquisition of
the remaining 44.4% of LDWC.
Cost of Services. Cost of services increased 32%, or $17.7 million, from $54.7
million for the three months ended March 31, 1996 to $72.4 million for the three
months ended March 31, 1997. Approximately $15.4 million of the cost of services
increase was due to the recurring costs related to increased MOUs, $2.6 million
of the increase was the result of increased facilities lease expense as a result
of the Company's expansion of its transmission network, and $0.3 million of the
increase was the result of the inclusion of Tel Labs' cost of services, all of
which was offset by a $0.6 million reduction in installation expenses. The
reduction in the cost of services per MOU from $0.084 for the three months ended
March 31, 1996 to $0.078 for the three months ended March 31, 1997 was largely
the result of an increased percentage of on-net traffic, other network
efficiencies and an increasing percentage of dedicated products that have lower
LEC access costs per MOU.
Gross Margin. Gross margin increased 36%, or $13.2 million, from $37.2 million
for the three months ended March 31, 1996 to $50.4 million for the three months
ended March 31, 1997 due to the reasons discussed above. As a percentage of
revenues, gross margin increased from 40.5% for the three months ended March 31,
1996 to 41.1% for the three months ended March 31, 1997.
Selling, General and Administrative Expense. Selling, general and administrative
expense increased 33%, or $9.3 million, from $27.9 million for the three months
ended March 31, 1996 to $37.2 million for the three months ended March 31, 1997.
Approximately $8.9 million of this increase was attributable to the direct
expenses of CSD which generated negligible expenses during the three months
ended March 31, 1996. The remaining increase of approximately $0.4 million for
the three months ended March 31, 1997 consisted of increased general and
administrative expense, flat expense growth associated with Consumer Division
marketing and customer service expenses and reduced costs associated with LEC
billing expenses. As a percentage of revenues, selling, general and
administrative expense remained constant at 30.3% for both the three months
ended March 31, 1996 and 1997.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased by $1.2 million from $1.4 million for the three months ended March 31,
1996 to $2.6 million for the three months ended March 31, 1997. 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 LDWC and the acquisition of Tel Labs.
Interest Expense. Interest expense decreased $0.9 million from $1.1 million for
the three months ended March 31, 1996 to $0.2 million in interest expense for
the three months ended March 31, 1997. This decrease was due to the proceeds
from the Company's August 1996 IPO which were used to repay substantially all of
the Company's indebtedness combined with free cash flow generated since that
time.
Net income. Net income increased $3.6 million from $3.3 million for the three
months ended March 31, 1996 to $6.9 million for the three months ended March 31,
1997.
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
were used to fund working capital and capital expenditures and for general
corporate purposes.
Since commencing operations in 1993, the Company has experienced rapid growth
requiring substantial investments in working capital, capital expenditures and
mail marketing expenses. Additionally, start-up costs associated with the
formation of CSD are expected to reduce the Company's consolidated net income at
least through 1997.
In December 1996, the Company entered into a credit facility for borrowings up
to $100 million, which was later amended in April 1997 to $200 million in
connection with the Company's acquisition of certain voice network assets from
Advantis (the "New Credit Facility"). Borrowings under the New Credit Facility
are subject to various financial covenants and ratios including a Total Leverage
Ratio, Interest Coverage Ratio, Current Ratio, Pro Forma Debt Service Ratio and
Fixed Charge Ratio. The interest rate on the New Credit Facility is based on the
prevailing Total Leverage Ratio and ranges on a Eurodollar (LIBOR) option from a
spread of 0.75% to 2.00%, and on a Base (Prime) Rate option from a spread of 0%
to 1.00%. No scheduled principal payments on the New Credit Facility are due
until June 30, 1998. Borrowings under the New Credit Facility on the April 15,
1997 closing date of the Advantis voice network acquisition totaled
approximately $146.0 million which resulted in an initial spread of 1.75% for
LIBOR and .075% for Prime. The remaining purchase price and other
transaction-related expenses were funded using a portion of the Company's
existing cash.
Net cash from operating activities increased $11.7 million from $7.0 million in
cash used for operating activities for the three months ended March 31, 1996 to
$4.7 million in cash provided by operating activities for the three months ended
March 31, 1997. The increase was largely the result of increases in net income
and depreciation and amortization expense combined with a smaller increase in
working capital accounts. Net cash used for investing activities increased $0.9
million, from $2.3 million for the three months ended March 31, 1996 to $3.1
million for the three months ended March 31, 1997. The increase was the result
of increased expenditures on the Company's nationwide transmission network and
the deployment of CSD sales offices. Net cash from financing activities
decreased $9.3 million from $9.6 million for the three months ended March 31,
1996 to $0.3 million for the three months ended March 31, 1997. This decrease
was the result of the Company's increases in net income and reduced investments
in working capital partially offset by increases in capital expenditures for the
three months ended March 31, 1997 compared to the three months ended March 31,
1996.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In December 1996, Telco and LDWC became involved in a civil action, AT&T Corp.
v. Telco Communications Group, Inc. and Long Distance Wholesale Club, pending in
the United States District Court for the District of New Jersey. In this
litigation, AT&T claims that certain LDWC advertisements stating that consumers
can save up to 50% off AT&T's basic rates are false and misleading under federal
and state law. AT&T seeks treble damages, statutory attorneys' fees and costs,
and an injunction. The Company denies the allegations in this litigation and is
vigorously defending against them, including that all disclosures are contained
clearly in LDWC's advertisements and that it is possible for consumers in the
United States to place calls that will achieve up to a 50% savings. Further the
Company filed a separate complaint against AT&T (which has now been consolidated
with this litigation) and also asserted additional counterclaims against AT&T
based on AT&T's advertising which the Company believes contains a variety of
misleading and deceptive statements. If AT&T prevails, the Company could be
found liable for damages and an injunction might be issued against future use of
specific LDWC advertisements.
On December 31, 1996, An Apple A Day, Inc. ("Apple") filed suit against the
Company in the United States District Court for the Eastern District of Maryland
alleging trademark and tradename infringement, unfair competition, false
designation of origin, federal trademark dilution, trade dress dilution and
violations of Missouri common law. According to the complaint, Apple holds a
Dial and Save service mark for telephone order services in the field of
electronic equipment and uses that mark in the State of Missouri. Apple alleges
that the Company's use of a Dial & Save logo and tradename in connection with
its sale to consumers of long distance service infringes Apple's mark. Apple
seeks an injunction against the Company's further use of the Dial & Save logo
and name, disgorgement of all profits made from use of the Dial & Save logo and
name, damages for preparation and distribution of corrective advertising,
damages for loss of sales, loss of goodwill and damage to reputation, trebling
of damages and payment of attorney's fees and costs. The Company denies the
allegations and is vigorously defending against them, including on the grounds,
among others, that there is no competitive proximity of the electronic equipment
that Apple sells and the long distance service that the Company offers and no
likelihood of, or actual, confusion regarding the seller, and therefore the
source, of each. If the Company is found to have infringed Apple's mark, and/or
to have liability for Apple's other claims, then it may be found liable to Apple
in whole, or in part, for damages of the nature sought by Apple and may be
enjoined from using a Dial & Save service mark.
In related litigation, on April 15, 1997, the Company filed suit against Apple
and two (2) individuals in the United States District Court for the Eastern
District of Virginia. The suit includes claims for defamation, and conspiracy to
harm the Company's business, in violation of the statutory and common laws of
Virginia, and for tortious interference with contractual relationships and with
reasonable business expectations, in violation of the common laws of Virginia.
The Company seeks an injunction barring the defendants from making or causing
others to make further false and defamatory statements about the Company and
seeks compensatory and exemplary damages for wrongful diminution of the
Company's reputation and goodwill, for tortious interference with the Company's
business and for defamation, as well as payment of the Company's litigation
costs and expenses. The court has entered a preliminary injunction prohibiting
the defendants from directly or indirectly making defamatory statements about
the Company. The defendants have not yet filed their respective answers to the
Company's complaint in this litigation.
On May 8, 1995, the Company, and its subsidiary, Dial & Save of Nevada, Inc.,
filed suit against Central Telephone Company-Nevada, d/b/a Sprint/Central
Telephone Company-Nevada, a division of the Central Telephone Company ("CTC"),
Sprint, Inc., et al, in the District Court of Clark County, Nevada. The suit
includes claims for breach of contract, promissory and equitable estoppel,
unfair trade practices and breach of the duty of good faith and fair dealing,
all in violation of the laws of Nevada. The Company and its subsidiary seek an
order for temporary injunctive relief preventing the defendant from denying
possession of certain commercial real property in Las Vegas to the Company and
its subsidiary and compelling the defendant to execute and honor a commercial
real property lease with the Company, as well as compensatory and punitive
damages, attorneys fees and costs.
In related litigation, on May 5, 1995, CTC filed suit against the Company in the
United States District Court for the District of Nevada. The suit includes
claims for negligent and/or malicious omission or concealment of material facts,
conversion of personal property and trespass to chattel in violation of the
common laws of Nevada, in connection with certain commercial real property and
telecommunications facilities owned by the plaintiff in Las Vegas, Nevada. The
plaintiff seeks damages and a declaratory judgment specifying the respective
rights of the plaintiff and the Company regarding occupancy of the commercial
real property and use of the telecommunications facilities in Las Vegas, and
requiring the Company to present any complaint against the plaintiff to the FCC
prior to bringing any court action. The Company denies the allegations, intends
to defend vigorously against them and has filed the suit described above against
the plaintiff.
On March 14, 1997, Frontier Corporation and Frontier Communication Services,
Inc. filed suit against the Company, and three (3) of the Company's employees,
in the United States District Court for the Southern District of Indiana,
alleging breach of contract, tortious interference with contractual relations
and tortious interference with prospective economic relations. The plaintiffs
allege that three (3) of the Company's employees, who formerly were employed by
the plaintiffs, left the employ of plaintiffs, joined the Company, and
thereafter solicited on behalf of the Company plaintiffs' employees and
customers, in breach of written agreements between the plaintiffs and the
employees, and in violation of the common laws. The plaintiffs also allege that
the Company breached a written agreement between the Company and the plaintiffs
in which the Company agreed not to allow solicitation of plaintiffs' employees
or customers by the Company's employees who were formerly employed by the
plaintiffs. The plaintiffs seek an injunction preventing the Company and the
three (3) employees from breaching their respective written agreements with
plaintiffs and preventing the Company from aiding or abetting the employees in
breach of the employees' written agreements with the plaintiffs; an accounting
and disgorgement of all profits made by the Company and the employees arising
from the breach of the written agreements with the plaintiffs; a declaratory
judgment that the Company and the employees have breached their respective
written agreements with the plaintiffs and have tortiously interfered with the
plaintiffs' existing contractual and prospective economic relations; damages for
breach of contract and interference with plaintiffs' existing contractual and
prospective economic relations; and payment of attorneys' fees and costs. The
court has entered a preliminary injunction prohibiting one of the employee
defendants from performing certain limited acts in violation of her agreement
with Frontier, and requiring the other defendants to take certain actions to
enable and ensure her compliance. The Company has filed an answer denying the
allegations against it, and is vigorously defending the action.
ITEM 2. CHANGES IN SECURITIES
None.
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
See Exhibit Index on page 17.
B. Reports on Form 8-K
On March 18, 1997, the Company filed a report on Form 8-K
announcing that it had entered into an agreement to acquire the voice network
assets of Advantis, a partnership formed by International Business Machines
Corp. and Sears, Roebuck and Co., for approximately $170 million.
On March 24, 1997, the Company filed a report on Form 8-K
in connection with certain litigation filed against the Company by
Frontier Corporation and Frontier Communications Services, Inc.
<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 May 14, 1997.
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 A. Anastasi
---------------------------------------------------
Janet D. Anastasi, Vice President & Corporate Controller
<PAGE>
TELCO COMMUNICATIONS GROUP, INC.
EXHIBIT INDEX
Exhibit
No. Description
11.1 Computation of Earnings Per Common and Common Equivalent Share
27.1 Financial Data Schedule
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:
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 initial public offering 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.
Three months ended March 31,
(in thousands, except per share data)
1996 1997
----- -----
Common Stock:
Shares outstanding beginning of period 20,864 32,755
Shares issued during period, net (1) -- 144
SEC SAB 83 shares (2) 5,889 --
26,753 32,899
Common Stock Equivalents:
Options (3) 956 1,334
Warrants (4) 636 --
1,592 1,334
Weighted average number of shares 28,345 34,233
Net income (loss) $ 3,281 $ 6,859
Net income (loss) per share $ 0.12 $ 0.20
- ---------------------------------------------
(1) Weighted average shares issued
(2) Shares and employee options issued from June 14, 1995
through June 13, 1996 7,094
Less shares reacquired under treasury stock method 1,205
--------
Net SAB 83 shares 5,889
========
(3) Options granted, less shares acquired under treasury stock method,
on a weighted average basis.
(4) Represents warrant held by Signet Media Capital Group to purchase
636,158 shares of common stock at a nominal exercise price.
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<ARTICLE> 5
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 25,372,575 27,113,670
<SECURITIES> 0 0
<RECEIVABLES> 97,086,496 104,609,547
<ALLOWANCES> 7,972,104 6,084,853
<INVENTORY> 0 0
<CURRENT-ASSETS> 126,184,771 134,066,260
<PP&E> 49,786,683 52,861,167
<DEPRECIATION> 10,121,057 12,305,080
<TOTAL-ASSETS> 210,595,919 218,929,263
<CURRENT-LIABILITIES> 60,190,531 60,845,244
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0 0
0 0
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<TOTAL-LIABILITY-AND-EQUITY> 210,595,919 218,929,263
<SALES> 428,552,436 122,853,103
<TOTAL-REVENUES> 428,552,436 122,853,103
<CGS> 252,035,525 72,418,745
<TOTAL-COSTS> 252,035,525 72,418,745
<OTHER-EXPENSES> 133,542,536 39,784,202
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,514,903 162,662
<INCOME-PRETAX> 39,960,233 11,106,937
<INCOME-TAX> 16,394,046 4,246,993
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
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<NET-INCOME> 22,876,735 6,859,944
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