SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 No. 000-29284
TELEGROUP, INC.
(Exact name of Registrant as Specified in Its Charter)
Iowa 42-1344121
- ------------------------------ ----------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
2098 Nutmeg Avenue, Fairfield, IA 52556
- --------------------------------- -----------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 515-472-5000
------------------------
- -----------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [ X] *
* The Registrant has not been subject to such filing requirements for
the past 90 days.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securites under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date: There are 26,211,578
----------------------
shares of Common stock outstanding as of June 30, 1997 and 30,701,578 as of
- ---------------------------------------------------------------------------
the date of filing this report.
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TELEGROUP, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1996
and June 30, 1997 (unaudited)......................................3
Consolidated Statements of Operations for the Three
and Six Months Ended June 30, 1996 (unaudited) and June 30, 1997
(unaudited)........................................................4
Consolidated Statement of Shareholders' Equity for the
Six Months Ended June 30,1997 (unaudited)..........................5
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1996 (unaudited) and June 30, 1997 (unaudited)............6
Notes to Consolidated Financial Statements (unaudited).............7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................10
PART II - OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings.................................................20
Item 2. Changes in Securities.............................................20
Item 3. Default Upon Senior Securities N/A................................21
Item 4. Submission of Matters to a Vote of Shareholders...................21
Item 5. Other Information.................................................21
Item 6. Exhibits and Reports on Form 8-K..................................24
2<PAGE>
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PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TELEGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND JUNE 30, 1997 (UNAUDITED)
December 31, June 30,
ASSETS 1996 1997
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 14,155,013 5,769,631
Accounts receivable and unbilled services, less
allowance for credit losses of $3,321,119 and
$4,002,589 at December 31, 1996 and June 30,
1997, respectively 32,288,507 45,005,876
Income tax recoverable 1,796,792 962,793
Deferred taxes 1,392,058 1,786,038
Prepaid expenses and other assets 245,271 1,297,344
Receivables from shareholders 14,974 44,120
Receivables from employees 85,539 124,441
----------- ----------
Total current assets 49,978,154 54,990,243
----------- ----------
Net property and equipment 11,256,139 17,883,071
----------- ----------
Other assets:
Deposits and other assets 376,614 1,352,436
Goodwill, net of amortization of $22,768 and
$56,920 at December 31, 1996 and June 30, 1997,
respectively 1,001,841 967,689
Capitalized software, net of amortization 1,906,655 2,022,540
Debt issuance costs, net of amortization 1,437,004 1,333,412
----------- ----------
4,722,114 5,676,077
----------- ----------
Total assets $ 65,956,407 78,549,391
----------- ----------
----------- ----------
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1997
<S> <C> <C>
Current liabilities:
Accounts payable 30,719,562 42,165,647
Accrued expenses 8,561,041 10,694,232
Unearned revenue 64,276 146,593
Customer deposits 602,940 704,221
Current portion of long-term debt (note 2) 232,596 101,109
Current portion of capital lease obligations 138,309 127,804
----------- ----------
Total current liabilities 40,318,724 53,939,606
----------- ----------
Deferred taxes 756,891 977,915
Capital lease obligations 301,393 233,235
Long-term debt (note 2) 11,216,896 11,205,356
Shareholders' equity:
Common stock, no par or stated value;
150,000,000 shares authorized, 26,211,578
shares issued and outstanding at December 31,
1996 and June 30, 1997
Additional paid-in capital 10,765,176 10,936,366
Retained earnings 2,597,327 1,309,629
Foreign currency translation adjustment - (52,716)
----------- -----------
Total shareholders' equity 13,362,503 12,193,279
Commitments and contingencies (note 4)
----------- -----------
Total liabilities and
shareholders' equity $ 65,956,407 78,549,391
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
</TABLE>
3<PAGE>
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<TABLE>
<CAPTION>
TELEGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 1996 AND 1997
AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997
Three months Six months
ended June 30, ended June 30,
---------------------- ---------------------
1996 1997 1996 1997
<S> <C> <C> <C> <C>
Revenues:
Retail $ 42,924,103 56,618,155 84,364,051 113,527,560
Wholesale 4,352,313 23,442,850 6,262,905 40,629,222
---------- ---------- ---------- ------------
Total revenues 47,276,416 80,061,005 90,626,956 154,156,782
Cost of revenues 32,199,361 59,113,863 59,940,690 112,396,803
---------- ---------- ---------- -----------
Gross profit 15,077,055 20,947,142 30,686,266 41,759,979
---------- ---------- ---------- -----------
Operating expenses:
Selling, general and
administrative
expenses 14,240,836 20,604,803 27,401,634 40,059,558
Depreciation and
amortization 383,926 1,137,001 644,957 1,943,540
Stock option based
compensation - 85,595 - 171,190
---------- ---------- ---------- -----------
Total operating
expenses 14,624,762 21,827,399 28,046,591 42,174,288
---------- ---------- ---------- -----------
Operating income
(loss) 452,293 (880,257) 2,639,675 (414,309)
Other income (expense):
Interest expense (15,355) (759,930) (48,826) (1,489,380)
Interest income 60,775 170,263 126,650 354,622
Foreign currency trans-
action gain(loss) 37,693 (89,205) (90,646) (456,769)
Other 28,070 48,624 79,787 79,672
---------- ---------- ---------- ---------
Earnings (loss) before
income taxes 563,476 (1,510,505) 2,706,640 (1,926,164)
Income tax benefit
(expense) (204,825) 499,819 (960,462) 638,466
--------- --------- --------- ---------
Net earnings (loss) $ 358,651 (1,010,686) 1,746,178 (1,287,698)
--------- --------- --------- ----------
--------- --------- --------- ----------
Per share amounts:
Earnings (loss) per common
equivalent share $ 0.01 (0.04) 0.06 (0.04)
----- ---- ---- -----
----- ---- ---- -----
Weighted-average
common and common
equivalent shares
outstanding 28,784,635 28,784,635 28,784,635 28,784,635
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements.
</TABLE>
4<PAGE>
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<TABLE>
<CAPTION>
TELEGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997
Foreign Total
Additional Retained currency shareholders'
paid-in earnings translation equity
Shares Amount capital (deficit) adjustment (deficit)
<S> <C> <C> <C> <C> <C> <C>
Balances at
December
31, 1996 26,211,578 $ - 10,765,176 2,597,327 - 13,362,503
Net loss - - - (1,287,698) - (1,287,698)
Compensation
expense in
connection
with stock
option plan - - 171,190 - - 171,190
Change in
foreign
currency
translation - - - - (52,716) (52,716)
---------- --------- ---------- ---------- -------- ------------
Balances at
June 30,
1997 26,211,578 $ - 10,936,366 1,309,629 (52,716) 12,193,279
---------- --------- ---------- ------------ --------- ------------
---------- --------- ---------- ------------ --------- ------------
See accompanying notes to consolidated financial statements.
</TABLE>
5<PAGE>
<PAGE>06
<TABLE>
<CAPTION>
TELEGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
Six months
ended June 30,
-------------------------
1996 1997
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 1,746,178 (1,287,698)
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Depreciation and amortization 644,957 1,943,540
Deferred income taxes 379,811 (172,956)
Provision for credit losses on
accounts receivable 2,496,256 4,492,567
Accretion of debt discount - 132,952
Stock option based compensation expense - 171,190
Changes in operating assets and liabilities:
Accounts receivable (7,004,771) (17,209,936)
Prepaid expenses and other assets (26,293) (1,052,073)
Deposits and other assets 204,022 (975,822)
Accounts payable and accrued expenses 6,283,606 13,579,276
Income taxes (3,635,287) 833,999
Unearned revenue 7,278 82,317
Customer deposits 114,425 101,281
----------- ----------
Net cash provided by
operating activities 1,210,182 638,637
----------- ----------
Cash flows from investing activities:
Purchases of equipment (3,863,457) (8,253,247)
Capitalization of software (854,442) (295,366)
Net change in receivables from
shareholders and employees (183,670) (68,048)
------------ -----------
Net cash used in investing
activities (4,901,569) (8,616,661)
------------ -----------
Cash flows from financing activities:
Net payments on notes payable (2,000,000) -
Net proceeds from line of credit 1,028,333 -
Net proceeds (payments) from
long-term borrowings 1,369,280 (275,979)
Payments on capital lease obligations (66,770) (78,663)
Net change in due to shareholders (25,881) -
----------- ------------
Net cash (used in) provided by
financing activities 304,962 (354,642)
----------- ------------
Effect of exchange rate changes on cash - (52,716)
----------- ------------
Net decrease in cash and cash equivalents (3,386,425) (8,385,382)
Cash and cash equivalents at beginning
of period 4,591,399 14,155,013
------------ ------------
Cash and cash equivalents at end of period $ 1,204,974 5,769,631
------------ ------------
------------ ------------
Supplemental cash flow disclosures:
Dividends declared $ 425,000 -
------------ ------------
------------ ------------
Common stock issued in consideration
for notes receivable 52,366 -
------------ ------------
------------ ------------
Interest paid 48,826 1,491,610
------------ ------------
------------ ------------
Taxes paid, net of refunds of $1,300,000 4,215,938 520
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
</TABLE>
6<PAGE>
<PAGE>07
TELEGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) PREPARATION OF INTERIM FINANCIAL STATEMENTS
The consolidated financial statements of Telegroup, Inc. and subsidiaries
(the Company or Telegroup) have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission (SEC).
These consolidated financial statements include estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities and the amounts of revenues and
expenses. Actual results could differ from those estimates. The
consolidated balance sheet at December 31, 1996, was derived from the
Company's audited consolidated balance sheet as of that date. The
consolidated financial statements as of June 30, 1997 and for the three
month and six month periods then ended are unaudited. In the opinion of
the Company, such interim financial statements include all adjustments
necessary for a fair presentation of the results of all interim periods
reported herein. All adjustments are of a normal recurring nature unless
otherwise disclosed. Certain information and footnote disclosures
prepared in accordance with generally accepted accounting principles have
been either condensed or omitted pursuant to SEC rules and regulations.
However, the Company believes that the disclosures made are adequate for
a fair presentation of results of operations, financial position and cash
flows. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and accompanying
notes included in the Company's Registration Statement on Form S-1.
(2) Debt
Long-term debt at December 31, 1996 and June 30, 1997 is shown below:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
<S> <C> <C>
12% senior subordinated notes,
net of discount, unsecured $ 10,894,126 11,154,341
8.5% note payable, due monthly
through fiscal 2000, secured by
vehicle 19,003 13,875
10.8% note payable, due monthly
through fiscal 1998, secured by
equipment financed 160,628 121,862
12.0% note payable, paid in
February 1997 74,319 -
12.0% note payable, paid in
February 1997 276,853 -
6.85% note payable, due monthly
through fiscal 1999, unsecured 14,138 10,471
8.00% note payable, due monthly
through fiscal 1998, unsecured 10,425 5,916
-------------- ------------
11,449,492 11,306,465
Less current portion (232,596) (101,109)
-------------- ------------
$ 11,216,896 11,205,356
-------------- ------------
-------------- ------------
</TABLE>
The Company had a credit agreement with a bank which provided for up to
$5,000,000 in committed credit at December 31, 1996. The credit line was
amended to provide up to $7,500,000 effective March 28, 1997 and
terminating June 30, 1998. There were no borrowings under the line at
December 31, 1996 and June 30, 1997. The credit line is unsecured. On
August 12, 1997, the Company signed a commitment letter for a $15 million
credit facility to replace the existing $7.5 million credit facility.
The new facility is expected to close on or before September 12, 1997 and
will expire on October 31, 1997. The facility will be secured by the
Company's accounts receivable and other assets. The Company is currently
in negotiation concerning a new agreement in the form of bank debt and/or
equity, equity-linked or debt securities providing aggregate gross
proceeds of at least $40 million to replace the credit facility which
expires October 31, 1997.
7<PAGE>
<PAGE>08
(3) SHAREHOLDERS' EQUITY
WARRANTS
In connection with the private placement (Private Offering) of the 12
percent Senior Subordinated Notes (Notes), the Company issued warrants
to purchase 1,160,107 shares of the Company's common stock which, at
the time of closing of the Private Offering, represented 4 percent of
the Company's fully diluted common stock. Pursuant to the Private
Offering agreement, if the Company had not consummated an initial
public offering (IPO) prior to July 2, 1997, the holder of the warrants
would, upon exercise of the warrants, receive an additional 153,644
shares, a number equal to one-half percent of the outstanding shares on
a fully diluted basis. The Company did not consummate its IPO prior to
July 2, 1997. Accordingly, the number of shares of common stock
issuable upon exercise of the warrants was increased by additional
shares, which represented one-half of one percent of the outstanding
shares at July 2, 1997 on a fully diluted basis. The warrants are
currently exercisable, carry an exercise price of $.002 per share, and
expire November 27, 2003. As of June 30, 1997, all of these warrants
remained outstanding.
IPO
On July 14, 1997, the Company consummated an IPO. The Company sold
4,000,000 shares of common stock at a price to public of $10 per share
for net proceeds of approximately $35.6 million. On August 12, 1997,
the underwriters exercised their over-allotment option and purchased an
additional 450,000 shares at $10 per share for net proceeds to the
Company of approximately $4.2 million.
(4) COMMITMENTS AND CONTINGENCIES
COMMITMENTS WITH TELECOMMUNICATIONS COMPANIES
The Company has an agreement with Sprint Communications Company L.P.
(Sprint) with net monthly usage commitments of $1,500,000. In the
event such monthly commitments are not met, the Company is required to
remit to Sprint 25 percent of the difference between the $1,500,000
monthly commitment and actual usage. Such amount, if necessary, would
be recorded as cost of revenue in the period incurred. The Company has
exceeded the monthly usage commitments since the inception of this
agreement. This agreement extends through December 1997.
LITIGATION
In June 1996, Macrophone Worldwide (PTY) Ltd. (the Plaintiff), a former
Country Coordinator for South Africa, filed a complaint (the Complaint)
against the Company in the United States District Court for the
Southern District of Iowa (the Action) alleging, among other things,
breach of contract, wrongful termination and intentional interference
with contractual relations. The Complaint requests unspecified
damages. The Company is vigorously defending the Action. Management
believes that the Company will ultimately prevail and does not believe
8 <PAGE>
<PAGE>09
the outcome of the Action, if unfavorable, will have a material adverse
effect on the Company's business, financial condition or results of
operations, although there can be no assurance that this will be the
case.
The Company is a party to certain other litigation which has arisen in
the ordinary course of business. In the opinion of management, the
ultimate resolution of these matters will not have a significant effect
on the financial statements of the Company.
NETWORK
At June 30, 1997, the Company had $7.3 million in commitments for
capital expenditures. The Company has identified a total of $51.5
million of capital expenditures which the Company intends to undertake
in 1997 and 1998, subject to the ability to obtain additional
financing.
ACQUISITIONS
On August 14, 1997, Telegroup acquired 60% of the common stock of, and
a controlling interest in, PCS Telecom, Inc. (PCS) for $1.34 million
in cash and 40,000 shares of unregistered Telegroup common stock.
9<PAGE>
<PAGE>10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING STATEMENTS
REGARDING THE COMPANY'S ABILITY TO SEIZE OPPORTUNITIES FROM CONTINUING
DEREGULATION OF THE TELECOMMUNICATIONS MARKETS, THE PREPAYMENT OF EXISTING
NOTES, AND THE INCREASE IN THE COMPANY'S INTERNAL AND EXTERNAL SALES FORCES.
THE COMPANY'S REVENUES AND ABILITY TO CONTINUE ITS EXPANSION ARE DIFFICULT TO
FORECAST AND COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF NUMEROUS FACTORS, INCLUDING WITHOUT LIMITATION,
OPERATING AND TECHNICAL PROBLEMS, REGULATORY UNCERTAINTIES, POSSIBLE DELAYS
IN THE FULL IMPLEMENTATION OF LIBERALIZATION INITIATIVES, COMPETITION,
AVAILABILITY OF CAPITAL, FOREIGN CURRENCY FLUCTUATIONS, AND CHANGES IN THE US
AND FOREIGN TAX LAWS.
The following discussion of the financial condition and performance of
the Company should be read in conjunction with the consolidated financial
statements and related notes and other detailed information regarding the
Company included in the Prospectus filed with the SEC on July 8, 1997.
OVERVIEW
Telegroup is a leading global alternative provider of international
telecommunications services. The Company offers a broad range of discounted
international and enhanced telecommunications services to small and medium-sized
business and residential customers in over 170 countries worldwide.
Telegroup has achieved its significant international market penetration by
developing what it believes to be one of the most comprehensive global sales,
marketing and customer service organizations in the international
telecommunications industry. The Company operates a digital, switched-based
telecommunications network, the Telegroup Intelligent Global Network or the
TIGN, to deliver its services in a reliable, flexible and cost-effective
manner to more than 200,000 active (incurred charges during June 1997)
customers worldwide. According to FCC statistics, Telegroup was the sixth
largest US carrier of outbound international traffic in 1995. Telegroup's
revenues have increased from $29.8 million in fiscal 1993 to $276.7 million in
the 12 months ended June 30,1997.
As of June 30, 1997, the Company had more than 45,000 active retail
customers within the United States and more than 160,000 active retail
customers outside the United States. The Company's network currently includes
switches located in Australia, France, Hong Kong, Japan, the Netherlands,
Switzerland, the UK, and the US and leased and owned transmission facilities,
and enables the Company to offer a variety of enhanced telecommunications
services. In August 1997, the Company installed a switch in Frankfurt,
Germany that has been tested and is in service as of the date of this report.
The Company has attained positive net earnings in only two of the last
five years-- 1992 and 1995, and positive EBITDA in 1992, 1995 and 1996. EBITDA
represents net earnings (loss) plus net interest expense (income), income
10<PAGE>
<PAGE>11
taxes, depreciation and amortization and non-cash stock option based
compensation. The Company expects to incur lower gross margins, negative
EBITDA and significant operating losses and net losses for the near term as it
incurs additional costs associated with the development and expansion of the
TIGN, the expansion of its marketing and sales organization, and the
introduction of new telecommunications services. As the development and
expansion of the TIGN continues and the Company's customers migrate from
Global Access CallBack to Global Access Direct service, the Company expects
that its gross margins, EBITDA, and operating and net income will improve.
However, there can be no assurance that this will be the case.
Telegroup's revenues are derived from the sale of telecommunications
services to retail customers, typically residential users and small to medium-
sized businesses in over 170 countries worldwide and to wholesale customers,
typically other US and non-US telecommunications carriers. The Company's
revenues from retail and wholesale customers represented 84% and 16%,
respectively, of the Company's total revenues for the year ended December 31,
1996 and 74% and 26%, respectively, for the six months ended June 30, 1997.
The Company's retail customer base is diversified both geographically and by
customer type. No single retail customer accounted for more than 1% of the
Company's total revenues for the year ended December 31, 1996 nor for the six
months ended June 30, 1997. For the six months ended June 30, 1997, one
wholesale customer accounted for approximately 12% of the Company's total
revenues. The Company expects that wholesale revenues will continue to grow
as a percentage of total telecommunications revenue in the near term.
During the six months ended June 30, 1997, the geographic origin of the
Company's revenues was as follows: United States--35.1%; Europe--30.5%;
Pacific Rim--24.3%; Other--10.1%, compared to fiscal year 1996 in which such
geographic origin was as follows: United States--28.3%; Europe--38.1%; Pacific
Rim--19.8%; Other--13.8%. The most significant shift in composition of revenue
was the increase in revenue derived from carrier services both in the US and
internationally. The Company has developed its wholesale carrier business,
which accounted for 26% of revenues for the six months ended June 30, 1997
compared to 0.8% in 1995, primarily by serving wholesale customers in the US and
the Pacific Rim. The Company has expanded its Country Coordinator offices and
retail marketing activities primarily in its core markets, six of which are
located in Western Europe, and three in the Pacific Rim. The Company believes
that, because its core markets comprise approximately 64% of the total global
long distance telecommunications market, according to TeleGeography, the US,
Europe, and Pacific Rim regions will continue to comprise the bulk of the
Company's revenues.
The Company believes its retail services are typically competitively
priced below those of the Incumbent Telecommunications Operator in each
country in which the Company offers its services. Prices for
telecommunications services in many of the Company's core markets have
declined in recent years as a result of deregulation and increased
competition. The Company believes that worldwide deregulation and increased
competition are likely to continue to reduce the Company's retail revenues per
11
<PAGE>
<PAGE>12
billable minute. The Company believes, however, that any decrease in retail
revenues per minute will be at least partially offset by an increase in
billable minutes by the Company's customers, and by a decreased cost per
billable minute as a result of the expansion of the TIGN and the Company's
ability to use least cost routing in additional markets.
For the year ended December 31, 1996 and the six months ended June 30,
1997, 83.8% and 77.8%, respectively, of the Company's retail revenues were
derived from Telegroup's Global Access CallBack services. As the Company's
Global Access Direct service is provided to customers currently using
traditional call-reorigination services, the Company anticipates that revenue
derived from Global Access Direct will increase as a percentage of retail
revenues. However, the Company expects to continue to aggressively market its
Global Access CallBack service in markets not served by the TIGN and to use
transparent call-reorigination as a possible routing methodology for its
Global Access Direct customers where appropriate. Accordingly, the Company
believes that call-reorigination will continue to be a significant source of
revenue.
Historically, the Company has not been required to collect Value Added
Tax (VAT), typically 15% to 25% of the sales price, on call-reorigination
services provided to customers in the EU because prior laws deemed such
services to be provided from the US. However, Germany and France have adopted
rules whereby, as of January 1, 1997, telecommunications services provided by
non-EU based firms are deemed to be provided where the customer is located.
Austria and Italy adopted similar rules effective April 1,1997, Belgium
effective June 1, 1997, and the United Kingdom effective July 1, 1997. Other
members of the EU are in the process of adopting or have adopted similar
legislation. The Company is currently considering changes to its billing
system to enable it to bill VAT as and where required by legislation. The
Company may have no alternative but to reduce prices of particular services
offered to certain customer segments in order to remain competitive in light
of the imposition of VAT on its services in certain EU member states. Such
price reduction could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company believes
that whatever negative impact the imposition of VAT will have on its
operations, such impact will be partially mitigated by the migration of
customers to, and the higher gross margins associated with, call-through
services.
Cost of retail and wholesale revenues is comprised of (i) variable costs
associated with the origination, transmission and termination of voice and
data telecommunications services by other carriers, and (ii) costs associated
with owning or leasing and maintaining switching facilities and circuits.
Currently, a significant portion of the Company's cost of revenues is
variable, based on the number of minutes of use transmitted and terminated
over other carriers' facilities. The Company's gross profitability is driven
mainly by the difference between revenues and the cost of transmission and
termination capacity.
12<PAGE>
<PAGE>13
The Company seeks to lower the variable portion of its cost of services
by originating, transporting and terminating a higher portion of its traffic
over the TIGN. However, in the near term, the Company expects that its cost of
revenues as a percentage of revenues will increase as the Company continues
the development and expansion of the TIGN and introduces new
telecommunications services. Subsequently, as the Company increases the volume
and percentage of traffic transmitted over the TIGN, cost of revenues will
increasingly consist of fixed costs associated with leased and owned lines and
the ownership and maintenance of the TIGN, and the Company expects that the
cost of revenues as a percentage of revenues will decline. The Company seeks
to lower its cost of revenues by: (i) expanding and upgrading the TIGN by
acquiring owned and leased facilities and increasing volume on these
facilities, thereby replacing a variable cost with a fixed cost and spreading
fixed costs over a larger number of minutes; (ii) negotiating lower cost of
transmission over the facilities owned by other national and international
carriers; and (iii) expanding the Company's least cost routing choices and
capabilities.
The Company generally realizes higher gross margins from its retail
services than from its wholesale services. Wholesale services, however,
provide a source of additional revenue and add significant minutes originating
and terminating on the TIGN, thus enhancing the Company's purchasing power for
leased lines and switched minutes and enabling it to take advantage of volume
discounts. The Company also generally realizes higher gross margins from
direct access services than from call-reorigination. The Company expects its
gross margins to continue to decline in the near term as a result of increased
wholesale revenues as a percentage of total revenues. In addition, the Company
intends to reduce prices in advance of corresponding reductions in
transmission costs in order to maintain market share while migrating customers
from traditional call-reorigination to Global Access Direct. The Company then
expects gross margins to improve as the volume and percentage of traffic
originated, transmitted and terminated on the TIGN increases and cost of
revenues is reduced. The Company's overall gross margins may fluctuate in the
future based on its mix of wholesale and retail long distance services and the
percentage of calls using direct access as compared to call-reorigination, any
significant long distance rate reductions imposed by ITOs to counter external
competition, and any risks associated with the Company agreeing to minimum
volume contracts and not achieving the volume necessary to meet the
commitments.
The Company's general and administrative expenses include salaries and
benefits, other corporate overhead costs and costs associated with the
operation and maintenance of the TIGN. These costs have increased due to the
development and expansion of the TIGN and corporate infrastructure. The
Company expects that general and administrative expenses may increase as a
percentage of revenues in the near term as the Company incurs additional costs
associated with the development and expansion of the TIGN, the expansion of
its marketing and sales organization, and the introduction of new
telecommunications services.
13
<PAGE>
<PAGE>14
The Company spends considerable resources to collect receivables from
customers who fail to make payment in a timely manner. While the Company
continually seeks to minimize bad debt, the Company's experience indicates
that a certain portion of past due receivables will never be collected, and
that such bad debt is a necessary cost of conducting business in the
telecommunications industry. In addition to uncollectible receivables, the
telecommunications industry historically has been exposed to a variety of
forms of customer fraud. The TIGN and the Company's billing systems are
designed to detect and minimize fraud, where practicable, and the Company
continuously seeks to enhance and upgrade its systems in an effort to minimize
losses as it expands into new markets.
As the Company begins to integrate its distribution network in selected
strategic locations by acquiring Country Coordinators and independent agents
or by establishing internal sales organizations, it may incur added selling,
general and administrative expenses associated with the transition which may
result, initially, in an increase in selling, general and administrative
expenses as a percentage of revenues. The Company anticipates, however, that
as sales networks become fully integrated, new service offerings are
implemented, and economies of scale are realized, selling, general and
administrative expenses will decline as a percentage of revenue.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Revenues. Revenues increased 69.3%, or $32.8 million, from $47.3 million
in the three months ended June 30, 1996 to $80.1 million in the three months
ended June 30, 1997. This increase was primarily due to growth in
international and domestic retail sales and international and domestic
wholesale revenues. Wholesale revenues increased from $4.4 million, or 9.2% of
total revenues in the three months ended June 30, 1996, to $23.4 million, or
29.3% of revenues for the three months ended June 30, 1997.
Cost of Revenues. Cost of revenues increased 83.5%, or $26.9 million,
from approximately $32.2 million to approximately $59.1 million. As a
percentage of revenues, cost of revenues increased from 68.1% to 73.8%,
primarily as a result of a larger percentage of lower margin wholesale
revenues.
Operating Expenses. Operating expenses increased 49.3%, or $7.2 million,
from $14.6 million in the three months ended 1996 to $21.8 million in the
three months ended June 30, 1997, primarily as a result of increased sales
commissions related to revenue growth, as well as an increase in the number of
employees necessary to provide customer service, billing and collection and
accounting support. Other contributing factors were bad debt, depreciation,
and amortization, as discussed below. As a percentage of revenues, operating
expenses decreased 3.6% from 30.9% in the three months ended June 30, 1996 to
27.3% in the three months ended June 30, 1997. The number of full and part-time
employees grew from 399 in the three months ended June 30, 1996, to 536
in the three months ended June 30, 1997, representing a 34.3% increase.
14<PAGE>
<PAGE>15
Bad Debt. Bad debt expense increased from $1.3 million, or 2.7% of
revenues in the three months ended June 30, 1996 to $2.0 million, or 2.5% of
revenues, in the three months ended June 30, 1997. The decrease in bad debt
expense as a percentage of revenues in the three months ended June 30, 1997
was due to continued vigilance in assessing the credit worthiness of new
subscribers to Company services.
Depreciation and Amortization. Depreciation and amortization increased
from $0.4 million in the three months ended June 30, 1996, to $1.1 million in
the three months ended June 30, 1997, primarily due to increased capital
expenditures incurred in connection with the development and expansion of the
TIGN, as well as amortization expenses associated with intangible assets.
Operating Income. Operating income decreased by $1.4 million, from $0.5
million in the three months ended June 30, 1996, to $(0.9) million in the
three months ended June 30, 1997, as a result of the foregoing factors.
Net Earnings (Loss). Net earnings (loss) decreased approximately $1.4
million, from $0.4 million in the three months ended June 30, 1996, to $(1.0)
million in the three months ended June 30, 1997. The decrease is attributable
to lower operating income, a $0.6 million increase in net interest expense and
a $0.1 million increase in foreign currency transaction losses. The foreign
currency transaction losses resulted primarily from a strengthening of the US
Dollar in such period versus foreign currencies in which the Company had
unhedged positions.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Revenues. Revenues increased 70.2%, or $63.6 million, from $90.6 million
in the six months ended June 30, 1996, to $154.2 in the six months ended June
30, 1997. This increase was primarily due to growth in international and
domestic retail sales and international and domestic wholesale revenues.
Wholesale revenues increased from $6.3 million, or 6.9% of total revenues in
the six months ended June 30, 1996, to $40.6 million or 26.4% of revenues for
the six months ended June 30, 1997.
Cost of Revenues. Cost of revenues increased 87.6%, or $52.5 million,
from approximately $59.9 million to approximately $112.4 million. As a
percentage of revenues, cost of revenues increased from 66.1% to 72.9%,
primarily as a result of a larger percentage of lower margin wholesale
revenues.
Operating Expenses. Operating expenses increased 50.7%, or $14.2 million,
from $28.0 million in the six months ended June 30, 1996, to $42.2 million in
the six months ended June 30, 1997, primarily as a result of increased sales
commissions related to revenue growth, as well as an increase in the number of
employees necessary to provide customer service, billing and collection and
accounting support. Other contributing factors were bad debt, depreciation,
and amortization, as discussed below. As a percentage of revenues, operating
expenses decreased 3.5% from 30.9% in the six months ended June 30, 1996, to
27.4% in the six months ended June 30, 1997.
15<PAGE>
<PAGE>16
Bad Debt. Bad debt expense increased from $2.5 million, or 2.8% of
revenues in the six months ended June 30, 1996, to $4.5 million, or 2.9% of
revenues, in the six months ended June 30, 1997. The increase in bad debt
expense as a percentage of revenues in the six months ended June 30, 1997, was
due primarily to the write-off of accounts receivable for services rendered to
a single domestic customer during the first half of the period. Services to
this customer have been discontinued.
Depreciation and Amortization. Depreciation and amortization increased
from $0.6 million in the six months ended June 30, 1996, to $1.9 million in
the six months ended June 30, 1997, primarily due to increased capital
expenditures incurred in connection with the development and expansion of the
TIGN during the first half of 1997, as well as amortization expenses
associated with intangible assets.
Operating Income. Operating income decreased by $3.0 million, from $2.6
million in the six months ended June 30, 1996, to $(0.4) million in the six
months ended June 30, 1997, primarily as a result of the foregoing factors.
Net Earnings (Loss). Net earnings (loss) decreased approximately $3.0
million, from $1.7 million in the six months ended June 30, 1996, to $(1.3)
million in the six months ended June 30, 1997. The decrease was attributable
to lower operating income, a $1.2 million increase in interest expense and a
$0.4 million increase in foreign currency transaction losses. The foreign
currency transaction losses resulted primarily from a strengthening of the US
Dollar in such period versus foreign currencies in which the Company had
unhedged positions.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's capital requirements have consisted of
capital expenditures in connection with the acquisition and maintenance of
switching capacity and funding of accounts receivable and other working
capital requirements. The Company's capital requirements have been funded
primarily by funds provided by operations, term loans and revolving credit
facilities from commercial banks, and by capital leases. The Company expects
to require substantial additional capital to develop and expand the TIGN, open
new offices, introduce new telecommunications services, upgrade and/or replace
its management information systems, prepay the outstanding Senior Subordinated
Notes and fund its anticipated operating losses and net cash outflows in the
near term.
In July, the Company completed an IPO, issuing 4 million shares at a
price to public of $10 per share, yielding $40 million of gross proceeds. In
August, an additional 450,000 shares were issued pursuant to the exercise of
the underwriters' over-allotment option, yielding an additional $4.5 million
of gross proceeds. The net proceeds to the Company from the IPO (including
the over-allotment issue), after fees and other expenses, were approximately
$39.8 million. The Company expects that approximately $25.8 million of such
net proceeds will be used to expand the Telegroup Intelligent Global Network,
16<PAGE>
<PAGE>17
including the purchase of 60% of the stock of PCS Telecom, Inc; approximately
$9.8 million will be used for prepayment of the outstanding Senior
Subordinated Notes and the balance will be used for working capital.
Net cash provided by operating activities was $1.2 million in the six
months ended June 30, 1996 and $0.6 million in the six months ended June 30,
1997. The net cash provided by operating activities in the six months ended
June 30, 1996 was primarily due to net earnings and an increase in the
provision for credit losses on accounts receivable. The net cash provided by
operating activities in the six months ended June 30, 1997 was due to the
increase in depreciation and amortization expense, an increase in the
provision for credit losses on accounts receivable, and an increase in
accounts payable. These increases were partially offset by an increase in
accounts receivable. The $1.0 million increase in prepaid expenses and other
assets was due primarily to the deferral of expenses associated with the IPO.
The $1.0 million increase in deposits and other assets in the six months ended
June 30, 1997 was due primarily to a deposit to one vendor for card platform
switch equipment.
Net cash used in investing activities was $(4.9) million in the six
months ended June 30, 1996 and $(8.6) million in the six months ended June 30,
1997. The net cash used in the six month ended June 30, 1996 and June 30,
1997, was primarily due to increases in equipment purchases.
Net cash provided by (used in) financing activities was $0.3 million in
the six months ended June 30, 1996, and $(0.4) million in the six months ended
June 30, 1997. The net cash provided in the six months ended June 30, 1996 was
primarily due to proceeds from long-term borrowings and the operating line of
credit. The net cash used in the six months ended June 30, 1997 was primarily
due to payments of long term borrowings.
The development and expansion of the TIGN, the upgrade and/or replacement
of the Company's management information systems, the opening of new offices,
the introduction of new telecommunications services and the prepayment of the
Senior Subordinated Notes, as well as the funding of anticipated losses and
net cash outflows, will require substantial additional capital. At June 30,
1997, the Company had $7.3 million in commitments for capital expenditures.
The Company has identified a total of $51.5 million of capital expenditures
which the Company intends to undertake in 1997 and 1998, subject to the
ability to obtain additional financing.
The Company expects that the net proceeds from the IPO will provide the
Company with sufficient capital to fund planned capital expenditures and
anticipated operating losses through December 1997. On August 12, 1997, the
Company signed a commitment letter for a $15 million credit facility to
replace the existing $7.5 million credit facility. The new facility is
expected to close on or before September 12, 1997 and will expire on October
31, 1997. The facility will be secured by the Company's accounts receivable
and other assets. To replace this facility, the Company is in discussions to
obtain additional financing in the form of bank debt and/or equity, equity-
17<PAGE>
<PAGE>18
linked or debt securities providing aggregate gross proceeds of at least $40
million (the "Anticipated Financings"), which, together with the net proceeds
from the IPO, is expected to provide sufficient funds for the Company to
expand its business as planned and to fund anticipated operating losses and
net cash outflows for the next 18 to 24 months. There can be no assurance
that the Company will be able to obtain the Anticipated Financings or, if
obtained, that it will be able to do so on a timely basis or on terms
favorable to the Company. The amount of the Company's actual future capital
requirements will depend upon many factors, including the performance of the
Company's business, the rate and manner in which it expands the TIGN,
increases in staffing levels and customer growth, upgrades or replacements to
management information systems and opening of new offices, as well as other
factors that are not within the Company's control, including competitive
conditions and regulatory or other government actions. In the event that the
Company's plans or assumptions change or prove to be inaccurate or internally
generated funds and funds from other financings, including the Anticipated
Financings, if obtained, prove to be insufficient to fund the Company's growth
and operations, then some or all of the Company's development and expansion
plans could be delayed or abandoned.
FOREIGN CURRENCY
Although the Company's functional currency is the US Dollar, the Company
derives a substantial percentage of its telecommunications revenues from
international sales. In countries where the local currency is freely
exchangeable and the Company is able to hedge its exposure, the Company bills
for its services in the local currency. In cases where the Company bills in a
local currency, the Company is exposed to the risk that the local currency
will depreciate between the date of billing and the date payment is received.
In certain countries in Europe, the Company purchases foreign exchange
contracts through its fiscal agent to hedge against this foreign exchange
risk. For the six months ended June 30, 1997, approximately $37.1 million (US
Dollar equivalent) or 24.1% of the Company's billings for telecommunications
services were billed in non-US Dollar local currencies.
The Company's financial position and results of operations for the year
ended June 30,1997, were not significantly affected by foreign currency
exchange rate fluctuation. As the Company continues to expand the TIGN and
increase its customer base in its targeted markets, an increasing proportion
of costs associated with operating and maintaining the TIGN, as well as local
selling expenses, will be billed in foreign currencies. Although the Company
attempts to match costs and revenues and borrowings and repayments in terms of
local currencies, there will be many instances in which costs and revenues and
borrowings and repayments will not be matched with respect to currency
denominations. The Company may choose to limit any additional exposure to
foreign exchange rate fluctuations by the purchase of foreign forward exchange
contracts or similar hedging strategies. There can be no assurance that any
currency hedging strategy would be successful in avoiding exchange-related
losses.
18<PAGE>
<PAGE>19
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (SFAS) 128, "Earnings Per Share"
which revises the calculation and presentation provisions of Accounting
Principles Board Opinion 15 and related interpretations. SFAS 128 is effective
for the Company's fiscal year ending December 31, 1997. Retroactive
application will be required. The Company believes the adoption of SFAS 128
will not have a significant effect on its reported earnings per share.
SFAS 130, "Reporting Comprehensive Income", was issued in June 1997. It
establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. SFAS
131, "Disclosures about Segments of an Enterprise and Related Information",
was issued in June 1997. It establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company
does not believe that adoption of any of these standards will have a
significant effect on its consolidated financial statements.
EFFECTS OF INFLATION
Inflation is not a material factor affecting the Company's business and
has not had a significant effect on the Company's operations to date.
SEASONAL FLUCTUATIONS
The Company has historically experienced, and expects to continue to
experience, reduced growth rates in revenues in the months of August and
December due to extended vacation time typically taken by Americans and
Europeans during these months.
19<PAGE>
<PAGE>20
PART II. OTHER INFORMATION
TELEGROUP, INC.
Item 1. Legal Proceedings.
- ------ -----------------
The Company makes routine filings and is a party to customary
regulatory proceedings with the FCC relating to its operations. The Company is
not party to any lawsuit or proceeding which, in the opinion of management, is
likely to have a material adverse effect on the Company's business, financial
condition and results of operations.
In June 1996, Macrophone Worldwide (PTY) Ltd. (the "Plaintiff"), a
former Country Coordinator for South Africa, filed a complaint (the
"Complaint") against the Company in the United States District Court for the
Southern District of Iowa (the "Action") alleging, among other things, breach
of contract, wrongful termination and intentional interference with
contractual relations. The Complaint requests unspecified damages. The Company
is vigorously defending the Action. Management believes that the Company will
ultimately prevail and does not believe the outcome of the Action, if
unfavorable, will have a material adverse effect on the Company's business,
financial condition or results of operations, there can be no assurance that
this will be the case.
On June 19, 1997, the Company received notice of a threatened lawsuit
from counsel to Richard DeAngelis, a former Vice President--Sales and
Marketing of the Company employed from 1993 until May 30, 1997. The notice
alleges claims for breach of contract, wrongful termination, wrongful
discharge and defamation. The Company believes that the threatened claims are
without merit. If an action is filed, the Company intends to vigorously
contest any of such claims. Although management believes that if an action
were filed the Company would ultimately prevail and does not believe that the
outcome of such action, if unfavorable, would have a material adverse effect
on the Company's business, financial condition or results of operations, there
can be no assurance that this will be the case.
Item 2. Changes in Securities.
- ------ ---------------------
Amended and Restated 1996 Stock Option Plan. During the first half of
1997, options for a total of 339,756 shares were issued under the Amended
Stock Option Plan to four Telegroup vice presidents The options have an
exercise price of $10.00 per share (the IPO price to public), vest from April
10, 1997 through June 1, 2000, and have expiration dates of April 1, 2007.
Each issuance of securities described above was made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act as
a transaction by an issuer not involving any public offering. The recipients
of securities in each such transaction represented their intention to acquire
20
<PAGE>
<PAGE>21
the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed
to the share certificates in such transactions. All recipients had adequate
access, through their relationships with the Company, to information about the
Company.
Item 3. Default Upon Senior Securities N/A.
- ------ -----------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
A. On April 9, 1997, pursuant to Section 490.704 of the Iowa
Business Corporation Act, the Class A shareholders waived all notice of time,
place, or purpose of a meeting, and in lieu of a meeting, (1) adopted the
Second Restated Articles of Incorporation; and (2) approved the
Reclassification of the stock of Telegroup, Inc. which had been approved by
the Board of Directors on April 9, 1997; and (3) approved the
Recapitalization (and stock split) of the Company. On April 10, the Class B
shareholders approved the same. The vote was taken by mail and facsimile.
The following number of votes were cast "for" or were withheld:
DESIGNATION OF GROUP VOTES FOR VOTES WITHHELD
Class A Common 4,367,832 0
Class B Common 410,753 4,609
B. On June 28, 1997, pursuant to Section 490.704 of the Iowa
Business Corporation Act, the Class A and B shareholders waived all notice of
time, place, or purpose of a meeting, and in lieu of a meeting, readopted the
Second Restated Articles of Incorporation amended to reflect a 5.479931944-to-1
stock split to occur immediately prior to the Effective Time of the IPO of
Telegroup, Inc. The vote was taken by mail and facsimile.
The following number of votes were case "for" or were withheld:
DESIGNATION OF GROUP VOTES FOR VOTES WITHHELD
Class A Common 4,367,832 0
Class B Common 402,941 12,421
Item 5. Other Information.
- ------ -----------------
PCS. On August 14, 1997, Telegroup acquired 60% of the common stock
of, and a controlling interest in, PCS Telecom, Inc. (PCS) for $1.34 million
in cash and 40,000 shares of unregistered Telegroup common stock. 50% of the
21<PAGE>
<PAGE>22
PCS stock was acquired from David Dragon, and the remaining 10% from Mark
Ballantine who will remain as chief executive officer. PCS is a developer and
manufacturer of state of the art, feature-rich, calling card platforms used by
Telegroup and numerous other companies. PCS, which currently has 25
employees, has installed its products both in international and domestic
markets. Telegroup has purchased these platforms as part of its global
strategy of providing enhanced services for each TIGN, and considers this
acquisition to be a strategic purchase which is intended to ensure stability of
supply of platforms to establish expeditiously an international facilities
network for enhanced services.
Forward-Looking Statements. Item 2 of Part I of this report
includes, and future oral or written statements of the Company and its
management may include, certain forward-looking statements, including without
limitation statements with respect to the Company's anticipated future
operating and financial performance, financial position and liquidity, growth
opportunities and growth rates, business and competitive outlook, investment
and expenditure plans, pricing plans, strategic alternatives, business
strategies, and other similar statements of expectations or objectives that
are highlighted by words such as "expects," "anticipates," "intends," "plans,"
"believes," "projects," "seeks," "estimates," "should" or "may," and
variations thereof and similar expressions. Such forward-looking statements
are subject to uncertainties that could cause the Company's actual results to
differ materially from such statements. These uncertainties include but are
not limited to those set forth below:
(i) the effects of ongoing deregulation in the telecommunications industry
as a result of the Telecommunications Act of 1996 (the "1996 Act") and
other similar federal and state legislation and federal and state
regulations enacted thereunder, including without limitation (i)
greater than anticipated competition in the Company's telephone markets
resulting therefrom, (ii) the final outcome of FCC rulemaking with
respect to interconnection agreements and access charge reforms, and
(iii) future state regulatory actions taken in response to the 1996 Act.
(ii) the effects of greater than anticipated competition from other
telecommunications companies, including without limitation competition
requiring new pricing or marketing strategies or new product
offerings, and the attendant risk that the Company will not be able to
respond on a timely or profitable basis.
(iii) possible changes in the demand for the Company's products and
services, including without limitation lower than anticipated demand
for premium telephone services.
(iv) the Company's ability to successfully introduce new offerings on a
timely and cost-effective basis, including without limitation the
Company's ability to (i) expand successfully its long distance and
enhanced service offerings to new markets, and (ii) offer bundled
service packages on terms attractive to its customers.
22 <PAGE>
<PAGE>23
(v) the risks inherent in rapid technological change, including without
limitation (i) the lack of assurance that the Company's ongoing TIGN
improvements will be sufficient to meet or exceed the capabilities and
quality of competing networks, and (ii) the risk that technologies
will not be developed on a timely or cost-effective basis or perform
according to expectations.
(vi) regulatory limits on the Company's ability to change its prices for
telephone services in response to competitive pressures.
(vii) the Company's ability to effectively manage its growth, including
without limitation the Company's ability to (i) achieve projected
economies of scale and cost savings, (ii) meet pro forma cash flow
projections developed by management in valuing newly-acquired
businesses, and (iii) implement necessary internal controls, and
retain and attract key personnel.
(viii) any difficulties in the Company's ability to expand through additional
acquisitions, whether caused by financing constraints, a decrease in
the pool of attractive target companies, or competition for
acquisitions from other interested buyers.
(ix) higher than anticipated operating costs due to churn or fraudulent
uses of the Company's networks.
(x) the lack of assurance that the Company can compete effectively
against better capitalized competitors.
(xi) the effects of more general factors, including without limitation:
(a) changes in general industry and market conditions and growth
rates
(b) changes in interest rates or other general national, regional
or local economic conditions
(c) changes in legislation, regulation or public policy
(d) unanticipated increases in capital, operating or
administrative costs, or the impact of new business
opportunities requiring significant up-front investments
(e) the continued availability of financing in amounts, and on
terms and conditions, necessary to support the Company's
operations
(f) changes in the Company's relationships with vendors
(g) changes in accounting systems, policies or practices adopted
voluntarily or as required by generally accepted accounting
principles
(h) changes in VAT policies of the EU.
For a more detailed description of these and other uncertainties, see
Risk Factors in the Company's Prospectus dated July 8, 1997. Due to these
uncertainties, you are cautioned not to place undue reliance upon the
Company's forward-looking statements, which speak only as of the date hereof.
The Company undertakes no obligation to update or revise any of its forward-
looking statements for any reason.
23<PAGE>
<PAGE>24
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
A. Exhibits
Exhibit 27 Financial Data Schedule
B. Reports on Form 8-K
None
24<PAGE>
<PAGE>25
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.
Telegroup, Inc.
---------------
(Registrant)
Date: August 21, 1997 By: /s/Douglas Neish
-----------------------
Douglas Neish
Chief Financial Officer
25
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