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, 1998
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 [ X ] No [ ]
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 securities 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 33,327,770
----------------------
shares of Common stock outstanding as of June 30, 1998 and 33,527,520 as
- ----------------------------------------------------------------------------
of the close of business on August 12, 1998.
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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, 1997
and June 30, 1998 (unaudited).................................. 3
Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 1997 (unaudited) and
June 30, 1998 (unaudited)...................................... 4
Consolidated Statements of Comprehensive Earnings for the
Three and Six Months Ended June 30, 1997 (unaudited) and
June 30, 1998 (unaudited)...................................... 5
Consolidated Statement of Shareholders' Equity for the
Six Months Ended June 30, 1998 (unaudited)....................... 6
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1997 (unaudited) and June 30, 1998 (unaudited)....... 7
Notes to Consolidated Financial Statements (unaudited).......... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 12
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings.................................................17
Item 2. Changes in Securities and Use of Proceeds.........................17
Item 3. Defaults Upon Senior Securities...................................17
Item 4. Submission of Matters to a Vote of Security Holders...............17
Item 5. Other Information.................................................17
Item 6. Exhibits and Reports on Form 8-K..................................19
Exhibit Index.............................................................20
Signatures................................................................21
<PAGE>
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PART I - FINANCIAL INFORMATION
- -------------------------------
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TELEGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND JUNE 30,1998 (UNAUDITED)
December 31, June 30,
------------------------
ASSETS 1997 1998
------ ------------ ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 74,213,856 21,125,067
Securities available-for-sale 21,103,030 4,024,206
Accounts receivable and unbilled services, less
allowance for credit losses of $6,173,846 and
$7,053,954 at December 31, 1997 and June 30,
1998, respectively 54,188,757 58,767,130
Income tax recoverable 2,693,679 2,340,136
Prepaid expenses and other assets 1,384,886 3,355,726
Receivables from shareholders 39,376 536,302
Receivables from employees 152,259 153,764
----------- ----------
Total current assets 153,775,843 90,302,331
----------- ----------
Net property and equipment 27,912,978 52,102,045
----------- ----------
Other assets:
Deposits and other assets 3,594,101 14,191,124
Goodwill, net of amortization of $142,203 and
$453,963 at December 31, 1997 and
June 30,1998, respectively 3,102,707 21,379,343
Capitalized software, net of amortization 1,724,758 2,346,452
Debt issuance costs, net of amortization 3,648,026 3,805,015
----------- ----------
12,069,592 41,721,934
----------- ----------
Total assets $193,758,413 184,126,310
----------- ----------
----------- ----------
December 31, June 30,
------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1998
------------------------------------ ------------ ---------
<S> <C> <C>
Current liabilities:
Accounts payable $ 48,434,985 49,598,122
Commissions payable 7,691,401 6,107,412
Accrued expenses 4,479,515 5,296,779
Customer deposits 778,024 1,072,478
Unearned revenue 186,779 216,568
Current portion of capital lease obligations 158,706 126,405
Current portion of long-term debt (note 2) 93,788 111,716
----------- ----------
Total current liabilities 61,823,198 62,529,480
----------- ----------
Capital lease obligations, excluding current portion 221,179 263,118
Long-term debt, excluding current portion(note 2) 101,450,951 105,534,456
Minority interest - -
Shareholders' equity:
Common stock, no par or stated value;
150,000,000 shares authorized, 30,889,945
and 33,327,770 shares issued and outstanding
at December 31, 1997 and June 30,1998,
respectively - -
Additional paid-in capital 51,649,660 61,863,759
Retained deficit (21,125,080)(45,262,289)
Accumulated other comprehensive income (deficit) (261,495) (802,214)
----------- -----------
Total shareholders' equity 30,263,085 15,799,256
----------- -----------
Commitments and contingencies (notes)
Total liabilities and
shareholders' equity $193,758,413 184,126,310
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
3<PAGE>
<PAGE>
<TABLE>
<CAPTION>
TELEGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 1997 AND 1998
AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
Three months Six months
ended June 30, ended June 30,
------------------ ------------------
1997 1998 1997 1998
---- ---- ---- ----
<C> <C> <C> <C>
Revenues:
Retail $ 56,618,155 64,301,723 113,527,560 121,320,370
Wholesale 23,442,850 36,764,833 40,629,222 65,610,847
---------- ---------- ----------- -----------
Total revenues 80,061,005 101,066,556 154,156,782 186,931,217
Cost of revenues 59,113,863 82,390,718 112,396,803 151,393,105
---------- ---------- ----------- -----------
Gross profit 20,947,142 18,675,838 41,759,979 35,538,112
---------- ---------- ----------- -----------
Operating expenses:
Selling, general and
administrative
expenses 20,604,803 26,966,661 40,059,558 51,248,567
Depreciation and
amortization 1,137,001 2,720,914 1,943,540 4,902,706
Stock option-based
compensation 85,595 85,595 171,190 171,190
---------- ---------- ----------- -----------
Total operating
expenses 21,827,399 29,773,170 42,174,288 56,322,463
---------- ---------- ---------- -----------
Operating loss (880,257) (11,097,332) (414,309) (20,784,351)
Other income (expense):
Interest expense (759,930) (2,374,663) (1,489,380) (4,864,669)
Interest income 170,263 816,691 354,622 1,940,524
Foreign currency
transaction loss (89,205) (196,252) (456,769) (348,307)
Other 48,624 110,425 79,672 163,332
---------- ---------- ----------- -----------
Loss before
income taxes (1,510,505) (12,741,131) (1,926,164) (23,893,471)
Income tax benefit
(expense) 499,819 (155,858) 638,466 (243,738)
Minority interest in
share of loss - - - -
---------- ---------- ---------- ----------
Net loss $ (1,010,686) (12,896,989) (1,287,698) (24,137,209)
--------- ---------- ---------- -----------
--------- ---------- ---------- -----------
Basic and diluted net loss
per common share (0.04) (0.39) (0.05) (0.74)
--------- ---------- ---------- -----------
--------- ---------- ---------- -----------
Weighted-average common
shares outstanding--
basic and diluted 26,211,578 33,176,184 26,211,578 32,632,600
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
4<PAGE>
<PAGE>
<TABLE>
<CAPTION>
TELEGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 1997 AND 1998
AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
Three months Six months
ended June 30, ended June 30,
------------------ ------------------
1997 1998 1997 1998
---- ---- ---- ----
<C> <C> <C> <C>
Net earnings (loss) $ (1,010,686) (12,896,989) (1,287,698) (24,137,209)
Foreign currency
translation
adjustment,
net of tax 10,434 (554,538) (52,716) (540,719)
---------- ---------- ----------- -----------
Comprehensive
earnings (loss) $ (1,000,252) (13,451,527) (1,340,414) (24,677,928)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
5<PAGE>
<PAGE>
<TABLE>
<CAPTION>
TELEGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30,1998
Accumulated Total
Additional other share-
Common stock paid-in Retained comprehensive holders'
Shares Amount capital deficit income (deficit) equity
------ ------ ----------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at
December 31,
1997 30,889,945 $ - 51,649,660 (21,125,080) (261,495) 30,263,085
Net loss - - - (24,137,209) - (24,137,209)
Shares issued
in connection
with business
combinations
(note 3) 593,526 - 7,802,717 - - 7,802,717
Compensation
expense in
connection
with stock
option plan - - 171,190 - - 171,190
Shares issued
in-lieu of
future
commissions
(note 5) 40,000 - 1,565,000 - - 1,565,000
Payment received
on note
receivable from
shareholder - - 52,367 - - 52,367
Issuance of shares
for options
exercised 476,966 - 622,825 - - 622,825
Issuance of shares
for warrants
exercised 1,327,333 - - - - -
Change in
foreign
currency
translation - - - - (540,719) (540,719)
---------- ---- --------- ---------- ------- ----------
Balances at
June 30,
1998 33,327,770 $ - 61,863,759 (45,262,289) (802,214) 15,799,256
---------- ---- ---------- ---------- ------- ----------
---------- ---- ---------- ---------- ------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
6<PAGE>
<PAGE>
<TABLE>
<CAPTION>
TELEGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30,1997 AND 1998
Six months
ended June 30,
-------------------------
1997 1998
---------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,287,698) (24,137,209)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,943,540 4,902,706
Deferred income taxes (172,956) -
Loss on sale of equipment - 378
Provision for credit losses on
accounts receivable 4,492,567 4,310,258
Accretion of debt discounts 132,952 4,007,784
Stock option-based compensation expense 171,190 171,190
Changes in operating assets and liabilities,
excluding the effects of business
combinations:
Accounts receivable and
unbilled services (17,209,936) (2,308,458)
Prepaid expenses and other assets (1,052,073) (1,902,657)
Deposits and other assets (975,822) (9,162,783)
Accounts payable, commissions payable and
accrued expenses 13,579,276 (5,872,580)
Income taxes 833,999 353,543
Unearned revenue 82,317 29,789
Customer deposits 101,281 294,454
---------- ---------
Net cash provided by (used in)
operating activities 638,637 (29,313,585)
---------- ---------
Cash flows from investing activities:
Purchases of equipment (8,253,247) (27,389,466)
Sales of securities available-for-sale - 17,078,824
Proceeds from sale of equipment - 250
Capitalization of software (295,366) (980,899)
Business combinations,
net of cash acquired - (11,622,905)
Net change in receivables from
shareholders and employees (68,048) (498,431)
--------- ---------
Net cash (used in) provided by
investing activities (8,616,661) (23,412,627)
--------- ---------
Cash flows from financing activities:
Debt issuance costs - (458,548)
Net proceeds from options exercised - 622,825
Principal payments from other
long-term borrowings (275,979) (48,140)
Principal payments under capital
lease obligations (78,663) 9,638
Proceeds received on note due from
shareholder - 52,367
--------- ---------
Net cash (used in) provided by
financing activities (354,642) 178,142
--------- ---------
Effect of exchange rate changes on cash (52,716) (540,719)
--------- ---------
Net decrease in cash and
cash equivalents $(8,385,382) (53,088,789)
Cash and cash equivalents at beginning
of period 14,155,013 74,213,856
---------- ----------
Cash and cash equivalents at end of period $ 5,769,631 21,125,067
---------- ----------
---------- ----------
Supplemental disclosures of cash flow
information:
Interest paid $ 1,491,610 1,093,969
---------- ----------
---------- ----------
Income taxes paid $ 520 2,672
---------- ----------
---------- ----------
Supplemental disclosures of noncash
investing and financing activities:
Common stock issued in-lieu of
future sales commissions $ - 1,565,000
---------- ----------
---------- ----------
Common stock issued in connection
with business combinations $ - 7,802,717
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
7<PAGE>
<PAGE>
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, 1997, was derived from the
Company's audited consolidated balance sheet as of that date. The
consolidated financial statements as of June 30, 1998 and for the three
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
Form 10-K as filed with the SEC.
8<PAGE>
<PAGE>
(2) DEBT
Long-term debt at December 31, 1997 and June 30,1998 is shown
below:
<TABLE>
<CAPTION>
December 31, June 30,
------------------------------
1997 1998
------------- -----------
<S> <C> <C>
8.0% convertible subordinated
notes, due April 15, 2005,
unsecured $ 25,000,000 25,000,000
10.5% senior discount notes,
net of discount, due
November 1, 2004, unsecured 76,442,135 80,449,919
8.5% note payable, due monthly
through fiscal 2000, secured by
vehicle 11,082 -
10.8% note payable, due monthly
through fiscal 1998, secured by
equipment financed 80,955 37,789
8.00% note payable, due fiscal
1998, unsecured - 6,010
6.85% note payable, due monthly
through fiscal 1999, unsecured 8,204 5,833
8.00% note payable, due monthly
through fiscal 1998, unsecured 2,363 -
2.5% above prime note payable, due
monthly through fiscal 2002,
secured by office unit, London - 119,760
9.0% note payable, due monthly
through fiscal 1998, secured by
vehicle - 26,861
----------- -----------
101,544,739 105,646,172
Less current portion (93,788) (111,716)
----------- -----------
Total long-term debt $101,450,951 105,534,456
------------ ----------
------------ ----------
</TABLE>
(3) BUSINESS COMBINATIONS
During the six-month period ended June 30, 1998, the Company acquired
assets or common stock of various companies providing products or
services in the global telecommunications market. Each acquisition
(described below) was accounted for using the purchase method of
accounting and, accordingly, the net assets and results of operations
are included in the consolidated financial statements for the date of
acquisition.
On January 15, 1998, the Company acquired the operations of its
Australian and New Zealand country coordinators (collectively the
Coordinators). Consideration for the Australian country coordinator was
$107,584 and 119,036 shares of unregistered common stock of the Company
valued at $1,581,982, for total consideration of $1,689,566. Consideration
for the New Zealand country coordinator was $105,649 and 178,554 shares of
unregistered common stock of the Company valued at $2,374,768, for total
consideration of $2,480,417.
The agreements also contained provisions which called for additional
consideration if certain financial measures of the acquired entities were
met subsequent to the date of acquisition. On June 5, 1998, the Company
issued an additional 98,600 shares valued at $1,072,550 to the Coordinators
To cancel such contingent consideration provisions in the original purchase
agreements.
The aggregate purchase price for these acquisitions was allocated based on
estimated fair values as follows:
Property and equipment $ 36,226
Goodwill 5,206,307
Total $ 5,242,533
On January 21, 1998, the Company acquired 60 percent of the common stock
of, and controlling interest in, Redicall Pty Limited (Redicall) for
$531,751 and 7,179 shares of unregistered common stock valued at $107,254,
for total consideration of $639,005. Redicall is engaged in the wholesale
distribution of prepaid telephone calling cards. The aggregate purchase
price for this acquisition was allocated based on estimated fair values as
follows:
Current assets $ 156,337
Property and equipment 1,672
Deposits 8,207
Goodwill 762,110
Current liabilities (147,532)
Non-current liabilities (141,789)
Total $ 639,005
The minority interest's portion of the Redicall stockholders' deficit was
included in the Company's calculation of goodwill. Accordingly, the
Company will absorb all of Redicall's net earnings and losses until such
deficit becomes positive. At June 30, 1998, no minority interest has been
reflected in the accompanying financial statements.
On February 3, 1998, the Company acquired a 9.9% interest in Newsnet ITN
Limited (Newsnet), a provider of international and long-distance facsimile
services, for $880,770 On May 31, 1998, the Company acquired the
remaining 90.1% of Newsnet for an additional $8,909,565 bringing the total
consideration paid to $9,790,335. The aggregate purchase price for this
acquisition was allocated based on estimated fair values as follows:
Current assets $ 6,504,055
Property and equipment 682,398
Intangibles 1,840,702
Goodwill 6,879,092
Current liabilities (5,747,820)
Non-current liabilities (368,092)
Total $ 9,790,335
On April 20, 1998, the Company purchased South East Telecom Limited, Phone
Centre Communications Limited, and Corporate Networks Limited (collectively
Corporate Networks). Corporate Networks is engaged in the supply,
installation,and maintenance of telecommunications equipment.
Consideration for the purchase was cash of $62,544 and 164,463 shares of
unregistered common stock of the Company valued at $2,338,922. Additional
consideration to be paid in unregistered common stock of the Company is due
by April 1999 based on average monthly usage of telephone related services
by customers over a predetermined length of time as specified in the
agreement. Due to the uncertainty of future customer usage, the Company is
unable to calculate the minimum additional consideration. The aggregate
purchase price for this acquisition as of June 30, 1998 was allocated based
on estimated fair values as follows:
Current assets $ 2,171,640
Property and equipment 501,673
Goodwill 2,969,106
Current liabilities (3,240,953)
Total $ 2,401,466
Additional consideration resulting from the telephony usage of the acquired
customer accounts will be recorded as an addition to the purchase price
when known.
On May 31, 1998, the Company acquired the operations of its Latin American
coordinator. Consideration for the purchase was 25,294 shares of common
stock of the Company valued at $339,193. The acquisition was accounted for
using the purchase method of accounting. The aggregate purchase price for
this acquisition was allocated to goodwill based on estimated fair values
of the assets and liabilities acquired. The total consideration of
$339,193 is being amortized using an accelerated method over the estimated
life of the coordinator's customers or three years, whichever is shorter.
On June 5, 1998, the Company purchased approximately 2,500 long distance
customer accounts of Mediacom Telefacilities Limited (Mediacom). Mediacom
provides national and international long distance services to corporate
customers throughout the United Kingdom. In accordance with the purchase
agreement, the Company paid consideration of $576,100 and is obligated to
pay additional consideration in the form of cash and unregistered common
stock based upon the average monthly usage of the acquired customer
accounts from April 1, 1998 through October 31, 1998. Due to the
uncertainty of future customer usage, the Company is unable to calculate
the minimum additional consideration. The aggregate purchase price of
$576,100 was allocated to goodwill and will be amortized using an
accelerated method over the estimated life of the acquired customers or
three years, whichever is shorter. Additional consideration resulting from
the financial performance of the acquired customer accounts will be
recorded as an addition to the purchase price when known and amortized over
the remaining life of the customers.
Proforma operating results of the companies described above, assuming these
acquisitions were consummated on January 1, 1997, do not differ
significantly from reported amounts.
10<PAGE>
<PAGE>
(4) SHAREHOLDERS' EQUITY
WARRRANTS
During the quarter ended March 31, 1998, all of the Company's outstanding
warrants were exercised in a cashless transaction. Total warrants
exercised were 1,327,333, which represented the total warrants outstanding
of 1,327,500 less 167 warrants which were canceled. The canceled warrants
represent the value of the consideration (exercise price) due from the
warrant holder at the time of exercise.
STOCK OPTION PLAN
On May 19, 1998, the Company increased the number of shares available for
grant under the Stock Option Plan to 4,750,000.
(5) CONSIDERATION GIVEN IN-LIEU OF FUTURE COMMISSIONS
On January 15, 1998, the Company prepaid sales commissions owed to certain
independent sales agents. Total consideration was $700,000 and 40,000
shares of unregistered common stock valued at $565,000. The total
consideration of $1,265,000 is being amortized to selling, general and
administrative expenses using an accelerated method over the estimated life
of the agent's customers or three years, whichever is shorter.
On April 30, 1998, the Company prepaid sales commissions owed to an
independent sales agent. Total consideration was $210,000. The total
consideration is being amortized to selling, general and administrative
expenses using an accelerated method over the estimated life of the agent's
customers or three years, whichever is shorter.
On June 30, 1998, the Company entered into an agreement to prepay
commissions owed to an independent sales agent. Total consideration was
$1,100,000 in cash and common stock valued at $1,000,000. Under this
agreement, the Company is required to register the common stock in a
public offering allowing such stock to be tradable in the open market. As
of June 30, 1998, the common stock had not been registered or issued to
this agent and, accordingly, the determination of actual shares issuable
under this agreement could not be determined at June 30, 1998. The
$1,000,000 to be issued in the Company's common stock is shown as
additional paid-in capital on the consolidated financial statements at June
30, 1998. The number of shares will be listed as issued and outstanding
upon registering the shares in a public offering. However, an estimate of
the number of shares to be issued (approximately 97,500 shares based upon
the Company's stock price at June 30, 1998) are included in the calculation
of the weighted-average common shares outstanding for the three and six
months ended June 30, 1998. The total consideration of $2,100,000 is being
amortized using an accelerated method over the estimated life of this
agent's commission stream from certain countries or five years, whichever
is shorter.
(6) INDEFEASIBLE RIGHT OF USE AGREEMENTS
On April 23, 1998, the Company entered into a 25-year indefeasible right of
use (IRU) agreement with Cable and Wireless Communications Services Limited
(Cable and Wireless) for the right to use network capacity in an under-sea
fiber cable system. The Company paid $975,000 upon execution of the
agreement and $8,775,000 on June 15, 1998, the date of activation. The
cost of the IRU will be amortized over the life of the 25 year agreement.
In addition, the Company will be responsible for its pro rata share of the
cost and fees in relation to the operation and maintenance of the cable
system.
On May 21, 1998, the Company entered into an IRU agreement with Southern
Cross Cable Network for the right to use network capacity in an under-sea
fiber cable system. The Company paid $2,520,000 upon execution of the
agreement. The IRU is scheduled to be ready for service by December 1999.
Provided that the cable system is ready for service by this date, the
Company will owe an additional $17,480,000, payable $2,480,000 in December,
1999, and in three annual installments of $5,000,000 thereafter. Until
such time as the cable system is ready for service, the Company is
accounting for the initial payment of $2,520,000 as a deposit. In
addition, the Company will be responsible for its pro rata share of the
cost and fees in relation to the operation and maintenance of the cable
system.
(7) COMMITMENTS AND CONTINGENCIES
COMMITMENTS WITH TELECOMMUNICATIONS COMPANIES
The Company has an agreement with Sprint Communications Company L.P.
(Sprint) to use Sprint's fiber-optic network in its delivery of
telecommunication services. This agreement requires net quarterly usage
commitments of $6,000,000. In the event such quarterly commitments are
not met, the Company is required to remit to Sprint 25% of the difference
between the $6,000,000 quarterly commitment and actual usage. This
agreement extends through December 1998. When total usage exceeds
$24,000,000 during 1998, the Company has no further commitment.
The Company has a one-year $3,000,000 usage commitment with MFS/WorldCom in
Frankfurt, Germany, to use MFS/WorldCom's fiber-optic network in its
delivery of telecommunication services. This agreement began on September
5, 1997. On July 28, 1998, the Company and MFS/Worldcom agreed to an
extension of the term of this agreement to June 30, 1999.
The Company also has a two-year minimum usage commitment of $55,000,000
with WorldCom which began on May 1, 1998 and extends through April 30,
2000.
11<PAGE>
<PAGE>
The Company had an agreement with Meyer Group Limited (Meyer) with a
usage commitment to terminate $3,000,000 in Hong Kong call traffic on
Meyer's network by December 31, 1998. On August 1, 1998, the Company
terminated this agreement without penalty.
The Company has an agreement with Epoch Networks, Inc. for internet
services, with a minimum monthly usage commitment of $875,000 over the next
two years. This agreement began June 1, 1998.
Shortfalls in usage commitments, if any, are recorded as cost of revenues
in the period identified.
LETTERS OF CREDIT
The Company has outstanding irrevocable letters of credit in the amount of
$537,918 as of June 30, 1998 with certain carriers. In addition, the
Company has an outstanding revocable letter of credit in the amount of
$2,500,000 with Meyer Group Limited, which was cancelled with the
termination of the contract. These letters of credit, which have
expiration dates from July 1, 1998 to June 12, 1999, collateralize the
Company's obligations for network usage on the carriers' networks. The
fair value of these letters of credit is estimated to be the same as the
contract values based on the nature of the arrangement with issuing banks.
LITIGATION
The Company is a party to certain 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.
SUBSEQUENT EVENTS
On July 31, 1998, the Company entered into a definitive agreement to
purchase 100% of the outstanding shares of Switch Telecom Pty Ltd and all
of the assets of Frame Relay Pty Ltd. for cash consideration of
$22,000,000. The transaction was consummated on August 5, 1998.
On August 3, 1998, the Company entered into a Construction and Maintenance
Agreement (C&MA) to build the Japan-U.S. Cable Network, an undersea cable
system that will connect Japan and the U.S. by mid-year 2000. The Company
is obligated to pay $2.7 million for ownership of its 0.17% share of this
trans-Pacific cable, 20% by year-end 1998, 50% in 1999, and the balance in
early 2000.
On August 4, 1998, the Company obtained a $12,000,000 revolving credit
facility with a financial institution. The facility expires November 2,
1998. The Company is currently in discussions with the institution to
secure a long-term facility.
On August 5, 1998, the Company entered into an agreement with Golden Gate
Management, L.C. to purchase its present corporate headquarters located in
Fairfield, Iowa. The $2,300,000 purchase price consists of the
assumption of an existing $600,000 mortgage with the balance to be paid in
189,196 shares of unregistered common stock of the Company.
12<PAGE>
<PAGE>
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 NUMBER OF SWITCHES/NODES
AND FACILITIES THE COMPANY PLANS TO INSTALL, TECHNOLOGICAL DEVELOPMENT OF THE
COMPANY'S NETWORK, THE ANTICIPATED EXPANSION OF REGIONAL CARRIER SALES, 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 Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 and other reports filed by the Company with the
SEC.
SUMMARY
Telegroup is a rapidly growing multinational carrier of long distance
telecommunications services to over 200 countries. Telegroup offers services
to small and medium-sized businesses and residential customers. The Company
also provides value-added wholesale services to over 40 domestic and
international telecommunications carriers. Telegroup believes that it has one
of the most comprehensive global sales, marketing, and customer service
organizations of the emerging multinational carriers. The Company operates a
digital, facilities-based network, the Telegroup Intelligent Global Network ,
which consists of a central operating center, twenty-five switches, five
enhanced service platforms, owned or leased capacity on ten digital
fiber-optic cable links, and leased parallel data transmission capacity.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE
30, 1997
Revenues. Revenues increased 26.2%, or $21.0 million, from $80.1 million
in the three months ended June 30,1997 to $101.1 million in the three months
ended June 30,1998. This increase was primarily due to growth in
international and domestic wholesale revenues. Wholesale revenues increased
from $23.4 million, or 29.3% of total revenues in the three months ended June
30,1997, to $36.8 million, or 36.4% of revenues for the three months ended
June 30,1998. Retail revenues increased from $56.6 million, or 70.7% of total
revenues in the three months ended June 30, 1997, to $64.3 million, or 63.6% of
total revenues for the three months ended June 30, 1998.
13 <PAGE>
<PAGE>
Cost of Revenues. Cost of revenues increased 39.4%, or $23.3 million,
from $59.1 million in the three months ended June 30, 1997 to $82.4 million
in the three months ended June 30, 1998. As a percentage of revenues, cost of
revenues increased from 73.8% to 81.5%, primarily as a result of a larger
percentage of lower margin wholesale revenues, retail price declines in
certain deregulating markets, and an increase in fixed recurring costs as the
Company transitions to becoming a facilities-based provider. The Company
expects that the cost of revenues as a percentage of revenues will decline
as the Company increases the volume and percentage of traffic transmitted
over the TIGN and cost of revenues increasingly consists of fixed costs
associated with leased and owned lines and the ownership and maintenance
of the TIGN.
Operating Expenses. Operating expenses increased 36.4%, or $7.9 million,
from $21.8 million in the three months ended June 30,1997 to $29.8 million in
the three months ended June 30,1998, primarily as a result of an increase in
international subsidiaries and the number of employees necessary to provide
direct sales internationally, customer service, billing and collection and
accounting support. Other contributing factors were depreciation and
amortization, as discussed below. As a percentage of revenues, operating
expenses increased 2.2% from 27.3% in the three months ended June 30,1997
to 29.5% in the three months ended June 30,1998. The number of full
a 29.9% increase.
Bad Debt. Bad debt expense increased from $2.0 million, or 2.5% of
revenues in the three months ended June 30, 1997 to $2.9 million, or 2.9% of
revenues, in the three months ended June 30,1998. The increase in bad debt
expense as a percentage of revenues in the three months ended June 30, 1998
was due to an increase in reserve to cover a receivable from a single customer.
Depreciation and Amortization. Depreciation and amortization increased
from $1.1 million in the three months ended June 30,1997, to $2.7 million in
the three months ended June 30,1998, 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 Loss. Operating loss increased by $10.2 million, from $0.9
million in the three months ended June 30,1997, to $11.1 million in the
three months ended June 30,1998, as a result of the preceding factors.
Net Loss. Net loss increased approximately $11.9 million, from $1.0
million in the three months ended June 30,1997, to $12.9 million in the
three months ended June 30,1998. The increase is attributable to lower
operating income and a $0.9 million increase in net interest expense.
EBITDA. EBITDA decreased from $0.3 million in the three months ended
June 30, 1997, to $($8.4) million in the three months ended June 30, 1998,
as a result of the foregoing factors.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenues. Revenues increased 21.3%, or $32.8 million, from $154.2
million in the six months ended June 30, 1997 to $186.9 in the six months
ended June 30, 1998. This increase was primarily due to growth in
international and domestic retail sales and international and domestic
wholesale revenues. Wholesale revenues increased from $40.6 million, or 26.4%
of total revenues in the six months ended June 30, 1997, to $65.6 million or
35.1% of total revenues for the six months ended June 30, 1998. Retail rev
$121.3 million, or 64.9% of total revenues in the six months ended June 30,
1998.
Cost of Revenues. Cost of revenues increased 34.7%, or $39.0 million, from
approximately $112.4 million to approximately $151.4 million. As a percentage
of revenues, cost of revenues increased from 72.9% to 81.0%, primarily as a
result of a larger percentage of lower margin wholesale revenues, retail
price declines in certain deregulating markets, and an increase in fixed
recurring costs as the Company transitions to becoming a facilities-based
provider. The Company expects that the cost of revenues as a percentage of
revenues will decline as the Company increases the volume and
associated with leased and owned lines and the ownership and maintenance of
the TIGN.
Gross Profits. Gross profit decreased 14.9%, or $6.2 million, from $41.8
million in the six months ended June 30, 1997, to $35.5 million in the six
months ended June 30, 1998. As a percentage of revenues, gross profit
decreased from 27.0% to 19.0%, due to the increase in the relative cost of
revenues as a percentage of overall revenues.
Operating Expenses. Operating expenses increased 33.5%, or $14.1 million,
from $42.2 million in the six months ended June 30, 1997 to $56.3 million in
the six months ended June 30, 1998, primarily as a result of increased sales
commissions related to revenue growth, as well as an increase in
international subsidiaries and the number of employees necessary to provide
direct sales internationally, customer service, billing and collection and
accounting support. As a percentage of revenues, operating expenses increased
2.7% from 27.4% in the six months ended June 30, 1997 to 30.1% in the six
months ended June 30, 1998.
Bad debt expense decreased from $4.5 million, or 2.9% of revenues in the
six months ended June 30, 1997 to $4.3 million, or 2.3% of revenues, in the
six months ended June 30, 1998. The decrease in bad debt expense as a
percentage of revenues in the six months ended June 30, 1998 was due to
continued vigilance in assessing the creditworthiness of new subscribers to
Company services, partly offset by an increase in reserve to cover a
receivable from a single customer.
Depreciation and amortization increased from $1.9 million in the six
months ended June 30, 1997 to $4.9 million in the six months ended June 30,
1998, 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 Loss. Operating loss increased by $20.4 million, from $0.4
million in the six months ended June 30, 1997, to $20.8 million in the six
months ended June 30, 1998, as a result of increases in sales commissions and
general administration expenses which were greater than increases in gross
profit.
Net Loss. Net loss increased approximately $22.8 million, from $1.3
million in the six months ended June 30, 1997, to $24.1 million in the six
months ended June 30, 1998, as a result of lower operating income and a $1.8
million increase in interest expense net of interest income.
EBITDA. EBITDA decreased from $1.3 million in the six months ended June
30, 1997, to $(15.9) million in the six months ended June 30, 1998, as a
result of the foregoing factors.
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, the Company's Initial Public Offering,
convertible debentures, long-term debt, additional equity issuances, and by
capital leases. The Company may require additional capital to develop and
14<PAGE>
<PAGE>
expand the TIGN, open new offices, introduce new telecommunications services,
upgrade and/or replace its management information systems, fund its
acquisition plans, and fund its anticipated operating losses and net cash
outflows in the near term. In addition, the implementation of the Company's
strategy to expand the TIGN with an ATM backbone protocol is dependent on,
among other things, the ability of the Company to obtain additional
financing. The Company may seek to raise such additional capital from
public or private equity and/or debt sources. There can be no assurance
that the Company will be able to obtain the additional financings or if
obtained, that it will be able to do so on a timely basis or on terms favorable
to the Company.
Net cash provided by (used in) operating activities was $.6 million
in the six months ended June 30, 1997 and $(29.3) million in the six
months ended June 30, 1998. The net cash provided by operating activities in
the six months ended June 30, 1997 was primarily due to a greater increase
in accounts payable to carriers relative to the increase in accounts
receivable from customers and an increase in the provision for credit losses
on accounts receivable. The net cash used in operating activities in the
six months ended June 30, 1998 was primarily due to the net loss, partly
offset by a decrease in accounts receivable, an increase in depreciation and
amortization expense, and an increase in accretion of the debt discount. The
$9.2 million increase in deposits and other assets in the six months ended
June 30, 1998, was due primarily to deposits on major accounting and billing
software systems not yet in service at period end.
Net cash used in investing activities was $8.6 million in the six months
ended June 30, 1997, and $23.4 million in the six months ended June 30, 1998.
The net cash used in the six months ended June 30, 1997 was primarily due to
increases in equipment purchases. The net cash used in the six months ended
June 30, 1998 was primarily due to purchases of equipment and business
combinations, partially offset by sales of securities available-for-sale.
Net cash (used in) provided by financing activities was $(.4)
million in the six months ended June 30, 1997, and $.2 million in the six
months ended June 30, 1998. The net cash used in the six months ended
June 30, 1997, was primarily due to principal payments on long-term
borrowings. The net cash provided in the six months ended June 30, 1998,
was primarily due to proceeds from options exercised.
The continued development and expansion of the TIGN, the upgrade or
replacement of the Company's management information systems, the opening of
new offices, and the introduction of new telecommunications services, as well
as the funding of anticipated operating losses and net cash outflows, will
require additional capital. The Company has identified an additional $32
million of capital expenditures, including acquisitions, which the Company
intends to undertake for the remainder of 1998. The Company currently
anticipates that the cash on hand will allow the Company to fund capital
expenditures as planned and to fund anticipated operating losses and net cash
outflows for the remainder of the year. The amount of the Company's actual
future capital requirements will depend upon many factors, including the
15<PAGE>
<PAGE>
performance of the Company's business, the rate and manner in which it expands
the TIGN, increases staffing levels and customer growth, upgrades or replaces
management information systems and opens 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 if internally
generated funds and funds from other financings if entered into, 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,
or the Company may be required to seek additional funds earlier than currently
anticipated. There can be no assurance that any additional financing will be
available to the Company in the future or, if available, that it could be
obtained on terms acceptable to the Company.
YEAR 2000 (Y2K) COMPLIANCE
Internal While the Company believes that its hardware and software
applications are Y2K compliant, there can be no assurance until the year 2000
occurs that all systems will then function adequately. All software systems
and hardware that the Company purchases are required to be Y2K compliant.
In addition, the Company plans to develop Y2K compliancy test suites to test
for Y2K compliance across all systems. The Company does not believe that
either the risks or the costs incurred for internal systems to be Y2K
compliant are material.
External While all new contracts entered into by the Company contain a
provision warranting that the systems of the supplier or vendor are Y2K
compliant, there is a myriad of unidentified potential problems that could
occur in global telecommunications. Further, if the software applications of
local exchange carriers, long distance carriers, fiber optic cable systems,
ITOs, domestic and foreign banking systems, or others on whose services the
Company depends, are not Y2K compliant, the non-compliance of those applications
could have a material adverse effect on the Company's financial condition and
results of operations.
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.
16<PAGE>
<PAGE>
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 a 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.
Item 2. Changes in Securities and Use of Proceeds.
- ------ -----------------------------------------
On January 15, 1998, to acquire business assets of the LeHeron
Corporation Limited in Australia and New Zealand, the Company issued 297,590
shares of common stock. On June 5, 1998, the Company issued an additional
98,600 shares of common stock to complete this acquisition. On January 15,
1998, the Company issued 40,000 shares of common stock in lieu of future
sales commissions to Katz & Associates in Brazil. On January 21, 1998, the
Company issued 7,179 shares of common stock to purchase 60% of the common
stock of RediCall Pty. Limited in Australia.
On April 20, 1998, the Company issued 164,463 shares of common stock to
purchase South East Telecom Limited, Phone Centre Communications Limited,
and Corporate Networks Limited (collectively, Corporate Networks). On May
31, 1998, to acquire the operations of its Latin American coordinator, the
Company issued 25,294 shares of common stock.
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
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. Defaults Upon Senior Securities.
- ------- -------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ---------------------------------------------------
None.
Item 5. Other Information.
- ------- -----------------
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
17<PAGE>
<PAGE>
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 World Trade Organization agreement on basic
telecommunications services and 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 (a) greater than anticipated competition in the Company's
telephone markets resulting therefrom, (b) the final outcome of the
FCC rulemakings with respect to interconnection agreements and access
charge reforms, and of foreign regulatory proceedings affecting the
Company's ability to compete in foreign markets, and (c) 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 service offerings
on a timely and cost-effective basis, including without limitation the
Company's ability to (a) expand successfully its long distance and
enhanced service offerings to new markets, and (b) offer bundled
service packages on terms attractive to its customers.
(v) the risks inherent in rapid technological change, including without
limitation (a) 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 (b) 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 (a) achieve projected
18<PAGE>
<PAGE>
economies of scale and cost savings, (b) meet pro forma cash flow
projections developed by management in valuing newly acquired
businesses, and (c) 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, regulatory
limitations, 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 ability of the Company to identify and adequately address Y2K
issues, both internally and externally.
(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.
Item 6. Exhibits and Reports on Form 8-K.
- ------- --------------------------------
A. Exhibits
The exhibits filed as part of this report are set forth in the
Exhibit Index on page 24 of this report.
B. Reports on Form 8-K
None 19<PAGE>
<PAGE>
EXHIBIT INDEX
The following exhibits are included in this Quarterly Report on Form 10-Q:
Exhibit Number Exhibit Description
- --------------- -------------------
3.1 Form of Second Restated Articles of Incorporation of
Telegroup, Inc. (incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-1,
File No. 333-25065)
3.2 Form of Amended and Restated Bylaws of Telegroup, Inc.
(incorporated by reference to Exhibit 3.4 to the
Company's Registration Statement on Form S-1, File No.
333-25065)
3.1 Form of Indenture for 8.0% Convertible Notes dated
September 30, 1997 (incorporated by reference to Exhibit
4.1 to the Company's Form 10-Q for the quarter-ended
September 30, 1997, SEC File No. 0-29284)
3.2 Form of Indenture for 10.5% Senior Discount Notes dated
October 23, 1997 (incorporated by reference to Exhibit 4.2
to the Company's Form 10-Q for the quarter-ended September
30, 1997, SEC File No. 0-29284)
27 Financial Data Schedule
20<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.
Telegroup, Inc.
Date: August 13, 1998 By: /s/ Douglas Neish
-----------------------
Douglas Neish
Vice President and
Chief Financial Officer
Date: August 13, 1998 By: /s/ Gary Korf
-----------------------
Gary Korf
Controller
21
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