<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(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. 1-13433
EXCEL COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2720091
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8750 NORTH CENTRAL EXPRESSWAY 75231
DALLAS, TEXAS SUITE 2000 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(214) 863-8000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
----- -----
As of August 12, 1998 the registrant had outstanding 132,324,287 shares of
$.001 par value common stock.
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<PAGE>
EXCEL COMMUNICATIONS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I:FINANCIAL INFORMATION
Item 1.Financial Statements
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997.............................................. 1
Consolidated Statements of Operations for the three and six
months ended June 30, 1998 and 1997............................ 2
Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 and 1997......................................... 3
Notes to Consolidated Financial Statements...................... 4-8
Item 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9-16
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............................. 17
Signatures............................................................ 18
Exhibit Index......................................................... 19
</TABLE>
<PAGE>
PART I.FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 18,197 $ 16,161
Accounts receivable, net............................ 324,070 304,553
Income tax receivable, net.......................... 35,864 23,756
Inventories......................................... 4,367 3,651
Deferred income tax asset........................... 19,985 34,128
Other current assets................................ 13,916 14,217
---------- ----------
416,399 396,466
---------- ----------
Property and equipment, net........................... 324,714 281,847
---------- ----------
Goodwill.............................................. 931,490 943,682
---------- ----------
Deferred income tax asset............................. -- 3,684
---------- ----------
Other assets.......................................... 43,562 11,337
---------- ----------
$1,716,165 $1,637,016
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............ $ 316,186 $ 337,630
Commissions payable................................. 17,442 22,265
Other current liabilities........................... 4,266 4,296
Current maturities of long-term debt and capital
lease obligations.................................. 748 676
---------- ----------
338,642 364,867
Long-term debt and capital lease obligations.......... 541,874 477,292
---------- ----------
Deferred management services fees and other long-term
liabilities.......................................... 32,552 42,150
---------- ----------
Deferred income taxes payable......................... 7,582 --
---------- ----------
Commitments and contingencies......................... -- --
---------- ----------
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000,000 shares
authorized, none outstanding....................... -- --
Common stock, $0.001 par value, 500,000,000 shares
authorized, 132,934,901 and 132,679,709 issued;
132,264,641 and 132,613,909 outstanding............ 133 133
Additional paid-in capital.......................... 543,083 548,519
Unrealized gain on securities available for sale.... 31 21
Treasury stock, 670,260 and 65,800 shares at cost... (12,508) (970)
Retained earnings................................... 264,776 205,004
---------- ----------
Total stockholders' equity........................ 795,515 752,707
---------- ----------
$1,716,165 $1,637,016
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ------------------
1998 1997 1998 1997
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Communication services............. $ 473,014 $ 292,926 $950,292 $596,599
Marketing services................. 16,405 37,648 33,935 65,342
--------- --------- -------- --------
Total revenues................... 489,419 330,574 984,227 661,941
--------- --------- -------- --------
Operating expenses:
Communication...................... 262,256 157,239 525,020 322,485
Selling, general and administra-
tive.............................. 150,512 111,712 312,903 220,502
Depreciation and amortization...... 13,222 4,369 25,769 7,930
--------- --------- -------- --------
Total operating expenses......... 425,990 273,320 863,692 550,917
--------- --------- -------- --------
Operating income................. 63,429 57,254 120,535 111,024
--------- --------- -------- --------
Interest expense................... (9,446) (11) (18,879) (32)
Other income (expense)............. 574 2,050 962 4,186
--------- --------- -------- --------
Income before income taxes........... 54,557 59,293 102,618 115,178
Provision for income taxes......... 22,644 22,294 42,846 43,083
--------- --------- -------- --------
Income before cumulative effect of
change in accounting principle...... 31,913 36,999 59,772 72,095
Cumulative effect of change in
accounting principle, net of income
taxes............................... -- -- -- (65,214)
--------- --------- -------- --------
Net income........................... $ 31,913 $ 36,999 $ 59,772 $ 6,881
========= ========= ======== ========
Diluted and basic earnings per common
and equivalent share:
Income before cumulative effect of
change in accounting principle...... $ 0.24 $ 0.34 $ 0.44 $ 0.65
Cumulative effect of change in
accounting principle, net of income
taxes............................... -- -- -- (0.59)
--------- --------- -------- --------
Diluted and basic earnings per share. $ 0.24 $ 0.34 $ 0.44 $ 0.06
========= ========= ======== ========
Weighted average shares and share
equivalents outstanding............. 135,387 110,139 135,250 110,371
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1998 1997
-------- --------
<S> <C> <C>
Operating activities:
Net income............................................... $ 59,772 $ 6,881
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of change in accounting principle.... -- 65,214
Depreciation and amortization.......................... 25,769 7,930
Loss on disposal of assets............................. -- 152
Deferred income taxes.................................. 25,409 680
Changes in assets and liabilities:
Accounts receivable, net............................. (19,517) 6,806
Income tax receivable, net........................... (12,108) (1,696)
Accounts payable and accrued liabilities............. (21,444) (26,242)
Commissions payable.................................. (4,823) 417
Deferred management services fees and other.......... (9,618) (20,823)
Inventories and other................................ (100) 1,847
-------- --------
Net cash provided by operating activities.............. 43,340 41,166
-------- --------
Investing activities:
Proceeds from sale of assets............................. -- 20
Purchase of property and equipment....................... (55,433) (30,722)
Purchase of franchise agreements......................... (33,551) --
-------- --------
Net cash used in investing activities.................. (88,984) (30,702)
-------- --------
Financing activities:
Payments of debt and capital lease obligations........... (459,346) (69)
Proceeds from issuance of long-term debt................. 524,000 --
Net proceeds from issuance of common stock............... 11,823 7,812
Purchase of treasury stock............................... (28,797) (34,804)
-------- --------
Net cash provided by (used in) financing activities.... 47,680 (27,061)
-------- --------
Net increase (decrease) in cash............................ 2,036 (16,597)
Cash, beginning of period................................ 16,161 169,846
-------- --------
Cash, end of period...................................... $ 18,197 $153,249
======== ========
Supplemental disclosure:
Interest paid during the period.......................... $ 20,414 $ 32
Income taxes paid during the period...................... 36,783 40,709
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXCEL Communications, Inc., previously New RES, Inc., is a Delaware
corporation and the parent company of Excelcom, Inc. ("Excelcom"), previously
EXCEL Communications, Inc., which was formed in 1988 and commenced operations
in 1989. All references to the "Company" or "EXCEL" refer to EXCEL
Communications, Inc. and include its subsidiaries and predecessors. EXCEL is a
provider of a variety of communication products and services which include
residential long distance service, commercial long distance service, and
paging service. The Company's presubscribed residential services are marketed
primarily through a network marketing system of independent representatives
("IRs"). EXCEL markets residential dial around products and services through
Dial & SaveSM, Long Distance Wholesale ClubSM, and Telco ChoiceSM programs and
markets its commercial products and services through IRs, internal sales
personnel, and dealers. The Company completes subscriber calls to all directly
dialable locations worldwide.
The Consolidated Financial Statements include the accounts of EXCEL
Communications, Inc. and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. These
Consolidated Financial Statements have been prepared without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles ("GAAP") have been condensed or omitted pursuant to such rules and
regulations. These Consolidated Financial Statements should be read in
conjunction with the notes to the financial statements in the Company's Form
10-K for the fiscal year ended December 31, 1997 and the Company's Form 10-Q
for the quarterly period ended March 31, 1998.
The financial information included herein reflects all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for interim
periods. The results of operations for the three and six month periods ended
June 30, 1998 are not necessarily indicative of the results to be expected for
the full year.
1.MARKETING ACTIVITIES
Marketing services revenues are primarily comprised of receipts for
materials and services rendered by EXCEL to IRs and area coordinators ("ACs").
Except in certain states, IRs are required to make an initial refundable
application deposit with EXCEL as an expression of commitment. There is no
additional cost to participate. IRs have an option to purchase a start-up
package, which includes a training class and training materials, business
forms, promotional and presentation materials, ongoing technical and
administrative support services, and monthly reports. If the start-up package
is purchased, the application deposit requirement is waived. In addition,
EXCEL offers training positions whereby ACs, certified by the Company, provide
training to new IRs.
Selling, general and administrative expenses consist of marketing costs and
the costs of providing teleservices and other support services for
subscribers, billing and collecting long distance and paging revenues, bad
debt expenses, and the costs of the information systems and personnel required
to support the Company's operations. Marketing costs include commissions paid
to IRs, certain costs of providing training, business forms, promotional and
presentation materials to IRs, salaries, commissions, and other expenses
related to Commercial Sales Division ("CSD") sales representatives, and direct
mail advertising expenses. Commissions paid to IRs are based upon the
acquisition of new long distance and paging subscribers ("subscriber
acquisition costs") and long distance telephone and paging usage by
subscribers. The Company also pays commissions for the training of IRs and
certain ACs. Effective January 1, 1997, the Company changed its method of
accounting for subscriber acquisition costs. Previously, the Company had
deferred the portions of commissions paid to IRs that directly relate to the
acquisition of long distance and paging subscribers. Beginning January 1,
1997, the Company began fully expensing subscriber acquisition costs in the
period incurred in order to present its operating results in a manner more
consistent with other telecommunications companies against which its results
are compared. The
4
<PAGE>
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company recognized a one-time charge of $65.2 million, net of income taxes,
($0.59 per share) in the first quarter of 1997 to reflect the change in
accounting principle. Costs incurred in connection with direct mail
advertising and marketing commercial long distance products are recognized as
expense in the period in which they are incurred.
2. MERGERS AND ACQUISITIONS
EXCEL and Telco Merger
On October 14, 1997, New RES, Inc., a Delaware corporation and newly formed
holding company, now EXCEL Communications, Inc., ("Holdings"), succeeded to
the businesses of Excelcom, previously EXCEL Communications, Inc., and Telco
Communications Group, Inc. ("Telco"), as a result of mergers of wholly-owned
subsidiaries with and into Excelcom and Telco, pursuant to the Agreement and
Plan of Merger dated as of June 5, 1997 (the "Telco Merger"). At the closing
of the Telco Merger on October 14, 1997: (i) Excelcom and Telco became wholly-
owned subsidiaries of Holdings; (ii) each outstanding share of Excelcom common
stock converted into the right to receive one share of common stock of
Holdings; (iii) each outstanding share of Telco common stock converted into
the right to receive 0.7595 shares of common stock of Holdings and $15.00 in
cash; (iv) except for certain options, each then outstanding and unexercised
option to acquire one share of Telco common stock was assumed by Holdings and
converted into an option to acquire 1.5190 shares of Holdings common stock,
and the exercise price per share with respect to each such assumed option was
adjusted to equal the exercise price under the original option divided by
1.5190; (v) each then outstanding and unexercised option to acquire one share
of Excelcom common stock was assumed by Holdings and converted into an option
to acquire one share of Holdings common stock, and the exercise price per
share was unchanged; (vi) the name of EXCEL Communications, Inc. was changed
to Excelcom, Inc.; and (vii) the name of Holdings was changed to EXCEL
Communications, Inc. Consideration for the Telco Merger consisted of $666.2
million in cash (including $164.5 million of Telco debt assumed and paid by
EXCEL) and 25,376,506 shares of common stock, $.001 par value, of the Company
("Company Common Stock").
The merger of Telco into Holdings has been accounted for under the
"purchase" method of accounting, with EXCEL as the acquirer in accordance with
GAAP, and the merger of Excel into Holdings has been accounted for as a
reorganization. The merger with Telco resulted in the recognition of
incremental goodwill of $906.6 million which is being amortized straight-line
over a period of 40 years. The following unaudited financial information
represents the Company's results of operations on a pro forma basis as if the
Telco Merger had occurred January 1, 1997 (dollars in thousands, except per
share data):
<TABLE>
<CAPTION>
PRO FORMA
SIX MONTHS ENDED
JUNE 30, 1997
----------------
<S> <C>
Total revenues.......................................... $ 934,678
=========
Net income before cumulative effect of change in
accounting principle................................... $ 63,708
=========
Net income.............................................. $ (1,506)
=========
Net income per share before cumulative effect
of change in accounting principle...................... $ 0.48
=========
Net income per share.................................... $ (0.01)
=========
</TABLE>
5
<PAGE>
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
These pro forma amounts represent the historical operating results of EXCEL
and Telco combined with appropriate adjustments which give effect to
incremental goodwill amortization and interest expense incurred in connection
with the Telco Merger. These pro forma amounts do not give effect to any
potential cost savings or synergies that could result from the Telco Merger
and exclude certain non-recurring Telco Merger related transaction costs. The
pro forma data are not intended to be indicative of actual results had the
Telco Merger occurred on January 1, 1997, nor do they indicate results which
may be achieved in the future.
EXCEL and Teleglobe Merger
On June 14, 1998, the Company entered into a definitive merger agreement
(the "Teleglobe Merger Agreement") with Teleglobe Inc. ("Teleglobe"), a
Canadian corporation and a world leader in the intercontinental
telecommunications industry, and North Merger Sub Corporation, a wholly-owned
subsidiary of Teleglobe, (the "Teleglobe Merger"). Teleglobe's global network
includes submarine cable and satellite facilities, meeting the global
connectivity needs of established and emerging carriers from around the world,
as well as those of consumers, multinational corporations, internet service
providers, and broadcasters. Pursuant to the Teleglobe Merger Agreement,
Teleglobe shareholders will retain their shares and each share of EXCEL common
stock will be exchanged for 0.885 of a share of Teleglobe common stock.
The Teleglobe Merger is intended to be accounted for under the "pooling of
interests" method of accounting under U.S. GAAP. The Teleglobe Merger is
expected to qualify as a tax-free reorganization under the U.S. Internal
Revenue Code. The completion of the Teleglobe Merger is subject to the
satisfaction of a number of conditions, including, among others, receipt of
regulatory approvals under applicable U.S. and Canadian law, receipt of a
ruling from the U.S. Internal Revenue Service concerning certain tax
consequences of the Teleglobe Merger and the listing of the Teleglobe common
shares to be issued in the Teleglobe Merger on the New York Stock Exchange,
the Montreal Exchange and the Toronto Stock Exchange. The Teleglobe Merger is
expected to be consummated in the fourth quarter of 1998.
Simultaneous with the execution of the Teleglobe Merger Agreement, Troutt
Partners, Ltd., The Troutt Family Trust and Austex Enterprises, Ltd., which
together hold approximately 54% of the Company Common Stock, gave their
written consents approving the Teleglobe Merger and entered into Consent and
Voting Agreements with respect thereto. These written consents satisfied the
stockholder approval requirements of EXCEL for the Teleglobe Merger under
Delaware law, so no further vote of EXCEL stockholders is necessary to approve
the Teleglobe Merger. Holders of a majority of the Teleglobe common shares
gave their written consents approving the issuance of the Teleglobe common
shares in the Teleglobe Merger and entered into Consent and Voting Agreements
with respect thereto.
EXCEL and Teleglobe also each entered into stock option agreements in
connection with the Teleglobe Merger Agreement granting to the other the
option to acquire up to 19.9% of its common shares outstanding as of June 14,
1998. The options are exercisable upon a termination of the Teleglobe Merger
Agreement in certain circumstances.
On July 17, 1998, EXCEL filed with the Securities and Exchange Commission
(the "Commission") preliminary copies of an Information Statement on Schedule
14C (the "Information Statement") and other materials related to the Teleglobe
Merger. Teleglobe will register the Teleglobe common shares to be issued in
the Teleglobe Merger pursuant to a Registration Statement on Form F-4, (the
"F-4 Registration Statement") to be filed with the Commission under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The F-4
Registration Statement will contain the prospectus of Teleglobe and the
Information Statement of EXCEL, and will be mailed to the holders of Company
Common Stock after the F-4 Registration Statement is declared effective by the
Commission.
6
<PAGE>
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
After the closing of the Teleglobe Merger, the Company Common Stock will be
de-registered under the Exchange Act and will be de-listed from the New York
Stock Exchange. Thereafter, EXCEL will cease to file reports and other
information with the Commission under the Exchange Act. Following the
Teleglobe Merger it is expected that Teleglobe will continue to be a "foreign
private issuer" under the Exchange Act and will file reports and other
information thereunder, including pro-forma historical financial statements
which give effect to the Teleglobe Merger.
3.INCOME TAXES
The components of the provision for income taxes are as follows for the six
months ended June 30, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1998 1997
-------- --------
<S> <C> <C>
Current income tax expense:
Federal.................................................... $ 15,638 $ 38,156
State...................................................... 1,799 4,247
-------- --------
$ 17,437 $ 42,403
-------- --------
Deferred income tax expense:
Federal.................................................... $ 22,917 $ 76
State...................................................... 2,492 604
-------- --------
$ 25,409 $ 680
-------- --------
Provision for income taxes................................. $ 42,846 $ 43,083
======== ========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
Litigation, Claims and Assessments
EXCEL is party from time to time to litigation in the ordinary course of
business including employment related litigation. Based upon information
presently available, management believes the final disposition of these items
will not have a material adverse effect on the results of operations or
financial position of the Company.
EXCEL has entered into employment and consulting agreements with certain
members of management. The agreements provide for the employees to receive
amounts not less than specified base annual salaries through the terms of the
agreements, which have terms of one to five years. Certain of the contracts
also include non-competition covenants and options to purchase shares of the
Company Common Stock.
On August 30, 1996, AT&T filed suit in the United States District Court for
the District of Delaware against the Company, its subsidiary, EXCEL
Communications Marketing, Inc., and EXCEL Telecommunications, Inc. alleging
past and continued infringement of a single patent without specifying the
amount of damages. On April 1, 1998, the Court entered a judgment in favor of
EXCEL on EXCEL's motion for summary judgment that all claims asserted against
EXCEL were invalid as a matter of law under 35 U.S.C. Section 101. AT&T has
appealed the decision to the United States Court of Appeals for the Federal
Circuit. Based upon the information available to the Company, the Company does
not believe that these claims will have a material adverse effect on the
Company's results of operations or financial position; however, should an
unfavorable outcome result in this matter, it could have a material adverse
effect upon the Company's results of operations or financial position.
7
<PAGE>
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Several stockholders of EXCEL have filed four separate lawsuits in the
Delaware Court of Chancery challenging the Teleglobe Merger: Adolph D. Schulz
(C.A. No. 16448), Ronald K. Drucker (C.A. 16452), William Saxton (C.A. No.
16456), and Richard T. Rosso and Edward Rosso (C.A. No. 16483NC). In each
action, the named defendants include EXCEL directors or officers Stephen G.
Canton, J. Christopher Dance, Nicholas A. Merrick, T. Allan McArtor, Ronald A.
McDougall, Kenny A. Troutt, Stephen R. Smith, and EXCEL. The actions brought
by Drucker, Saxton, and the Rossos also name Teleglobe as a defendant.
All four complaints allege that the directors of EXCEL breached their
fiduciary duties to EXCEL's stockholders in approving the Teleglobe Merger.
The complaints filed by Drucker, Saxton, and the Rossos also allege that
Teleglobe knowingly aided and abetted the alleged breaches of fiduciary duty
committed by EXCEL's directors. The plaintiffs in each action seek injunctive
relief to prohibit the defendants from completing the Teleglobe Merger, or to
rescind it if it is consummated. The plaintiffs also seek compensatory damages
from the defendants in an amount to be determined at trial. EXCEL and
Teleglobe believe that these suits are without merit with respect to each of
them, respectively, and they intend to defend these suits vigorously.
Legislative and Regulatory Matters
On February 8, 1996, the 1996 Telecommunications Act was enacted into law.
This comprehensive federal legislation will affect every sector of the
telecommunications industry. Included in the new statutory provisions is the
opening up of local telephone markets to competition from facilities-based and
resale carriers and, subject to certain safeguards, the elimination of
restrictions on Bell Operating Company ("BOC") and GTE Operating Company
("GTOC") entrance into the long distance telecommunications market. The FCC
adopted rules to govern the introduction of these new forms of competition in
its August 8, 1996 Interconnection Orders, significant aspects of which,
including provisions governing the wholesale pricing of local service, were
overturned by the U.S. Eighth Circuit Court of Appeals. The U.S. Supreme Court
has agreed to hear appeals of this decision, but it is not expected by the
Company to render a final decision until early 1999. Therefore, it is unknown
at this time whether this Eighth Circuit decision will be upheld or what
impact the 1996 Telecommunications Act or the Interconnection Orders will have
on the Company. Depending on the nature and timing of BOC and GTOC entry into
the long distance market, the Company may face significant additional
competition in the provision of long distance services. However, the 1996
Telecommunications Act opens the local telephone market to competition, which,
depending on the nature of such opening, the Company believes may provide
opportunities to compete in the provision of local services. The Company is
currently seeking certification to provide resold local exchange services in
several states. As of June 30, 1998, the Company is authorized to provide
resold local exchange services in 31 states.
Various governmental agencies monitor direct selling activities, and the
Company has occasionally been requested to supply information regarding its
marketing plan to certain of such agencies. Although the Company believes that
its network marketing system is in substantial compliance with laws and
regulations of each state relating to direct selling activities, there is no
assurance that legislation and regulations adopted in particular jurisdictions
in the future will not adversely affect the Company's operations.
5. SUBSEQUENT EVENTS
In July 1998, the Company announced its intent to file for voluntary
dissolution of its recently-opened, wholly-owned thrift, FirstExcel, F.S.B.
The decision results from the Teleglobe Merger. Under U.S. bank regulations,
Teleglobe would be required to apply for and be granted "thrift holding
company" status, which would subject the proposed merger to additional
regulatory approvals and potentially expose Teleglobe to additional regulatory
approval requirements in future potential corporate combinations. The
voluntary dissolution of FirstExcel was filed in August 1998 and is not
expected to have a material adverse effect on the Company's financial position
or results of operations.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements set forth in this report are forward looking statements
that involve a number of risks and uncertainties. Among many factors that
could cause actual results to differ materially are the following: the
consummation of the proposed merger with Teleglobe Inc.; the Company's ability
to manage rapid growth; the Company's ability to attract, maintain, and
motivate a large base of independent representatives ("IRs"); litigation
including that with competitors, existing IRs and shareholders; the Company's
ability to migrate traffic to its network; the Company's ability to pass
through Primary Interexchange Carrier Charge ("PICC") and Universal Service
Fund ("USF") charges to customers; the adoption of new, or changes in,
accounting policies, practices and estimates and the application of such;
regulation and management of IRs; competition in the long distance
telecommunications and paging industries; the Company's ongoing relationship
with its long distance carriers; dependence upon key personnel; subscriber
attrition; federal and state governmental regulation of the long distance
telecommunications and direct selling industries; the Company's ability to
maintain, operate, and upgrade its information systems; the Company's ability
to address and manage the Year 2000 issue; the Company's success in the
offering of other additional communications products and services; any risks
associated with the change from 10+XXX to 10+10+XXX dialing for dial around
customers; possible claims relating to the ownership of proprietary rights;
the Company's ability to manage customer acquisition costs and other SG&A
expenses; and general economic conditions.
GENERAL
EXCEL provides long distance telecommunications and paging services to both
residential and commercial customers in the United States. The Company has
developed several marketing channels for its services, including direct sales
to residential, commercial and wholesale customers through IRs, dealers and
internal sales personnel, as well as direct mail marketing of several dial
around products. These multiple distribution channels, which target both
residential and commercial customers, are a key element of the Company's
business strategy as they allow the Company to balance its network traffic
capacity and provide multiple avenues for growth.
The Company operates a nationwide telecommunications network consisting of
nine switches, leased transmission lines and sophisticated network management
systems designed to optimize traffic routing. This network currently
originates traffic in all or some part of 48 states and the District of
Columbia and operates as an "open network", meaning that any individual within
the Company's originating service area, whose local exchange carrier ("LEC")
provides equal access, can access the Company's long distance network by
dialing either of the Company's carrier identification codes ("CIC"), or by
presubscribing to the Company as their long distance service provider.
The Company owns approximately 100,000 network miles of DS-3 capacity (under
a long term right to use agreement) and also leases additional transmission
lines from a variety of facilities-based and resale long distance carriers.
The Company's contracts with these entities typically have terms ranging from
12 to 60 months. The Company supplements its leased "on-network" capacity with
"off-net" services from a variety of resale and facilities-based long distance
carriers. In addition, the Company does not have any on-network international
network arrangements and exclusively resells the network capacity of other
resale and facilities-based long distance carriers to international
destinations.
The Company currently has agreements with Frontier Communications Services,
Inc. ("Frontier"), IXC Long Distance, Inc. ("IXC Long Distance"), MCI
Telecommunications Corp. ("MCI"), and WorldCom, Inc. ("WorldCom") to provide
switching services and network transmission of its long distance subscribers'
traffic. The agreements with IXC Long Distance, MCI, and WorldCom each contain
minimum usage commitments. The Company is currently meeting all minimum
commitments under these contracts. Under the agreement with Frontier, Frontier
is the carrier for the Company for certain calling card calls and personal 800
service. The Company is in the process of migrating a substantial portion of
its traffic currently being carried by third parties onto its own network and
expects the majority of the migration to be completed by the end of 1998.
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The Company's revenues primarily consist of revenues for communication
services and marketing services. Revenues for communication services, as
reflected in the Company's Consolidated Financial Statements, are net of the
effect of certain adjustments, including those for unbillable call records.
The Company's long distance subscribers are located throughout the United
States, and the Company completes subscriber calls to all directly dialable
locations worldwide. The Company bills its subscribers for long distance usage
based on the type of calls, time of calls, duration of calls, the terminating
phone numbers, and each subscriber's rate plan in effect at the time of the
call.
Marketing services revenues are primarily comprised of receipts for
materials and services rendered by EXCEL to IRs and area coordinators ("ACs").
Except in certain states, IRs are required to make an initial refundable
application deposit with EXCEL as an expression of commitment. There is no
additional cost to participate. IRs have an option to purchase a start-up
package, which includes a training class and training materials, business
forms, promotional and presentation materials, ongoing technical and
administrative support services, and monthly reports. If the start-up package
is purchased, the application deposit requirement is waived. In addition,
EXCEL offers training positions whereby ACs, certified by the Company, provide
training to new IRs. The portions of the marketing services revenues received
that relate to ongoing technical and administrative support services are
deferred and amortized over the period in which the services are used in order
to match those revenues with the costs of providing the related support
services.
Operating expenses include communication charges, depreciation and
amortization, and selling, general and administrative expenses. Communication
charges include the costs of operating the Company's network and amounts paid
by the Company based on the Company's subscribers' long distance and paging
usage. The Company pays third-party carriers based on the type of calls, time
of certain calls, duration of calls, the terminating phone numbers, and the
terms of the Company's contract in effect at the time of the calls.
Selling, general and administrative expenses consist of marketing costs and
the cost of providing teleservices and other support services for subscribers,
billing and collecting long distance and paging revenues, bad debt expenses,
and the costs of the information systems and personnel required to support the
Company's operations. Marketing costs include commissions paid to IRs, certain
costs of providing training, business forms, promotional and presentation
materials to IRs, salaries, commissions, and other expenses related to CSD
sales representatives, and direct mail advertising expenses. Commissions paid
to IRs are based upon the acquisition of new long distance and paging
subscribers ("subscriber acquisition costs") and long distance telephone and
paging usage by subscribers. The Company also pays commissions for the
training of IRs and certain ACs. Effective January 1, 1997, the Company
changed its method of accounting for subscriber acquisition costs. Previously,
the Company had deferred the portions of commissions paid to IRs that directly
relate to the acquisition of long distance and paging subscribers. Beginning
January 1, 1997, the Company began fully expensing subscriber acquisition
costs in the period incurred in order to present its operating results in a
manner more consistent with other telecommunications companies against which
its results are compared.
EXCEL AND TELEGLOBE MERGER
On June 14, 1998, the Company entered into a definitive merger agreement
(the "Teleglobe Merger Agreement") with Teleglobe Inc. ("Teleglobe"), a
Canadian corporation, and North Merger Sub Corporation, a Delaware corporation
and a wholly-owned subsidiary of Teleglobe, (the "Teleglobe Merger"). If
consummated, the Teleglobe Merger will create the fourth largest
telecommunications company in North America with pro forma consolidated
revenues of approximately U.S.$3.4 billion and 15.7 billion long distance
minutes of usage, based on results for the first quarter of 1998 annualized.
(See Note 2 to Consolidated Financial Statements--"Mergers and Acquisitions--
EXCEL and Teleglobe Merger," and Part II. Item 4--"Submission of Matters to a
Vote of Security Holders.")
Teleglobe is recognized as a world leader in the intercontinental
telecommunications industry. Teleglobe's global network includes submarine
cable and satellite facilities, meeting the global connectivity needs of
established and emerging carriers from around the world, as well as those of
consumers, multinational
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corporations, internet service providers, and broadcasters. In addition,
Teleglobe has a 35% interest in ORBCOMM, the world's first commercial low-
earth-orbit satellite-based data communications system. Pursuant to the
Teleglobe Merger Agreement, Teleglobe shareholders will retain their shares
and each share of EXCEL common stock will be exchanged for 0.885 of a share of
Teleglobe common stock.
The Teleglobe Merger is intended to be accounted for under the "pooling of
interests" method of accounting under U.S. GAAP. The completion of the
Teleglobe Merger is subject to a number of terms and conditions, and is
expected to be consummated in the fourth quarter of 1998.
EXCEL AND TELCO MERGER
On October 14, 1997, EXCEL succeeded to the businesses of Excelcom and
Telco, as a result of mergers of wholly-owned subsidiaries with and into
Excelcom and Telco, pursuant to the Agreement and Plan of Merger dated as of
June 5, 1997 (the "Telco Merger"). Consideration for the Telco Merger
consisted of $666.2 million in cash (including $164.5 million of Telco debt
assumed and paid by EXCEL) and 25,376,506 shares of common stock, $.001 par
value, of the Company ("Company Common Stock"). On October 14, 1997, EXCEL
made an initial borrowing of approximately $544 million under the new credit
facility to fund the cash purchase price of the Telco Merger and related costs
and expenses and to refinance existing indebtedness of Telco. (See Note 2 to
Consolidated Financial Statements-- "Mergers and Acquisitions--EXCEL and Telco
Merger".)
The merger of Telco into EXCEL has been accounted for under the "purchase"
method of accounting, with EXCEL as the acquirer in accordance with GAAP. The
Telco Merger resulted in incremental goodwill of $906.6 million which is being
amortized straight-line over a period of 40 years.
Current and future issues affecting the Company's operations for 1998 and
beyond include the following:
Ability of the Company to Migrate Traffic. The Company's realization of
operating cost savings from the Telco Merger will be affected by the Company's
ability to direct traffic to its network from EXCEL's existing third-party
carriers in a timely manner, which is expected to result in an overall lower
cost per minute. The Company's ability to migrate this traffic in a timely
manner will be limited by operational and network infrastructure limitations
as well as by the continuing purchase commitment requirements under EXCEL's
agreements with third-party carriers.
Regulatory Changes. The operations of the Company will continue to be
affected by the ongoing events associated with the 1996 Telecommunications
Act. Such events include access charge reform which could change existing
transmission costs for both the Company and other long distance companies, the
entry by the Regional Bell Operating Companies into the long distance
marketplace, and the ability of long distance companies like the Company to
begin marketing local telephone services.
In conjunction with upcoming local competition, incumbent local phone
companies are not likely to provide billing services for customers
presubscribed to competitive local phone companies. This would force the
Company to either bill the customer directly, enter into a billing and
collection agreement with new local phone companies, or seek other
alternatives.
Additionally, effective July 1, 1998 the Company changed its dial around
marketing programs from five-digit CIC codes (10+XXX) to seven digit CIC codes
(10+10+XXX), as a result of mandated changes by the Federal Communications
Commission, which have required a change in the dialing patterns of the Telco
Consumer Division customers in order to utilize the Company's services. During
the second quarter of 1998, the Company developed a comprehensive customer
retention program designed to educate Telco customers of the change. This
program is expected to be fully implemented in the third quarter of 1998.
Although the Company does not anticipate a decline in revenues as a result of
this change, there can be no assurance that such change will not adversely
affect customers' usage of the Company's dial around services.
Competitive Factors. The Company has observed increased competition in all
of its distribution channels, as well as an increase in the number of
promotional, discounted calling plans available to all long distance
consumers, particularly relating to residential customers. The impact to the
Company has included (i) a decline
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in the Company's residential revenue per minute as the Company has responded
to competitive pressures with lower priced products, and (ii) a sequential
decline in dial around revenues.
Network Costs. The Company is in the process of expanding its network in
order to facilitate the on-net migration of traffic that is currently being
carried by third parties. This will result in an increase in recurring fixed
costs associated with the network which the Company anticipates will be offset
by reductions in third-party costs for switch services. However, the Company
may experience a temporary increase in overall network costs as additional
fixed costs are incurred in anticipation of the migration of traffic.
Integration of the Companies. The Telco Merger involves the integration of
two companies that have previously operated independently and there can be no
assurance that the Company will not encounter significant difficulties in
integrating the respective operations of EXCEL and Telco including, but not
limited to, integrating, documenting, and operating certain software systems;
retaining key employees; and integrating other operational functions, or that
the benefits expected from such integration will be realized. These benefits
include the migration of EXCEL traffic from third parties to the Telco
network, the expansion of commercial products to be sold by the IRs, reduced
capital spending, and reductions in various general and administrative
expenses.
Increased Customer Acquisition. Occasionally, the Company observes an
increase in its acquisition of new customers through its network marketing
channel. In connection with the Company's IR marketing plan, an upfront
customer acquisition commission is typically paid before a customer has
generated material usage revenue. In a period of customer growth, commissions
paid for new customers can exceed the corresponding profit generated by the
additional revenue in the current period and thus reduce net income.
Expansion of the Commercial Sales Division. The Company intends to continue
to grow its level of commercial sales. As a result, the Company expects to see
an increase in its commercial revenues as a percentage of total revenues.
Since commercial products tend to generally yield a lower rate per minute, the
Company could experience a decrease in its overall revenue per minute and a
decline in operating margins.
Year 2000 Issue. The Year 2000 issue is the risk that computer programs
using two-digit date fields will fail to properly recognize the Year 2000,
with the result being business interruptions due to computer system failures
by the Company's software and hardware or that of government entities, service
providers, vendors, and customers. The Company is continuing its evaluation
and upgrade of its computer systems and applications for the Year 2000. The
Company is also seeking confirmation from its primary vendors that they are
developing and implementing plans to minimize Year 2000 consequences. The
Company is utilizing both internal and external resources to identify, correct
or reprogram, and test its systems for minimizing Year 2000 consequences and
expects to incur internal labor as well as consulting and other expenses
related to infrastructure and facilities enhancements necessary to prepare its
systems for the Year 2000. The costs incurred during the three months ended
June 30, 1998 were not material and were consistent with the Company's planned
expenditures for the period. The total cost of modifications and conversions
is not known at this time, however the costs could be material to the
Company's financial position and results of operations. If compliance is not
achieved in a timely manner, the Year 2000 issue could have a material adverse
effect on the Company's operations.
Teleglobe Merger. The Company recently executed a definitive merger
agreement with Teleglobe and the transaction is expected to be consummated in
the fourth quarter of 1998. The completion of the Teleglobe Merger is subject
to the satisfaction of a number of conditions, including, among others,
receipt of regulatory approvals under applicable U. S. and Canadian law,
receipt of a ruling from the U. S. Internal Revenue Service concerning certain
tax consequences of the Teleglobe Merger and the listing of the Teleglobe
common shares to be issued in the Teleglobe Merger on the New York Stock
Exchange, the Montreal Exchange and the Toronto Stock Exchange. Upon
completion of the Teleglobe Merger, the two companies will attempt to
reorganize and restructure its management and operational organization and
facilities to eliminate duplicate facilities, abandon certain projects and
activities, and to take advantage of the synergies available to the combined
entities. Accordingly, the combined entities could incur additional ongoing
expenses as well as non-recurring charges related to these reorganization and
restructuring activities. There can be no assurance that the Teleglobe Merger
will eventually be completed or that the anticipated benefits of the merger
will be realized.
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RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 Compared to the Three Months Ended June 30,
1997
Revenues. Total revenues increased 48.0% to $489.4 million for the three
months ended June 30, 1998 from $330.6 million for the three months ended June
30, 1997. Communication services revenues increased 61.5% to $473.0 million
for the three months ended June 30, 1998 from $292.9 million for the three
months ended June 30, 1997. Long distance minutes of usage increased 93.8% to
3.1 billion minutes for the three months ended June 30, 1998 from 1.6 billion
minutes for the three months ended June 30, 1997 primarily due to the
inclusion of Telco's minutes following the Telco Merger and continued strong
growth in the Company's commercial minutes. However, long distance revenue per
minute of usage decreased by 17.0% to 15.1 cents per minute for the three
months ended June 30, 1998 from 18.2 cents per minute for the three months
ended June 30, 1997. This decrease in revenue per minute of usage is due
primarily to the inclusion of Telco's commercial and wholesale minutes which
yield a lower revenue per minute than residential minutes. Pro forma
communications services revenues for the second quarter of 1997, including
Telco, were $437.8 million. Included in communication services revenues for
the three months ended June 30, 1998 and 1997 is net paging revenue of $6.9
million and $7.2 million, respectively.
Commercial revenues for the three months ended June 30, 1998 totaled $90.0
million, an increase of approximately eleven times commercial revenues of $8.2
million for the three months ended June 30, 1997, and an increase of 83.3%
from pro forma commercial revenues for the second quarter of 1997, including
Telco, of $49.1 million. Residential revenues totaled $376.1 million for the
three months ended June 30, 1998, compared to $277.5 million for the three
months ended June 30, 1997 and pro forma residential revenues, including
Telco, of $381.5 million for the three months ended June 30, 1997. The decline
in residential revenues from the prior year pro forma amount is due to a
decrease in dial around revenues, which was partially offset by an increase in
presubscribed residential revenues.
Marketing services revenues, which include revenues recognized from IRs for
training, business forms, promotional and presentation materials, ongoing
technical and administrative support services, and monthly reports, decreased
56.4% to $16.4 million for the three months ended June 30, 1998 from $37.6
million for the three months ended June 30, 1997. These revenues decreased
primarily as a result of fewer applications from new IRs. Marketing revenues
for the three months ended June 30, 1998 represented only 3.4% of total
revenues compared to 11.4% for the three months ended June 30, 1997.
Operating Expenses. Communication charges increased 66.9% to $262.3 million
for the three months ended June 30, 1998 from $157.2 million for the three
months ended June 30, 1997. Long distance communication charges were 8.4 cents
per minute for the three months ended June 30, 1998 compared to 9.6 cents per
minute for the three months ended June 30, 1997. As a percentage of
communication services revenues, communication charges were 55.4% for the
three months ended June 30, 1998 compared to 53.7% for the three months ended
June 30, 1997. This increase in communication charges as a percentage of
communication services revenues primarily relates to the relative growth in
commercial and wholesale revenues, which generate a lower gross margin than
residential revenues. This increase was partially offset by reductions in per
minute charges resulting from the effects of access charge reform, the
migration of long distance minutes from third-party networks onto the
Company's network, and reduced rates from third-party carriers.
Depreciation and amortization expenses increased from $4.4 million for the
three months ended June 30, 1997 to $13.2 million for the three months ended
June 30, 1998 primarily due to amortization of goodwill resulting from the
Telco Merger and an increase in depreciation resulting from assets acquired in
the Telco Merger and increased capital spending primarily related to the
expansion of the Company's network.
Selling, general and administrative expenses increased 34.7% to $150.5
million for the three months ended June 30, 1998 from $111.7 million for the
three months ended June 30, 1997. Selling expenses, which include commissions
paid to IRs, certain costs of providing training, business forms, promotional
and presentation
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materials to IRs, and since the Telco Merger, salaries, commissions and other
expenses related to CSD sales representatives in addition to direct mail
advertising costs, increased 36.3% from $45.2 million for the three months
ended June 30, 1997 to $61.6 million for the three months ended June 30, 1998,
primarily due to the inclusion of direct mail advertising costs and
commissions paid to CSD sales representatives following the Telco Merger.
General and administrative expenses increased 33.7% from $66.5 million for the
three months ended June 30, 1997 to $88.9 million for the three months ended
June 30, 1998. The increase primarily relates to the inclusion of Telco's
operating results in the second quarter of 1998. As a percentage of
communication services revenues, selling, general and administrative expenses
were 31.8% for the three months ended June 30, 1998 compared to 38.1% for the
three months ended June 30, 1997.
Total operating income increased 10.6% to $63.4 million for the three months
ended June 30, 1998 from $57.3 million for the three months ended June 30,
1997. As a percentage of communications services revenues, operating income
was 13.4% and 19.5% for the three months ended June 30, 1998 and 1997,
respectively.
The Company's interest expense increased to $9.4 million for the three
months ended June 30, 1998 from $11,000 for the three months ended June 30,
1997. The increase in interest expense results primarily from the payment of
interest on the Company's revolving credit facility incurred to fund the
acquisition of Telco.
Other income (expense) decreased to $574,000 for the three months ended June
30, 1998 from $2.1 million for the three months ended June 30, 1997. Included
in other income (expense) for the three months ended June 30, 1997 was $1.8
million of interest income generated by the investment of cash received from
operations and from the sale of the Company's common stock in the initial
public offering in May 1996.
Six Months Ended June 30, 1998 Compared to the Six Months Ended June 30, 1997
Revenues. Total revenues increased 48.7% to $984.2 million for the six
months ended June 30, 1998 from $661.9 million for the six months ended June
30, 1997. Communication services revenues increased 59.3% to $950.3 million
for the six months ended June 30, 1998 from $596.6 million for the six months
ended June 30, 1997. Long distance minutes of usage increased 87.9% to 6.2
billion minutes for the six months ended June 30, 1998 from 3.3 billion
minutes for the six months ended June 30, 1997 primarily due to the inclusion
of Telco's minutes following the Telco Merger and continued strong growth in
the Company's commercial minutes of usage. However, long distance revenue per
minute of usage decreased by 16.2% to 15.0 cents per minute for the six months
ended June 30, 1998 from 17.9 cents per minute for the six months ended June
30, 1997. This decrease in revenue per minute of usage is due primarily to the
inclusion of Telco's commercial and wholesale minutes which yield a lower
revenue per minute than residential minutes. Pro forma communications services
revenues for the six months ended June 30, 1997, including Telco, were $869.4
million. Included in communication services revenues for the six months ended
June 30, 1998 and 1997 is net paging revenue of $14.9 million and $10.9
million, respectively.
Commercial revenues for the six months ended June 30, 1998 totaled $164.0
million, an increase of ten times commercial revenues of $16.4 million for the
six months ended June 30, 1997 and an increase of 115.2% from pro forma
commercial revenues for the six months ended June 30, 1997, including Telco,
of $76.2 million. Residential revenues totaled $771.4 million for the six
months ended June 30, 1998, compared to $569.3 million for the six months
ended June 30, 1997 and pro forma residential revenues for the six months
ended June 30, 1997, including Telco, of $782.3 million. The decline in
residential revenues from the prior year pro forma amount is due to a decrease
in dial around revenues, which was partially offset by an increase in
presubscribed residential revenues.
Marketing services revenues, which include revenues recognized from IRs for
training, business forms, promotional and presentation materials, ongoing
technical and administrative support services, and monthly reports, decreased
48.1% to $33.9 million for the six months ended June 30, 1998 from $65.3
million for the six months ended June 30, 1997. These revenues decreased
primarily as a result of the net impact of deferring a
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portion of marketing revenues related to ongoing business support services and
fewer applications received from new IRs. Marketing revenues for the six
months ended June 30, 1998 represented only 3.4% of total revenues compared to
9.9% for the six months ended June 30, 1997.
Operating Expenses. Communication charges increased 62.8% to $525.0 million
for the six months ended June 30, 1998 from $322.5 million for the six months
ended June 30, 1997. Long distance communication charges were 8.3 cents per
minute for the six months ended June 30, 1998 compared to 9.6 cents per minute
for the six months ended June 30, 1997. As a percentage of communication
services revenues, communication charges were 55.2% for the six months ended
June 30, 1998 compared to 54.1% for the six months ended June 30, 1997. This
increase in communication charges as a percentage of communication services
revenues primarily relates to the relative growth in commercial and wholesale
revenues, which generate a lower gross margin than residential revenues. This
increase was partially offset by reductions in per minute charges resulting
from the effects of access charge reform, the migration of long distance
minutes from third-party networks onto the Company's network, and reduced
rates from third-party carriers.
Depreciation and amortization expenses increased from $7.9 million for the
six months ended June 30, 1997 to $25.8 million for the six months ended June
30, 1998 primarily due to amortization of goodwill resulting from the Telco
Merger and an increase in depreciation resulting from assets acquired in the
Telco Merger and increased capital spending primarily related to the expansion
of the Company's network.
Selling, general and administrative expenses increased 41.9% to $312.9
million for the six months ended June 30, 1998 from $220.5 million for the six
months ended June 30, 1997. Selling expenses, which include commissions paid
to IRs, certain costs of providing training, business forms, promotional and
presentation materials to IRs, and since the Telco Merger, salaries,
commissions and other expenses related to CSD sales representatives in
addition to direct mail advertising costs, increased 55.4% from $89.2 million
for the six months ended June 30, 1997 to $138.6 million for the six months
ended June 30, 1998, primarily due to the inclusion of direct mail advertising
costs and commissions and other expenses related to CSD sales representatives
following the Telco Merger. General and administrative expenses increased
32.7% from $131.3 million for the six months ended June 30, 1997 to $174.3
million for the six months ended June 30, 1998. The increase primarily relates
to the inclusion of Telco's operating results in the first half of 1998. As a
percentage of communication services revenues, selling, general and
administrative expenses were 32.9% for the six months ended June 30, 1998
compared to 37.0% for the six months ended June 30, 1997.
Total operating income increased 8.6% to $120.5 million for the six months
ended June 30, 1998 from $111.0 million for the six months ended June 30,
1997. As a percentage of communications services revenues, operating income
was 12.7% and 18.6% for the six months ended June 30, 1998 and 1997,
respectively.
The Company's interest expense increased to $18.9 million for the six months
ended June 30, 1998 from $32,000 for the six months ended June 30, 1997. The
increase in interest expense results primarily from the payment of interest on
the Company's revolving credit facility incurred to fund the acquisition of
Telco.
Other income (expense) decreased to $962,000 for the six months ended June
30, 1998 from $4.2 million for the six months ended June 30, 1997. Included in
other income (expense) for the six months ended June 30, 1997 was $3.6 million
of interest income generated by the investment of cash received from
operations and from the sale of the Company's common stock in the initial
public offering in May 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had cash and cash equivalents of $18.2
million and working capital of $77.8 million. The Company's operating
activities provided cash of approximately $43.3 million for the six months
ended June 30, 1998 and $41.2 million for the six months ended June 30, 1997.
The Company's investing activities have consisted primarily of the purchase
of franchise agreements of $33.6 million and property and equipment purchases
of $55.4 million for the six months ended June 30, 1998. The Company purchased
property and equipment totaling $30.7 million for the six months ended June
30, 1997.
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Total cash generated from financing activities was $47.7 million for the six
months ended June 30, 1998. The increase in cash generated from financing
activities for the six months ended June 30, 1998 was primarily due to net
proceeds received from the issuance of long-term debt. In addition, other
financing activities consisted of the repurchase of approximately 1.5 million
shares of the Company's common stock for $28.8 million offset by proceeds
received from the issuance of additional common stock due to the exercise of
stock options. For the six months ended June 30, 1997, the Company's cash used
in financing activities was $27.1 million, which consisted primarily of the
purchase of approximately 1.8 million shares of the Company's common stock and
proceeds from the issuance of additional common stock due to the exercise of
stock options.
On October 10, 1997, the Company entered into a new credit facility for
borrowings up to $1 billion (the "New Credit Facility"). Borrowings under the
New Credit Facility are available for general corporate purposes including
acquisitions and are subject to various financial covenants of which the
Company is in compliance. The interest rate on the New Credit Facility is
based on the Company's prevailing debt ratio and ranges on a Eurodollar
(LIBOR) option from a spread of 0.625% to 1.75%, and on a Base (Prime) Rate
option from a spread of 0% to 0.50%. Total borrowing availability under the
New Credit Facility reduces to $800 million on September 30, 2000, and to $500
million on September 30, 2001, and the New Credit Facility expires on
September 30, 2002.
The Company believes that its existing sources of liquidity and anticipated
funds from operations will be sufficient to fund its capital expenditures,
working capital, and other cash requirements through the end of 1998.
LITIGATION, CLAIMS AND ASSESSMENTS
Information pertaining to the Company's litigation is included in Note 4 to
the Company's Consolidated Financial Statements.
LEGISLATIVE AND REGULATORY MATTERS
Information pertaining to legislative and regulatory matters is included in
Note 4 to the Company's Consolidated Financial Statements.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information pertaining to this item is incorporated from Part I. Financial
Information (Item 1. Financial Statements--Note 4 to Consolidated Financial
Statements--Commitments and Contingencies--Litigation, Claims, and
Assessments).
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information pertaining to this item is incorporated from Part I. Financial
Information (Item 1. Financial Statements--Note 2 to Consolidated Financial
Statements--"Mergers and Acquisitions--EXCEL and Teleglobe Merger").
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The exhibits filed as part of this report are set forth in
the Index of Exhibits on page 19 of this report.
(b) Reports on Form 8-K:
(1) Current report on Form 8-K dated June 14, 1998, regarding the
proposed merger of the Company and Teleglobe Inc.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
EXCEL Communications, Inc.
Date: August 14, 1998 /s/ Nicholas A. Merrick
_____________________________________
Nicholas A. Merrick
Executive Vice President and
Chief Financial Officer
Date: August 14, 1998 /s/ Craig E. Holmes
_____________________________________
Craig E. Holmes
Vice President and
Chief Accounting Officer
18
<PAGE>
EXHIBIT INDEX
The following exhibits are included in this Quarterly Report on Form 10-Q:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated June 5, 1997, by and among EXCEL
Communications, Inc., New RES, Inc., T-Sub, Inc., E-Sub, Inc. and
Telco Communications Group, Inc. The schedules to the Agreement and
Plan of Merger and the appendices thereto have been omitted. The
Company will furnish supplementally to the Commission any of the
schedules or appendices upon request (incorporated by reference to
Exhibit 2.1 to the Company's Registration Statement on Form S-4, as
amended, File No. 333-35377).
2.2 Agreement and Plan of Merger, dated June 14, 1998, by and among
Teleglobe Inc., North Merger Sub Corporation, and EXCEL
Communications, Inc. The schedules to the Agreement and Plan of Merger
and the appendices have been omitted. The Company will furnish
supplementally to the Commission any schedules or appendices upon
request (incorporated by reference to Exhibit 2 to the Company's
current report on Form 8-K dated June 14, 1998).
3.1 Certificate of Incorporation of the Company (incorporated herein by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-
Q for the quarter ended September 30, 1997 filed with the Commission).
3.2 Amended and Restated Bylaws of the Company (incorporated herein by
reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-
Q for the quarter ended September 30, 1997 filed with the Commission).
4.1 Specimen Certificate for Common Stock of the Company (incorporated
herein by reference to Exhibit 4.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997 filed with the
Commission).
18.1 Change of Accounting Letter from Arthur Andersen LLP (incorporated
herein by reference to Exhibit 18.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 filed with the
Commission).
21.1 Subsidiaries of EXCEL Communications, Inc. (incorporated herein by
reference to Exhibit 22.1 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 filed with the Commission).
27 Financial Data Schedule as of June 30, 1998
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AS
OF JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 18,197
<SECURITIES> 0
<RECEIVABLES> 349,754
<ALLOWANCES> 25,684
<INVENTORY> 4,367
<CURRENT-ASSETS> 416,399
<PP&E> 372,646
<DEPRECIATION> 47,932
<TOTAL-ASSETS> 1,716,165
<CURRENT-LIABILITIES> 338,642
<BONDS> 0
0
0
<COMMON> 133
<OTHER-SE> 795,382
<TOTAL-LIABILITY-AND-EQUITY> 1,716,165
<SALES> 0
<TOTAL-REVENUES> 984,227
<CGS> 0
<TOTAL-COSTS> 863,692
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,879
<INCOME-PRETAX> 102,618
<INCOME-TAX> 42,846
<INCOME-CONTINUING> 59,772
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
</TABLE>
