UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 October 31, 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 Number 0-2180
TOTAL-TEL USA COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-1656895
(State or other Jurisdiction of (IRS Employer Identification
Identification No.) Number)
150 Clove Road, 8th Floor, Little Falls, NJ 07424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 812-1100
Not applicable
(Former address of principal executive offices) (Zip 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_____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at December 15, 1998
----- --------------------------------
Common Shares, $.05 par value 7,721,004 shares
1
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TOTAL-TEL USA COMMUNICATIONS, INC.
AND SUBSIDIARIES
THIRD QUARTER REPORT ON FORM 10-Q
INDEX
-----
Page No.
PART I. FINANCIAL INFORMATION
Condensed Consolidated Statement of Earnings
Nine months ended October 31, 1998 and 1997
(unaudited) and three months ended October
31, 1998 and 1997 (unaudited) 3
Condensed Consolidated Balance Sheets
October 31, 1998 (unaudited), and
January 31, 1998 4 - 5
Condensed Consolidated Statements of Cash Flows
Nine months ended October 31, 1998 and 1997
(unaudited) 6
Notes to Condensed Consolidated Financial
Statements (unaudited) 7 - 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 15
PART II. OTHER INFORMATION
Items 1-5 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
<PAGE>
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended Three months ended
----------------- ------------------
October 31, October 31,
----------- -----------
1998 1997 1998 1997
---- ----- ---- -----
<S> <C> <C> <C> <C>
Net Sales $106,698,013 $ 92,403,054 $ 41,259,576 $ 29,918,945
----------- ---------- ----------- ----------
Costs and Expenses
Cost of Sales 86,406,798 74,191,131 35,126,233 23,478,087
Selling, general 21,016,407 16,106,963 7,637,323 5,864,283
and administrative
107,423,205 90,298,094 42,763,556 29,342,370
----------- ---------- ---------- ----------
Operating (Loss) Income (725,192) 2,104,960 (1,503,980) 576,575
--------------- ----------- ------------- ----------
Other Income (Expense)
Interest income 71,562 77,607 21,431 27,316
Other income 145,995 3,298 4,995 2,716
Interest expense (143,214) (130,622) (45,273) (54,351)
--------------- ----------- ------------- ----------
Total Other Income (Expense) 74,343 (49,717) (18,847) (24,319)
--------------- ----------- ------------- ----------
(Loss) Earnings before (650,849) 2,055,243 (1,522,827) 552,256
provision for income taxes --------------- ----------- ------------- ----------
Provision for Income Tax (264,300) 858,200 (596,260) 236,400
--------------- ----------- ------------- ----------
NET (LOSS) EARNINGS $ (386,549) $ 1,197,043 $ (926,567) $ 315,856
--------------- ----------- ------------- ----------
BASIC (LOSS) EARNINGS $ (0.05) $ 0.20 $ (0.12) $ 0.05
PER COMMON SHARE --------------- ----------- ------------- ----------
DILUTED (LOSS) EARNINGS $ (0.05) $ 0.18 $ (0.12) $ 0.05
PER COMMON SHAR --------------- ----------- ------------- ----------
Dividends Per Share NONE NONE NONE NONE
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 31, JANUARY 31,
1998 1998
----------- -----------
(Unaudited) (Note)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,121,446 $ 3,416,904
Investments available for sale 556,390 578,293
Accounts receivable 24,897,866 20,346,988
Note receivable 269,933 117,590
Deferred income taxes 151,256 151,256
Prepaid expenses and other current assets 3,529,217 2,497,707
----------- -----------
TOTAL CURRENT ASSETS 35,526,108 27,108,738
---------- ----------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 14,614,625 12,405,924
---------- ----------
OTHER ASSETS:
Deferred line installation costs, less
accumulated amortization 305,171 298,304
Other assets 639,788 432,275
----------- -------
944,959 730,579
---------- -----------
$ 51,085,692 $ 40,245,241
------------ ------------
4
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NOTE: The balance sheet at January 31, 1998 has been taken from the audited
consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 31, JANUARY 31,
1998 1998
----------- -----------
(Unaudited) (Note)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion - long term debt $ 516,106 $ 487,000
Accounts payable 25,721,771 16,356,427
Salaries and wages payable 1,146,984 572,112
Other current and accrued liabilities 2,202,573 1,757,375
-------------- -----------
TOTAL CURRENT LIABILITIES 29,587,434 19,172,914
------------- ----------
OTHER LONG-TERM LIABILITIES 305,320 331,754
------------- -----------
LONG-TERM DEBT 1,701,079 2,092,201
------------ ----------
DEFERRED INCOME TAXES 245,951 50,491
------------- -----------
SHAREHOLDERS' EQUITY
Common stock 462,859 207,059
Additional paid-in capital 22,660,626 9,656,488
Retained earnings 9,789,234 10,175,784
------------- ------------
32,912,719 20,039,331
5
<PAGE>
OCTOBER 31, JANUARY 31,
1998 1998
----------- -----------
(Unaudited) (Note)
(continued)
Unearned ESOP shares (12,225,000) -
Treasury stock (1,547,331) (1,547,331)
Unrealized gain on securities available 105,520 105,881
for sale
Total shareholders' equity 19,245,908 18,597,881
-------------- ------------
$ 51,085,692 $ 40,245,241
------------ ------------
NOTE: The balance sheet at January 31, 1998 has been taken from the audited
consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
TOTAL TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
October 31,
-----------------
1998 1997
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net earnings $ (386,549) $ 1,197,043
Adjustment for non-cash charges 2,972,492 1,905,168
Changes in assets and liabilities 3,871,441 (1,199,992)
--------------- --------------
Net cash provided by operating activities 6,457,384 1,902,219
----------- -------------
INVESTING ACTIVITIES:
Maturities of securities available for sale 80,373 221,112
Purchase of securities available for sale (51,273) (102,545)
Collection of notes receivable 115,600 18,085
Note receivable (267,943) -
Purchase of property and equipment (4,210,784) (2,436,914)
Additions to deferred line installation costs (91,737) (110,167)
--------------- ---------------
Net cash used in investing activities (4,425,764) (2,410,429)
------------- ---------------
6
<PAGE>
Nine months ended
October 31,
-----------------
1998 1997
(continued) ---- ----
FINANCING ACTIVITIES:
Exercise of stock options 657,438 296,447
Repayments of bank borrowings (362,016) (245,912)
Tax benefit of options exercised 377,500 -
-------------- ---------------
Net cash provided by financing activities 672,922 50,535
-------------- ---------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 2,704,542 (457,675)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 3,416,904 2,589,187
----------- ----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 6,121,446 $ 2,131,512
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest $ 143,214 $ 129,573
Income taxes $ 65,179 $ 752,792
</TABLE>
See notes to condensed consolidated financial statements.
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. They do not include all information and notes required
by generally accepted accounting principles for complete annual financial
statements. However, except as disclosed herein, there has been no material
change in the information disclosed in the notes to consolidated financial
statements included in the Annual Report on Form 10-K of Total-Tel USA
Communications, Inc. and Subsidiaries (the "Company") for the fiscal year ended
January 31, 1998. In the opinion of Management, all adjustments (consisting of
only normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the nine month period ended October
31, 1998 are not necessarily indicative of the results which may be expected for
the year ending January 31, 1999.
NOTE B -- STOCK SPLIT
On July 15, 1998, the Company distributed 3,491,477 shares of Common Stock
$.05 par value, in connection with a 2 for 1 stock split to record holders as of
June 30, 1998. All references in the accompanying financial statements to the
number of Common Shares and per-share amounts have been restated to reflect the
stock split.
NOTE C -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted (loss)
earnings per common share:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
Oct. 31, 1998 Oct. 31, 1997 Oct. 31, 1998 Oct. 31, 1997
------------- ------------- ------------- -------------
Numerator:
<S> <C> <C> <C> <C>
Net (Loss) Income available to Common $ (386,549) $ 1,197,043 $ (926,567) $315,856
Shareholders used in basic and diluted
(loss) earnings per Common Share
Denominator:
Weighted-average number of Common 7,134,301 6,115,336 7,544,685 6,125,736
Shares used in basic (loss) earnings
per Common Share
Effect of diluted securities:
Common share options 447,793 613,186 418,716 619,728
---------- ---------- ---------- ----------
Weighted-average number of Common 7,582,094 6,728,522 7,963,401 6,745,464
Shares and diluted potential Common ---------- ---------- ----------- ----------
Shares used in diluted (loss)
earnings per Common Share
Basic (loss) earnings per Common Share $ (0.05) $ 0.20 $ (0.12) $ 0.05
---------- ---------- ----------- ----------
Diluted (loss) earnings per Common Share $ (0.05) $ 0.18 $ (0.12) $ 0.05
---------- ---------- ----------- ----------
</TABLE>
7
<PAGE>
NOTE D -- ADOPTION OF NEW ACCOUNTING STANDARD
Effective February 1, 1998, the Registrant adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). This
statement established standards for the reporting and presentation of
comprehensive income and its components. Net unrealized gain on available for
sale securities is the item that is to be added to net (loss) earnings to arrive
at comprehensive (loss) income. The adoption of FAS 130 had no significant
effect on the Company's financial position or net earnings.
The Company's comprehensive (loss) income is as follows:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
Oct. 31, 1998 Oct. 31, 1997 Oct. 31, 1998 Oct. 31, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net (loss) earnings $(386,549) $1,197,043 $(926,567) $315,856
-------------------
Unrealized gain (loss) on available
for sale securities (361) 2,662 (8,033) (23,677)
---------- ---------- ---------- --------
Comprehensive (loss)/income $(386,910) $1,199,705 $(934,600) $292,179
</TABLE>
The components of accumulated other comprehensive income, net of related
taxes at October 31, 1998 and January 31, 1998 is as follows:
Unrealized gain on available for sale securities $ 105,520 $ 105,881
------- -------
Accumulated other comprehensive income $ 105,520 $ 105,881
------- -------
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
Certain matters discussed in this Quarterly Report on Form 10-Q are
"forward-looking statements" intended to qualify for the safe harbors from
liability by the Private Securities Litigation Reform Act of 1995. These
forward-looking statements can generally be identified as such because the
context of the statement will include words such as the Company "believes",
"anticipates", "expects", or words of similar import. Similarly, statements
which describe the Company's future plans, objectives or goals are also
forward-looking statements. Such forward-looking statements are subject to
certain risks and uncertainties which are described in close proximity to such
statements and which could cause actual results to differ materially from those
anticipated as of the date of this report. Shareholders, potential investors and
other readers are urged to consider these factors in evaluating the
forward-looking statements and are cautioned not to place undue reliance on such
forward-looking statements. The forward-looking statements included herein are
only made as of the date of this report and the Company undertakes no obligation
to publicly update such forward-looking statements to reflect subsequent events
or circumstances.
8
<PAGE>
YEAR 2000 ISSUES:
As is the case with most other companies using computers in their
operations, the Company is in the process of addressing year 2000 issues. The
Company believes it has substantially addressed such issues with the
installation and upgrading of certain software and hardware and that only minor
modifications, such as future software upgrades, are further required to address
any year 2000 issues in its computer systems, relating both to its information
technology ("IT") and non-IT systems. Specifically, the Company's review of its
year 2000 compliance includes the Company's electronic data processing
equipment, including all switches, digital cross connects, and other data
sensitive processor controlled equipment associated with the Company's
telecommunications network, back office, and billing and collection systems. Any
required modifications will be addressed concurrently with another project to
enhance the companies billing system and should be completed by the middle of
1999. The total cost for the upgrades and management overhead and expense is
estimated to be approximately $200,000, which has been included in the Company's
budget. Despite the foregoing efforts and expenditures, there can be no
assurance that the Company will be able to identify all year 2000 issues in its
IT and non-IT systems in advance of their occurrence or that the Company will be
able to successfully remedy any such issues. In addition, to the extent that the
Company's suppliers or customers fail to address year 2000 issues in a timely
and effective manner, the Company's ability to provide uninterrupted, reliable
service to customers serviced through its networks may be adversely affected. In
an effort to assess the foregoing risk, the Company is currently surveying all
of its material customers and suppliers as to their current state of year 2000
compliance. The Company anticipates that this survey will be completed by the
end of the Company's fiscal year ending January 31, 1999. Moreover, the
profitability and stability of the Company's customers may be adversely affected
by year 2000 issues not related to their relationships with the Company. The
expense or liabilities to which the Company may become subject as a result of
any year 2000 issues, or the impact of year 2000 issues on the ability of
existing or future customers to do business with the company cannot be precisely
determined, but could have a material adverse effect on the Company's business,
prospects, operating results, and financial condition. The Company has plans to
assess and correct any data discrepancies which may result from year 2000
issues. The Company is also assessing the desirability of a contingency plan if
year 2000 problems should surface. Any such contingency plan should be developed
by the end of the Company's fiscal year ending January 31, 1999. Finally,
network operations personnel will be available at the Company's Network
Operations Center ("NOC") to attempt to remedy any potential network disruption.
9
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATION
(continued)
OVERVIEW
The Company is a leading facilities-based long distance provider servicing
both the commercial and wholesale marketplace. The Company began offering
interexchange telecommunications services in January 1983. Gross revenues have
increased from approximately $19 million in the fiscal year ended January 31,
1994 to approximately $123 million for the fiscal year ended January 31, 1998,
although there can be no assurance given that this rate of growth will be
sustained. These revenues are currently derived approximately 50% each from
wholesale and commercial services. The Company's EBITDA has increased from
approximately $1.9 million for the fiscal year ended January 31, 1994 to
approximately $3.6 million for the fiscal year ended January 31, 1998. This
growth has been achieved through internal efforts, and not as a result of
acquisitions.
The Company currently owns three long-distance switches in New York,
Newark, New Jersey and Miami, Florida. The Company also has a "NOC" which
monitors and controls its network. The Company sells its services through three
sales channels: its own retail sales force, independent sales agents, and the
wholesale sales team.
The Company's principal expenses consist of: direct cost of sales,
operating costs, and depreciation. Direct cost of sales consist of access fees,
line installation expenses, switch and NOC expenses, transport expenses, and
local and long-distance expenses. Operating costs are comprised of selling and
marketing costs, and general and administrative costs.
RESULTS OF OPERATIONS
Net sales were approximately $106,698,000 for the first nine months of the
current fiscal year, an increase of approximately $14,295,000 or 15.5% as
compared to the first nine months of the prior fiscal year. These sales were
comprised of retail sales of approximately $ 55,366,000 and carrier sales of
approximately $51,332,000 for the first nine months of the current fiscal year.
Net sales for the third quarter were approximately $ 41,260,000, an increase of
approximately $11,341,000 or 37.9% as compared to the third quarter of the prior
year. The increase in sales for the first nine months of the fiscal year result
from the billing of approximately 730,652,000 minutes of traffic, an increase of
83,979,000 or 13.0% over the first nine months of the prior fiscal year. For the
third fiscal quarter the company billed 258,307,000 minutes, an increase of
37,218,000, or 16.8% over the third quarter of the prior year. However, given
the competitive climate in the long distance telephone industry, there can be no
assurance that this rate of growth will continue throughout the remainder of the
fiscal year ending January 31, 1999.
Net retail sales were approximately $55,366,000 for the first nine months
of the current fiscal year, an increase of approximately $7,041,000, or 14.6%,
as compared to the first nine months of the prior fiscal year. Net retail sales
for the third quarter were approximately $ 18,425,000, an increase of
approximately $1,753,000 or 10.5% as compared to the third quarter of the prior
year. The increase in sales for the first nine months of the fiscal year
resulted from the billing of approximately 472,328,000 minutes of traffic, an
increase of 52,205,000 or 12.4% over the first nine months of the prior fiscal
year. For the third fiscal quarter the company billed approximately 161,560,000
minutes, an increase of 14,717,000, or 10.0% over the third quarter of the prior
year. Due to increased pricing pressures the average billing rate has been
reduced by approximately 6.0% since the beginning of this fiscal year.
Net carrier sales were approximately $51,332,000 for the first nine months
of the current fiscal year, an increase of approximately $7,253,000 or 16.5% as
compared to the first nine months of the prior fiscal year. Net carrier sales
for the third quarter were approximately $22,835,000, an increase of
approximately $9,587,000 or 72.3% as compared to the third quarter of the prior
year. The increase in sales for the first nine months of the fiscal year result
from the billing of approximately 258,324,000 wholesale minutes of traffic, an
increase of 31,774,000, or 14.0% over the first nine months of the prior fiscal
year. For the third fiscal quarter the registrant billed approximately
96,747,000 minutes, an increase of approximately 22,500,000 minutes, or 30.3%
over the third quarter of the prior year. There was a change in the sales mix
from the lower rated domestic traffic to higher rated international traffic.
International carrier traffic for the first nine months of the current fiscal
year was approximately 146,581,000 minutes, an increase of approximately
70,253,000 minutes or 92.0% over the comparable nine months of the prior fiscal
year. Domestic carrier traffic was approximately 111,742,000 minutes, a decrease
of approximately 38,479,000 carrier minutes, or 25.6% over the comparable nine
months of the prior fiscal year.
10
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATION
(continued)
Cost of sales for the current nine months were approximately $86,407,000,
an increase of $12,216,000, or 16.5%. Cost of sales for the third quarter were
approximately $35,126,000, an increase of approximately $11,648,000 or 49.6%.
The increase in cost of sales was primarily due to the volume increase in sales
and expense increases in the Company's switch and NOC, amounted to approximately
$9,471,000, or 12.8%. The increased cost associated with volume increases for
the third quarter amounted to approximately $4,761,000. The balance of the
increased cost of sales was due to a swing in the mix of carrier traffic from
low cost domestic traffic to higher cost international traffic as described
above. Cost of sales also increased for the current nine months due to increases
in switch and NOC expenses of approximately $1,597,000, consisting primarily of
additional salaries and fringe benefits, approximately $703,000, depreciation of
the additional switches in New York and Miami, approximately $529,000;
consulting expenses incurred in connection with the planned expansion of the
registrant's network, approximately $206,000; and recruiting fees of
approximately $98,000. For the three month period switch and NOC expenses
increased approximately $741,000, consisting primarily of increases in salaries,
wages and benefits of approximately $368,000; increased depreciation expense
(due to the installation of the Miami switch) of approximately $202,000;
increased rent expense (Miami switch site) of approximately $42,000; increases
in repair and maintenance of approximately $52,000; and increases in consulting
costs of approximately $71,000.
Selling, general and administrative expenses for the current nine months
were approximately $21,016,000, an increase of approximately $4,909,000 or
30.5%, as compared to the first nine months of the prior fiscal year, and
approximately $7,637,000 for the third quarter, an increase of approximately
$1,773,000 or 30.2%. The increases for the current nine months are attributable
to increased sales salaries, wages and benefits of approximately $797,000,
resulting from the build up of the new sales office infrastructure as the
Company expands into the Miami, Washington DC, and Atlanta markets. Additional
increases were derived from an increase in sales commissions of approximately
$573,000, attributable to the higher sales volumes; an increase in the reserve
for bad debt of approximately $325,000, due to higher sales volume and the
reversal of certain bad debt accruals, increased travel and entertainment
expense of $164,000 resulting from additional sales personnel, higher expenses
for advertising and selling promotions of approximately $316,000; consulting
fees of approximately $617,000; recruiting fees of approximately $218,000;
additional office rents of approximately $244,000, and legal expenses, primarily
associated with the recently settled Anderson litigation, of approximately
$848,000.
The increase for the third quarter of the current fiscal year of
approximately $1,773,000 is attributable to primarily from an increase in sales
salaries, wages and benefits of approximately $591,000; resulting from the
installation of new sales offices in Washington, D.C., Atlanta and Miami;
increased sales commissions of approximately $218,000, due to higher volumes;
increased advertising and promotions of approximately $336,000; relating to the
marketing of the new locations; an increase in rent for the new sales offices of
approximately $68,000; an increase in consulting fees of approximately $262,000;
an increase in recruiting fees of approximately $165,000; an increase in travel
related expenses of $78,000; and an increase in repairs and maintenance
(primarily for I/S systems) of approximately $55,000.
11
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATION
(continued)
Other income of approximately $146,000 for the nine months ended October
31, 1998 and approximately $5,000 for the three months ended October 31, 1998
represents the recognition of income from the expiration of prepaid calling
cards.
Diluted (loss) earnings per share decreased to $(.05) per share for the
current nine months as compared to $.20 per share for the nine months ended
October 31, 1997. Diluted (loss) earnings per share for the three months ended
October 31, 1998 decreased to $(.12) for the three months ended October 31, 1998
as compared to $.05 per share for the three months ended October 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1998, the Company had working capital of approximately
$5,939,000, a decrease of approximately $1,997,000 or 25.2% as compared to
January 31, 1998. The ratio of current assets to current liabilities at October
31, 1998 was 1.2:1, as compared to a current ratio of 1.4.1 at January 31, 1998.
The decrease in working capital at October 31, 1998 was primarily attributable
to increases in cash and cash equivalents of approximately $2,705,000; in
accounts receivable of approximately $4,551,000; notes receivable of
approximately $152,000; and prepaid expense and other current accounts of
approximately $1,031,000; offset by increases in salaries and wages payable of
approximately $575,000 offset by increases in accounts payable of approximately
$9,365,000, other current and accrued liabilities of $445,000, current portion
of long term debt of approximately $29,000, and decreases in investments
available for sale of approximately $22,000.
The increase in cash and cash equivalents of approximately $2,705,000 was
primarily the result of an increase in accounts payable and other current
liabilities of approximately $9,811,000, non-cash charges (including
depreciation and amortization) of approximately $2,972,000; proceeds from
exercise of stock options of approximately $657,000; a net increase in
securities available for sale of approximately $22,000; the tax benefit effect
on options exercised of approximately $377,000, and the collection on notes
receivable of $116,000, offset by a net loss of approximately $387,000, an
increase in accounts receivable of approximately $4,875,000, the purchase of
property and equipment of approximately $4,211,000; the addition of deferred
line costs of approximately $92,000, the repayment of bank borrowings of
approximately $362,000; issuance of notes receivable in the amount of
approximately $268,000; and the increase in prepaid and other current assets of
approximately $1,031,000.
Capital expenditures for the fiscal year ended January 31, 1999 are
substantially complete. For the balance of the fiscal year ending January 31,
1999 capital expenditures are planned to include upgrades to the switch
equipment of approximately $300,000 and the continued improvements and upgrades
to the LAN/WAN software and hardware of approximately $250,000. These
expenditures are planned to be financed via funds provided from the cash derived
from operations and existing working capital.
12
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATION
(continued)
As of October 31, 1998, the Company had an Equipment Facility and Revolving
Credit Agreement (the "Facility") with a major New Jersey bank. This Facility
was amended in October of 1998. The amendment provides the Company with an
unsecured lines of credit of $5,000,000 and an additional facility of
$10,000,000 for the purchase of machinery and equipment, primarily switching
equipment, and is secured by the Company's machinery and equipment. In addition,
the Company had previously borrowed $2,217,185 of a prior loan commitment at an
interest rate of 7.71% payable over five years.
RECENT DEVELOPMENTS
On December 10, 1998, the Company agreed to settle all of its outstanding
litigation with Walt Anderson, Gold & Appel, S.A., and Revision LLC. In
accordance with the terms of the settlement agreements, the parties agreed to
request that certain Court orders outstanding in connection with the litigation
be rescinded and to seek the dismissal of the litigation. The Company also
agreed to rescind its Bylaw amendments and its Rights Agreement (and the
associated rights issued under such agreement) approved earlier in the year.
Warren Feldman, the Chief Executive Officer and a director of the Company, and
Solomon Feldman, a director of the Company, have also agreed to sell between 1.1
million and 1.2 million shares of the Company's Common Stock beneficially owned
by them to Revision LLC at $24.00 per share. Consummation of these transactions
is subject to compliance with certain regulatory approvals, and is expected to
occur during January 1999. No assurance can be given that such closing will
occur at such time, if at all.
The settlement provides for a resolution of a proxy contest initiated by
Revision LLC and Mr. Anderson. The parties have also agreed to reconstitute the
Company's Board of Directors with three directors designated by Warren Feldman
and three directors designated by Walt Anderson. A rescheduled Annual Meeting of
Shareholders is to be held no later than February 28, 1999, at which time
shareholders will be asked to elect the reconstituted Board. The Feldmans and
Mr. Anderson have agreed to vote their shares in favor of the nominees for the
reconstituted Board. They have also agreed that, for the two years following the
first anniversary of their agreement, to vote all of their shares in favor of
the election to the Board of two nominees designated by Warren Feldman and the
nominees of Mr. Anderson (for so long as either the Feldmans or Mr. Anderson
beneficially own 5% or more of the Company's outstanding shares). The parties
have agreed to negotiate a one-year employment agreement for Warren Feldman,
with Mr. Feldman remaining in his capacity as Chief Executive Officer and
Chairman of the Company. Mr. Anderson has also agreed to indemnify the Feldmans
against certain liabilities to the extent not covered under the Company's
liability insurance policies. Mr. Anderson has agreed that neither he nor any of
his affiliates will purchase any shares of the Company's Common Stock prior to
December 10, 1999, for a purchase price of less than $24.00 per share and that
he and Revision LLC will use their commercially reasonable efforts to assist the
Company in obtaining any financing needed by it to the extent the Company
requests such assistance.
The Company believes that the settlement summarized above will remove many
of the distractions to the Company in implementing its business plans. The
settlement should align the largest shareholder blocs in pursuing a single
business plan with unified management. Significantly, the substantial cost of
litigating against Mr. Anderson and the attendant proxy contest will cease,
allowing the funds otherwise used for these purposes to be redeployed for
business development purposes. Uncertainty in the marketplace for the Company's
Common Stock is expected to diminish as Mr. Anderson's goals become more closely
aligned with that of the Company. The Company believes that its ability to
obtain additional sources of capital to implement its business plan will be
enhanced as a result of the settlement and the agreement of Mr. Anderson and
Revision LLC to use their commercially reasonable efforts to assist the Company
in obtaining any financing, if the Company so requests. While no assurance can
be given that the Company will be better able to implement its business plans as
a result of this settlement, it does believe that management and capital
resources will be more effectively deployed without the disruptive distractions
of litigation and conflicts over the management of the Company.
13
<PAGE>
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
---------------------------------------------------
PART II - OTHER INFORMATION
---------------------------
THREE MONTHS ENDED OCTOBER 31, 1998
-----------------------------------
ITEMS 1 See discussion under Recent Developments
ITEM 2 - 5 Not applicable
ITEM 6 Exhibits and reports on Form 8-K
(a) Exhibits - 27 - Financial Data Schedule
(b) Reports on Form 8-K were filed during the
three months ended October 31, 1998 as follows:
September 2, 1998 and October 15, 1998
14
<PAGE>
SIGNATURES
----------
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.
TOTAL-TEL USA COMMUNICATIONS, INC.
(Registrant)
TOTAL-TEL USA COMMUNICATIONS, INC.
Date: December 15, 1998 BY: /s/ Warren H. Feldman
-------------------------
Warren H. Feldman, Esq.
President and Chief Executive
Officer
Date: December 15, 1998 -------------------------
Thomas P. Gunning
Chief Financial Officer,
Secretary, Treasurer and
Principal Accounting
Officer
15
<PAGE>
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<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> OCT-31-1998
<CASH> 6,121,446
<SECURITIES> 556,390
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0
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