<PAGE>
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, 1999
-----------------------------
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)
<TABLE>
<S> <C>
NEW JERSEY 22-1656895
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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.
<TABLE>
<CAPTION>
Class Outstanding at December 13, 1999
- ---------------------------- --------------------------------
<S> <C>
Common Share, $.05 par value 7,854,182 shares
</TABLE>
<PAGE>
TOTAL-TEL USA COMMUNICATIONS, INC.
AND SUBSIDIARIES
THIRD QUARTER REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Condensed Consolidated Statements of Operations and
Comprehensive Loss
Nine months ended October 31, 1999 and 1998
(unaudited) and three months ended October 31,
1999 and 1998 (unaudited) 3
Condensed Consolidated Balance Sheets
October 31, 1999 (unaudited), and
January 31, 1999 4-5
Condensed Consolidated Statements of Cash Flows
Nine months ended October 31, 1999 and 1998
(unaudited) 6
Notes to Condensed Consolidated Financial
Statements (unaudited) 7-9
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
PART II. OTHER INFORMATION
Items 1-5 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
-2-
<PAGE>
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
October 31, October 31,
----------- -----------
1999 1998 1999 1998
---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
NET SALES $107,135,437 $106,698,013 $36,988,483 $41,259,576
---------------- ----------------- ---------------- ----------------
Costs and Expenses
Cost of Sales 85,757,454 86,406,798 30,058,098 35,126,233
Selling general and administrative
(exclusive of other compensation below) 20,589,960 21,016,407 7,251,943 7,637,323
Restructuring charge (138,349) - (138,349) -
Other compensation 5,770,554 - 5,770,554 -
---------------- ----------------- ---------------- ----------------
Total costs and expenses 111,979,619 107,423,205 42,942,246 42,763,556
---------------- ----------------- ---------------- ----------------
OPERATING LOSS (4,844,182) (725,192) (5,953,763) (1,503,980)
---------------- ----------------- ---------------- ----------------
Other (Expense) Income
Interest Income 64,159 71,562 27,723 21,431
Other (Expense) Income 19,181 145,995 23,574 4,995
Interest Expense (114,450) (143,214) (36,128) (45,273)
---------------- ----------------- ---------------- ----------------
Total Other (Expense) Income (31,110) 74,343 15,169 (18,847)
---------------- ----------------- ---------------- ----------------
Loss before Provision for
(Benefit from) Income Taxes (4,875,292) (650,849) (5,938,594) (1,522,807)
Provision for (Benefit from) Income Tax 29,086 (264,300) (399,279) (596,260)
---------------- ----------------- ---------------- ----------------
NET LOSS (4,904,378) (386,549) (5,539,315) (926,567)
Other Comprehensive Income, net of tax:
Unrealized holding gain (loss) 15,595 (361) (3,926) (8,033)
---------------- ----------------- ---------------- ----------------
COMPREHENSIVE LOSS $ (4,888,783) $ (386,910) $(5,543,241) (934,600)
================ ================= ================ ================
BASIC LOSS PER COMMON SHARE $ (0.70) $ (0.05) $ (0.77) $ (0.12)
---------------- ----------------- ---------------- ----------------
DILUTED LOSS PER COMMON SHARE $ (0.70) $ (0.05) $ (0.77) $ (0.12)
---------------- ----------------- ---------------- ----------------
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
<TABLE>
<CAPTION>
October 31, January 31,
1999 1999
-------------- ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,885,433 $ 6,051,892
Investments available for sale 579,431 549,612
Accounts receivable, net 25,045,803 18,732,480
Notes receivable - employees 83,614 95,402
Deferred income taxes 504,403 1,419,642
Prepaid expenses and other current assets 1,884,619 1,801,210
------------ ------------
TOTAL CURRENT ASSETS 30,983,303 28,650,238
------------ ------------
PROPERTY AND EQUIPMENT, NET 13,271,327 14,473,261
------------ ------------
OTHER ASSETS:
Deferred line installation costs, net 303,311 447,226
Other assets 382,865 488,175
Deferred income taxes 2,509,020 1,633,238
------------ ------------
3,195,196 2,568,639
------------ ------------
$47,449,826 $45,692,138
============ ============
</TABLE>
NOTE: The balance sheet at January 31, 1999 has been taken from
the audited consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
(Continued)
-4-
<PAGE>
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, January 31,
1999 1999
----------------- -----------------
(Unaudited) (Note)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 559,595 $ 526,361
Accounts payable 22,781,461 20,699,873
Accrued restructuring costs 192,525 2,128,000
Other current and accrued liabilities 3,308,209 3,037,255
Salaries and wages payable 1,102,819 998,081
----------- -----------
TOTAL CURRENT LIABILITIES 27,944,609 27,389,570
----------- -----------
OTHER LONG-TERM LIABILITIES 267,695 294,500
----------- -----------
LONG-TERM DEBT 1,141,407 1,565,884
----------- -----------
SHAREHOLDERS' EQUITY
Common stock 468,178 455,739
Additional paid-in-capital 29,340,438 22,809,518
Retained earnings 1,853,609 6,757,987
----------- -----------
31,662,225 30,023,244
Unearned ESOP Shares (12,225,000) (12,225,000)
Treasury stock (1,457,426) (1,456,781)
Accumulated other comprehensive income 116,316 100,721
----------- -----------
Total Shareholders' Equity 18,096,115 16,442,184
----------- -----------
$47,449,826 $45,692,138
=========== ===========
</TABLE>
NOTE: The balance sheet at January 31, 1999 has been taken from
the audited consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
-5-
<PAGE>
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
October 31,
-----------------------
1999 1998
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (Loss) $(4,904,378) $ (386,549)
Adjustment for non-cash charges 8,777,638 2,972,492
Loss on disposal of property and equipment 7,633 --
Changes in assets and liabilities (6,092,615) 3,871,441
----------- -----------
Net cash (used) provided by operating activities (2,211,722) 6,457,384
----------- -----------
INVESTING ACTIVITIES:
(Increase) decrease in marketable securities (14,224) 29,100
Collection of notes receivable 45,402 115,600
Issuance of note receivable (33,614) (267,943)
Purchase of property and equipment (2,189,388) (4,210,784)
Proceeds on sale of fixed assets 3,000 --
Additions to deferred line installation costs (46,830) (91,737)
----------- -----------
Net cash used in investing activities (2,235,654) (4,425,764)
----------- -----------
FINANCING ACTIVITIES:
Exercise of stock options 1,672,160 657,438
Repayments of bank borrowings (391,243) (362,016)
Tax benefit of options exercised -- 377,500
----------- -----------
Net cash provided by financing activities 1,280,917 672,922
----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (3,166,459) 2,704,542
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 6,051,892 3,416,904
----------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 2,885,433 $ 6,121,446
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest $ 114,450 $ 143,214
Income taxes $ 3,400 $ 65,179
</TABLE>
See notes to condensed consolidated financial statements.
-6-
<PAGE>
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 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/A of Total-Tel USA
Communications, Inc. and Subsidiaries (the "Registrant") for the fiscal year
ended January 31, 1999. 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, 1999 are not necessarily indicative of the results that may be
expected for the year ending January 31, 2000.
NOTE B--REVENUE RECOGNITION
The company's revenues are recognized in the period that the service is
provided, based on the number of minutes of telecommunications traffic carried
times a rate per minute.
NOTE C--STOCK SPLIT
On July 15, 1998, the Registrant distributed 4,207,887 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 D--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted loss per
common share:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
October 31, 1999 October 31, 1998 October 31, 1999 October 31, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Numerator:
Loss available to Common Shareholders
used in basic and diluted loss per
Common Share $(4,904,378) $ (386,549) $(5,539,315) $ (926,567)
Denominator:
Weighted-average number of Common
Shares used in basic loss per
Common Share(1) 7,024,076 7,134,301 7,166,232 7,544,685
Effect of diluted securities:
Common share options(2) -- -- -- --
----------- ---------- ----------- ----------
Weighted-average number of Common
Shares and diluted potential Common Shares
used in diluted loss per Common Share 7,024,076 7,134,301 7,166,232 7,544,685
----------- ---------- ----------- ----------
Basic loss per Common Share $ (0.70) $ (0.05) $ (0.77) $ (0. 12)
------- -------- -------- --------
Diluted loss per Common Share $ (0.70) $ (0.05) $ (0.77) $ (0.12)
------- -------- -------- --------
</TABLE>
(1) Note 600,000 ESOP shares have not been included in the weighted average
number of Common Shares--See Note H
(2) Common Share options are not included in the calculation of diluted loss per
Common Share as doing so would be antidilutive due to the net loss
-7-
<PAGE>
NOTE E -- SEGMENT REPORTING
The Registrant sells telecommunication services to two distinct
segments: a retail segment, consisting primarily of small to medium size
businesses within the Northeastern United States, and a wholesale segment, with
sales to other telecommunications carriers throughout North America and Europe.
In addition to direct costs, each segment is allocated a proportion of
the Registrant's switch and operating expenses. The allocation of expense is
based upon the minutes of use flowing through the Registrant's switching
network. There are no intersegment sales. Assets are held at the consolidated
level and are not allocable to the operating segments. The Registrant evaluates
performance on operating earnings of the two business segments. The other
compensation expense of $5,770,554, discussed in Note G has been allocated to
the segments based on the percentage of sales.
Summarized financial information concerning the Registrant's reportable
segments is shown in the following table:
<TABLE>
<CAPTION>
RETAIL WHOLESALE TOTAL
------ --------- -----
<S> <C> <C> <C>
NINE MONTHS ENDED
OCTOBER 31, 1999
Net Sales $53,009,981 $54,125,456 $107,135,437
Gross margin 16,469,347 4,908,636 21,377,983
Operating (loss) income before
other compensation (2,054,396) 2,980,768 926,372
Operating (loss) income after
other compensation (4,909,632) 65,450 (4,844,182)
NINE MONTHS ENDED
OCTOBER 31, 1998
Net Sales $55,366,097 $51,331,916 $106,698,013
Gross margin 17,074,176 3,217,039 20,291,215
Operating (loss) income (808,316) 83,124 (725,192)
</TABLE>
NOTE F -- COST OF SALES
The Company is involved in a number of billing disputes with suppliers that
arise in the normal course of business, as is common in the industry. The
Company records supplier invoices at full value and recognizes any cost
reduction upon written notification from the vendor that a credit will be
issued. The ultimate resolution of these disputes usually does not have an
adverse material effect on the operations of the Company.
During the second quarter of the current fiscal year the Company received
invoices from a major supplier containing obvious billing errors, which the
company calculated to be approximately $1,400,000. During the third quarter
the Company received verbal indications from the major supplier that a credit
will be issued for approximately $1,200,000 of the $1,400,000 billed. The
difference of $200,000 was additional charges for cellular terminations which
was not anticipated and has been charged to cost of sales in this quarter.
NOTE G -- OTHER COMPENSATION
On September 21, 1999 the Company entered into an agreement with Warren Feldman,
Chairman of the Board of Directors and a shareholder of the Company. As part of
this agreement, a lump sum in the amount of $900,000 was paid to Mr. Feldman in
settlement of his employment agreement. The Company paid $650,000 and Mr. Walter
Anderson, a major shareholder, paid $250,000. Mr. Feldman's Employment Agreement
was to have been in effect until December 31, 2001. The Company expensed the
$900,000 in the current quarter with the $250,000 being accounted for as a
capital contribution.
Simultaneously Revision LLC and Mr. Walt Anderson ("Revision/Anderson") and the
Company entered into put option agreements with Warren Feldman, Sol Feldman
("the Feldmans") and Leon Genet, ("Genet") a director of the company. These Put
Option agreements allow the Feldmans and Genet the right to sell their shares of
the Company to Revision/Anderson at a price of $16.00 per share and obligate
Revision/Anderson to purchase the shares during an exercise period beginning on
December 10, 1999 and ending at 5:00 PM on February 10, 2000. The company has no
obligation to purchase any shares from the Feldmans or Genet. The closing market
price of the Company's shares on September 21, 1999, the date of the agreements,
was $12.25, and the total number of shares covered by the agreements was
1,208,137. Using an binomial valuation model with an interest rate of 5% and a
volatility rate of 50%, the fair value of the Put agreements was determined to
be $4.03 per share or $4,870,554. In accordance with the Securities and Exchange
Commission Staff Accounting Bulletin No. 83, the Company accounted for this
non-cash transaction as a charge to expense and a credit to paid-in capital
during the current fiscal quarter.
-8-
<PAGE>
NOTE H -- EMPLOYEE STOCK OWNERSHIP PLAN
On September 1, 1998, the Company established the TotalTel USA Communications,
Inc. Employee Stock Ownership Plan (the "ESOP Plan"). Concurrently with the
establishment of the non-leveraged ESOP Plan, the Company contributed 600,000
shares of its Common Stock to the ESOP Plan. The common shares were recorded at
fair value at the date contributed to the ESOP, totaling approximately $12.3
Million, with an offset to Unearned ESOP Shares in the Statement of
Shareholders' Equity. The ESOP Plan is administered through a trust by a trustee
as designated by the Board of Directors. No shares have been allocated from the
ESOP Plan as of October 31, 1999.
In February, 1999, the Company's Board of Directors authorized the termination
of the ESOP Plan. On November 26, 1999 the Registrant filed a request for a
determination letter with the IRS. Upon IRS approval, the ESOP will be
terminated.
NOTE I -- ACCRUED RESTRUCTURING COSTS
During the fourth quarter of fiscal 1999, the registrant recorded a
restructuring charge of approximately $2,368,000 related to the adoption by
the Registrant of a formal plan for restructuring its focus of operations.
The restructuring was adopted in an effort to concentrate the Registrant's
efforts on the Northeastern United States market. Elements of the Registrant's
restructuring plan include eliminating the sales offices in Florida, Atlanta,
Georgia, Washington D.C. and the United Kingdom as well as the Miami switch.
The write downs incurred in connection with the restructuring included a
charge of approximately $1,280,000 associated with the planned disposal of
the Miami switch and switch site, a charge of approximately $723,000
associated with the termination costs to reduce employee headcount and sales
offices, a charge of approximately $265,000 for the cost associated with the
balance on the Fort Lauderdale lease, and a charge of approximately $100,000
to write off line installation costs associated with the Florida network. In
the fiscal year ending January 31, 1999, amounts paid included approximately
$240,000 for severance and termination costs. The balance of approximately
$2,128,000 was included was included on the balance sheet at January 31, 1999
as accrued restructuring costs.
The January 31, 1999 reserve included an amount of approximately $1,280,000 for
the abandonment of the Miami switch (Total book value of approximately
$1,713,000 less the fair value of approximately $433,000). The fair value
of the equipment retained was based on the best estimates of the replacement
cost of the switch hardware which could be used in the company's other switch
sites. Also included in the reserve were amounts for the severance of
approximately 25 employees of approximately $427,000, a reserve for the
balance of amounts due on the Fort Lauderdale lease of approximately $265,000,
a reserve to close the UK office of approximately $57,000 and line installation
costs of approximately $99,000.
The balance at October 31, 1999, of approximately $193,000, in accrued
restructuring costs consists primarily of approximately $76,000 for future
payments on the five year lease in Fort Lauderdale Florida, and approximately
$117,000 of costs associated with the severance of employees. In the quarter
ended October 31, 1999 approximately $15,000 was paid out for the Fort
Lauderdale lease and approximately $31,000 was paid out for severance payments.
For the nine month period ended October 31, 1999 amounts applied against the
accrual consisted of approximately $1,280,000 for the write down of the Miami
switch, approximately $99,000 for the line installation costs, approximately
$51,000 for payments made on the Fort Lauderdale lease, approximately
$310,000 for severance payments, approximately $57,000 for payments made to
shut down the U.K. operation and $310,000 for severance payments, approximately
$57,000 for payments made to shut down the U.K. operation and $138,000 reduction
in the accrual on the Fort Lauderdale lease, due to revisions in the lease.
The salvageable components of the switch were relocated to the company's New
York City switch in the third quarter.
-9-
<PAGE>
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS 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 harbor from
liability provided 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 Registrant "believes",
"anticipates", "expects", or words of similar import. Similarly, statements
which describe the Registrant'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 Registrant undertakes no
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances.
YEAR 2000 MATTERS
As is the case with most other companies using computers in their
operations, the Registrant is in the final stages of addressing the year 2000
("Y2K") issues. The Registrant believes it has completed upgrading all mission
critical systems. Modifications of non-mission critical software and hardware
have been completed or are in the final stages of deployment and should be
completed by the end of the year. Preparation for year 2000 compliance included
the Registrant's electronic data processing equipment, including all switches,
digital cross connects, and other date sensitive processor associated with the
Registrant's telecommunications network, back office, and billing and collection
systems. The Registrant's billing system modifications were addressed
concurrently with a project to enhance the overall system, which was completed
in the quarter ending October 31, 1999. The total cost incurred through the
period ended October 31, 1999 for the upgrades and management overhead was
approximately $750,000, which had been included in the Registrant's budget.
Despite the foregoing efforts and expenditures, the Registrant cannot
predict with absolute certainty what facilities or systems may ultimately be
adversely affected by the complex inter-relationships, which exist among all the
businesses along the supply chain, and between their applications and operating
systems. In addition to addressing internal systems the Registrant has worked
closely with all our critical suppliers and major wholesale customers and feel
confident, based on their responses, they have taken the steps necessary to
ensure their readiness.
The profitability and stability of the Registrant's customers may be
adversely affected by year 2000 issues not related to their relationships with
the Registrant. The expenses or liabilities to which the Registrant 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
Registrant cannot be precisely determined, but could have a material adverse
effect on the Registrant's business, operating results and financial condition.
OVERVIEW
The Registrant is a regional facilities-based telecommunications
provider servicing both the retail and wholesale marketplace. The Registrant
began offering interexchange telecommunications services in January, 1983. Gross
revenues have increased from approximately $30 million in the Fiscal year ended
January 31, 1995 ("Fiscal 1995") to approximately $137 million in the Fiscal
year ended January 31, 1999.
During the year the Registrant has focused it efforts on further
penetration into the Northeastern USA market, rather than pursuing a plan of
national expansion previously announced. This decision led to a restructuring of
the Registrant's business in the year's first quarter, which eliminated sales
offices in Florida, Georgia, Virginia and the United Kingdom, as well as the
switch in Miami, Florida.
-10-
<PAGE>
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Net sales were approximately $107,135,000 for the first nine months of
the current fiscal year, an increase of approximately $437,000 or 0.4% as
compared to the approximately $106,698,000 recorded in the first nine months of
the prior fiscal year. Net sales for the third quarter of the current fiscal
year were approximately $36,988,000, a decrease of approximately $4,271,000, or
10.4%, as compared to the approximately $41,260,000 recorded in the third
quarter of the prior fiscal year.
Wholesale revenues for the nine-month period increased to approximately
$54,125,000 an increase of approximately $2,794,000, or 5.4%. For the quarter
ended October 31, 1999 wholesale revenues were approximately $19,821,000, an
approximately $3,014,000, or 13.2% decrease over the comparative quarter in the
last fiscal year. Wholesale minutes sold in the nine-month period ended October
31, 1999 increased to approximately 418,660,000 minutes, an increase of
approximately 160,336,000 minutes, or 62.1%. Wholesale minutes sold in the
quarter ended October 31, 1999 increased to approximately 156,805,000 minutes,
an increase of approximately 60,058,000 minutes, or 62.1%. The rate of revenue
growth does not parallel the rate of volume growth due to the reduction of
prices found in a competitive wholesale market place.
Retail revenues for the nine-month period decreased to approximately
$53,010,000 a decrease of approximately $2,356,000, or 4.3%. For the quarter
ended October 31, 1999 retail revenues were approximately $17,167,000, an
approximately $1,257,000, or 6.8% decrease over the comparative quarter in the
last fiscal year. Retail minutes sold in the nine-month period ended October 31,
1999 increased to approximately 518,259,000 minutes, an increase of
approximately 45,931,000 minutes, or 9.7%. Retail minutes sold in the quarter
ended October 31, 1999 increased to approximately 171,974,000 minutes, an
increase of approximately 10,414,000 minutes, or 6.4%. The growth in the volume
of minutes sold come as a result of the registrant's efforts to further
penetrate the metro New York / New Jersey market and the overall growth in
demand in the telecommunications industry. The volume gains are offset by the
drop in the selling rate due to intense competition within the industry. The
Registrant has experienced a drop of 1.5 cents per minute, or 14.3% to an
average billing rate per minute of 9.0 cents for this fiscal year. This rate
decrease equates to an approximately $7,740,000 reduction in retail sales. This
reduction is offset by the volume increases, equating to approximately
$5,384,000. These two factors combined make up the approximately $2,356,000
shortfall over the prior years nine month revenues. Given the competitive
climate in the long distance telephone industry, there can be no assurance that
the trend in pricing will abate during the remainder of the fiscal year.
Cost of sales for the nine month period decreased to approximately
$85,757,000 a decrease of approximately $649,000, or 0.8%. For the quarter ended
October 31, 1999 cost of sales was approximately $30,058,000, an approximately
$5,068,000, or 14.4% decrease over the comparative quarter in the last fiscal
year. These changes were favorable in relation to the 0.4% increase in the sales
for the nine month period and the 10.4% decrease in sales in the third quarter.
The decrease in cost of sales was primarily due to the reduction in wholesale
buy rates, offset by the increased volume of minutes sold and reductions in the
cost of the switches and Network Operating Center. The gross margin for the
current nine months increased to approximately 20.0% as compared to
approximately 19.0% for the first nine months of the prior fiscal year, and
increased to 18.7% from 14.9% for the third quarter of the current fiscal year
as compared to the third quarter of the prior fiscal year. These increases in
the gross margins are reflective of a higher margin in the wholesale segment
over the prior year. The retail to carrier mix for the fiscal period ended
October 31, 1999, was 49% to 51%. In the comparative prior fiscal period, the
retail to carrier mix was 52% to 48%.
-11-
<PAGE>
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Selling, general and administrative expenses for the nine month period decreased
to approximately $20,590,000, an decrease of approximately $426,000, or 2.0%.
The decrease for the nine month period consisted of savings in legal expenses
resulting from the settlement of the Revision litigation of approximately
$759,000; savings in consulting expenses of approximately $381,000; the reversal
of a portion of the provision for bad debts of approximately $400,000, savings
of $162,000 in data processing services resulting from bringing the billing
system in house. These cost decreases were partially offset by an increase in
the cost of advertising and promotions of approximately $491,000; additional
sales staff to man the new regional sales offices of approximately $372,000; and
additional sales commissions paid to the carrier group for increased wholesale
volume of approximately $244,000, additional line installation costs of
approximately $138,000 and other net additional expenses of approximately
$31,000.
For the quarter ended October 31, 1999 Selling, general and administrative
expenses were approximately $7,252,000, an approximately $385,000, or 5.0%
decrease over the comparative quarter in the last fiscal year. The decrease of
approximately $385,000 from the quarter ended October 31, 1998 to the quarter
ended October 31, 1999 was principally comprised of savings in officers'
salaries of approximately $255,000; the reversal of a portion of the provision
for bad debts of approximately $400,000, savings in consulting fees of
approximately $105,000 and other net savings of approximately $32,000. This was
partially offset by additional advertising and promotion expense of
approximately $269,000 and additional line installation costs of approximately
$138,000.
Other compensation expense of approximately $5,771,000 consisted of a non-cash
charge of approximately $4,871,000 for the Put Option agreement as described in
Note G to the condensed financial statements, and $900,000 for the separation
agreement as described in Note G to the condensed financial statements.
Total other expense for the nine-month period was approximately $31,000 as
compared to approximately $74,000 of other income recorded in the prior
nine-month period. Other income for the current fiscal quarter was approximately
$15,000 as compared to approximately $19,000 of other expense recorded in the
prior fiscal year. The approximate $105,000 change for the current year was
primarily due to income derived from prepaid debit cards, which expired during
the last fiscal year.
The operating loss for the nine-month period ended October 31, 1999 was
approximately $4,844,000, an increase in the operating loss of approximately
$4,119,000 over the nine-month period ended October 31, 1998. The operating loss
for the quarter ended October 31, 1999 was approximately $5,954,000, an increase
in the operating loss of approximately $4,450,000 over the nine-month period
ended October 31, 1998. If not for the separation agreement and Put Option
agreements described in Note G, operating income for the nine month period ended
October 31, 1999 would have been approximately $926,000, an increase of
approximately $1,651,000 over the nine month period ended October 31, 1998. The
operating loss, adjusted for the separation agreement and Put Option agreements
described in Note G, for the quarter ended October 31, 1999 would have been
approximately $183,000, an improvement of approximately $1,321,000 over the
approximately $1,504,000 of operating loss in the quarter ended October 31,
1998.
Diluted loss per Common share increased to $0.70 per share for the nine-month
period ended October 31, 1999 as compared to the $0.05 loss per share for the
nine-month period ended October 31, 1998, and increased to $0.77 per share for
the third quarter of the current fiscal year as compared to the loss per share
of $0.12 for the third quarter of the prior fiscal year.
-12-
<PAGE>
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1999, the Registrant had working capital of approximately
$3,039,000, an increase of approximately $1,778,000 as compared to January 31,
1999. The ratio of current assets to current liabilities at October 31, 1999
increased to 1.1:1, over the ratio of 1.0:1 at January 31, 1999. The increase in
working capital from January 31, 1999, to October 31, 1999, was primarily
attributable to an increase in net accounts receivable of approximately
$6,313,000, an increase in prepaid expenses of approximately $84,000. This was
offset by a decrease in cash and cash equivalents of approximately $3,137,000, a
decrease in deferred income taxes of approximately $915,000, the increase in
accounts payable and accrued liabilities (including the accrued restructuring
costs, salaries and wages payable) of approximately $522,000, a decrease in
notes receivable of approximately $12,000 and an increase in the current portion
of long term debt of approximately $33,000.
The decrease in cash and cash equivalents of approximately $3,166,000
was the result primarily of the changes in assets and liabilities of
approximately $6,092,000; purchases of fixed assets of approximately $2,189,000;
the net loss of approximately $4,904,000, additions to deferred line costs of
approximately $47,000 and the repayment of bank borrowings of approximately
$391,000. This was offset primarily by the exercise of stock options of
approximately $1,672,000, non-cash charges for the "Put" agreements described in
Note - G of approximately $4,871,000, depreciation and amortization of
approximately $2,192,000, doubtful accounts of approximately $132,000, non-cash
compensation of approximately $204,000, the write off of the Miami switch and
line installation costs of approximately $1,378,000 and the loss on the disposal
of property and equipment of approximately $8,000.
Capital Expenditures
Capital expenditures for the nine-month period ended October 31, 1999
were approximately $2,189,000. These expenditures were financed from funds
provided by operations. Approximately $627,000 was applicable to the purchase
and installation of the Registrant's Internet Service Provider (ISP) platform;
approximately $764,000 for the purchase of software and hardware necessary to
upgrade the Registrant's data processing network to include among other
improvements, the Oracle financial system; an in-house billing system;
approximately $698,000 of upgrades to the Newark and New York city switches, and
approximately $100,000 for furniture and fixtures for the new sales offices in
New York City, Long Island and New Jersey.
Capital expenditures for the fiscal year ending January 31, 2000 are
estimated to be $3,600,000. This includes the capital purchases of $2,189,000
made through October 31, 1999. The additional spending includes amounts for
switch site improvements, switch expansion and upgrades, continued improvements
to internal information systems, and the cost to provide additional sales
offices. These expenditures are planned to be financed through working capital,
vendor financing and additional lines of credit which the Registrant intends to
negotiate with its current lender or other sources.
As of October 31, 1999, the Registrant had an Equipment Facility and
Revolving Credit Agreement (the "Facility") with a major New Jersey bank. This
Facility provides the Registrant with an unsecured line of credit of $5,000,000.
In addition, the Registrant has drawn down $1,701,002 of a prior loan commitment
at an interest rate of 7.71% payable over five years. At October 31, 1999 the
Registrant is in compliance with all covenants.
-13-
<PAGE>
TOTAL-TEL USA COMMUNICATIONS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
NINE MONTHS ENDED OCTOBER 31, 1999
ITEMS 1 - 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, 1999 as follows:
September 22, 1999 and October 6, 1999
-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)
<TABLE>
<S> <C>
Date December 14, 1999 By /S/ Dennis J. Spina
-------------------------- -------------------------------------------
President and Chief Executive Officer
Date December 14, 1999 By /S/ Salvatore M. Quadrino
--------------------------- -------------------------------------------
Vice President, Chief Financial Officer
Date December 14, 1999 By /S/ Thomas P. Gunning
--------------------------- ---------------------------------------
Thomas P. Gunning
Vice President, Secretary/Treasurer
and Principal Accounting Officer
</TABLE>
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF OCTOBER 31, 1999 AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS FOR THE NINE MONTHS
ENDED OCTOBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> OCT-31-1999
<CASH> 2,885,433
<SECURITIES> 579,431
<RECEIVABLES> 26,208,150
<ALLOWANCES> 1,078,733
<INVENTORY> 0
<CURRENT-ASSETS> 30,983,303
<PP&E> 23,815,192
<DEPRECIATION> 10,543,865
<TOTAL-ASSETS> 47,449,826
<CURRENT-LIABILITIES> 27,944,609
<BONDS> 1,141,407
0
0
<COMMON> 468,178
<OTHER-SE> 17,627,937
<TOTAL-LIABILITY-AND-EQUITY> 47,449,826
<SALES> 107,135,437
<TOTAL-REVENUES> 107,135,437
<CGS> 85,757,454
<TOTAL-COSTS> 85,757,404
<OTHER-EXPENSES> 26,090,198
<LOSS-PROVISION> 131,967
<INTEREST-EXPENSE> 114,450
<INCOME-PRETAX> (4,875,292)
<INCOME-TAX> 29,086
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,904,378)
<EPS-BASIC> (0.70)
<EPS-DILUTED> (0.70)
</TABLE>
