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 AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997.
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
----------- -------
COMMISSION FILE NUMBER 0 - 26728
TEL-SAVE HOLDINGS, INC.
----------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
------------------------------------------------------------
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
23-2827736
-----------------------------------
(I.R.S. EMPLOYER IDENTIFICATION NO.)
6805 ROUTE 202, NEW HOPE, PA. 18938
-------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES - ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 215 - 862 - 1500
---------------------------------------------------------------------------
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGES SINCE LAST
REPORT.
INDICATE BY CHECK 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
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTION 12,13, OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT
YES NO
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS: INDICATE THE NUMBER OF SHARES OUTSTANDING
OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE
DATE.
COMMON STOCK, $.01 PAR VALUE, 64,258,823 SHARES OUTSTANDING AS OF MAY 12, 1997.
<PAGE>
TEL-SAVE HOLDINGS, INC.
FORM 10-Q
MARCH 31, 1997
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996 3
Consolidated Statements of Income for the three
months ended March 31, 1997 and 1996 4
Consolidated Statement of Stockholders' Equity for the
three months ended March 31, 1997 5
Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II - OTHER INFORMATION
Items 1 - 6 20
Signatures 22
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, December 31,
1997 1996
- -------------------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS:
CURRENT:
<S> <C> <C>
Cash and cash equivalents $ 15,719 $ 8,023
Marketable securities 24,459 149,237
Accounts receivable, trade net of allowance for uncollect-
ible accounts of $1,348 and $987, respectively 31,172 19,971
Advances to partitions and note receivables 15,231 13,410
Due from broker - 867
Prepaid expenses and other current assets 15,268 10,377
- ------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 101,849 201,885
Property and equipment, net of accumulated depreciation of
$706 and $499, respectively 35,591 30,097
Intangibles, net of accumulated amortization of $4,604 and
$3,787, respectively 26,262 21,102
Advance to AOL 111,700 -
Other assets 3,699 3,924
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $279,101 $257,008
====================================================================== ================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable and accrued expenses:
Trade and other $ 15,894 $17,812
Partitions 6,282 4,398
Sales and excise taxes payable 1,429 1,592
Other 507 1,619
Securities sold short, at cost to purchase - 867
- ------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 24,112 26,288
- ------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 5,000,000 shares autho-
rized; no shares outstanding - -
Common stock - $.01 stated value, 100,000,000 autho-
rized; 63,028,823 and 62,237,998 issued and outstand-
ing, respectively 630 622
Additional paid-in capital 227,256 210,616
Retained earnings 31,663 24,042
Treasury stock (4,560) (4,560)
- ------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 254,989 230,720
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $279,101 $257,008
====================================================================== ================= ==================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-3-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------
1997 1996
- --------------------------------------------------------------------------------
SALES $71,160 $51,065
COST OF SALES 58,193 44,233
- --------------------------------------------------------------------------------
GROSS PROFIT 12,967 6,832
SELLING, GENERAL AND ADMINISTRATIVE 3,293 2,286
- --------------------------------------------------------------------------------
OPERATING INCOME 9,674 4,546
OTHER INCOME, NET 2,819 872
- --------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 12,493 5,418
PROVISION FOR INCOME TAXES 4,872 2,041
- --------------------------------------------------------------------------------
NET INCOME $ 7,621 $ 3,377
=============================================================== ===============
NET INCOME PER SHARE - PRIMARY $ .12 $ .08
=============================================================== ===============
WEIGHTED AVERAGE COMMON AND COMMON EQUIV-
ALENT SHARES OUTSTANDING - PRIMARY 65,839 43,086
=============================================================== ===============
NET INCOME PER SHARE - FULLY DILUTED $ .12 $ .07
=============================================================== ===============
WEIGHTED AVERAGE COMMON AND COMMON EQUIV-
ALENT SHARES OUTSTANDING - FULLY DILUTED 65,839 45,858
=============================================================== ===============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-4-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
--------------------- Paid-in Retained -----------------------
Shares Amount Capital Earnings Shares Amount Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 62,238 $622 $210,616 $24,042 (428) $(4,560) $230,720
NET INCOME - - - 7,621 - - 7,621
ISSUANCE OF WARRANTS TO
AOL - - 11,700 - - - 11,700
ISSUANCE OF COMMON STOCK 141 1 2,217 - - - 2,218
EXERCISE OF COMMON STOCK
WARRANTS 650 7 3,026 - - - 3,033
PURCHASE OF COMMON STOCK
WARRANTS - - (4,400) - - - (4,400)
INCOME TAX BENEFIT RELATED
TO COMMON
STOCK WARRANTS - - 4,097 - - - 4,097
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 63,029 $630 $227,256 $31,663 (428) $(4,560) $254,989
==================================== ============ ================ ============ ======== =============== ==============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-5-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 7,621 $3,377
Adjustment to reconcile net income to net cash (used in)
provided by operating activities:
Unrealized loss on securities sold short and marketable
securities 220 50
Provision for bad debts 775 17
Depreciation and amortization 1,024 517
Deferred credits - (120)
Income tax benefit related to warrants 4,097 -
(Increase) decrease in:
Accounts receivable - trade (11,562) (1,595)
Advances to partitions and note receivables (1,821) (1,816)
Prepaid expenses and other current assets (4,892) (497)
Other assets 225 (1,463)
Increase (decrease) in:
Accounts and partition payables and accrued expenses (1,723) 3,263
Income taxes payable - 1,266
- -----------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (6,036) 2,999
- -----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of intangibles (3,759) (439)
Capital expenditures (5,701) (8,770)
Securities sold short (867) 660
Due from broker 867 (710)
Loans to stockholder - (2,915)
Proceeds from sale of marketable securities 124,559 -
Advance to AOL (100,000) -
- -----------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 15,099 (12,174)
- -----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of common stock warrants 3,033 -
Purchase of common stock warrants (4,400) -
Payment of note payable to stockholder - (5,920)
- -----------------------------------------------------------------------------------------------
Net cash used in financing activities (1,367) (5,920)
- -----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 7,696 (15,095)
Cash and cash equivalents, at beginning of period 8,023 41,211
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents, at end of period $ 15,719 $26,116
========================================================================= =================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-6-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation The consolidated financial statements include
the accounts of Tel- Save Holdings, Inc. and
its two wholly-owned subsidiaries, and have
been prepared as if the entities had operated
as a single consolidated group since their
respective dates of incorporation. All
intercompany balances and transactions have
been eliminated.
The consolidated financial statements and
related notes thereto as of March 31, 1997 and
for the three months ended March 31, 1997 and
1996 are presented as unaudited but in the
opinion of management include all adjustments
necessary to present fairly the information
set forth therein. These adjustments consist
solely of normal recurring accruals. The
consolidated balance sheet information for
December 31, 1996 was derived from the audited
financial statements included in the Company's
Form 10-K. These interim financial statements
should be read in conjunction with that
report. The interim results are not
necessarily indicative of the results for any
future periods.
2. Stock Split On January 3, 1997, the Company's Board of
Directors approved a two-for-one split of the
common stock in the form of a 100% stock
dividend. The additional shares resulting from
the stock split were distributed on January
31, 1997, to all stockholders of record at the
close of business on January 17, 1997. The
consolidated balance sheet as of December 31,
1996 reflects the recording of the stock split
as if it had occurred on December 31, 1996.
Further, all references in the consolidated
financial statements to average number of
shares outstanding and related prices, per
share amounts, warrant and stock option data
have been restated for all periods to reflect
the stock split.
3. AOL Agreement In conjunction with the previously reported
Telecommunications Marketing Agreement with
America Online, Inc. ("AOL Agreement"), the
Company advanced AOL a total of $100 million
(the "Cash Advance") and issued warrants to
purchase up to 12 million shares of the
Company's stock. The $11.7 million value
assigned at the grant date by an investment
bank to the anticipated number of warrants to
be vested will be adjusted to the extent that
the number of warrants ultimately vested
differs from the anticipated vested warrants.
The Company has thus advanced $111.7 million
for its rights under the AOL Agreement.
-7-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The AOL Agreement provides for marketing
payments based on the "pre-tax profit" (as
defined in the AOL Agreement) for each
calendar quarter from the services provided by
the Company. AOL's share of the pre-tax profit
will vary from 50% to 70% percent depending on
the level of revenues from services provided
by the Company. The Company will withhold a
portion of AOL's share of the pre-tax profit
as a recovery of the Cash Advance. The Company
is permitted to withhold up to $4.3 million in
each of the 10 quarters ending after December
31, 1997 and to withhold 33% of AOL's share of
the pre-tax profits for every quarter ending
after June 30, 2002 until the entire Cash
Advance has been recovered. AOL's share of
pre-tax profits in excess of the $4.3 million
and 33% will be distributed as earned.
The Company has acquired the exclusive use of
a distinctive brand name that will be used to
market the Company's telecommunications
services (the "Services") to be provided by
the Company and marketed by AOL under the AOL
Agreement (the "Mark"). AOL is required to
provide an online area on the AOL network (the
"Online Area") for the Company's exclusive use
in marketing and remarketing the Services
during the term of the AOL Agreement and
thereafter. The Online Area provides direct
access to the Company's online network server
by users of the AOL network. The Company's
exclusive use of the Mark, the Online Area and
marketing and remarketing rights to the
Customer Base (which are the significant
intangibles that the Company has identified
that were acquired in the AOL Agreement)
survive the termination of the AOL Agreement
and continue as long as there are any
remaining end users of the Services. The
Company will identify, with the assistance of
outside experts, the specific rights obtained,
the aggregate and individual values to be
allocated to those rights and the appropriate
range of useful lives of each such right. The
amortization of the rights, combined with the
profits allocable to AOL (based on percentages
as specified in the AOL Agreement as adjusted
for certain cash withheld by the Company
during years one to three and five to seven as
also provided in the AOL Agreement), will be
reflected as costs in the Company's future
income statements.
-8-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company fully expects that it will have
the beneficial use of the Mark, the Online
Area and other significant rights under the
AOL Agreement for at least 40 years and that
such usage will be an integral and substantial
part of OBN and the Company's continuing
operations. However, the actual lives assigned
will be ultimately determined based on the
specific evidence identified. The value of any
additional warrants that may be granted to AOL
in years 4 or 5 in conjunction with an
extension of the "term" of the AOL Agreement
will be valued at that time and will be
charged as an expense in the Company's income
statement.
4. Recent Accounting In February 1997, the Financial Accounting
Pronouncement Standards Board issued Statement No. 128,
"Earnings per Share," which is effective for
fiscal years ending after December 15, 1997.
The Company will adopt Statement No. 128 for
the year ended December 31, 1997. The adoption
of this standard is not expected to have a
material impact on the Company's consolidated
statements.
-9-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Company was founded in 1989 as a switchless reseller of AT&T
long distance services to small and medium-sized businesses and
currently has over 500,000 end users. The Company has completed
successful testing of its own nationwide telecommunications
network, One Better Net ("OBN") consisting of five Company-owned,
AT&T (now Lucent) manufactured 5ESS-2000 switches connected by AT&T
transmission facilities. A majority of the Company's new orders are
now being placed on OBN. As more fully described below, the Company
believes that gross margins for OBN long distance service will be
higher than those for AT&T long distance service which the Company
resells.
Historically, the Company has marketed the majority of its services
through independent carriers and marketing companies known as
"partitions", which allowed the Company to minimize overhead
expenses. The Company expanded its business by adding partitions
and providing existing and new partitions with operational,
financing, marketing and management support. Beginning in 1996, the
Company initiated and subsequently expanded through an acquisition
in December 1996, a direct marketing effort. Direct marketing
requires the Company to incur costs of marketing, including
personnel, occupancy, marketing support and additional customer
service - costs which were historically borne by partitions.
Currently, a large majority of the Company's new sales are
generated via direct marketing. From time to time, the Company may
consider acquisitions and other transactions in the course of
pursuing its business strategy.
The Company believes that gross margins for OBN long distance
service will be higher than those for AT&T long distance service
which the Company resells. AT&T long distance service is "bundled,"
which means that the Company pays a single, all-inclusive price to
AT&T for switching, transmission, and LEC access. OBN long distance
service is "unbundled," which means that the Company provides its
own switching, pays AT&T for transmission, and pays access fees
directly to LECs. The "unbundled" charges per call on OBN are
expected to be less than the "bundled" charge paid to AT&T.
On February 25, 1997, the Company announced that it had entered
into a Telecommunications Marketing Agreement (the "AOL
Agreement"), dated as of February 22, 1997 and effective as of
February 25, 1997, with AOL, under which the Company will be the
exclusive provider of long distance telecommunications services to
be marketed by AOL under a distinctive brand name to be used
exclusively for the Company's services. The services will include
provision for online sign-up, call detail and reports and credit
card payment. Under the AOL Agreement, AOL will provide millions of
dollars of online advertising and promotion of the services and
provide all of its subscribers with access to a dedicated service
area online for the Company. AOL subscribers who sign up for the
telecommunications services will be customers of the Company, as
the carrier providing such services.
-10-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
The Company also has certain rights under the AOL Agreement to
offer, on a comparably exclusive basis, local and wireless
telecommunications services when such services become available to
the Company through a contract for resale or otherwise. The
inclusion of such additional services (which the Company does not
currently offer) in the telecommunications services to be marketed
by AOL under the distinctive brand name is subject to the
negotiation of an amendment to the AOL Agreement describing the
specifics of the rollout, marketing and other terms applicable to
such new services offering, including the specific economic
arrangements between the Company and AOL with respect to such
additional services. AOL and the Company have agreed to submit any
dispute with respect to such an amendment for resolution by
arbitration. AOL may not contract for the provision of such
additional services with any other provider prior to December 31,
1997 nor may it so contract after the Company has become and is the
provider of such additional service under the AOL Agreement. The
Company also has certain rights of first refusal with respect to
such additional services should AOL seek to contract with any other
provider prior to such times.
The exclusivity provisions of the AOL Agreement generally do not
prohibit AOL from selling online advertising to other
telecommunications service providers. AOL may terminate its
exclusivity obligations under the AOL Agreement with respect to a
category of telecommunications services (long-distance, local and
wireless) if the Company's overall pricing to end users for such
category of services exceeds the overall prices for such services
that are generally available to end users from major carriers so as
to be non-competitive with those carriers' offerings. The Company
expects that this termination opportunity is unlikely to occur,
since the Company's business plan and policy are to provide
telecommunications services at prices that are competitive with
those generally available to end users from major carriers.
It is anticipated that the services will be tested in the early
summer and offered generally to AOL subscribers in the fall of
1997. The AOL Agreement has an initial term of three years and can
be extended by AOL on an annual basis thereafter.
Under the AOL Agreement, the Company made an initial advance of
$100 million to AOL at signing and agreed to providing marketing
payments to AOL based on a percentage of the "pretax profit" (as
defined in the AOL Agreement) from the services (between 50% and
70%, depending on the revenues from the services). The AOL
Agreement provides that $43 million of the initial advance will be
offset and recoverable by the Company through reduction of such
profit-based marketing payments during the initial term of the AOL
Agreement or, subject to certain monthly reductions by offset of
the amount thereof, directly by AOL upon certain earlier
terminations of the AOL Agreement. The $57 million balance of the
initial advance and any portion of the $43 million not previously
recovered will be offset and is recoverable through a percentage of
such profit-based marketing payments made after the first five
years of the AOL Agreement (when extended beyond the initial term)
and by offset against a percentage of AOL's share of the profits
from the services after termination or expiration of the AOL
Agreement.
-11-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
In addition, the Company issued to AOL at signing two warrants to
purchase shares of the Company's common stock at a premium over the
market value of such stock on the issuance date. One warrant is for
5 million shares, at an exercise price of $15.50 per share,
one-half of which shares will vest at the time the service is first
made generally available to AOL online network subscribers in
accordance with the AOL Agreement or the first anniversary of the
warrant issuance, whichever is earlier, and the balance of which
will vest on the first anniversary of issuance if the AOL Agreement
has not terminated. The other warrant is for up to 7 million
shares, at an exercise price of $14.00 per share, which will vest,
commencing December 31, 1997, based on the number of subscribers to
the services and would vest fully if there are at least 3.5 million
such subscribers at any one time. The Company also agreed to issue
to AOL an additional warrant to purchase 1 million shares of its
common stock, at market value at the time of issuance, upon each of
the first two annual extensions by AOL of the term of the AOL
Agreement, which warrants also will vest based on the number of
subscribers to the services.
The $11.7 million value assigned at the grant date by an investment
bank to the anticipated number of warrants to be vested will be
adjusted to the extent that the number of warrants ultimately
vested differs from the anticipated vested warrants. The Company
has thus advanced $111.7 million for its rights under the AOL
Agreement.
Further, the Company and AOL will jointly develop the online
marketing and advertising for the services. The Company will
provide online customer service as well as inbound calling customer
service to the AOL subscriber base in connection with the services.
While the Company expects to utilize its Clearwater, Florida
facility to provide customer service support to AOL subscribers,
the Company may need to increase staffing and purchase equipment to
support this activity. The Company anticipates that it will incur
expenses for the start-up and development of the services
contemplated in the AOL Agreement during 1997, including expenses
for the expansion of the Clearwater operation, for software
programming and for software and hardware additions to the
Company's network, OBN, to expand its capacity for the traffic. The
Company believes that the increased revenues to the Company
resulting from the AOL Agreement and the services offered pursuant
thereto will be limited in 1997, but could be significant in 1998,
although there can be no assurance that these results can be
achieved in light of a number of uncertainties, including the
following: the Company's ability to timely develop the online
ordering, call detail, billing and customer services for the AOL
subscribers, which will require, among other things, being able to
identify and employ sufficient personnel qualified to provide
necessary programming; the Company's and AOL's ability to work
effectively together to jointly develop the online marketing
contemplated by the AOL Agreement; the response rate to online
promotions of AOL's online subscribers, most of whom are expected
to be residential rather than businesses, which have historically
been the Company's customer base; the Company's ability to expand
OBN to accommodate increased traffic levels; and AOL's ability to
successfully execute its publicly stated business plan and
implement its announced network changes to improve subscribers
access to its online service.
-12-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
In addition to historical information, certain of the statements
contained herein may be considered forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange act of 1934. Such statements
are identified by the use of forward-looking words or phrases,
including, but not limited to,"estimates," "expects," "expected,"
"anticipates," and "anticipated." These forward-looking statements
are based on the Company's current expectations. Although the
Company believes that the expectations reflected in such
forward-looking statements are reasonable, there can be no
assurance that such expectations will prove to have been correct.
Forward-looking statements involve risks and uncertainties and the
Company's actual results could differ materially from the Company's
expectations. Important factors that could cause such actual
results to differ materially include, among others, adverse
developments in the Company's relationship with AT&T, increased
price competition for long distance services, delays in the direct
marketing of residential long distance services under the AOL
Agreement, attrition in the number of end users, and changes in
government policy or regulation. The Company undertakes no
obligation to update its forward- looking statements.
-13-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial data
as a percentage of sales:
PERCENTAGE OF SALES
--------------------------
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
1997 1996
- --------------------------------------------------------------------------------
SALES 100.0% 100.0%
COST OF SALES 81.8 86.6
------- -----
GROSS PROFIT 18.2 13.4
SELLING, GENERAL AND ADMINISTRATIVE 4.6 4.5
----- ----
OPERATING INCOME 13.6 8.9
OTHER INCOME, NET 4.0 1.7
---- ----
INCOME BEFORE PROVISION FOR INCOME TAXES 17.6 10.6
PROVISION FOR INCOME TAXES 6.9 4.0
---- ----
NET INCOME 10.7% 6.6%
============================================================================
-14-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
THREE MONTHS ENDED MARCH 31, 1997 TO THE THREE MONTHS ENDED
MARCH 31, 1996
SALES. Sales increased by 39.4% to $71.2 million in the
first quarter of 1997 from $51.1 million in the first
quarter of 1996. The increase in sales related primarily to
the initial marketing of the Company's OBN services, as well
as increases in the number of orders submitted by the
Company's direct marketing operation and the addition of new
partitions.
Although the Company expects sales to increase through the
Company's direct marketing efforts, the AOL Agreement, the
addition of new partitions, the growth of end user business
through existing partitions and possible future
acquisitions, there can be no assurance that the Company
will continue to increase sales on a quarter-to-quarter or
year-to-year basis.
COST OF SALES. The Company's costs of sales increased by
31.6% to $58.2 million in the first quarter of 1997 from
$44.2 million in the first quarter of 1996. The primary
component of the Company's cost of sales is network usage
costs. Prior to 1997, network usage costs consisted solely
of "bundled" charges from AT&T. Beginning in 1997, the
Company also incurred "unbundled" charges, including local
access fees, associated with the operation of OBN. Both
"bundled" and "unbundled" charges are directly related to
calls made by the Company's end users.
As a switchless reseller of AT&T long distance services and
in order to provide its OBN services, the Company subscribes
to contract tariffs. The ability of the Company to negotiate
competitive terms of these tariffs has been an important
reason for the Company's success. In October 1996, the
Company subscribed to a new AT&T contract tariff, which was
further revised in December 1996 and permits the Company to
continue to resell AT&T long distance services, including
AT&T-SDN service, through mid-1998. The new AT&T contract
tariff also includes other AT&T services (such as
international long distance, inbound and outbound services)
that will be used in the Company's nationwide telecommunica-
tions network, OBN. The rates that the Company pays under
the new AT&T contract tariff are more favorable to the
Company than under previous tariffs. During its term, the
new AT&T contract tariff will enable the Company to minimize
possible attrition that might result from moving existing
end users from the AT&T network to OBN. The new AT&T
contract tariff also permits a more gradual introduction of
OBN, which has reduced the expense of providing the capacity
required in a more rapid phase-in of OBN and lessened the
impact of any technical difficulties during the phase-in of
OBN. The new AT&T contract tariff requires the Company to
commit to purchase $285 million of service from AT&T over
the next 4 years, including at least $1 million per month of
international service. This commitment is larger than any
previous commitment that the Company has made, but the
Company believes that it can be met based on its current
purchases of long distance service from AT&T which are in
excess of $10 million per month. Further, the Company can
terminate the new contract tariff without liability to AT&T
at the end of 18 months if the Company has generated at
least $105 million in usage charges, including at least $15
million in international usage charges. The Company also may
discontinue the new contract tariff without liability prior
to the 18th month if the Company and AT&T enter into a new
contract tariff or another contract with a revenue
commitment of at least $7.5
-15-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
million per month and a term of at least the difference
between 18 months and the number of months that the Company
subscribed to the contract tariff, provided that the Company
must purchase or pay for AT&T services under the contract
tariff at least $6.7 million per month for the months prior
to such termination, including $1 million per month of
international usage.
OBN and the operation of the Company's own switches and
network will require the Company to incur systems and
equipment maintenance, lease, and network personnel expenses
significantly above the levels historically experienced by
the Company as a switchless reseller of AT&T services.
However, these per call costs, in combination with
"unbundled" charges paid to LECs and AT&T, are expected to
be less than the per call cost currently incurred by the
Company as a switchless reseller paying "bundled" charges to
AT&T.
Operations of its own direct marketing requires the Company
to incur additional costs including personnel, occupancy,
and marketing support, which are significantly above levels
historically experienced by the Company.
The AOL Agreement will initially require the Company to
provide competitively priced residential long distance
service along with various on-line capabilities including
on-line sign-up, call detail and reports and credit card
payment. The Company may incur expenses for the start-up and
development of the services contemplated in the AOL
Agreement particularly during the second and third quarters
of 1997. These costs may result in higher costs of sales in
1997 than historically experienced by the Company.
GROSS MARGIN. Gross margin increased to 18.2% in the first
quarter of 1997 from 13.4% during the first quarter of 1996.
The increase in gross margin was primarily due to lower
network usage costs and credits for long distance services
on the Company's new contract tariff with AT&T and network
costs for OBN services which were lower on a per call basis
when compared to those paid to AT&T. As a result of the
Company's expansion of its direct marketing, decreases in
partition costs were more than offset by an increase in
direct marketing costs.
Although the basic rates of the three largest long distance
carriers - AT&T, MCI and Sprint - have consistently
increased over the past three years, AT&T and other carriers
have announced new price plans and significantly simplified
rate structures aimed at residential customers, the
Company's primary target audience under the AOL Agreement,
which may have the impact of lowering overall long distance
prices. There can be no assurance that AT&T or other
carriers will not make similar offerings available to the
small and medium sized businesses that the Company currently
serves. Although OBN is expected to make the Company more
price competitive, further reductions in long distance
prices charged by competitors still may have a material
adverse impact on the Company's gross margin in future
periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,
general and administrative expenses increased by 44.0% to
$3.3 million in the first quarter of 1997 from $2.3 million
in the first quarter of 1996. The increase in selling,
general and administrative expenses was due primarily to the
costs associated with hiring additional management personnel
to support the Company's continuing growth and increased
fees for professional services.
-16-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
The Company expects selling, general and administrative
expenses to increase as it implements, operates and
maintains OBN, its direct marketing efforts and the rollout
of the AOL service offering. These efforts will require
additional personnel, equipment and support. The additional
selling, general and administrative expenses may be offset
by the increased sales and profit gained as a result of the
implementation of the components of the Company's strategic
plan, but increased costs may have an adverse impact on
results of operations.
OTHER INCOME. Other income was $2.8 million in the first
quarter of 1997 versus $872,000 for the first quarter of
1996. Other income consists primarily of interest income
earned on the Company's cash balances resulting primarily
from the unapplied proceeds of the Company's public offering
in April 1996 and excess cash from operations.
As a result of the $100 million initial advance to AOL,
interest income for future periods is expected to be
significantly less than amounts realized for the three
months ended March 31, 1997.
PROVISION FOR INCOME TAXES. The Company's effective tax rate
increased to 39.0% for the three months ended March 31, 1997
from the effective tax rate of 37.7% for the three months
ended March 31, 1996 due to an anticipated higher effective
state tax rate in 1997.
OTHER INFORMATION. While the Company does not release
revenues and earning per share estimates to the public and
does not intend to continue to do so in the future, the
Company currently expects that revenues and earnings per
share for 1997 will be in line with the current consensus of
analysts' published projections, which estimate total 1997
revenues of $300 million to $350 million and 1997 earnings
per share of approximately $.45 to $.52. These revenue
projections reflect the Company's decision to defer direct
marketing of its long distance services to residential
customers until its marketing arrangements with AOL are in
place in light of increasingly aggressive price competition
for residential long distance telecommunications services.
The Company also notes that certain previously published
reports by the financial press regarding analysts' 1997
earnings per share estimates failed to take into account the
Company's two-for-one stock split in the form of a stock
dividend effective as of January 31, 1997.
-17-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
The Company consummated its initial public offering of
10,350,000 shares of Common Stock in September and October
of 1995. The Company received net proceeds from such
offering of $42.8 million, of which $4.5 million was used to
pay the minority stockholder. The Company consummated a
public offering of 17,068,000 shares of Common Stock in
April and May, 1996. The Company received net proceeds from
such offering of approximately $139.1 million. During 1996,
certain options and warrants to purchase shares of the
Company's Common Stock were exercised and the Company
received net proceeds of approximately $4.9 million and $7.4
million, respectively. Also during 1996, the Company
repurchased approximately 428,000 shares, which are held as
treasury shares, for $4.6 million. During the three months
ended March 31, 1997, certain warrants to purchase shares of
the Company's Common Stock were exercised and the Company
received net proceeds of approximately $3.0 million. In
addition, the Company purchased certain Common Stock
warrants for $4.4 million. The tax benefit realized from the
options and warrants was approximately $21.3 million in 1996
and $4.1 million for the quarter ended March 31, 1997 and is
reflected as an adjustment to additional paid-in capital and
taxes payable. At March 31, 1997, the Company had cash, cash
equivalents and marketable securities of approximately $40.2
million.
The Company's working capital was $77.7 million and $175.6
million at March 31, 1997 and December 31, 1996,
respectively. The significant decrease in working capital is
primarily a result of the $100 million cash advance made to
AOL in February, 1997.
The Company invested $5.7 million in capital equipment
during the quarter ended March 31, 1997, of which $1.2
million was used for the acquisition of capital equipment
and installation costs relating to the deployment of OBN. To
date, through March 31, 1997, the Company has invested $26.1
million for the acquisition of capital equipment and
installation costs relating the deployment of OBN.
In March 1996, the Company negotiated an unsecured,
committed line of credit with PNC Bank, N.A. ("PNC Credit
Facility") under which borrowings of up to $50.0 million are
available. The Company is required to pay an availability
fee of $62,500 per annum, or 0.125% of the total available
borrowings. Interest on borrowing is payable monthly at PNC
Bank's prime rate less 0.5% or LIBOR plus 0.875%, at the
Company's option. Principal is payable upon demand by PNC
Bank. Under the terms of the PNC Credit Facility, the
Company must maintain certain financial covenants and adhere
to certain restrictions. During February 1997, the bank
provided a temporary increase in the amount available under
the agreement to $60.0 million under similar terms to the
existing credit facility. At March 31, 1997, the Company had
no borrowings outstanding under the PNC Credit Facility.
-18-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
In February 1997, the Company negotiated a secured,
committed line of credit with Merrill Lynch International
Bank Limited ("ML Credit Facility") under which borrowings
of up to $120.0 million, based on specific collateral value
presented to Merrill Lynch, are available. Interest on
borrowings is payable at LIBOR plus 0.625%. Principal is
payable upon demand by Merrill. Under the terms of the ML
Credit Facility, the Company must maintain certain financial
covenants and adhere to certain restrictions. At March 31,
1997, the Company had no borrowings outstanding under the ML
Credit Facility.
The Company has used a portion of the proceeds from its 1996
stock offering for: (i) advances to new and exiting
partitions to support their marketing efforts, (ii)
procurement of additional hardware and software for OBN,
(iii) direct marketing efforts, including the ABA
transaction, and a direct marketing center in Clearwater,
Florida, (iv) the purchase of a new headquarters building in
New Hope, Pennsylvania and (v) an initial advance of $100
million made in February 1997 to AOL in conjunction with the
AOL Agreement. The Company intends to use the remaining
proceeds: (i) to further fund new and existing partitions,
(ii) to expand direct marketing efforts, and (iii) to take
advantage of growth opportunities, including but not limited
to, possible acquisitions. At March 31, 1997, excess cash
was invested primarily in cash equivalents and marketable
securities. Generally, excess cash is invested primarily in
marketable securities, short term government securities and
cash equivalents consisting of money market accounts with
major international brokerage firms. The Company has had to
spend less of the proceeds of the 1996 stock offering to
start up OBN than originally planned because of the new AT&T
contract tariff, which allows the Company to avoid some of
the costs associated with moving existing end users to OBN
and permits the Company to phase in OBN more cost
effectively by not leasing transmission facilities before
traffic levels are sufficient to fill them.
The Company does not have a significant concentration of
credit risk with respect to accounts receivable due to the
large number of partitions and end users comprising the
Company's customer base and their dispersion across
different geographic regions. The Company maintains reserves
for potential credit losses and, to date, such losses have
been within the Company's expectations.
The Company believes that its current cash position,
marketable securities, the credit facilities and the cash
flow expected to be generated from operations, will be
sufficient to fund its capital expenditures, working capital
and other cash requirements for at least the next twelve
months.
-19-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
In January, 1997 in connection with the exercise of outstanding
warrants the Company issued 650,000 shares of its common stock to
the holders of such warrants upon the payment of $3,033,000 in
accordance with the terms thereof. The Company believes that the
issuance of such warrants was exempt from registration under the
Securities Act of 1933 ("1933 Act") pursuant to Section 4(2)
thereunder.
In March, 1997, in connection with the acquisition of certain
assets and the assumption of certain liabilities of a former
partition, the Company issued an aggregate of 140,825 shares of
common stock to such partition of which 35,206 shares of common
stock are held by the Company pursuant to the terms of an escrow
agreement. The Company believes that the issuance of such shares
was exempt from registration under the 1933 Act pursuant to
Section 4(2) thereunder.
Reference is made to Part I, Item 2 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for
information regarding the issuance of warrants to AOL in
accordance with the AOL Agreement. The Company believes that the
issuance of such warrants was exempt from registration under the
1933 Act pursuant to Section 4(2) thereunder.
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
Item 5. Other Information
-----------------
None.
-20-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit 11 Computation of Net Income Per Share
(b) Reports on Form 8-K
-------------------
(1) Current Report on Form 8-K/A dated February 3, 1997.
(2) Current Report on Form 8-K/A dated February 28, 1997.
(3) Current Report on Form 8-K dated March 7, 1997.
(4) Current Report on Form 8-K dated April 24, 1997.
-21-
<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.
Date: May 15, 1997 TEL-SAVE HOLDINGS, INC.
-----------------------
(Registrant)
By: /s/ Daniel Borislow
-------------------------------------------
Daniel Borislow
Chairman of the Board,
Chief Executive Officer and Director
By: /s/ Joseph A. Schenk
-------------------------------------------
Joseph A. Schenk
Chief Financial Officer, Treasurer and Director
By: /s/ Kevin R. Kelly
-------------------------------------------
Kevin R. Kelly
Controller
-22-
EXHIBIT 11
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS)
For the Three Months
Ended March 31,
----------------------
1997 1996
- --------------------------------------------------------------------------------
Net income $ 7,621 $ 3,377
======== ========
PRIMARY
Weighted average common and common
equivalent shares outstanding - Primary:
Weighted average shares 62,429 39,000
Weighted average equivalent shares 3,410 4,086
-------- --------
Weighted average common and common
equivalent shares - Primary 65,839 43,086
======== ========
Net income per share - Primary $ .12 $ .08
======== ========
FULLY DILUTED
Weighted average common and
common equivalent shares
outstanding - Fully Diluted:
Weighted average shares 62,429 39,000
Weighted average equivalent shares 3,410 6,858
-------- --------
Weighted average common and common
equivalent shares - Fully Diluted 65,839 45,858
======== ========
Net income per share - Fully Diluted $ .12 $ .07
======== ========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997 AND THE
UNAUDITED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED
MARCH 31, 1997 OF TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> $15,719,000
<SECURITIES> 24,459,000
<RECEIVABLES> 32,520,000
<ALLOWANCES> 1,348,000
<INVENTORY> 0
<CURRENT-ASSETS> 101,849,000
<PP&E> 36,297,000
<DEPRECIATION> 706,000
<TOTAL-ASSETS> 279,101,000
<CURRENT-LIABILITIES> 24,112,000
<BONDS> 0
0
0
<COMMON> 630,000
<OTHER-SE> 254,359,000
<TOTAL-LIABILITY-AND-EQUITY> 279,101,000
<SALES> 0
<TOTAL-REVENUES> 71,160,000
<CGS> 0
<TOTAL-COSTS> 58,193,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,493,000
<INCOME-TAX> 4,872,000
<INCOME-CONTINUING> 7,621,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,621,000
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
