UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 2
(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 14, 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>
RESTATED
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 AOL marketing costs - current 62,405 -
Prepaid expenses and other current assets 16,668 10,377
- ------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 165,654 201,885
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
Prepaid AOL marketing costs 43,668 -
Other assets 3,135 3,924
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 274,310 $ 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 224,656 210,616
Retained earnings 29,472 24,042
Treasury stock (4,560) (4,560)
- ------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 250,198 230,720
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $274,310 $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,
------------------------
RESTATED
1997 1996
- --------------------------------------------------------------------------------
SALES $71,160 $51,065
COST OF SALES 61,785 44,233
- --------------------------------------------------------------------------------
GROSS PROFIT 9,375 6,832
SELLING, GENERAL AND ADMINISTRATIVE 3,293 2,286
- --------------------------------------------------------------------------------
OPERATING INCOME 6,082 4,546
OTHER INCOME, NET 2,819 872
- --------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 8,901 5,418
PROVISION FOR INCOME TAXES 3,471 2,041
- --------------------------------------------------------------------------------
NET INCOME $ 5,430 $ 3,377
=============================================================== ===============
NET INCOME PER SHARE - PRIMARY $ .08 $ .08
=============================================================== ===============
WEIGHTED AVERAGE COMMON AND COMMON EQUIV-
ALENT SHARES OUTSTANDING - PRIMARY 65,839 43,086
=============================================================== ===============
NET INCOME PER SHARE - FULLY DILUTED $ .08 $ .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 RESTATED TREASURY STOCK
--------------------- PAID-IN RETAINED ----------------------- RESTATED
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 - - - 5,430 - - 5,430
ISSUANCE OF WARRANTS TO
AOL - - 9,100 - - - 9,100
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 $224,656 $29,472 (428) $(4,560) $250,198
==================================== ============ ================ ============ ======== =============== ==============
</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,
-------------------------------
RESTATED
1997 1996
- -----------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 5,430 $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
AOL marketing costs 3,591 -
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 (6,292) (497)
Prepaid AOL marketing costs (100,564) -
Other assets 789 (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 (106,036) 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 -
- -----------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 115,099 (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 (the
"AOL Agreement") with America Online, Inc.
("AOL"), the Company paid AOL a total of $100
million and issued two warrants to purchase
shares of the Company's stock, one warrant
(the "First Warrant") to purchase, at an
exercise price of $15.50 per share, up to
5,000,000 shares, which vests as to 2,500,000
shares on the earlier of the time the
Company's service under the AOL Agreement is
first made generally available to the public
(the "Commercial Launch Date") and February
22, 1998, and as to 2,500,000 shares on
February 22, 1998 if the AOL Agreement has not
terminated, and one warrant (the "Second
Warrant") to purchase, at an exercise price of
$14.00 per share, up to 7,000,000 shares,
which will vest, commencing December 31, 1997,
based on the number of subscribers to the
Company's service and would vest fully if
there are at least 3.5 million such
subscribers at any one time. The initial term
of the AOL Agreement runs to June 30, 2000,
and the AOL Agreement provides for annual
extensions by AOL of its term therafter.
After discussions with the Staff of the
Securities and Exchange Commission (the
"SEC"), the Company has determined to change
the originally described accounting treatment
for the AOL Agreement and to account for the
$100 million cash payment, the value of the
First Warrant, as described below, and $0.6
million of agreement related costs as follows:
(i) $35.9 million will be charged to expense
ratably over the period from the signing of
the AOL Agreement to December 31, 1997, as
payment for certain exclusivity rights for
that period; (ii) $13.2 million will be
treated as production of advertising costs and
will be charged to expense on the Commercial
Launch Date, currently anticipated to be in
September 1997; and (iii) the $60.6 million,
the balance of the cash payment, the value of
the First Warrant, and AOL Agreement related
costs, represents the combined value of
advertising and exclusivities which extend
over the term of the AOL Agreement and will be
recognized ratably after the Commercial Launch
Date as advertising services are received.
Accordingly, during the three months ended
March 31, 1997, the Company recognized $3.6
million related to the exclusivity, as
discussed in (i) above and has restated its
consolidated financial statements as of and
for the three months ended March 31, 1997. The
effect of this restatement was a decrease in
income before provision of income taxes of
$3.6 million, a decrease in net income of $2.2
million and a decrease in net income per share
(primary and fully diluted) of $.03.
While the First Warrant has been valued by an
indepenedent investment bank at $9.1 million
at its date of grant, the Company is
continuing to discuss with the SEC the
valuation of this First Warrant, and such
amount could change prior to the Commerical
Launch Date, which would affect the amount
charged to expense over the balance of the
intial term of the AOL Agreement. The Second
Warrant will be valued and charged to expense
as and when subcribers to the Company's
services under the AOL Agreement sign-up and
the shares under the Second Warrant vest.
The AOL Agreement also provides for marketing
payments to AOL based on the "pre-tax profit"
(as defined in the AOL Agreement) in each
calendar quarter from the telecommunications
services provided by the Company. AOL's share
of the pre-tax profit will vary from 50% to
70%, depending upon the level of revenues from
such services. The Company will withhold a
portion of AOL's share of the pre-tax profit
as a recovery of the initial $100 million cash
payment. 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 $100 million cash payment 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 AOL Agreement also provides for the grant
to AOL of additional warrants to purchase up
to an aggregate of 2 million shares if AOL
extends its obligations under the AOL
Agreement beyond June 30, 2000. Any such
additional warrants that may be granted to AOL
will be valued at that time and will be
charged as an expense in the 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 provide marketing
payments to AOL based on a percentage of the Company's profit 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 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. Any portion of the
$43 million not previously recovered or reduced in amount would be
added to the $57 million and would be recoverable similarly.
-11-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
Also under the AOL Agreement, 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.
In connection with the AOL Agreement, 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,
--------------------------
Restated
1997 1996
- --------------------------------------------------------------------------------
SALES 100.0% 100.0%
COST OF SALES 86.8 86.6
------- -----
GROSS PROFIT 13.2 13.4
SELLING, GENERAL AND ADMINISTRATIVE 4.6 4.5
----- ----
OPERATING INCOME 8.6 8.9
OTHER INCOME, NET 3.9 1.7
---- ----
INCOME BEFORE PROVISION FOR INCOME TAXES 12.5 10.6
PROVISION FOR INCOME TAXES 4.9 4.0
---- ----
NET INCOME 7.6% 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
39.7% to $61.8 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. Also included in the
1997 cost of sales is a charge of $3.6 million related to
the AOL Agreement (See Note 3).
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 Company and AOL are working together to prepare to begin
online marketing and billing of long distance service.
Development and testing is continuing for the systems that
will be needed to support the offering, but there can be no
assurance that such development and testing will be
completed successfully or in a timely manner. The Company
currently estimates that between 2% and 6% of AOL's
customers will need to sign up for the Company's long
distance service in order for the Company to break even on
its investment in the AOL Agreement.
GROSS MARGIN. Gross margin decreased to 13.2% in the first
quarter of 1997 from 13.4% during the first quarter of 1996.
The decrease in gross margin was primarily due to the charge
discussed above (See Note 3). Absent this charge, gross
margin increased to 18.2% in the first quarter of 1997 from
13.4% during the first quarter of 1996. This 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 it rolls out
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 and there can be no assurances of such
increased sales and profits.
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 cash payment 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 expected that revenues and earnings per share for
1997 would be in line with the then current consensus of
analysts' published projections, which estimated total 1997
revenues of $300 million to $350 million and 1997 earnings
per share of approximately $.45 to $.52. These revenue
projections reflected the Company's decision to defer direct
marketing of its long distance services to residential
customers until its marketing arrangements with AOL were in
place in light of increasingly aggressive price competition
for residential long distance telecommunications services.
The Company also noted 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. In light of the
accounting for the AOL Agreement discussed in Note 3 to the
consolidated financial statements herein and the Company's
change in accounting for customer acquisition costs
discussed in its Form 10-Q for the quarter ended June 30,
1997, the Company no longer expects 1997 revenues and
earnings per share to be as described above.
-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, excluding prepaid AOL
marketing costs, was $79.1 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 payment 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) cash payment 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
Exhibit 27 Financial Data Schedule
(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: September 2, 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,
------------------------
Restated
1997 1996
- --------------------------------------------------------------------------------
Net income $ 5,430 $ 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 $ .08 $ .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 $ .08 $ .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> 165,654,000
<PP&E> 36,297,000
<DEPRECIATION> 706,000
<TOTAL-ASSETS> 274,310,000
<CURRENT-LIABILITIES> 24,112,000
<BONDS> 0
0
0
<COMMON> 630,000
<OTHER-SE> 249,568,000
<TOTAL-LIABILITY-AND-EQUITY> 274,310,000
<SALES> 0
<TOTAL-REVENUES> 71,160,000
<CGS> 0
<TOTAL-COSTS> 61,785,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,901,000
<INCOME-TAX> 3,471,000
<INCOME-CONTINUING> 5,430,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,430,000
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
