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 September 30, 1997.
[x] 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, 66,785,515 shares outstanding as of November 10,
1997.
<PAGE>
TEL-SAVE HOLDINGS, INC.
FORM 10-Q
SEPTEMBER 30, 1997
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996 3
Consolidated Statements of Income for the three and nine
months ended September 30, 1997 and 1996 4
Consolidated Statement of Stockholders' Equity for the
nine months ended September 30, 1997 5
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II - OTHER INFORMATION
Items 1 - 6 23
Signatures 25
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1997 1996
<S> <C> <C>
ASSETS:
CURRENT:
Cash and cash equivalents $ 166,102 $ 8,023
Marketable securities 6,666 149,237
Accounts receivable, trade net of allowance for uncollect
ible accounts of $3,064 and $987, respectively 44,388 19,971
Advances to partitions and note receivables 40,568 13,410
Due from broker - 867
Prepaid AOL marketing costs - current 53,705 -
Prepaid expenses and other current assets 16,062 10,377
--------- --------
TOTAL CURRENT ASSETS 327,491 201,885
Property and equipment, net of accumulated depreciation of
$2,674 and $499, respectively 55,349 30,097
Intangibles, net of accumulated amortization of $1,915 and
$3,787, respectively 23,032 21,102
Investment in STF notes 155,409 -
Prepaid AOL marketing costs 30,818 -
Other assets 14,718 3,924
--------- --------
TOTAL ASSETS $606,817 $257,008
====================================================================== ================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable and accrued expenses:
Trade and other $ 24,524 $17,812
Partitions 9,037 4,398
Sales and excise taxes payable 1,790 1,592
Other 3,054 1,619
Securities sold short, at cost to purchase - 867
--------- -------
TOTAL CURRENT LIABILITIES 38,405 26,288
4 1/2% convertible subordinated notes due 2002 300,000 -
--------- -------
TOTAL LIABILITIES 338,405 26,288
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 5,000,000 shares autho
rized; no shares outstanding - -
Common stock - $.01 par value, 100,000,000 authorized;
65,778,823 and 62,237,998 issued, respectively 658 622
Additional paid-in capital 247,986 210,616
Retained earnings 24,328 24,042
Treasury stock (4,560) (4,560)
--------- --------
TOTAL STOCKHOLDERS' EQUITY 268,412 230,720
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $606,817 $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)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES $ 80,314 $ 60,079 $ 226,506 $ 168,159
COST OF SALES 78,217 51,756 224,298 145,617
--------- --------- ---------- ---------
GROSS PROFIT 2,097 8,323 2,208 22,542
SELLING, GENERAL AND ADMINIS
TRATIVE 5,340 2,452 13,293 7,244
--------- --------- ---------- ---------
OPERATING INCOME (LOSS) (3,243) 5,871 (11,085) 15,298
OTHER INCOME, NET 4,425 5,416 11,554 7,923
--------- --------- ---------- ---------
INCOME BEFORE PROVISION FOR
INCOME TAXES 1,182 11,287 469 23,221
PROVISION FOR INCOME TAXES 461 4,255 183 8,754
--------- --------- ---------- ---------
NET INCOME $ 721 $ 7,032 $ 286 $ 14,467
=========================================== =========== =========== ============ ===========
NET INCOME PER SHARE -
PRIMARY $ .01 $ .11 $ - $ .27
=========================================== =========== =========== ============ ===========
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING - PRIMARY 68,966 63,397 67,239 54,538
=========================================== =========== =========== ============ ===========
NET INCOME PER SHARE - FULLY
DILUTED $ .01 $ .11 $ - $ .26
=========================================== =========== =========== ============ ===========
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING - FULLY
DILUTED 70,065 64,740 69,119 56,178
=========================================== =========== =========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 - - - 286 - - 286
ISSUANCE OF WARRANTS TO
AOL - - 9,100 - - - 9,100
ISSUANCE OF COMMON STOCK 141 1 2,217 - - - 2,218
EXERCISE OF COMMON STOCK
WARRANTS 1,915 20 8,939 - - - 8,959
EXERCISE OF COMMON STOCK
OPTIONS 1,485 15 6,891 - - - 6,906
PURCHASE OF COMMON STOCK
WARRANTS - - (4,400) - - - (4,400)
INCOME TAX BENEFIT RELATED
TO EXERCISE OF COMMON
STOCK OPTIONS AND WAR
RANTS - - 14,623 - - - 14,623
--------- ------------ ---------------- --------- ------------ ----------------- -----------
BALANCE, SEPTEMBER 30,
1997 65,779 $658 $247,986 $24,328 (428) $(4,560) $268,412
=================================== ========= ============ ================ ========= ============ ================= ==========
</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 NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 286 $ 14,467
Adjustment to reconcile net income to net cash (used in)
provided by operating activities:
Unrealized (gain) loss on securities sold short and market
able securities (324) 2
Provision for bad debts 1,952 23
Depreciation and amortization 4,466 1,733
Charge for customer acquisition costs 11,550 -
AOL marketing costs 25,141 -
Deferred credits - 120
Income tax benefit related to warrants 14,623 -
(Increase) decrease in:
Accounts receivable - trade (26,494) (2,991)
Advances to partitions and note receivables (27,158) (11,270)
Prepaid expenses and other current assets (14,910) (2,195)
Prepaid AOL marketing costs (100,564) -
Other assets (10,794) (1,921)
Increase (decrease) in:
Accounts and partition payables and accrued expenses 13,109 8,757
Income taxes payable - 4,914
-------- -------
Net cash (used in) provided by operating activities (109,117) 11,639
-------- -------
Cash flows from investing activities:
Acquisition of intangibles (4,328) (1,811)
Capital expenditures (27,427) (20,006)
Securities sold short (867) (1,100)
Due from broker 867 1,100
Loans to stockholder - (3,034)
Repayment of stockholder loans - 5,109
Purchase of STF notes (155,409) -
Sale (purchase) of marketable securities 142,895 (10,501)
-------- --------
Net cash used in investing activities (44,269) (30,243)
-------- --------
Cash flows from financing activities:
Proceeds from sale of 4 1/2% convertible subordinated notes 300,000 -
Proceeds from sale of common stock - 139,069
Proceeds from exercise of options and warrants 15,865 4,471
Purchase of common stock warrants (4,400) -
Payment of note payable to stockholder - (5,921)
-------- ---------
Net cash provided by financing activities 311,465 137,619
-------- ---------
Net increase in cash and cash equivalents 158,079 119,015
Cash and cash equivalents, at beginning of period 8,023 41,211
-------- ---------
Cash and cash equivalents, at end of period $166,102 $160,226
====================================================================== ================= =================
</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 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
September 30, 1997 and for the three
and nine months ended September 30,
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, as amended. 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.
-7-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. AOL Agreement In conjunction with the
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 vested as to
2,500,000 shares on October 9, 1997
("Commercial Launch Date"), when the
Company's service was launched on the
AOL online network, 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
thereafter.
The $100 million cash payment and the
value of the First Warrant, as
described below, and $0.6 million of
agreement related costs is accounted
for 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 October 9, 1997, the
Commercial Launch Date; and (iii) $60.6
million, the balance of the cash
payment and 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
and nine months ended September 30,
1997, the Company recognized $10.8
million and $25.1 million of expense,
respectively, related to the
exclusivity, as discussed in (i) above.
While the First Warrant has been valued
by an independent invest ment 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 any change to the valuation
would affect the amount charged to
expense over the balance of the initial
term of the AOL Agreement. The Second
Warrant will be valued and charged to
expense as and when subscribers to the
Company's services under the AOL Agree
ment sign-up and the shares under the
Second Warrant vest.
-8-
<PAGE>
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. Customer Acquisition The Company determined in the second
quarter to deemphasize the use of
direct marketing to solicit customers
for the Company as the carrier and to
focus the majority of its existing
direct marketing resources on customer
service and support for the marketing
operations of its carrier partitions,
on a fee basis. The Company recognized
fees of $2.7 million and $8.1 million
for the three and nine months ended
September 30, 1997, respectively,
included in other income, from the
services net of related costs of $8.7
million and $14.6 million for the three
and nine months ended September 30,
1997, respectively.
The Company recorded a one-time charge
of $11.5 million in the quarter ended
June 30, 1997, primarily as a result of
the Company changing its accounting for
customer acquisition costs to expense
them in the period incurred versus the
Company's prior treatment of
capitalizing customer acquisition costs
and amortizing them over a six month
period.
In October 1997, the Company decided to
discontinue its internal telemarketing
operations which were primarily
conducted through American Business
Alliance (which was acquired by the
Company in December 1996), as part of
its restructuring of its sales and
marketing efforts and will write-off in
the Company's 1997 fourth quarter
approximately $25.2 million of
intangible and related assets.
-9-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. Proposed Merger with As of July 16, 1997, the Company, a
Shared Technologies wholly-owned subsidiary of the Company
Fairchild, Inc. ("Merger Sub") and Shared Technologies
Fairchild, Inc. ("STF") entered into an
Agreement and Plan of Merger (the
"Merger Agreement"), pursuant to which
STF would, by merger with and into
Merger Sub (the "STF merger"), become a
wholly-owned subsidiary of the Company
and the shares of STF common stock
would be exchanged for shares of the
Company's common stock.
Pursuant to the terms of the Merger
Agreement, each share of STF stock will
be converted into the number of shares
of the Company Common Stock calculated
by dividing $11.25 by the average
closing price of the Company common
stock over a 15-trading-day period
ending on the trading date three
trading days immediately preceding the
closing date of the Merger, provided
that the exchange ratio shall not be
greater than 1.125 shares of the
Company's common stock for a share of
STF common stock and that, if such
average closing price is greater than
$20 per share, the exchange ratio will
be calculated by dividing the sum of
(a) $11.25 plus the product of .3 times
the amount by which such average
closing price exceeds $20 by (b) such
average closing price. STF's
outstanding convertible preferred stock
will be exchanged for preferred stock
of the Company with substan tially
identical terms or for shares of the
Company's common stock.
The consummation of the Merger is
subject to the approval of the
stockholders of both the Company and
STF (including, in the case of the
Company, approval of an amendment to
the Company's certifi cate of
incorporation to increase the number of
the Company's authorized shares of
common stock), which meetings are
scheduled to occur on December 1, 1997,
as well as the Merger's qualifying as a
pooling of interests transaction for
accounting purposes and other customary
closing conditions.
STF has approximately $164 million
aggregate face amount of 12 1/4% Senior
Subordinated Discount Notes due 2007
(the "STF Notes"). As of September 30,
1997, the Company had purchased
substantially all of the STF Notes and
the remaining portion of the STF Notes
were purchased during October 1997.
-10-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. 4 1/2% Convertible In September 1997, the Company sold
Subordinated Notes $300 million of its 4 1/2% Convertible
Subordinated Notes which mature on
September 15, 2002 (the "Convertible
Notes"). Interest on the Convertible
Notes is due and payable semiannually
on March 15 and September 15 of each
year. The Convertible Notes are
unsecured obligations of the Company
and are subordinate in right of payment
to all existing and future senior debt
(as defined) and are subordinate to all
liabilities of the Company's
subsidiaries. The Convertible Notes are
convertible, at the option of the
holder thereof, at any time after 90
days follow ing the date of original
issuance thereof and prior to maturity,
unless previously redeemed, into shares
of the Company's common stock at a
conversion price of $24.61875 per
share. The Convertible Notes are
redeemable, in whole or in part, at the
option of the Company, at any time on
or after September 15, 2000, at 101.80%
of par prior to September 14, 2001 and
100.90% of par thereafter.
7. Recent Accounting In February 1997, the Financial
Pronouncements Accounting Standards Board ("FASB")
issued Statement of Financial
Accounting Standards ("SFAS") No. 128,
"Earnings Per Share," which is
effective for fiscal years ended 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
earnings per share.
In June 1997, the FASB issued SFAS No.
130, "Reporting Compre hensive Income",
which establishes standards for
reporting and display of comprehensive
income, its components and accumulated
balances. Comprehensive income is
defined to include all changes in
equity except those resulting from
investments by owners and distributions
to owners. Among other disclosures,
SFAS 130 requires that all items that
are required to be recognized under
current accounting standards as
components of comprehensive income be
reported in a financial statement that
is displayed with the same prominence
as other financial statements.
SFAS 130 is effective for financial
statements for periods beginning after
December 15, 1997 and requires
comparative information for earlier
years to be restated. Because of the
recent issuance of this standard,
management has been unable to fully
evaluate the impact, if any, the
standard may have on future financial
statement disclo sures. Results of
operations and financial position,
however, will be unaffected by
implementation of this standard.
-11-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In June 1997, the FASB issued SFAS No.
131, "Disclosures about Segments of an
Enterprise and Related Information",
which super sedes SFAS No. 14,
Financial Reporting for Segments of a
Business Enterprise. SFAS 131
establishes standards for the way that
public companies report information
about operating segments in annual
financial statements and requires
reporting of selected information about
operating segments in interim financial
statements issued to the public. It
also establishes standards for
disclosures regarding products and
services, geographic areas and major
customers. SFAS 131 defines operating
segments as components of a company
about which separate financial
information is available that is
evaluated regularly by the chief
operating decision maker in deciding
how to allocate resources and in
assessing performance.
SFAS 131 is effective for financial
statements for periods beginning after
December 15, 1997 and requires
comparative information for earlier
years to be restated. Because of the
recent issuance of this standard,
management has been unable to fully
evaluate the impact, if any, it may
have on future financial statement
disclosures. Results of operations and
financial position, however, will be
unaffected by implementation of this
standard.
-12-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
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. In 1997, the
Company commenced the deployment 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 vast majority of the
Company's new outbound end users are now being provisioned to OBN.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
financial data as a percentage of sales:
<TABLE>
<CAPTION>
PERCENTAGE OF SALES
-------------------
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES 100.0% 100.0% 100.0% 100.0%
COST OF SALES 97.4 86.1 99.0 86.6
------- ----- ------- -----
GROSS PROFIT 2.6 13.9 1.0 13.4
SELLING, GENERAL AND ADMINISTRATIVE 6.6 4.1 5.9 4.3
------- ---- ------- ----
OPERATING INCOME (LOSS) (4.0) 9.8 (4.9) 9.1
OTHER INCOME, NET 5.5 9.0 5.1 4.7
------- ---- ------- ----
INCOME BEFORE PROVISION FOR
INCOME TAXES 1.5 18.8 0.2 13.8
PROVISION FOR INCOME
TAXES 0.6 7.1 0.1 5.2
------- ----- ------ -----
NET INCOME 0.9% 11.7% 0.1% 8.6%
</TABLE>
13
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
THREE MONTHS ENDED SEPTEMBER 30, 1997 TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1996
Sales. Sales increased by 33.7% to $80.3 million in the third quarter of
1997 from $60.1 million in the third quarter of 1996. The increase in
sales related primarily to the marketing of the Company's OBN services
and the addition of new partitions.
Although the Company expects sales to increase through the AOL
Agreement, the addition of new partitions, the growth of end user
business through existing partitions, the pending merger with STF and
possible future acquisitions, in view of the intense competition in this
industry, 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 cost of sales increased by 51.1% to $78.2
million in the third quarter of 1997 from $51.8 million in the third
quarter of 1996 as a result of increased sales and a charge of $10.8
million related to the exclusivity portion of the AOL Agreement ( Note
3). Absent the AOL charge, the Company's cost of sales increased by
30.1% to $67.4 million in the third quarter of 1997 from $51.8 million
in the third quarter of 1996.
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.
Although the Company's service was launched on the AOL online network in
October 1997 on a limited basis, with the general public promotion of
the service anticipated to begin late in the 1997 fourth quarter, the
Company and AOL continue to work together to develop and to maintain
online marketing and billing of long distance service that will be
needed to support the offering and 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
custom ers 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. With respect to the cost of sales relating to the AOL
Agreement, see Note 3.
14
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
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
contract 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 in May 1997 and permits
the Company to continue to resell AT&T long distance services, including
AT&T-SDN service, through mid-1998, and also includes, through late
2000, other AT&T services (such as international long distance, inbound
and outbound services) that will be used in the Company's nationwide
telecommunications network, OBN. The rates that the Company pays under
the 1996 AT&T contract tariff are more favorable to the Company than
under previous tariffs. During its term, the 1996 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 1996
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 1996 AT&T contract tariff
commits the Company to purchase $285 million of service from AT&T over
its 4 year term, including at least $1 million per month of interna
tional service. The Company can terminate the 1996 contract tariff
without liability to AT&T in mid-1998 if the Company has generated at
least $105 million in usage charges, including at least $15 million in
international usage charges and the Company currently expects that these
thresholds will be met ($105 million and $15 million) in the fourth
quarter of 1997.
OBN and the operation of the Company's own switches and network have to
date and will in the future require the Company to incur systems and
equipment maintenance, lease and network personnel expenses signifi
cantly 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, were, in the
quarter and the nine months ended September 30, 1997, and are expected
in the future, to be less than the per call cost currently incurred by
the Company as a switchless reseller paying "bundled" charges to AT&T.
The Company is already expanding the capacity of OBN, which currently
could accommodate 400,000 new residential customers. Separately, the
Company has entered into an agreement with AT&T to purchase its Carrier
Solutions Platform ("CSP") service for an initial period of six (6)
months (beginning in August 1997) subject to either party's right to
terminate the agreement. The Company is negotiating a longer term
agreement with AT&T for such service. The CSP service provides OBN with
significant additional capacity and would enable the Company to
accommodate large numbers of additional customers on OBN by handling
their peak load or overflow traffic. CSP has been installed, and testing
is expected to be completed by mid-December. This expansion of capacity
costs the Company approximately $180,000 per month. By utilizing CSP,
the Company expects that it can operate its network close to capacity,
thereby lowering transport costs. Further, CSP gives the Company the
ability to seamlessly migrate traffic to OBN and reduce the task of
forecasting demand.
15
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
Gross Margin. Gross margin decreased to 2.6% in the third quarter of
1997 from 13.9% during the third quarter of 1996. The decrease in gross
margin was primarily due to the AOL charge discussed above. Absent this
charge, gross margin increased to 16.1% in the third quarter of 1997
from 13.9% during the third quarter of 1996, due to lower network usage
costs on the Company's current 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.
Although the basic rates of the three largest long distance carriers -
AT&T, MCI and Sprint - have historically increased, 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 117.8% to $5.3 million in the third
quarter of 1997 from $2.5 million in the third quarter of 1996. The
increase in selling, general and administrative expenses was due
primarily to the costs associated with hiring additional personnel to
support the Company's continuing growth, the development costs
associated with AOL and increased fees for professional services.
The Company expects selling, general and administrative expenses to
continue to increase as it implements, operates and maintains OBN and as
it rolls out the AOL service offering. If the STF merger is consummated,
the Company also anticipates an increase in such expenses for the
integration of the operations of STF. 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 $4.4 million in the third quarter of 1997
versus $5.4 million for the third quarter of 1996. Other income consists
primarily of fees for customer service and support for the marketing
operations of the Company's carrier partitions in 1997 and interest
income earned on the Company's cash balances. Other income for the third
quarter of 1997 was offset by STF merger-related costs of $1.4 million.
Provision for income taxes. The Company's effective tax rate increased
to 39.0% for the three months ended September 30, 1997 from the
effective tax rate of 37.7% for the three months ended September 30,
1996 due to an anticipated higher effective state tax rate in 1997.
16
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 30, 1997 TO THE NINE MONTHS ENDED SEPTEMBER
30, 1996
Sales. Sales increased by 34.7% to $226.5 million in the first nine
months of 1997 from $168.2 million in the first nine months of 1996. The
increase in sales related primarily to the marketing of the Company's
OBN services and the addition of new partitions.
Cost of Sales. The Company's costs of sales increased by 54.0% to $224.3
million in the first nine months of 1997 from $145.6 million in the
first nine months of 1996 as a result of increased sales and charges of
$11.5 million primarily as a result of the Company's change in its
accounting for customer acquisition costs (Note 4) and $25.1 million
related to the exclusivity portion of the AOL Agreement (Note 3). Absent
the customer acquisition and AOL charges, the Company's cost of sales
increased by 28.9% to $187.7 million for the first nine months of 1997
from $145.6 million for the first nine months of 1996.
Gross Margin. Gross margin decreased to 1.0% in the first nine months of
1997 from 13.4% during the first nine months of 1996. The decrease in
gross margin was primarily due to the charges discussed above. Absent
the customer acquisition and AOL charges, gross margin increased to
17.2% in the first nine months of 1997 from 13.4% in the first nine
months of 1996, due to lower network usage costs on the Company's
current 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, offset by an increase in direct marketing costs.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 83.5% to $13.3 million in the first
nine months of 1997 from $7.2 million in the first nine months of 1996.
The increase in selling, general and administrative expenses was due
primarily to the costs associated with hiring additional personnel to
support the Company's continuing growth, the development costs
associated with AOL, and increased fees for professional services.
Other Income. Other income was $11.6 million in the first nine months of
1997 versus $7.9 million for the first nine months of 1996. Other income
consists primarily of fees for customer service and support for the
marketing operations of the Company's carrier partitions and interest
income earned on the Company's cash balances. Other income for the nine
months ended September 30, 1997 was offset by STF merger-related costs
of $1.4 million.
Provision for income taxes. The Company's effective tax rate increased
to 39.0% for the nine months ended September 30, 1997 from the effective
tax rate of 37.7% for the nine months ended September 30, 1996 due to an
anticipated higher effective state tax rate in 1997.
17
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
SOME POTENTIAL FUTURE CHARGES
Of the $100 million payment to AOL (plus the value of the 5 million
share AOL warrant, which is valued, subject to possible increase, as
discussed above, at $9.1 million, and $.6 million of AOL
Agreement-related costs), the Company anticipates that, with the
commercial launch of the Company service in early October 1997, an
aggregate of approximately $35 million will be charged to expense in the
fourth quarter of 1997 (an aggregate of $25.1 million was so charged in
the first three quarters of 1997). The balance will be recognized
ratably over the balance of the term of the AOL Agreement, the initial
term of which expires on June 30, 2000, as advertising services are
received. The AOL warrant for up to 7 million shares will be valued and
charged to expense as and when subscribers to the Company's services
under the AOL Agreement sign-up and the shares under such warrant vest.
The amount of such charges, which could be significant, will be based on
the extent to which such AOL warrants vest and the market prices of the
Company's Common Stock at the time of vesting and therefore such charges
are not currently determinable. Generally, the higher the market price
of the Company's Common Stock at the time of vesting, the larger the
amount of the charge will be. The Company also anticipates that it will
incur additional promotional expenses in the 1997 fourth quarter and the
1998 first quarter in connection with the general public promotion of
its service under the AOL Agreement. If the AOL Agreement should prove
unsuccessful, any remaining amount of the total value paid under the AOL
Agreement could be written off earlier.
As discussed above, in connection with the Company's decision in October
1997 to discontinue its internal telemarketing operations, which were
primarily conducted through American Business Alliance (which was
acquired by the Company in December 1996), as part of its restructuring
of its sales and marketing efforts, the Company will write-off approxi
mately $25.2 million of intangible and related assets in the 1997 fourth
quarter.
In addition to the approximately $19.0 million one-time acquisition and
transition related pre-tax charges and special pre-tax charges of
approxi mately $39.0 million related to the acquisition and retirement
of the STF Notes, which will be recorded in the quarter in which the STF
merger is consummated, various special costs are anticipated to be
incurred in realizing some of the benefits of the STF merger, including
enhancing the Company's (post STF merger) direct sales force, and
associated with systems modifications and other integration-related
charges after the STF merger. While the exact timing, nature and amount
of these charges cannot be predicted, the Company currently estimates
that pre-tax charges in connection with the consolidation and
centralization of the facilities of STF and the related program of
upgrading equipment and eliminating duplicative and obsolete equipment
and incurred in realizing some of the other benefits of the STF merger,
will range from $50.0 million to $70.0 million. These charges currently
are anticipated to be recorded during the 1997 fourth quarter and first
half of 1998. It is also possible, as the Company proceeds with the
integration of STF with the Company, that further charges may be
incurred.
18
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
The Company granted an option to an executive officer to purchase
800,000 shares of Company Common Stock at an exercise price of $11.125
per share. The option granted is subject to the approval of the
stockholders and is being submitted for approval at the Company's
stockholder meeting scheduled for December 1, 1997. Approval of the
option grant will result in compensation expense equal to the difference
between the exercise price and the market value of the Company Common
Stock on the date of such approval. In addition, a newly appointed
executive officer, in connection with his employment purchased 200,000
shares of Company Common Stock at a price of $4.25 per share from a
former executive officer of the Company. This purchase will result in a
compensation expense in the fourth quarter of 1997 of approximately
$3,400,000 based on the difference between the purchase price and market
value of the Company Common Stock on the date of purchase.
19
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
The Company has since September 1995 raised capital primarily through
public and private distributions of its securities. In fall 1995 and
spring of 1996 the Company consummated public offerings of shares of the
Com pany's Common Stock and received net proceeds of $42.8 million and
$139.1 million, respectively.
In September 1997, the Company sold $300 million of 4 1/2% Convertible
Subordinated Notes which mature on September 15, 2002 (the "Convertible
Notes"). Interest on the Convertible Note is due and payable
semiannually on March 15 and September 15 of each year. The Convertible
Notes are convertible, at the option of the holder thereof, at any time
after December 9, 1997 and prior to maturity, unless previously
redeemed, into shares of the Company's Common Stock at a conversion
price of $24.61875 per share. The Convertible Notes are redeemable, in
whole or in part, at the Company's option, at any time on or after
September 15, 2000 at 101.80% of par prior to September 14, 2001 and
100.90% of par thereafter.
During 1996, certain options and warrants to purchase shares of the
Company's Common Stock were exercised and the Company repurchased
approximately 428,000 shares, which are held as treasury shares,
yielding to the Company net proceeds of $7.7 million. During the nine
months ended September 30, 1997, certain options and warrants to
purchase shares of the Company's Common Stock were exercised and the
Company repurchased certain Common Stock Warrants, yielding to the
Company net proceeds of $11.5 million. The tax benefit realized from the
options and warrants was approximately $21.3 million in 1996 and $14.6
million for the nine months ended September 30, 1997 and is reflected as
an adjustment to additional paid-in capital.
In June 1997, the Company negotiated a one year, unsecured, committed
line of credit with First Union Bank ("First Union Credit Facility") for
borrowings of up to $65.0 million. Under the terms of the First Union
Credit Facility the Company is required to pay an availability fee of
$81,250 per annum, or 0.125% of the total available borrowings; interest
on borrowing is payable monthly at First Union Bank's prime rate less
0.5% or LIBOR plus 0.875%, at the Company's option; and principal is
payable upon demand by First Union Bank. The Company is renegotiating
certain covenants of the First Union Credit Facility as a result of the
issuance by the Company of the Convertible Notes and until those
covenants are renegotiated, the First Union Credit Facility is not
available to the Company. There can be no assurances that the covenants
will be renegotiated. At September 30, 1997, the Company had no
borrowings outstanding under the First Union Credit Facility.
The Company has put out to bid short-term credit facilities with other
banks. The Company believes that it will be able to obtain a commitment
for a short-term credit facility in an amount sufficient to meet its
needs over the next 12 months, but there can be no assurance that such
can be obtained.
The Company's working capital, excluding prepaid AOL marketing costs,
was $235.4 million and $175.6 million at September 30, 1997 and December
31, 1996, respectively.
The Company invested $27.4 million in capital equipment during the nine
months ended September 30, 1997, of which $16.8 million was used for the
acquisition of capital equipment and installation costs relating to the
deployment of OBN. To date, through September 30, 1997, the Company has
invested $41.7 million for the acquisition of capital equipment and
installation costs relating to the deployment of OBN.
20
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
As of September 30, 1997, STF had bank debt of approximately $116
million and outstanding redeemable preferred stock which is redeemable
for cash of approximately $22.0 million upon consummation of the STF
merger. The Company will be required upon consummation of the STF merger
to payoff all of STF's bank debt (unless it is renegotiated) and to
redeem the redeemable preferred stock. These payments coupled with
approximately $19 million of one-time acquisition and transaction
related costs due and payable at the consummation of the STF merger
would aggregate an amount equal to approximately 91% of the Company's
cash, cash equivalents and marketable securities as of September 30,
1997. Upon consummation of the STF merger the Company's investment in
the STF Notes will be eliminated in connection with the extinguishment
of the STF Notes. In addition, the Company plans to purchase a
significant amount of telecommunications equipment in order to
accomplish the objective of the STF merger, which is to take advantage
of opportunities provided to offer telecommunications services using OBN
to a broader market of buildings and customers than those currently
served by STF.
In addition to the approximately $19.0 million one-time acquisition and
transition related pre-tax charges and special pre-tax charges of
approximately $39.0 million related to the acquisition and retirement of
the STF Notes, which will be recorded in the quarter in which the STF
merger will be consummated, various special costs are anticipated to be
incurred in realizing some of the benefits of the STF merger, including
enhancing the Company's (post STF merger) direct sales force, and
associated with systems modifications and other integration-related
charges after the STF merger. While the exact timing, nature and amount
of these charges cannot be predicted, the Company currently estimates
that pre-tax charges in connection with the consolidation and
centralization of the facilities of STF and the related program of
upgrading equipment and eliminating duplicative and obsolete equipment
and incurred in realizing some of the other benefits of the STF merger,
will range from $50.0 million to $70.0 million. These charges currently
are anticipated to be recorded during the 1997 fourth quarter and first
half of 1998. It is also possible, as the Company proceeds with the
integration of STF with the Company, that further charges may be
incurred.
The Company generally 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.
As a result of the payments required upon consummation of the STF merger
additional financial arrangements may be necessary in connection with
telecommunications equipment purchases. Upon consummation of the STF
merger, the Company will issue a significant number of shares of its
common stock ( Note 5) (approximately 14 million shares assuming an
average closing price for the Company's common stock over the 15 trading
days prior to the closing of $21.00).
21
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
If the amendment to the Company's Amended and Restated Certificate of
Incorporation (the "Charter"), increasing the number of authorized
shares of Company Common Stock from 100,000,000 to 300,000,000, is
approved at the Company's stockholders meeting scheduled for December 1,
1997, the Company will be authorized to issue up to an aggregate of
300,000,000 shares of Company Common Stock. The Company may use
authorized and unissued shares of Company Common Stock for various
corporate purposes, including, but not limited to, acquisition
transactions, and such shares may be issued by the Company's Board of
Directors without further stockholder action unless the issuance is in
connection with a transaction for which stockholder approval is
otherwise required under the Charter, applicable law, regulation or
agreement.
The Company regularly considers growth opportunities through
acquisitions, joint ventures and partnerships as well as other business
expansion opportunities. The Company previously reported that it had
proposed to ACC Corp. ("ACC") for its consideration a merger transaction
between the Company and ACC, in which ACC would be acquired by the
Company and ACC's stockholders would receive $50 in the Company's Common
Stock in exchange for each share of ACC common stock (as of August 1,
1997, there were approximately 16.8 million shares of ACC common stock
reported to be outstanding), and that the Company intended to commence
negotiations with ACC with respect to a potential merger transaction.
The Company also stated that it does not intend to make any further
announcements regarding any such potential merger transaction until it
has either reached a definitive agreement with ACC or it has decided not
to proceed with such a transaction.
Any such transaction between the Company and ACC is subject, among other
things, to the satisfactory completion of due diligence reviews, the
negotiation of a mutually satisfactory agreement, approval thereof by
the companies' respective boards of directors, the transaction being
accounted for as a pooling-of-interests transaction, any necessary
regulatory approvals and any necessary stockholder approvals. There can
be no assurance that any agreement will be reached or as to the terms of
any such agreement, should it be reached and approved.
* * * * *
22
<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, regulation and enforcement
and statements regarding the STF merger are based on the consummation of
the STF merger, which is subject to a number of conditions. The Company
undertakes no obligation to update its forward-looking statements.
23
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
In August, 1997 in connection with the exercise of outstanding
Warrants the Company issued 600,000 shares of its common stock to
the holder of such Warrant upon the payment of $2,450,000 in
accordance with the terms thereof. The Company believes that the
issuance of such shares was exempt from registration under the
Securities Act of 1933 ("1933 Act") pursuant to Section 4(2)
thereunder.
In September 1997 the Company sold $300 million of 4 1/2%
Convertible Subordinated Notes which mature on September 15, 2002
("Convertible Notes") to Salomon Brothers Inc., Deutsche Morgan
Grenfell, Bear Stearns & Co. Inc., Smith Barney, Inc., Robertson,
Stephens & Company and First Union Capital Markets Corp.
(collectively, "Initial Purchasers"). The Initial Purchasers
offered and sold the Convertible Notes to investors. The Company
believes that the issuance of the Convertible Notes 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
On November 13, 1997, the Company and STF entered into a
five-year telecommunications services agreement under which the
Company will provide substantially all of STF's long distance
telecommunications services. Under the terms of the agreement, in
each year of the agreement, STF is required to purcahse from the
Company a minimum of 85% of the long distance telecommunications
services that STF purchases in such year and to make minimum
annual payments to the Company (ranging from $15 million in the
first year to $27 million in the fifth year of the agreement, for
a total of $105 million in minimum payments over the term of the
agreement), or to pay to the Company an amount equal to the
greater of (i) 50% of the shortfall in the minimum annual
payments for such year and (ii) the amount by which 85% of STF's
total purchases of long distance telecommunications services in
such year exceeds the percentage of such total purchased from the
Company. In addition, if STF does not purchase from the Company
the minimum percentage of its services in any year, STF must pay
an additional 30% surchage on the services purchased under the
agreement in such year, and, if STF terminates the agreement
before the end of its term without cause, it must pay to the
Company an additional amount equal to 50% of the aggregate of the
minimum annual payments for the remaining years of the agreement.
24
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10 Employment Agreement with George P. Farley
Exhibit 11 Computation of Net Income Per Share
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
Since June 30, 1997, the following Current Reports on Form
8-K have been filed by the Company:
Current Report on Form 8-K, dated July 22, 1997, reporting
the execution of an Agreement and Plan of Merger with
Shared Technologies Fairchild Inc. ("STF"), providing for
the merger (the "STF Merger") of STF with a wholly owned
subsidiary of the Company, and of related agreements,
including certain voting agreements by STF stockholders.
Current Report on Form 8-K/A, dated August 15, 1997,
including certain historical financial statements of
American Business Alliance, Inc. ("ABA") and certain
Company pro forma financial statements reflecting the
Company's acquisition of substantially all of ABA's assets.
Current Report on Form 8-K, dated September 2, 1997,
reporting the Com pany's entering into a $150 million short
term credit facility and including certain pro forma
financial statements reflecting the proposed STF Merger and
a summary of certain Company risk factors.
Current Report on Form 8-K, dated September 5, 1997,
reporting the private placement of $300,000,000 principal
amount of the Company's 4-1/2% Convertible Subordinated
Notes.
Current Report on Form 8-K, dated October 29, 1997,
reporting the execution of a further voting agreement with
a stockholder of STF in respect of the proposed STF Merger.
Current Report on Form 8-K, dated November 5, 1997,
reporting the Com pany's proposal to ACC Corp. ("ACC") of a
merger transaction between the Company and ACC and the
Company's purchase of an interest in US WATS, Inc.
Current Report on Form 8-K, dated November 7, 1997,
reporting further developments with regard to its merger
transaction proposal to ACC.
25
<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: November 14 , 1997 TEL-SAVE HOLDINGS, INC.
-----------------------
(Registrant)
By: /s/ Daniel Borislow
-----------------------------------------------
Daniel Borislow
Chairman of the Board,
Chief Executive Officer and Director
By: /s/ George P. Farley
-----------------------------------------------
George P. Farley
Chief Financial Officer, Treasurer and Director
By: /s/ Kevin R. Kelly
-----------------------------------------------
Kevin R. Kelly
Controller
26
<PAGE>
EXHIBIT INDEX
10 Employment Agreement
11 Tel-Save Holdings, Inc. and subsidiaries computation of net income
per share
27 Financial Data Schedule
EXHIBIT 10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
the 3rd day of July, 1997 by and among Tel-Save, Inc. ("Company"), a
Pennsylvania corporation and a wholly-owned subsidiary of Tel-Save Holdings,
Inc. ("Holdings") and Holdings, having its prinicipal place of business at Route
202, New Hope, Pennsylvania 18938) ("Principal Place of Business"), and George
P. Farley ("Employee"). Company and Holdings shall be collectively be referred
to herein as "Company".
Preliminary Statement
WHEREAS, Employee is currently employed as the chief financial officer
of Twin County Grocers, Inc. and can not commence his employment with the
Company until after September 30, 1997;
WHEREAS, Company desires to employ Employee, and Employee desires to be
employed by Company; and
WHEREAS, Company and Employee desire to enter into this Agreement which
sets forth the terms and conditions of said employment.
NOW, THEREFORE, in consideration of the mutual covenants set forth
herein, the parties hereto agree as follows:
1. Employment. Company agrees to employ Employee, and Employee accepts
such employment and agrees to serve Company, on the terms and conditions set
forth herein. Except as otherwise specifically provided herein, Employee's
employment shall be subject to the employment policies and practices of Company
in effect from time to time during the Term of Employee's employment hereunder
(including without limitation its practices as to reporting and withholding).
2. Term of Agreement. The Term of Employee's employment hereunder shall
commence in October 1997 and shall continue in effect for a period of three
years thereafter, except as hereinafter provided ("Term").
3. Position and Duties.
3.1 General. Except as may otherwise be agreed upon between
Company and Employee, Employee shall perform such duties and
responsibilities of Chief Financial Officer of Holdings and
Company and such duties as may be reasonably assigned or
delegated to him from time to time by the Chief Executive
Officer and/or the majority of the Board of Directors,
including without limitation service as an, officer or
director of Company and affiliates of the Company without
additional compensation. References in this Agreement to
Employee's employment
<PAGE>
-2-
with Company shall be deemed to refer to employment with
Company or an affiliate. Employee shall perform his duties and
responsibilities to the best of his abilities in a diligent,
trustworthy, businesslike and efficient manner.
3.2 Base Amount. Employee shall devote at the Principal Place of
Business or such specific place as the Chairman of the Board
and Chief Executive Officer shall designate at least four days
per week ("Base Amount") to the business and affairs of
Company. Employee shall devote such additional working time
and effort to the business and affairs of the Company as may
from time to time be reasonably requested by the Company.
3.3 Directorships. Employer acknowledges that Employee may serve
as a member of the Board of Directors of up to three other
corporations. Employee will not serve on the Boards of
Directors of corporations in the telecommunications or any
other related industries or which are, directly, or
indirectly, competitive with Employer, without the written
consent of Employer. Employee agrees that his membership on
the Boards of Directors of other corporations and any time
devoted to such membership will not impair his ability to
fully perform his duties and responsibilities hereunder.
3.4 Holdings' Board of Directors. Employee shall continue as a
member of the Board of Directors of Holdings until the next
annual meeting of the shareholders and shall be nominated to
stand for election at such meeting to serve as a director
until the year 2000.
4. Compensation and Related Matters.
4.1 Base Salary. During the Term of his employment hereunder,
Company shall pay to Employee a minimum annual base salary of
not less than $200,000 or such greater amount as may be
determined from time to time by Company's Board of Directors.
Base salary shall be paid in accordance with Company's usual
and customary payroll practices. Base salary shall be
increased each year after the first full year (on the
anniversary hereof) by the greater of (i) an amount
established by the Board of Directors; and (ii) the percentage
increase in the CPI (as hereinafter defined) over the previous
year's CPI, with such increases each year being on a
cumulative basis. "CPI" shall mean the U.S. City Average
Consumer Price Index for all Urban Customers.
4.2 Benefit Plans and Arrangements. Employee shall be entitled to
participate in and to receive benefits under Company's benefit
plans available to a Company employee with your tenure and
annual compensation level under Company's employee benefit
plans and arrangements in effect during the Term of his
employment hereunder, which may be altered from time to time
at the discretion of Company.
4.3 Perquisites. During the Term of his employment hereunder,
Employee shall be
<PAGE>
-3-
entitled to receive fringe benefits ordinarily and customarily
provided by Company to officers of the Company, including but
not limited to a credit card.
4.4 Expenses. Company shall promptly reimburse Employee for all
normal out-of-pocket expenses related to Company's business
that are actually paid or incurred by him in the performance
of his services under this Agreement and that are incurred,
reported and documented in accordance with Company's policies.
In addition, the Company agrees during the Term to provide
Employee with (i) an automobile, as the Company shall
determine; and telephones, a computer and a fax for use at
Employee's office.
4.5 Stock Options. Holdings agrees to issue Employee non-qualified
and investment options to purchase an aggregate number of
shares of Common Stock, $.01 par value, of Holdings ("Common
Stock") as follows:
(i) Employee shall be granted an option to purchase
400,000 shares of Common Stock (the "Option). The
form of, terms and conditions of the Option are set
forth in Exhibit A attached hereto. The Option shall
have an exercise price equal to $13.25, the fair
market value of the Common Stock on the date hereof
and shall vest in accordance with the schedule in the
Option. The fair market value of the Company's Common
Stock for purposes of this Agreement shall mean the
last reported sale price of a share of the Company's
Common Stock on the NASDAQ National Market System.
(ii) Company agrees to register the shares issuable upon
the exercise of the options contemplated hereunder
under the Securities Act of 1933 and any applicable
state registration provisions as so as practicable
after issuance or purchase as the case may be.
5. Termination. The Term of Employee's employment hereunder
may be terminated under the following circumstances:
5.1 Death. The Term of Employee's employment hereunder shall
terminate upon his death.
5.2 Disability. Company may terminate the Term of Employee's
employment hereunder as a result of Employee's physical or
mental incapacity in accordance with Company's disability
policy.
5.3 Cause. Company may terminate the Term of Employee's employment
hereunder for Cause. For purposes of this Agreement, Company
shall have "Cause" to terminate Employee's employment
hereunder upon Employee's (i) material breach of any material
provision of this Agreement, (ii) engaging in conduct
injurious to Company or in willful misconduct as an employee
of the Company in connection with misappropriating any funds
or property of Company or attempting to willfully obtain
<PAGE>
-4-
any personal profit from any transaction in which Employee has
an interest adverse to the interests of the Company, or (iii)
gross neglect or unreasonable refusal to perform the duties
assigned to Employee under or pursuant to this Agreement.
5.4 By Employee.
(i) Employee may terminate the Term of this employment
hereunder upon sixty days prior written notice to
Company, provided that, upon the giving of such
notice by Employee, Company may establish an earlier
date for the termination of the Term and such
termination nonetheless shall be considered a
termination under this Section 5.4.
(ii) Employee may terminate employment hereunder for good
reason immediately and with notice to the Company.
"Good Reason" for termination by Employee shall
include, but is not limited to, the following conduct
of Company:
(a) Material breach of any provision of this
Agreement by Company, which breach shall
have not been cured by Company within thirty
(30) days of receipt of written notice of
said material breach;
(b) Failure to maintain Employee in a position
commensurate with that referred to in
Section 2 of this Agreement, or any action
by Company which results in the diminution
of such position, authority, duties or
responsibilities.
(iii) Employee may terminate employment hereunder in the
event of a "Change in Control" of Holdings, if the
conduct described in Section 5.4(ii)(a), (b) or (c)
shall also occurred. For purposes of this Agreement,
a "Change in Control" shall be deemed to have
occurred if (I) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange
Act of 1934, as amended ("Exchange Act"), other than
a trustee or other fiduciary holding securities under
an employee benefit plan of Company or a corporation
owned directly or indirectly by the stockholders of
the Company in substantially the same proportions as
their ownership of the Company, becomes after the
date hereof the "beneficial owner" (as defined in
Rule 13d-3 under said Act), directly or indirectly,
of securities of Company representing more than 20%
of the total voting power represented by the
Company's then outstanding voting securities, (ii)
during any period of two consecutive years,
individuals who at the beginning of such period
constitute the Board of Directors of Holdings and any
new director whose election by the Board of Directors
or nomination for election by Holding's stockholders
was approved by a vote of at least two thirds (2/3)
of the directors then still in office who either were
directors at the beginning of the period or whose
election or nomination for election was
<PAGE>
-5-
previously so approved, cease for any reason to
constitute a majority thereof, (iii) the stockholders
of Holdings approve a merger or consolidation of
Holdings or Company with any other corporation other
than a merger or consolidation which would result in
the voting securities of Holdings outstanding
immediately prior thereto continuing to represent
(either by remaining outstanding or by being
converted into voting securities of the surviving
entity) at least 80% of the total voting power
represented by the voting securities of Holdings or
such surviving entity outstanding immediately after
such merger or consolidation, or the stockholders of
Holdings approve a plan of complete liquidation of
the Company or an agreement for the sale or
disposition by the Company of (in one transaction or
a series of transactions) all or substantially all of
the assets of the Company , (vi) a change in control
of a nature that would be required to be reported in
response to Item 6(e) of Schedule 14A of Regulation
14A promulgated under the Exchange Act to Item1 of
Form 8-K promulgated under the Exchange Act, or(vii)
Daniel Borislow ceases to be the Chief Executive
Officer of Holdings and/or Company. Notwithstanding
the foregoing, it shall not be a "Change in Control"
of Holdings if stock holders of Holdings who or which
as of the date of this Agreement beneficially own
more than 5% of the total voting power of Holdings
increase its beneficial holdings to above 20%.
5.5 Without Cause. Company may terminate the Term of Employee's
employment other than for Cause or disability at any time upon
written notice to Employee.
6. Compensation in the Event of Termination. In the event that
Employee's employment pursuant to this Agreement terminates
prior to the end of the Term of this Agreement, Company shall
pay the Employee compensation as set forth below:
6.1 By Employee for Good Reason Following a Change in Control; By
Company without Cause. In the event that Employee's employment
hereunder is terminated: (i) by Employee for good reason or
pursuant to Section 5.4 (iii); or (ii) by the Company without
cause, then the Company shall continue to pay and provide
Employee his Compensation as set forth in Section 4 in the
same manner as before termination, and for a period of time
ending on the date when the Term of this Agreement would
otherwise have expired in accordance with Section 1 of this
Agreement.
<PAGE>
-6-
Employee shall not be required to mitigate the amount of
payment provided for in this Section 6.1 by seeking employment
or otherwise, nor shall any amounts received from other
employment or otherwise by Employee offset in any manner the
obligations of Company hereunder.
6.2 By Company for Cause. In the event that Company shall
terminate Employee's employment hereunder for Cause pursuant
to Section 5.3 hereof, all Compensation, as specified in this
Agreement heretofore payable or provided to the Employee shall
cease to be payable or provided, except for salary and
benefits which may have been earned and are due and payable
but which have not been paid as of the date of termination and
reimbursements for expenses which may have been incurred,
reported and documented but which have not been paid as of the
date of termination.
6.3 Death; Disability By Employee Without Cause or Good Reason. In
the event of Employee's death, disability, or in the event
that Employee shall terminate employment hereunder without
Good Reason or Cause, Company shall not be obligated to pay
Employee or his estate or beneficiaries any compensation
except for salary and benefits which may have been earned and
are due and payable but which have not been paid as of the
date of termination.
7. Unauthorized Disclosure. Employee shall not, without the prior
written consent of Company, disclose or use in any way, either during the
Employee's employment with Company or thereafter, except as required in the
course of such employment, any confidential business or technical information or
trade secret acquired in the course of such employment, whether or not conceived
of or prepared by him, which is related to any service or business of Company or
any Company affiliate, other than information which is generally known (other
than through a breach of this Agreement by Employee) in the industry in which
such business is transacted or acquired from public sources, all of which are
the exclusive and valuable property of Company and its affiliates.
8. Tangible Items. All files, records, documents, manuals, books,
forms, reports, memoranda, studies, data, calculations, recordings,
correspondence, in whatever from they may exist, and all copies, abstracts and
summaries of the foregoing and all physical items related to the business of
Company and its affiliates, other than merely personal items, whether of a
public nature or not, and whether prepared by Employee or not, are and shall
remain the exclusive property of Company and its affiliates and shall not be
removed from their premises, except as required in the course of employment by
Company, without the prior written consent of Company, and the same shall be
promptly returned by Employee on the termination of Employee's employment with
Company or at any time prior thereto upon the request of Company.
9. Inventions and Patents. Employee agrees that all inventions,
innovations, improvements, developments, methods, designs, analyses, drawings,
reports, and all similar or related information which relates to Company's
actual or anticipated business, research and development or existing or future
products or services and which are conceived, developed or made
<PAGE>
-7-
by or at the direction of Employee while employed by Company will be owned by
Company. Employee also agrees to promptly perform all reasonable actions
(whether before, during or after the Term) necessary to establish and confirm
such ownership.
10. Certain Restrictive Covenants. During the Term of his employment
hereunder and for a period of six months thereafter, Employee agrees that, he
will not act either directly or indirectly as a partner, officer, director,
substantial stockholder or employee, or render advisory or other services for,
or in connection with, or become interested in, or make any substantial
financial investment in any firm, corporation, business entity or business
enterprise competitive with the business of Company or its affiliates, except
with the express written consent of the Board of Directors of Company. Employee
further agrees that in the event of the termination of his employment under
Section 5, for a period of two years thereafter, he will employ or offer to
employ, call on, solicit, actively interfere with Company's or any Company's
affiliates relationship with, or attempt to divert or entice away, any employee
of Company or any Company affiliate.
11. Employee Representations. Employee hereby represents and warrants
to Company that (i) the execution, delivery and performance of this Agreement by
Employee does not and will not conflict with, breach, violate or cause a default
under any contract, agreement, instrument, order, judgment or decree to which
Employee is a party or by which he is bound, (ii) except as disclosed to Company
in writing prior to the execution of this Agreement, Employee is not a party to
or bound by any employment agreement, noncompete agreement or confidentiality
agreement with any other person or entity, and (iii) upon the execution and
delivery of this Agreement by Company, this Agreement shall be the valid and
binding obligation of Employee, enforceable in accordance with its terms.
12. Remedies. Employee acknowledges that the restrictions and
agreements contained in this Agreement are reasonable and necessary to protect
that legitimate interests of Company, and that any violation of this Agreement
will cause substantial and irreparable injury to Company that would not be
quantifiable and for which no adequate remedy would exist at law and agrees that
injunctive relief, in addition to all other remedies, shall be available
therefor.
13. Severability. It is the intent and understanding of the parties
hereto that if, in any action before any court or agency legally empowered to
enforce this Agreement, any term, restriction, covenant, or promise is found to
be unreasonable and for that reason unenforceable, then such term, restriction,
covenant, or promise shall not thereby be terminated but that it shall be deemed
modified to the extent necessary to make it enforceable by such Court or agency
and, if it cannot be so modified, that it shall be deemed amended to delete
therefrom such provision or portion adjudicated to be invalid or unenforceable,
such modification or amendment in any event to apply only with respect to the
operation of this Agreement in the particular jurisdiction in which such
adjudication is made.
<PAGE>
-8-
14. Notice. For the purposes of this Agreement, notices, demands and
all other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when received if delivered in person or
by overnight courier or if mailed by United States registered mail, return
receipt requested, postage prepaid, to the following addresses:
If to Employee:
Mr. George P. Farley
89 Highwood Avenue
Tenafly NJ 07670
If to Company:
Tel-Save, Inc.
6805 Route 202
New Hope, Pennsylvania 18938
Attn: Chief Executive Officer
Either party may change its address for notices by written notice to the other
party in accordance with this Section 14.
15. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by Employee and Company. No waiver by either party hereto at
any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
oral or otherwise, expressed or implied, with respect to the subject matter
hereof have been made by either party which are not set forth expressly or
referred to in this Agreement. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of Pennsylvania
relating to contracts made and to be performed entirely therein.
16. Headings. The headings in this Agreement are inserted for
convenience only and shall have no significance in the interpretation of this
Agreement.
17. Successors. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their heirs, personal representatives and
successors, including without limitation any affiliate to which Company may
assign this Agreement.
18. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement as of the
<PAGE>
-9-
day and year first written above.
Tel-Save, Inc.
By:
-------------------------------
----------------------------------
TEL-SAVE HOLDINGS, INC.
By:
-------------------------------
-------------------------------
George P. Farley
EXHIBIT 11
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 721 $ 7,032 $ 286 $14,467
======= ======= ======= =======
PRIMARY
Weighted average common and common equivalent shares outstanding - Primary:
Weighted average shares 64,666 58,098 63,675 50,196
Weighted average equivalent shares 4,300 5,299 3,564 4,342
------- ------- ------- -------
Weighted average common and common
equivalent shares - Primary 68,966 63,397 67,239 54,538
------- ======= ======= =======
Net income per share - Primary $ .01 $ .11 -- .27
======= ======= ======= =======
FULLY DILUTED
Weighted average common and common equivalent shares outstanding - Fully
Diluted:
Weighted average shares 64,666 58,098 63,675 50,196
Weighted average equivalent shares 5,399 6,642 5,444 5,982
------- ------- ------- -------
Weighted average common and common
equivalent shares - Fully Diluted 70,065 64,740 69,119 56,178
======= ======= ======= =======
Net income per share - Fully Diluted $ .01 $ .11 $ -- $ .26
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND THE UNAUDITED
CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 OF
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 166,102,000
<SECURITIES> 162,075,000
<RECEIVABLES> 47,452,000
<ALLOWANCES> 3,064,000
<INVENTORY> 0
<CURRENT-ASSETS> 327,491,000
<PP&E> 58,023,000
<DEPRECIATION> 2,674,000
<TOTAL-ASSETS> 606,817,000
<CURRENT-LIABILITIES> 38,405,000
<BONDS> 300,000,000
0
0
<COMMON> 658,000
<OTHER-SE> 267,754,000
<TOTAL-LIABILITY-AND-EQUITY> 268,412,000
<SALES> 0
<TOTAL-REVENUES> 226,506,000
<CGS> 0
<TOTAL-COSTS> 224,298,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 469,000
<INCOME-TAX> 183,000
<INCOME-CONTINUING> 286,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 286,000
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
