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, 1998.
[ ] 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.
AS OF NOVEMBER 13, 1998, 48,910,491 SHARES OF COMMON STOCK WERE ISSUED AND
OUTSTANDING, WHICH NUMBER REFLECTS AS HELD IN TREASURY AND NO LONGER OUTSTANDING
ALL SHARES OF COMMON STOCK THAT HAD BEEN PURCHASED FOR THE COMPANY'S ACCOUNT AS
OF NOVEMBER 13, 1998 AND FOR WHICH THE COMPANY HAS PAID, NOTWITHSTANDING THAT
DELIVERY OF SUCH SHARES TO THE COMPANY MAY NOT HAVE BEEN MADE.
<PAGE>
TEL-SAVE HOLDINGS, INC.
FORM 10-Q
SEPTEMBER 30, 1998
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997
Consolidated Statements of Operations for the three and nine
months ended September 30, 1998 and 1997
Consolidated Statement of Stockholders' Equity (Deficit) for
the nine months ended September 30, 1998
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II - OTHER INFORMATION
Items 1-6
Signatures
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,
1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
CURRENT:
Cash and cash equivalents $23,199 $316,730
Marketable securities 168,595 212,269
Accounts receivable, trade net of allowance for uncollectible
accounts of $8,088 and $2,419, respectively 53,125 44,587
Advances to partitions and note receivables 5,317 26,110
Due from broker -- 21,087
Prepaid AOL marketing costs - current 9,100 30,857
Deferred taxes - current -- 30,916
Prepaid expenses and other current assets 13,236 8,495
- ------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 272,572 691,051
Property and equipment, net 60,602 55,835
Intangibles, net 10,331 10,590
Prepaid AOL marketing costs 15,900 32,722
Other assets 90,207 24,693
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $449,612 $814,891
============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT:
Margin account indebtedness $107,323 $ -
Accounts payable and accrued expenses:
Trade and other 55,987 16,858
Partitions 3,183 7,740
Interest and other 11,429 10,578
Securities sold short, at cost to purchase -- 21,087
- ------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 177,922 56,263
Convertible debt 389,424 500,000
Deferred revenue 30,250 35,800
Other liabilities 1,559 -
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 599,155 592,063
- ------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value, 5,000,000 shares authorized; no
shares outstanding - -
Common stock - $.01 par value, 100,000,000 shares authorized;
66,934,635 and 67,249,635 issued, respectively 669 672
Additional paid-in capital 276,475 291,952
Retained earnings (accumulated deficit) (176,586) 3,097
Unrealized loss on marketable securities (16,730) -
Treasury stock (233,371) (72,893)
- ------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (149,543) 222,828
============================================================================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $449,612 $814,891
============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- ------------------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES $ 122,525 $ 80,314 $ 324,769 $ 226,506
COST OF SALES 99,789 67,442 269,427 199,157
--------- --------- --------- ---------
GROSS PROFIT 22,736 12,872 55,342 27,349
GENERAL AND ADMINISTRATIVE EXPENSES 10,822 5,340 30,645 13,293
PROMOTIONAL, MARKETING AND ADVERTISING
EXPENSES - PRIMARILY AOL 107,653 10,775 192,592 25,141
RESEARCH AND DEVELOPMENT COSTS 308 -- 21,903 --
--------- --------- --------- ---------
OPERATING LOSS (96,047) (3,243) (189,798) (11,085)
INVESTMENT AND OTHER INCOME (EXPENSE), NET 3,751 4,425 (59) 11,554
--------- --------- --------- ---------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (92,296) 1,182 (189,857) 469
PROVISION FOR INCOME TAXES -- 461 40,388 183
--------- --------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN (92,296) 721 (230,245) 286
EXTRAORDINARY GAIN 50,562 -- 50,562 --
--------- --------- --------- ---------
NET INCOME (LOSS) $ (41,734) $ 721 $(179,683) $ 286
========= ========= ========= =========
BASIC EPS:
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN $ (1.58) $ 0.01 $ (3.69) $ --
EXTRAORDINARY GAIN 0.87 -- 0.81 --
--------- --------- --------- ---------
NET INCOME (LOSS) $ (0.71) $ 0.01 $ (2.88) $ --
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 58,376 64,666 62,317 63,675
========= ========= ========= =========
DILUTED EPS:
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN $ (1.58) $ 0.01 $ (3.69) $ --
EXTRAORDINARY GAIN 0.87 -- 0.81 --
--------- --------- --------- ---------
NET INCOME (LOSS) $ (0.71) $ 0.01 $ (2.88) $ --
========= ========= ========= =========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING - DILUTED 58,376 68,966 62,317 67,239
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED UNREALIZED
COMMON STOCK ADDITIONAL EARNINGS LOSS ON
-------------------------- PAID-IN (ACCUMULATED MARKETABLE
SHARES AMOUNT CAPITAL DEFICIT) SECURITIES
----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 67,250 $672 $291,952 $ 3,097 $ --
Net loss -- -- -- (179,683) --
Issuance of warrants to
AOL -- -- 33,086 -- --
Exercise of common stock
warrants -- -- (3,620) -- --
Exercise of common stock
options -- -- (37,041) -- --
Purchase of treasury
shares -- -- -- -- --
Exercise of AOL warrants -- -- (7,693) -- --
Retirement of common
stock (315) (3) (1,467) -- --
Common stock issued for
bonuses -- -- (257) -- --
Issuance of common stock
options for
compensation -- -- 1,500 -- --
Conversion of
convertible debt -- -- 15 -- --
Unrealized loss on
marketable securities -- -- -- -- (16,730)
============================ =========== =========== ============= ============ =============
Balance, September 30, 1998 66,935 $669 $276,475 $(176,586) $(16,730)
============================ =========== =========== ============= ============ =============
<CAPTION>
TREASURY STOCK
---------------------------
SHARES AMOUNT TOTAL
------------ ------------ -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1998 (3,608) $ (72,893) $222,828
Net loss -- -- (179,683)
Issuance of warrants to
AOL -- -- 33,086
Exercise of common stock
warrants 250 5,053 1,433
Exercise of common stock
options 2,378 48,847 11,806
Purchase of treasury
shares (16,031) (224,112) (224,112)
Exercise of AOL warrants 381 7,693 --
Retirement of common
stock -- -- (1,470)
Common stock issued for
bonuses 97 1,956 1,699
Issuance of common stock
options for
compensation -- -- 1,500
Conversion of
convertible debt 4 85 100
Unrealized loss on
marketable securities -- -- (16,730)
============================ ============ ============ ===========
Balance, September 30, 1998 (16,529) $(233,371) $(149,543)
============================ ============ ============ ===========
</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,
-----------------------------
1998 1997
- ---------------------------------------------------------------------------------------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(179,683) $ 286
Adjustment to reconcile net income (loss) to net cash used in
operating activities:
Unrealized gain on securities -- (324)
Provision for bad debts 6,130 1,952
Depreciation and amortization 4,145 4,466
Vested AOL warrants and amortization of prepaid AOL marketing costs 71,665 25,141
Charge for customer acquisition costs -- 11,550
Purchased research and development 21,034 --
Deferred revenue (5,550) --
Compensation charges 1,500 --
Valuation allowance for deferred tax assets 40,388 --
Extraordinary gain (50,562) --
Income tax benefit related to exercise of options and warrants -- 14,623
(Increase) decrease in:
Accounts receivable, trade (14,207) (26,494)
Advances to partitions and note receivables 20,794 (27,158)
Prepaid expenses and other current assets (4,741) (14,910)
Prepaid AOL marketing costs -- (100,564)
Other assets (67,578) (10,794)
Increase (decrease) in:
Accounts and partition payables and accrued expenses 35,485 13,109
Other liabilities (1,592) --
- -------------------------------------------------------------------------------- ------------- ---------------
Net cash used in operating activities (122,772) (109,117)
- -------------------------------------------------------------------------------- ------------- ---------------
Cash flows from investing activities:
Acquisition of intangibles (285) (4,328)
Acquisition of Symetrics Industries, Inc. (26,707) --
Capital expenditures (8,369) (27,427)
Securities sold short (21,087) (867)
Due from broker 21,087 867
Purchase of STF notes -- (155,409)
Sale of securities, net 26,942 142,895
- -------------------------------------------------------------------------------- ------------- ---------------
Net cash used in investing activities (8,419) (44,269)
- -------------------------------------------------------------------------------- ------------- ---------------
Cash flows from financing activities:
Proceeds from margin account indebtedness 107,323 --
Proceeds from sale of convertible debt -- 300,000
Acquisition of convertible debt (57,320) --
Proceeds from exercise of options and warrants 13,238 15,865
Retirement of common stock (1,470) --
Purchase of common stock warrants -- (4,400)
Acquisition of treasury stock (224,111)
- -------------------------------------------------------------------------------- ------------- ---------------
Net cash (used in) provided by financing activities (162,340) 311,465
- -------------------------------------------------------------------------------- ------------- ---------------
Net (decrease) increase in cash and cash equivalents (293,531) 158,079
Cash and cash equivalents, at beginning of period 316,730 8,023
================================================================================ ============= ===============
Cash and cash equivalents, at end of period $ 23,199 $166,102
================================================================================ ============= ===============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basic 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, 1998 and for the three and nine months ended September 30, 1998
and 1997 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, 1997 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 Form 10-K
report. The interim results are not necessarily indicative of the results for
any future periods.
Certain reclassifications of prior period's data have been made to conform
to the current period's classifications. The promotion, advertising and
marketing expenses related to the Company's Telecommunications Marketing
Agreement (the "AOL Agreement") dated as of February 22, 1997, with America
Online, Inc. ("AOL"), as amended, have been reclassified from cost of sales to
promotional, marketing and advertising expenses - primarily AOL in the
statements of operations for the three and nine months ended September 30, 1997,
in order to conform to the current period's classifications.
2. Acquisition of ADS Holding Corporation (formerly Symetrics Industries,
Inc.)
In January 1998, the Company acquired all of the outstanding stock of
Symetrics Industries, Inc. ("Symetrics"), a manufacturer of digital telephone
switching equipment and systems (the "Telephone Business") and electronic
equipment for the U.S. Department of Defense (the "Defense Business") for $26.7
million. The transaction has been accounted for under the purchase method. The
Company has completed the sale of the Defense Business for approximately $10
million (including assumed liabilities). In connection with the sale, Symetrics
Industries, Inc. changed its name to ADS Holding Corporation ("ADS").
The Company's purpose for purchasing Symetrics was to obtain the technology
for the digital switch manufactured by the Telephone Business . The Company
believes that the digital switch requires substantial development in order to
provide state of the art features which would make the digital switch attractive
for use by local telephone companies operating in smaller cities and rural areas
and competitive local exchange carriers operating in metropolitan areas. The
Company plans to use the digital switch in its own operation as a competitive
local exchange carrier and in its planned entry into the college and university
telecommunication business. The net purchase price of $18.6 million exceeded the
book deficit of the Telephone Business by approximately $22.8 million. The
majority of this excess has been recorded by the Company as purchased research
and development and included in research and development expense in the first
quarter of 1998. The Company is still in the process of valuing the purchased
research and development and approximately $21.0 million is its current
estimate. The operations of the Telephone Business, which resulted in a loss in
1997 and 1996, are not material.
3. Other Assets
In connection with the Company entering into a Telecommunications Services
Agreement ("TSA") dated May 20, 1998 with Communications Telesystems
International d/b/a WorldXChange Communications ("WXC") a California
corporation, the Company has advanced $56.2 million to WXC, which is due and
payable on November 30, 2000 ("WXC Notes"). The Company recorded the WXC Notes
in other assets in the consolidated balance sheet at September 30, 1998.
Interest on the WXC Note is payable quarterly commencing November 25, 1998 at a
rate of 12.5% per annum. The Company can purchase from WXC international
termination telecommunication services pursuant to the TSA.
4. Income Taxes
7
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company had recorded net deferred tax assets at December 31, 1997 and
March 31, 1998 primarily representing net operating loss carry-forwards and
other temporary differences because the Company believed that no valuation
allowance was required for these assets due to future reversals of existing
taxable temporary differences and expectation that the Company will generate
taxable income in future years.
In June 1998, the Company decided to make substantial expenditures in the
third and fourth quarters for marketing services to customers. As a result, the
Company anticipated a significant loss in those quarters and for 1998. In view
of those anticipated losses, the intense competition in the telecommunications
industry and the lack of any assurance that the Company would realize any of the
tax benefits, the Company decided in June 1998 to provide a 100% valuation
reserve for the $78 million of previously recorded deferred tax benefits and to
provide a 100% valuation reserve for the current and future tax benefits which
may result from the anticipated 1998 loss.
5. Litigation
On June 16, 1998, a purported shareholder class action was filed in the
United States District Court for the Eastern District of Pennsylvania against
the Company and certain of its officers alleging violation of the securities
laws in connection with certain disclosures made by the Company in its public
filings and seeking unspecified damages. Thereafter, additional lawsuits making
substantially the same allegations were filed by other plaintiffs in the same
court. At this point, no classes have been certified. The Company believes the
allegations in the complaints are without merit and intends to defend the
litigations vigorously. The Company also is a party to certain legal actions
arising in the ordinary course of business.
The Company believes that the ultimate outcome of the foregoing actions
will not result in liability that would have a material adverse effect on the
Company's financial condition or results of operations.
6. Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). The
adoption of this Statement had no impact on the Company's net loss or
stockholders' equity. SFAS 130 requires that all components of comprehensive
income and total comprehensive income be reported on one of the following: a
statement of income and comprehensive income, a statement of comprehensive
income or a statement of stockholders' equity. Comprehensive income is comprised
of net income and all changes to stockholders' equity, except those due to
investments by owners (changes in paid in capital) and distributions to owners
(dividends). For interim reporting purposes, SFAS 130 requires disclosure of
total comprehensive income.
Comprehensive income (loss) and its components consist of the following:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -------------------------------
1998 1997 1998 1997
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) $(41,734) $721 $(179,683) $286
Other comprehensive loss:
Unrealized loss on marketable securities
available for sale (10,000) -- (16,730) --
------------ ------------- ------------- --------------
Comprehensive income (loss) $(51,734) $721 $(196,413) $286
------------ ------------- ------------- --------------
</TABLE>
8
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following tables set forth for the periods indicated certain financial
data as a percentage of sales:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1998 1997
---- ----
<S> <C> <C>
Sales 100.0% 100.0%
Cost of sales 81.4 84.0
----- -----
Gross profit 18.6 16.0
General and administrative expenses 8.8 6.6
Promotional, marketing and advertising expenses - primarily AOL 87.9 13.4
Research and development costs 0.3 --
----- -----
Operating loss (78.4) (4.0)
Investment and other income, net 3.1 5.5
----- -----
Income (loss) before income taxes (75.3) 1.5
Provision for income taxes -- 0.6
----- -----
Income (loss) before extraordinary gain (75.3) 0.9
Extraordinary gain 41.2 --
----- -----
Net income (loss) (34.1)% 0.9%
===== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
1998 1997
---- ----
<S> <C> <C>
Sales 100.0% 100.0%
Cost of sales 83.0 87.9
----- -----
Gross profit 17.0 12.1
General and administrative expenses 9.4 5.9
Promotional, marketing and advertising expenses - primarily AOL 59.3 11.1
Research and development costs 6.7 --
----- -----
Operating loss (58.4) (4.9)
Investment and other income, net -- 5.1
----- -----
Income (loss) before income taxes (58.4) 0.2
Provision for income taxes 12.5 0.1
----- -----
Income (loss) before extraordinary gain (70.9) 0.1
Extraordinary gain 15.6 --
----- -----
Net income (loss) (55.3)% 0.1%
===== =====
</TABLE>
9
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Sales. Sales increased by 52.6% to $122.5 million in the third quarter of
1998 from $80.3 million in the third quarter of 1997. The increase in sales
resulted primarily from the Company's marketing campaign directed at generating
new customers under the AOL Agreement that was conducted in the late second and
early third quarters of 1998. This AOL-related sales increase offset a decrease
in the Company's non-AOL sales, which decrease was due primarily to price
competition, which has a greater effect on non-AOL sales, and reflected, to a
lesser extent, the Company's focus on marketing under the AOL Agreement.
Since entering into the AOL Agreement in February 1997, the Company and AOL
have had frequent discussions, and have negotiated a number of changes,
regarding the marketing of services under the AOL Agreement and expenditures by
the Company in connection with such marketing, particularly off-line marketing
programs. While these marketing agreements, principally those related to
off-line marketing, have significantly contributed to the rate of growth in the
Company's AOL-related business, the Company believes that it is necessary to
revise further the terms of these marketing arrangements for future marketing
programs. Although the Company believes that its AOL-related sales will continue
to increase, the rate of growth will be affected by the Company's ability to
negotiate further changes in the AOL relationship to expand its AOL-related
business on economic terms acceptable to the Company. AOL-related sales could
also be affeted adversely by the intense competition in this industry and have
continued to be affected adversly by the PIC freezes implemented by the local
telephone companies. Accordingly, 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. Cost of sales increased by 48.0% to $99.8 million in the
third quarter of 1998 from $67.4 million in the third quarter of 1997 as a
result of increased sales.
In April 1998, the Company entered into a new three-year contract with AT&T
that provides a wide variety of services supporting the Company's nationwide
telecommunications network and resale operations. The contract includes AT&T
Network Connection Services (formerly known as AT&T's Carrier Solutions
Platform) that enables the Company to accommodate greater numbers of additional
customers on OBN by handling their peak load or overflow traffic. The new
contract also provides most of the other services that the Company acquires from
AT&T. The new contract includes certain financial commitments by the Company,
both in terms of minimum revenue commitments and a minimum percentage of certain
services that must be purchased from AT&T if those services are also purchased
from any other carrier. These commitments expire at any time after the first
year that total charges from services purchased from AT&T during the term have
reached $110 million. The new contract also specifies various options for
satisfying the financial commitments in the event of a change in control of the
Company. The Company and AT&T agreed to guidelines for describing the Company's
relationship with AT&T and, specifically, how the Company may refer to that
relationship in the marketplace.
Gross Margin. Gross margin increased to 18.6% in the third quarter of 1998
from 16.0% in the third quarter of 1997. The increase in gross margin was
primarily due to lower network usage costs for OBN services and lower local and
international access charges, in each case on a per call basis. Price
competition continues to intensify for the Company's products and this trend can
be expected to continue to put downward pressure on gross margins.
General and administrative expenses. General and administrative expenses
increased by 102.6% to $10.8 million in the third quarter of 1998 from $5.3
million in the third quarter of 1997. The increase in general and administrative
expenses was due primarily to the costs associated with hiring additional
personnel to support the Company's continuing growth, the general and
administrative expense incurred as a result of the acquisitions of Compco, Inc.
and ADS which were acquired in November 1997 and January 1998, respectively and
increased fees for professional services. The Company expects to recognize
one-time charges in the 1998 fourth quarter in connection with the appointment
of a new Chairman of the Board, Chief Executive Officer and President of the
Company of and the related retirement of certain Company officers.
10
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
Promotional, Marketing and Advertising Expense - Primarily AOL. During the
third quarter of 1998, the Company expensed approximately $16.3 million related
to the AOL Agreement based on the Company's assessment of the current and
prospective value of the advertising and promotion provided by AOL and
approximately $5.9 million for the performance warrants issued to AOL that
vested on September 30, 1998. During the third quarter of 1997, the Company
expensed approximately $10.8 million for certain exclusivity rights under the
AOL Agreement. The Company made an initial payment of $100 million to AOL at the
signing of the AOL Agreement and 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. Under an amendment of the AOL Agreement
dated as of May 14, 1998, among other things, the term of the AOL Agreement with
respect to the Company's long distance telecommunications services was extended
by one year to June 30, 2001, and the Company issued to AOL an additional, fully
exercisable warrant to purchase up to 1 million Company shares at an exercise
price of $22.25. The $11.1 million value of the new AOL warrant will be expensed
consistent with the treatment of the initial payment of $100 million. Of the
prepaid AOL marketing costs (including the values of two fully exercisable
warrants issued to AOL), approximately $57.0 million was charged to expense in
1997 and approximately $49.7 million was charged to expense in the first nine
months of 1998. The remaining portion of the prepaid AOL marketing costs
(approximately $25.0 million at September 30, 1998) will be recognized as
advertising services are received. The AOL warrant for up to 7 million shares
vests at the rate of 2 shares for each new user of the Company's services that
subscribes through AOL and 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. Through September 30, 1998, approximately 2.9
million of the 7 million shares under such warrant had vested, leaving up to 4.1
million shares that could still vest under this AOL warrant and be charged to
expense in the future. 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.
In addition to the prepaid AOL marketing costs and the warrant vestings
that were charged to expense in the third quarter, the Company incurred $76.9
million in marketing and advertising expenses, primarily for off-line marketing
directed at generating new subscribers under the AOL Agreement. The Company
currently anticipates that such marketing and advertising expenses will be
significantly lower in the fourth quarter as compared to the third quarter. As
noted above, the Company is currently seeking to revise further the terms of its
marketing arrangements with AOL. The inability of the Company to revise these
marketing arrangements on terms economically acceptable to the Company could
have a material adverse effect on the Company's AOL business and its financial
condition and results of operations.
Investment and Other Income (Expense), Net. Investment and other income
(expense), net was $3.8 million in the third quarter of 1998 versus $4.4 million
in the third quarter of 1997. During the third quarter of 1998, investment and
other income (expense), net consists primarily of investment income offset by
interest expense related to the Company's Convertible Notes.
Provision for Income Taxes. The Company had recorded net deferred tax
assets at December 31, 1997 and March 31, 1998 primarily representing net
operating loss carry-forwards and other temporary differences because the
Company believed that no valuation allowance was required for these assets due
to future reversals of existing taxable temporary differences and expectation
that the Company will generate taxable income in future years.
In June 1998, the Company decided to make substantial expenditures in the
third and fourth quarters for marketing and advertising to expand the Company's
AOL and non-AOL customer bases. As a result, the Company had a significant loss
in the third quarter and anticipates for 1998. In view of anticipated losses,
the intense competition in the telecommunications industry and the lack of any
assurance that the Company will realize any of the tax benefits, the Company
decided in June 1998 to provide a 100% valuation reserve for the previously
recorded deferred tax benefits and to provide a 100% valuation reserve for the
current and future tax benefits which may result from the anticipated 1998 loss.
The valuation reserves of approximately $78.4 million were included in provision
for income taxes in the statements of operations for the three and nine months
ended September 30, 1998.
Extraordinary gain. During the third quarter of 1998, the Company recorded
an extraordinary gain in connection with the acquisition of the Company's
convertible debt at a discount.
11
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Sales. Sales increased by 43.4% to $324.8 million in the first nine months
of 1998 from $226.5 million in the first nine months of 1997. The increase in
sales resulted primarily from the Company's marketing campaign under the AOL
Agreement which offset a decrease in the Company's non-AOL sales.
Cost of Sales. Cost of sales increased by 35.3% to $269.4 million in the
first nine months of 1998 from $199.2 million in the first nine months of 1997
as a result of increased sales. In addition, the 1997 cost of sales includes a
charge of $11.5 million primarily related to the Company's change in its
accounting for customer acquisition costs.
Gross Margin. Gross margin increased to 17.0% in the first nine months of
1998 from 12.1% in the first nine months of 1997. The increase in gross margin
was primarily due to a charge of $11.5 million (described above) included in
1997 cost of sales and to lower network usage costs for OBN services and lower
local and international access charges, in each case on a per call basis.
General and administrative expenses. General and administrative expenses
increased by 230.5% to $30.6 million in the first nine months of 1998 from $13.3
million in the first nine months of 1997. The increase in general and
administrative expenses was due primarily to the costs associated with hiring
additional personnel to support the Company's continuing growth, the general and
administrative expense incurred as a result of the acquisitions of Compco, Inc.
and ADS which were acquired in November 1997 and January 1998, respectively and
increased fees for professional services.
Promotional, Marketing and Advertising Expense - Primarily AOL. During the
first nine months of 1998, the Company expensed approximately $49.7 million
related to the AOL Marketing Agreement based on the Company's assessment of the
current and prospective value of the advertising and promotion provided by AOL
and approximately $22.0 million for the performance warrants issued to AOL that
vested in 1998. During the first nine months of 1997, the Company expensed
approximately $25.1 million for certain exclusivity rights. In addition to the
prepaid AOL marketing costs and the warrant vestings that were charged to
expense in the first nine months of 1998, the Company incurred $112.3 million in
marketing and advertising expenses directed primarily at generating new
subscribers under the AOL Agreement.
Research and Development Costs. Research and development costs are
associated with the telephone business of ADS and include purchased research and
development costs of approximately $21.0 million (Note 2).
Investment and Other Income (Expense), Net. Investment and other income
(expense), net was $(0.1) million in the first nine months of 1998 versus $11.6
million in the first nine months of 1997. During the first nine months of 1998,
investment and other income (expense), net consists primarily of investment
income offset by interest expense related to the Company's Convertible Notes and
a loss of $3.0 million incurred during the first quarter of 1998 on the sale of
its investment in US Wats, Inc., which was originally acquired in connection
with the Company's proposed acquisition of another telecommunications company.
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
1996, the Company consummated public offerings of shares of the Company's Common
Stock and received net proceeds of $42.8 million and $139.1 million,
respectively.
12
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
In September 1997, the Company privately sold $300 million of 4 1/2%
Convertible Subordinated Notes which mature on September 15, 2002 (the "2002
Convertible Notes"). Interest on the 2002 Convertible Notes is due and payable
semiannually on March 15 and September 15 of each year. The 2002 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
2002 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.
In December 1997, the Company privately sold $200 million of 5% Convertible
Subordinated Notes which mature on December 15, 2004 (the "2004 Convertible
Notes"). Interest on the 2004 Convertible Notes is due and payable semiannually
on June 15 and December 15 of each year. The 2004 Convertible Notes are
convertible, at the option of the holder thereof, at any time after March 5,
1998 and prior to maturity, unless previously redeemed, into shares of the
Company's Common Stock at a conversion price of $25.47 per share. The 2004
Convertible Notes are redeemable, in whole or in part at the Company's option,
at any time on or after December 15, 2002 at 101.43% of par prior to December
14, 2003 and 100.71% of par thereafter.
During 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 $16.9 million. In
addition, during 1997 the Company repurchased approximately 3.5 million shares
of the Company's Common Stock, which were held as treasury shares for the future
issuance of shares upon the exercise of options, warrants and convertible
securities of the Company, for approximately $72.0 million.
The Company's working capital was $94.7 million and $634.8 million at
September 30, 1998 and December 31, 1997, respectively. The significant decrease
in working capital at September 30, 1998, when compared to historical amounts,
is primarily a result of the repurchase of the Company's securities described
below, the advertising and marketing expenditures incurred in connection with
the AOL Agreement, the advance to WXC described below, and the increase in
accounts payable, primarily reflecting recent rapid growth in the Company's AOL
business. At September 30, 1998, the Company's marketable securities consisted
of approximately $168.6 million (at market value) in a government bond fund. The
Company has recorded an unrealized loss of $16.7 million as a component of
shareholders equity. Any realized gain or loss upon the sale in the future will
be reflected in the Company's consolidated statement of operation. In addition,
the Company incurred approximately $107.3 million of margin account indebtedness
in connection with this investment.
During the first nine months of 1998, certain options and warrants to
purchase shares of the Company's Common Stock were exercised yielding to the
Company proceeds of $13.2 million.
The Company expended an aggregate of $281.4 million for the repurchase of
outstanding securities during the first nine months of 1998. Between March and
July 31, 1998, the Company repurchased approximately 1.3 million shares, for an
aggregate of $28.9 million, pursuant to such authorization. In August 1998, the
Company's Board of Directors authorized the expenditure from time to time
thereafter of up to an additional $300 million for the repurchase of the
Company's outstanding securities. Through September 30, 1998, pursuant to the
$300 million repurchase authorization, the Company repurchased approximately
14.7 million shares of its Common Stock for an aggregate of $195.2 million, as
well as $110.6 million principal amount of the Company's Convertible Notes for
approximately $57.3 million. In the fourth quarter of 1998, the Company has
repurchased, through November 15, 1998, an additional 1.5 million shares of
Common Stock for an aggregate of $15.8 million, and an additional $20.7 million
principal amount of Convertible Notes for approximately $9 million. The third
quarter purchases of Convertible Notes at a discount resulted in an
extraordinary gain in that quarter, and these fourth quarter purchases of the
Convertible Notes will result in an extraordinary gain in the fourth quarter.
The Company invested $8.4 million in capital equipment during the first
nine months of 1998.
In connection with the Company entering into the TSA with WXC, the Company
advanced $56.2 million to WXC which is due and payable on November 30, 2000
("WXC Notes"). Interest on the WXC Notes is payable quarterly commencing
November 25, 1998 at a rate of 12.5% per annum. The Company purchases
international termination telecommunication services pursuant to the TSA.
13
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
The Company generally does not have a significant concentration of credit
risk with respect to accounts receivable due to the large number of 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
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. Should the Company seek to raise additional
capital, there can be no assurance that, given current market conditions, the
Company would be able to raise such additional capital on terms acceptable to
the Company.
YEAR 2000
The "Year 2000 issue" refers to the potential harm from computer programs
that identify dates by the last two digits of the year rather than using the
full four digits. As such, dates on or after January 1, 2000 could be
misidentified, and such programs could fail. If such a failure were to occur to
the Company's internal computer-based systems or if the computer-based systems,
on which the Company's business depends, that are operated by third parties were
to malfunction, the Company could be unable to continue to provide
telecommunications services, to sign up new customers or to bill existing
customers for services. Such failures, if they occurred, would have a material
adverse effect on the Company's business, results of operations and financial
condition. However, because of the complexity of the issues and the number of
parties involved whose actions could affect the Company and the fact that many
of the issues are outside the Company's control, the Company cannot reasonably
predict with certainty the nature or likelihood of such effects.
The Company, using its internal staff, has conducted a review of most of
the internal computer-based systems that it uses in its business. Most of the
Company's systems are relatively new. Much of the software used by the Company
in its business has been developed internally and is regularly modified and
updated to meet the changing requirements of its business. The Company expects
that its critical internal systems will be able to process relevant date
information in the future to permit the Company to continue to provide its
services without significant interruption or material adverse effect on its
business, results of operations and financial condition. However, there can be
no assurances that the Company will not experience unanticipated negative
consequences caused by undetected errors or defects in the technology used in
its internal systems.
However, notwithstanding the Company's expectation that its own systems
will be able to process Year 2000 date information, the Company's business
depends significantly on services provided by other parties and on the ability
of other parties to continue to conduct their respective businesses without
significant interruption. The principal service suppliers to the Company include
AT&T, the local exchange carriers throughout the country and AOL. Other parties
whose ability to deal with Year 2000 issues could affect the Company include the
Company's partitions and the credit card companies through which most of the
Company's AOL customers are billed. The Company has made inquiry of some of
these parties with which the Company has direct relationships regarding their
respective levels of preparedness for Year 2000 issues as they may affect the
Company and will continue to make such inquiries, as well as to monitor the
public disclosures of such companies regarding their Year 2000 status. The
responses to such inquiries generally have been non-committal regarding their
levels of preparedness or their willingness to provide assurances to the
Company. In almost all cases, the Company is not in a position to require either
that these other companies give assurances to the Company as to their continued
provision of services or that such companies take the necessary actions to
assure that they will be ready for the Year 2000. Accordingly, while the Company
has not been advised by any of these other companies on which it depends that
they do not expect to be ready for Year 2000 issues, the Company does not
believe it is in a position to project the likelihood of such parties' abilities
to provide uninterrupted services to the Company. The Company has considered
possible contingency plans, should one of these significant suppliers fail,
including entering into contracts with long-distance service providers other
than AT&T to support its OBN network. However, given the nature of the Company's
relationships with most of these significant suppliers, it may be impracticable
for the Company to replace them should they be unable to continue to provide
these services. The failure of any of these companies to provide uninterrupted
service to the Company likely would have a material adverse effect on the
Company's business and its results of operations and financial condition.
The Company does not separately identify costs incurred in connection with
Year 2000 compliance activities. To date, however, the Company does not believe
such costs to be significant because they generally have been incurred in normal
course activities of the Company's internal personnel in regularly modifying and
updating
14
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
its software programs. Future expenditures are not expected to be significant
and will be funded out of operating cash flows.
* * * * *
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. In
addition to factors reflected elsewhere herein, important factors that could
cause such actual results to differ materially include, among others, adverse
developments in the Company's relationship with AT&T or AOL, increased price
competition for long distance services, failure of the marketing of long
distance services under the AOL Agreement or the need to incur greater marketing
costs to maintain expected customer bases, attrition in the number of end users,
increased implementation of PIC freezes by local telephone companies, the
occurrence of as yet generally unidentified problems related to the Year 2000
problem or other like date identification issues in computer systems and changes
in government policy, regulation and enforcement. The Company undertakes no
obligations to update its forward-looking statements.
15
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On June 16, 1998, a purported shareholder class action was filed in
the United States District Court for the Eastern District of
Pennsylvania against the Company and certain of its officers alleging
violation of the securities laws in connection with certain disclosures
made by the Company in its public filings and seeking unspecified
damages. Thereafter, additional lawsuits making substantially the same
allegations were filed by other plaintiffs in the same court. At this
point, no classes have been certified. The Company believes the
allegations in the complaints are without merit and intends to defend
the litigations vigorously. The Company also is a party to certain legal
actions arising in the ordinary course of business.
The Company believes that the ultimate outcome of the foregoing
actions will not result in liability that would have a material adverse
effect on the Company's financial condition or results of operations.
Item 2. Changes in Securities
None.
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.
(d) Not applicable
Item 5. Other Information
The Company announced on November 16, 1998 the appointment of Mr.
Gabriel Battista, 54, as Chairman, Chief Executive Officer and President of the
Company and the retirement of Mr. Daniel Borislow as the Company's Chairman and
Chief Executive Officer upon Mr. Battista's assumption of such offices. Mr.
Battista will commence employment with the Company in December 1998 and he will
assume such offices as of January 4, 1999. The Company also announced the change
of its name to Tel-Save.com, Inc.
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
Since June 30, 1998, the Company has filed the following Current
Reports on Form 8-K:
(i) September 18, 1998 where the Company disclosed status of
its repurchase program and expectations regarding
operating results for 1998 third quarter.
(ii) October 29, 1998 where the Company announced estimated
results for the third quarter of 1998 and the resumption
of its authorized repurchases.
16
<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 16, 1998 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
17
EXHIBIT 11
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS
SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- ----------------------------
1998 1997 1998 1997
- ------------------------------------------------------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Income (loss) before extraordinary gain $ (92,296) $ 721 $(230,245) $ 286
Extraordinary gain 50,562 -- 50,562 --
---------- --------- --------- ---------
Net income (loss) $ (41,734) $ 721 $(179,683) $ 286
========== ========= ========= =========
BASIC
Weighted average common shares outstanding - Basic: 58,376 64,666 62,317 63,675
========== ========= ========= =========
Income (loss) before extraordinary gain $ (1.58) $ 0.01 $ (3.69) $ --
Extraordinary gain 0.87 -- 0.81 --
---------- --------- --------- ---------
Net income (loss) $ (0.71) $ 0.01 $ (2.88) $ --
========== ========= ========= =========
DILUTED
Weighted average common and common equivalent shares
outstanding - Diluted:
Weighted average shares 58,376 64,666 62,317 63,675
Weighted average equivalent shares -- 4,300 -- 3,564
---------- --------- --------- ---------
Weighted average common and common equivalent shares -
Diluted 58,376 68,966 62,317 67,239
========== ========= ========= =========
Income (loss) before extraordinary gain $ (1.58) $ 0.01 $ (3.69) $ --
Extraordinary gain 0.87 -- 0.81 --
---------- --------- --------- ---------
Net income (loss) $ (0.71) $ 0.01 $ (2.88) $ --
========== ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND THE UNAUDITED
CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 OF
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 23,199,000
<SECURITIES> 168,595,000
<RECEIVABLES> 61,213,000
<ALLOWANCES> 8,088,000
<INVENTORY> 0
<CURRENT-ASSETS> 272,572,000
<PP&E> 67,840,000
<DEPRECIATION> 7,238,000
<TOTAL-ASSETS> 449,612,000
<CURRENT-LIABILITIES> 177,922,000
<BONDS> 389,424,000
0
0
<COMMON> 669,000
<OTHER-SE> (150,212,000)
<TOTAL-LIABILITY-AND-EQUITY> 449,612,000
<SALES> 0
<TOTAL-REVENUES> 324,769,000
<CGS> 0
<TOTAL-COSTS> 269,427,000
<OTHER-EXPENSES> 245,140,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,752,000
<INCOME-PRETAX> (189,857,000)
<INCOME-TAX> 40,388,000
<INCOME-CONTINUING> (230,245,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 50,562,000
<CHANGES> 0
<NET-INCOME> (179,683,000)
<EPS-PRIMARY> (2.88)
<EPS-DILUTED> (2.88)
</TABLE>
