SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Year Ended December 31, 1997
Commission File No. 0 - 26728
TEL-SAVE HOLDINGS, INC.
(Exact name of registrant as specified an its charter)
DELAWARE 23-2827736
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6805 ROUTE 202
NEW HOPE, PENNSYLVANIA 18938
(215) 862-1500
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
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None Not applicable
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 30, 1998 was approximately $895,030,756 based on the
average of the high and low prices of the Common Stock on March 30, 1998 of
$22.59 per share as reported on the Nasdaq National Market.
As of March 30, 1998, the Registrant had outstanding 64,585,012 shares of its
Common Stock, par value $.01 per share.
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TEL-SAVE HOLDINGS, INC.
INDEX TO FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
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ITEM PAGE
NO. NO.
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PART I
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1. BUSINESS.................................................................................................. 1
2. PROPERTIES............................................................................................... 16
3. LEGAL PROCEEDINGS........................................................................................ 16
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................................... 16
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................................... 19
6. SELECTED CONSOLIDATED FINANCIAL DATA..................................................................... 20
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 21
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................................. 26
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE................................... 42
PART III
10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................................... 42
11 EXECUTIVE COMPENSATION................................................................................... 42
12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................................... 42
13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................................... 42
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.......................................... 43
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PART I
ITEM 1. BUSINESS
For the definition of certain terms used in this Form 10-K, see
"Glossary."
OVERVIEW
Tel-Save Holdings, Inc. (the "Company") provides long distance services
throughout the United States to small and medium-sized businesses, and to
increasing numbers of residential customers as a result of the Company's recent
online marketing efforts. The Company's long distance service offerings include
outbound service, inbound toll-free 800 service, and dedicated private line
services for data.
Until 1997, the Company operated primarily as a switchless,
nonfacilities-based reseller of AT&T long distance services to small and
medium-sized businesses. By purchasing large usage volumes from AT&T pursuant to
contract tariffs, the Company has been and continues to be able to procure
substantial discounts and offer low cost, high quality long distance services to
its customers at rates generally more favorable than those offered directly by
AT&T.
In order to reduce its dependence on AT&T contract tariffs and increase
its growth opportunities, the Company has deployed its own nationwide
telecommunications network, One Better Net ("OBN"). OBN features five
Company-owned, AT&T (now Lucent Technologies, Inc., hereinafter "Lucent")
manufactured 5ESS-2000 switches connected with AT&T digital transmission
facilities. OBN's reduced cost structure allows the Company to offer rates
competitive with those of non-AT&T resellers while continuing to provide the
quality of AT&T (now Lucent) manufactured switches and AT&T-provided
transmission facilities and billing services. OBN allows the Company to pursue
the non-AT&T based switchless resale market, which represents the majority of
the switchless resale long distance market.
In February 1997, as part of its efforts to expand its business by
taking advantage of online marketing, billing and customer service, the Company
entered into a Telecommunications Marketing Agreement (the "AOL Agreement") with
America Online, Inc. ("AOL"), under which the Company provides long distance
telecommunications services marketed by AOL to the subscribers to AOL's online
network. The Company's services were launched on the AOL online network on
October 9, 1997 on a limited basis and the general public promotion of the
service began at the end of 1997. The AOL Agreement has an initial term of three
years and can be extended by AOL on an annual basis thereafter.
The Company's strategy for expanding its business is principally to
target new retail customers through the Company's online marketing, expanded
services to be offered to the Company's online customer base, local service and
dial around long distance service. The Company also intends to attract new
partitions and support existing partitions, to grow through acquisitions and
strategic partnerships and to expand into the college and university market. The
Company will approach online customers through the AOL Agreement and similar
opportunities, such as the Company's recently announced arrangement with
CompuServe Interactive, Inc. ("CompuServe") pursuant to which the Company will
provide long distance telecommunications services to be marketed by CompuServe
to its online network subscribers. The Company intends to attract new partitions
and support existing partitions by, among other things, continuing its current
practice of offering advances to new partitions to enable such partitions to pay
outstanding balances due to their existing long distance providers in order for
such partitions to transfer their end users to the Company's service, and to
existing partitions to support their marketing efforts. The Company regularly
evaluates potential acquisition candidates and strategic partners with which the
Company could achieve its expansion goals. The Company, with the recent
completion of the acquisition of Compco, Inc. ("Compco"), intends to leverage
the relationships that Compco has as a leading provider of communications
software in the college and university marketplace by offering bundled
communications services to the college and university market. The Company has
also recently gained certification in many states to sell local services,
although it does not yet offer such services. Although the Company expects to
expand its business through these and other opportunities, in view of the
intense competition in this industry and other contingencies, there can be no
assurance that the Company will be able to expand its business.
Tel-Save, Inc., the Company's predecessor ("Predecessor Corporation")
and now its principal operating subsidiary, was incorporated in Pennsylvania in
May 1989. The Company was incorporated in Delaware in June 1995. The address of
the Company's principal executive offices is 6805 Route 202, New Hope,
Pennsylvania 18938, and its telephone number is (215)
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862-1500. Unless the context otherwise requires, the "Company" or "Tel-Save"
includes the Predecessor Corporation and the Company's other subsidiaries.
DEVELOPMENT OF THE COMPANY
The Company was formed to capitalize on the Federal Communications
Commission ("FCC") mandate allowing the resale of AT&T services. The Company
initially marketed AT&T's multi-location calling plan ("MLCP"), which provided
incremental discounts earned by inclusion of the usage volume of diverse end
user locations under a single service plan. The Company was successful in
marketing MLCP, but realized that there were significant barriers to growth
associated with the product, primarily the lack of reporting from AT&T, product
inflexibility and the lack of control over end user accounts.
In late 1989, the Company successfully obtained an additional AT&T
service plan developed by AT&T and marketed as Software Defined Network Service
("SDN"), an AT&T product designed for larger business customers. SDN provided
the Company with higher margins, network controls, advanced features and the
ability to rebill its end users through AT&T and AT&T's College and University
Systems ("ACUS"), thus enabling the Company to have more control over the end
user account. As a result of SDN, the Company began to offer services on a
wholesale basis through partitions. The Company thereby outsourced its marketing
and end user service expenses to partitions, allowing it to focus on managing
the AT&T relationship and to further develop its billing and information
systems.
In December 1992, the Company obtained the first contract tariff
created by AT&T specifically for the Company. The contract tariff provided the
Company with significant additional price advantages at stabilized rates and the
ability to absorb the traffic of competitors' plans into the contract tariff.
The Company subsequently obtained other contract tariffs, which also provide
AT&T inbound 800 services and AT&T private line services, in order to diversify
its service offerings. This in turn enabled the Company to increase the number
of its partitions and end users.
Prior to 1997, the Company operated primarily as a "switchless,"
nonfacilities-based reseller of AT&T long distance services. The Company
offered, and continues to offer, its partitions and end users nationwide access
to AT&T long distance network services through contract tariffs, including
outbound long distance, 800 service and private line service. Outbound long
distance service accommodates voice, data and video transmissions. The Company's
800 service is currently provided by reselling AT&T's 800 Service (Readyline,
Megacom 800, etc.), which is AT&T's inbound, toll-free (recipient of the call
pays the charges) long distance service. The Company's private line service is
currently provided by reselling AT&T Private Line Service, which includes
dedicated transmission lines connecting pairs of sites.
The Company successfully established its position as a switchless
reseller of AT&T long distance services as a result of its ability to negotiate
with and obtain favorable contract tariffs from AT&T, manage and distribute
data, bill accurately and provide partition support. Contract tariff
subscriptions do not impose restrictions on the rates the Company may charge its
partitions and end users. By purchasing large usage volumes from AT&T pursuant
to such contract tariffs, the Company is able to procure substantial volume
discounts and offer long distance services to its partitions and end users at
rates generally more favorable than those offered directly by AT&T. With its
information systems, the Company is able to manage and distribute to partitions
information such as data about end user usage and payment history.
In order to reduce its dependence on the AT&T contract tariffs and
increase its growth opportunities, the Company developed its own network, OBN.
Since 1996, the Company has deployed a total of five 5ESS-2000 switches, in
Chicago, Dallas, Jacksonville, New York and San Francisco. As of March 30, 1998,
the Company has provisioned approximately one million lines (representing
approximately 71% of the total lines then using the Company's services) to OBN
and most of the Company's new outbound lines are now being provisioned to OBN.
OBN enables the Company to offer its end users and partitions more competitive
rates than in the past and to improve customer provisioning, as well as to
improve reporting to existing and new partitions.
RECENT DEVELOPMENTS
The Company believes that eventually it must either be, or become part
of, a larger organization in order to succeed in the long term. To that end, the
Company has been exploring the possibility of being acquired by larger entities
that have expressed interest in the Company. The Company has previously
disclosed that it has had discussions with potential suitors and that the
Company has retained Salomon Smith Barney to advise the Company on any proposed
acquisition of the Company.
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There can be no assurance that any transaction will take place and no prediction
can be made as to the price at which an acquisition of the Company, if any, may
be consummated or whether any such transaction would be for cash or securities.
Moreover, the Company has not made any determination to be acquired, and may
remain independent. The Company does not plan to make any further public
statements regarding the possible acquisition of the Company until it either has
reached a definitive agreement regarding such a transaction, or has determined
not to continue to pursue such possibility.
At the same time, the Company continues to seek and consider potential
acquisitions and strategic partnerships. On February 3, 1998, the Company
completed the acquisition of Symetrics Industries, Inc. ("Symetrics"), a Florida
corporation, for approximately $25 million in cash, plus assumed liabilities.
Symetrics designs, develops and manufactures electronic systems, system
components and related software for defense-related products and for
telecommunications applications. In the telecommunications field, Symetrics has
developed hardware and software to make telephone switching more efficient for
small telephone networks, such as in college dormitories and apartments. The
equipment routes room-to-room calls itself and sends only billing information
back to the service provider's switch, freeing space on the system to handle
more calls. The Company intends to dispose of Symetrics' assets related to
non-telecommunications businesses, although there can be no assurance that any
such transaction will be consummated.
The Company has announced that its Board has authorized the repurchase
from time to time of up to eight million shares of its Common Stock. It is
anticipated that the repurchased shares will be held in treasury for issuance
upon exercise of outstanding options and warrants and upon conversion, if any,
of convertible notes, and for other general corporate purposes. In connection
with the AOL Agreement, the Company issued two warrants to AOL to purchase
shares of the Company's Common Stock, including a warrant to purchase 5 million
shares at an exercise price of $15.50 per share, which warrant became fully
vested on February 22, 1998. On March 31, 1998, AOL exercised this warrant as to
1 million shares of Company Common Stock on a net issuance basis and the Company
repurchased from AOL all of the 380,624 shares issued upon such net issuance
exercise for $23 1/4 per share. In connection with such repurchase, AOL agreed
not to dispose of any shares of the Company's Common Stock acquired by AOL under
any of these warrants until March 30, 1999.
SALES AND MARKETING
Online
The Company launched a major new initiative for the marketing and
provisioning of its telecommunication services online when, in February 1997, it
entered into the AOL Agreement, under which the Company provides long distance
telecommunications services that are marketed by AOL to the subscribers of AOL's
online network. The AOL Agreement has an initial term of three years and can be
extended by AOL on an annual basis thereafter. Under the AOL Agreement, the
Company also has certain rights to offer, on a comparable basis, local and
wireless telecommunications services when available.
The Company's services, which include provision for online sign-up,
call detail and reports and credit card payment, were launched on the AOL online
network on October 9, 1997 on a limited basis, and general public promotion of
the services began at the end of 1997. AOL subscribers who sign-up for the
telecommunications services are customers of the Company, as the carrier
providing such services.
Under the AOL Agreement, AOL provides each month, over the term of the
Agreement, certain minimum amounts of online advertising and promotion of the
services and provides all of its subscribers with access to a dedicated Company
service area online. Effective January 25, 1998, the Company and AOL entered
into an amendment (the "AOL Amendment") to the AOL Agreement to provide for the
acceleration of some of AOL's online advertising and promotion obligations under
the AOL Agreement into a special promotional period (the "Special Promotional
Period") during the latter part of the first quarter of 1998, as well as to
provide for offline marketing through other media, such as directed mail
promotions and print and radio promotions of the services, the costs of which
would be borne by the Company.
The Company made an initial payment of $100 million to AOL at the
signing of the AOL Agreement and agreed to provide marketing payments to AOL
based on a percentage of the Company's profits from the services (between 50%
and 70% depending on the level of revenues from the services). The AOL Agreement
provides that $43 million of the initial $100 million payment will be offset and
recoverable by the Company through reduction of such profit-based marketing
payments during the initial term of the AOL Agreement or, subject to certain
monthly reductions of the amount thereof, directly by AOL upon certain earlier
terminations of the AOL Agreement. The $57 million balance of the initial
payment is solely recoverable by offset against a percentage of such
profit-based marketing payments made after the first five years of the AOL
Agreement (when extended beyond the initial term) and by offset against a
percentage of AOL's share of the profits from the services after termination or
expiration of the AOL Agreement. Any portion of the $43 million not previously
repaid or reduced in amount would be added to the $57 million and would be
recoverable similarly.
Also under the AOL Agreement, the Company issued to AOL at signing two
warrants to purchase shares of the Company Common Stock at a premium over the
market value of such stock on the issuance date. One warrant is for 5 million
shares, at an exercise price of $15.50 per share, one-half of which shares
vested on October 9, 1997 when the Company's service was launched on the AOL
online network in accordance with the AOL Agreement and the balance of which
vested on February 22, 1998, the first anniversary of issuance. See "RECENT
DEVELOPMENTS." The other warrant (the "Second Warrant") is for up to 7 million
shares, at an exercise price of $14.00 per share, which vest, commencing
December 31, 1997, based on the number of subscribers to the services and would
vest fully if there are at least 3.5 million such subscribers at any one time.
The Company also agreed to issue to AOL an additional warrant to purchase 1
million shares of the Company Common Stock, at market value at the time of
issuance, upon each of the first two annual
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extensions by AOL of the term of the AOL Agreement, which warrants also will
vest based on the number of subscribers to the services.
Under the AOL Amendment, the Company agreed to pay to AOL an additional
bonus fee for each new subscriber (up to an aggregate of 1,000,000 subscribers)
to the Company's services under the AOL Agreement who subscribed during the
Special Promotional Period or after this Period in response to AOL telemarketing
efforts and to direct mail solicitations to AOL subscribers and who continued as
a customer of the Company services for at least 30 days. Such bonus payments
also would continue as to additional qualifying subscribers who subscribe in
response to certain AOL telemarketing efforts. Under the AOL Amendment, the
Company guaranteed, with respect to these bonus payments, that it would pay to
AOL, as of April 3, 1998, an amount (the "Excess Amount") equal to $10 million
reduced by the amount of bonus fees paid to AOL before such date and by an
amount based on the number of shares of Company Common Stock that vested under
the Second Warrant during the Special Promotional Period. Any Excess Amount
would be credited against, and solely recoverable from, any bonus fees
subsequently payable to AOL.
The Company also entered into a Telecommunications Marketing Agreement,
dated as of February 6, 1998 (the "CompuServe Agreement"), with CompuServe, a
wholly owned subsidiary of AOL, under which the Company will provide long
distance telecommunications services to be marketed by CompuServe to all of the
subscribers of CompuServe's online network in substantially the same manner as
under the AOL Agreement. The CompuServe Agreement has an initial term of three
years that can be extended by CompuServe on an annual basis thereafter and is
also subject to earlier termination by CompuServe if the AOL Agreement shall
have terminated upon payment of $10 million to the Company. As with the AOL
Agreement, the Company also has certain rights under the CompuServe Agreement to
offer, on a comparable basis, local and wireless telecommunications services
when available. The Company anticipates that the services will be offered
generally to CompuServe subscribers in the third quarter of 1998.
Under the CompuServe Agreement, which is similar to the AOL Agreement,
the Company services will include provision for online sign-up, call detail and
reports and credit card payment. CompuServe will provide each month, over the
term of the CompuServe Agreement, certain minimum amounts of online and offline
advertising and promotion of the Company services and provide all of its
subscribers with access to a dedicated Company service area online. CompuServe
subscribers who sign up for the telecommunications services will be customers of
the Company, as the carrier providing such services. The Company will provide
marketing payments to CompuServe based on a percentage of the Company's profits
from the services under the CompuServe Agreement (between 50% and 70% depending
on the level of revenues from such services).
Under the CompuServe Agreement, the Company made an initial payment of
$3,500,000 as an advance against profit-sharing payments to be made to
CompuServe; the Company will make an additional, non-refundable payment of
$3,500,000 (the "Base Payment") on the date that the Company's services first
are made generally available to substantially all of the CompuServe subscribers
(but, generally, not later than November 1, 1998); and, 18 months after the date
such services are first made generally available and if the CompuServe Agreement
has not earlier terminated, the Company will make a further advance (the
"Midterm Advance") of an amount up to $7,000,000 and based on the then number of
subscribers to the CompuServe service. The CompuServe Agreement provides that
the initial $3.5 million advance and the Midterm Advance will be offset and
recoverable by the Company through reduction of the profit-based marketing
payments to be made to CompuServe during the initial term of the CompuServe
Agreement or, subject to certain monthly reductions of the amount thereof,
directly by CompuServe upon certain earlier terminations of the CompuServe
Agreement. The Base Payment is generally not recoverable by the Company. Under
the CompuServe Agreement, the Company also agreed to pay to CompuServe a $10 fee
for each new subscriber to the Company's services under the CompuServe Agreement
who subscribes within the first six months after the date that the Company's
services first are made generally available to substantially all of the
CompuServe subscribers and who continues as a subscriber for at least 60 days,
which fees also are not recoverable by the Company. Under the terms of the AOL
Amendment, subscribers to the Company services under the CompuServe Agreement
will be counted as subscribers for purposes of vesting under the AOL
Supplemental Warrant.
In connection with the AOL Agreement, the Company, and AOL jointly
developed the online marketing and advertising for the services, and the Company
and CompuServe will jointly develop the marketing and advertising under the
CompuServe Agreement. The Company provides online customer service as well as
inbound calling customer service to the AOL member base in connection with the
services and will do so for the Compuserve member base. Customer service
representatives for these services are located in the Company's Clearwater,
Florida facility. The Company anticipates that it will incur expenses for the
promotion of the services under the AOL Agreement and for the start-up and
development of the services contemplated in the CompuServe Agreement primarily
during the first half of 1998, including expenses for the continued expansion of
the Clearwater operation, for software programming and for software and hardware
additions to the Company's network, OBN, to expand its capacity for the traffic.
The profitability of the AOL and CompuServe Agreements for the Company
depends on the Company's ability to continue to develop (and, in the case of
CompuServe, to develop) and to maintain online ordering, call detail, billing
and customer services for the AOL and CompuServe members, which will require,
among other things, the ability to identify and employ sufficient personnel
qualified to provide the necessary programming; the ability of the Company and
AOL and CompuServe to work together effectively to
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develop jointly the marketing contemplated by the AOL and CompuServe Agreements;
a rapid response rate to online promotions to AOL's and CompuServe's online
subscribers, most of whom are expected to be potential residential customers
rather than business customers to which Tel-Save has marketed historically; the
Company's ability to expand OBN to accommodate increased traffic levels; and, in
the case of CompuServe, CompuServe's ability to maintain its subscriber base in
light of its recently completed acquisition by AOL. Since the $100 million
initial payment under the AOL Agreement and up to $10.5 million of the payments
that may be made by the Company under the CompuServe Agreement are recoverable
only through the profits from the services under the respective Agreements, to
the extent that the respective Agreement is unsuccessful, such respective
amounts are subject to potential non-recovery or limited recovery by the
Company. The Company currently estimates that between 2% and 6% of AOL's
customers will need to sign up for the Company's long distance service in order
for the Company to break even on its investment in the AOL Agreement.
Partitions
Prior to 1997, the Company primarily marketed its services to small and
medium-sized business end users (i.e., generally businesses with fewer than 200
employees) throughout the United States through independent long distance and
marketing companies known as "partitions." While the Company explored the use of
direct marketing in 1997, it has determined (as described below) to continue to
market its services to small and medium sized business end users primarily
through partitions. Partitions resell and market the Company's products,
allowing the Company to minimize its marketing and end user overhead. Partitions
offer end users a variety of services and rates. As compensation for their
services, partitions generally receive the difference between the amount
received from end users and the amount charged by the Company to the partition
for providing such services. The Company offers customer service to end users,
including end users of certain partitions. Customer service representatives are
located in the Company's facilities in Clearwater, Florida and New Hope,
Pennsylvania.
A substantial number of the Company's partitions have executed
partition agreements with the Company pursuant to which the Company agrees to
provide services utilizing the AT&T network service or OBN and to arrange for
end user billing services at agreed upon prices or discounts. The Company
requires that the partitions adhere to certain Company established guidelines in
marketing the Company's services and comply with federal and state regulations.
These requirements include certain representations by each organization that it
is acting as an independent contractor with regard to the resale of the
Company's services, and not as a joint venture partner, agent or employee of the
Company, along with provisions for the proper completion of forms and other
sales procedures. In addition, payments for long distance services made by end
users are either paid directly into a lock-box controlled by the Company or are
made to the end-user's local exchage carrier ("LEC"), which payments are then
forwarded by a third-party billing company to the Company. The Company's
partition agreements typically run for three years or for the term of the
applicable tariffs, whichever is less. The partitions generally make no minimum
use or revenue commitments to the Company under these agreements with respect to
the resale of services. The agreements also are generally non-exclusive. If the
Company were to lose access to services on the AT&T network or billing services
or experience difficulties with OBN, the Company's agreements with partitions
could be adversely affected.
The Company intends to continue to promote increased marketing
activities of certain of its partitions through advances collateralized by
assets of such partitions. In return for providing such marketing advances, the
Company seeks long-term arrangements with such partitions. In 1997, the Company
entered into long term arrangements with several existing and new partitions.
One partition, Group Long Distance, Inc., accounted for approximately 13% of the
Company's sales in 1997; however, the Company does not expect that any partition
will account for 10% or more of the Company's sales in 1998. In the event that
any of the partitions, and particularly the partition specifically noted above,
were to cease doing business with the Company, the financial condition or
results of operations of the Company could be materially adversely affected.
The Company believes that the discounts it offers partitions and end
users using OBN, together with the functionality and quality of OBN and the
accuracy of the billing services used, will enable it to continue to attract
current and future partitions to OBN. The Company will continue its policy of
advancing funds to most partitions to support their marketing efforts.
Historically, partitions of the Company have continued to do business under
their partition agreements following changes in the Company's service offerings.
Current marketing practices, including the methods and means to convert
a customer's long distance telephone service from one carrier to another, have
recently been subject to increased regulatory review at both the federal and
state levels. See "REGULATION". This increased regulatory review could affect
the current business of existing partitions and also could affect possible
future acquisitions of new business from new partitions or other resellers.
Provisions in the Company's partition agreements mandate compliance by the
partitions with applicable state and federal regulations. A partition's failure
to comply with applicable state and federal regulations could have an adverse
effect on the Company. Such a failure could result in state and
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federal authorities imposing sanctions on a partition (such as restrictions on
the partition's business practices, loss of its right to do business, or fines
or forfeitures) that would hinder the partition's ability to resell the
Company's services or raise its costs of doing so. Such sanctions also could
make it difficult for the Company to engage in an asset sale, merger, or other
transaction with the partition, and might impair any loans that the partition
has outstanding from the Company. State or federal authorities also might
attempt to hold the Company responsible for the partition's misconduct. Because
the Company's partitions are independent carriers and marketing companies, the
Company is unable to control such partitions' activities. The Company is also
unable to predict the extent of its partitions' compliance with applicable
regulations or the effect of such increased regulatory review.
The Company's partitions that resell AT&T long distance service are
under a contractual obligation to the Company to comply with AT&T's guidelines
on the use of the AT&T name and logo in connection with their resale of AT&T
long distance service. AT&T recently announced that it intends to enforce those
guidelines with renewed vigor. A partition's failure to comply with AT&T's
guidelines could have an adverse effect not only on the partition but also on
the Company, which might be sued by AT&T or be subject to increased rates or
loss of service from AT&T.
Colleges and Universities
In late November 1997, the Company acquired Compco, Inc., a provider
of communications software for the college and university marketplace, for $15
million in cash and stock. Compco primarily licenses proprietary communications
software to colleges and universities. This software assists the institution in
its management of the billing, services and facilities related to its
telecommunications network. In addition to the licensing of its telemanagement
software, Compco also offers and provides billing services and training to such
institutions. Compco's customers include approximately 100 academic institutions
in the country. The Company intends to leverage the relationships Compco has
with these institutions by offering bundled communications services to the
college and university market.
Direct Telemarketing
In 1996, Tel-Save began to telemarket its long distance service
directly to small and medium-sized businesses and, in December 1996, acquired
substantially all of the assets, and hired substantially all of the employees,
of American Business Alliance, Inc. ("ABA"), a switchless reseller of long
distance services and a partition of Tel-Save, which acquisition significantly
increased Tel-Save's direct telemarketing capabilities. In the second quarter of
1997, Tel-Save determined to change its business practice and de-emphasize the
use of direct telemarketing to solicit customers for Tel-Save as the carrier,
and, in October 1997, Tel-Save decided to discontinue its internal telemarketing
operations, which were primarily conducted through the ABA business that it had
acquired. Both federal and state officials are tightening the rules governing
the telemarketing of telecommunications services and the requirements imposed on
carriers acquiring customers in that manner. See "REGULATION". Customer
complaints of unauthorized conversion or "slamming" are widespread in the long
distance industry and are beginning to occur with respect to newly competitive
local services. While Tel-Save's discontinuance of its internal telemarketing
operations should reduce its exposure to customer complaints and federal or
state enforcement actions with respect to telemarketing practices, certain state
officials have made inquiries with respect to the marketing of Tel-Save's
services and there is the risk of enforcement actions by virtue of its prior
telemarketing efforts and its ongoing support of its customer/partitions. Some
direct telemarketing is being used in connection with the AOL and CompuServe
Agreements.
INFORMATION AND BILLING SERVICES
The Company has developed and will seek to continue to develop and to
improve systems for customer care and billing services, including online
sign-up, call detail and billing reports and credit card payments. The Company
is currently implementing these technologies in connection with the AOL
Agreement. Any delay or difficulties in developing these systems or in hiring
personnel could adversely affect the success of this service offering and the
offering to AOL subscribers.
The Company also utilizes the billing services of AT&T and ACUS, a
wholly owned strategic business unit of AT&T, as well as the billing services of
the LECs. Detailed call information on the usage of each end user is produced by
AT&T (in the case of the switchless resale business) and by the Company (in the
case of OBN business). In each case, AT&T or the LEC then processes the
information and provides billing information to the Company and bills the end
users. In addition, the Company has developed its own information systems in
order to have its own billing capacity, although the Company has not provided
such direct billing services to end users in the past except in connection with
the online billing area under the AOL Agreement.
The Company provides to each partition computerized management systems
that control order processing, accounts receivable, billing and status
information in a streamlined fashion between the Company and its partitions.
Furthermore, when applicable, the systems interface with the AT&T Provisioning
System and ACUS for order processing and billing services,
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respectively. Enhancements and additional features are provided as needed.
Electronic processing and feature activation are designed to maintain the
Company's goal of minimizing overhead.
The information functions of the system are designed to provide easy
access to all information about an end user, including volume and patterns of
use, which will help the Company and partitions identify value-added services
that might be well suited for that end user. The Company also expects to use
such information to identify emerging end user trends and respond with services
to meet end users' changing needs. Such information also allows the Company and
its partitions to identify unusual or declining use by an individual end user,
which may indicate fraud or that an end user is switching its service to a
competitor. Recently released FCC rules, however, may limit the Company's use of
such customer proprietary network information. See "REGULATION."
ONE BETTER NET ("OBN")
In order to reduce its dependence on AT&T contract tariffs and to
increase its growth opportunities, the Company developed its own
telecommunications network, OBN, which utilizes AT&T (now Lucent) manufactured
switches owned by the Company in conjunction with AT&T-provided lines and
digital cross-connect equipment (herein referred to as "transmission
facilities") and AT&T-provided billing systems that the Company uses pursuant to
agreements with AT&T and ACUS. OBN includes five AT&T (now Lucent) 5ESS-2000
switches, which are generally considered the most reliable switches in the
telecommunications industry. The Company was one of the first installation sites
for AT&T's 5ESS-2000 switching equipment featuring the new Digital Networking
Unit--SONET technology, a switching interface designed to increase the
reliability of the 5ESS-2000 and to provide much greater capacity in a
significantly smaller footprint.
OBN allows the Company to offer long distance services directly to its
end users and partitions throughout the continental United States at rates that
are competitive with or below those offered by the major long distance
providers. OBN also allows the Company to control provisioning of end user
accounts.
The Company's current contract tariffs under which it resells AT&T
services require the Company to pay one all-inclusive "bundled" charge to AT&T
for the delivery of services, including switching and transmission services and
the payment of LEC access fees. As a result of the deployment of OBN, for
customers provisioned on OBN, the Company pays "unbundled" charges consisting of
charges paid directly to the LECs for access charges and, under AT&T contract
tariffs, charges paid to AT&T for use of its network transmission facilities.
The Company pays AT&T "bundled" charges for use of its international facilities
to handle the international portion of a call on OBN. The total cost per call to
the Company for the LEC access fees, the charges for use of AT&T's transmission
facilities and the overhead cost for calls using OBN is less than the per call
cost incurred by the Company as a switchless reseller paying "bundled" charges
to AT&T. LEC access fees represent a substantial portion of the total cost of
providing long distance services. As a result of the Telecommunications Act, it
is generally expected that the entry over time of competitors into LEC markets
will result in lowering of access fees, but there is no assurance that this will
occur. To the extent it does occur, the Company, by using OBN, will receive the
benefit of any future reduction in LEC access fees, which it would not
automatically receive under contract tariffs. See "REGULATION" for a discussion
of universal service contributions imposed on carriers, which may offset some or
all of the savings from lower access charges.
In October 1996, the Company subscribed to a new AT&T contract tariff,
which was amended in December 1996 and May 1997 and which permits the Company to
continue to resell through mid-1998 AT&T long distance services, including AT&T
SDN service and other services, at rates that are more favorable to the Company
than prior tariffs. As a result, the Company decided only to provision new end
users on OBN and to leave existing end users on AT&T service. The 1996 AT&T
contract has enabled the Company to earn higher margins on existing traffic and
minimize possible attrition that might result from moving existing end users
from the AT&T network to OBN. This has permitted 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. See "AT&T CONTRACT TARIFFS."
While the Company expects to continue to offer private line service as
a reseller, in 1998 the Company also will begin to offer private line service
using OBN to new and existing customers.
In order for the Company to provide service over OBN, the Company has
installed and operates, and is responsible for the maintenance of, its own
switching equipment. The Company also has installed lines to connect its OBN
switches to LEC
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switches and is responsible for maintaining these lines. The Company entered
into a contract with GTE with respect to the monitoring, servicing and
maintenance of the switching equipment purchased from AT&T (now Lucent).
Additional management personnel and information systems are required to support
OBN, the costs of which have increased the Company's overhead. Moreover,
operation as a switch-based provider subjects the Company to risk of significant
interruption in the provision of services on OBN in the event of damage to the
Company's facilities (switching equipment or connections to AT&T transmission
facilities) such as could be caused by fire or natural disaster. Such
interruption could have a material adverse impact on the Company's financial
condition and results of operations.
The Company began testing new customer calls over OBN in the third
quarter of 1996. In the fourth quarter of 1996, the Company began provisioning
on a test basis new customer orders on OBN. In early 1997, the Company deployed
OBN. Of the over 1.4 million lines using the Company's services, OBN currently
provides services to approximately one million lines and most of the Company's
new outbound lines are now being provisioned to OBN.
The Company has continued to expand the capacity of OBN to meet its
increased demands and believes that such capacity may be further expanded at
reasonable cost to meet the Company's needs in the foreseeable future, including
under the AOL and CompuServe Agreements. Separately, the Company is operating
under an interim agreement with AT&T to purchase its Carrier Solutions Platform
("CSP") service, subject to either party's right to terminate such agreement.
The Company is negotiating a long term agreement with AT&T for such service. The
CSP service provides OBN with significant additional capacity and enables the
Company to accommodate large numbers of additional customers on OBN by handling
their peak load or overflow traffic.
AT&T CONTRACT TARIFFS
The Company historically has obtained services from AT&T through
contract tariffs and has been able to obtain the services it seeks and to do so
at increasingly favorable contract tariff rates. The deployment of OBN decreases
the Company's dependence on AT&T contract tariffs or other service arrangements.
To the extent the Company will need future service from AT&T, there is no
guarantee the Company will be able to obtain favorable contract tariffs or other
service arrangements, although the Company has been successful in the past in
obtaining such arrangements.
In October 1996, the Company subscribed to a new AT&T contract tariff
("Contract Tariff No. 5776"), which was amended in December 1996 and May 1997
and which 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 network, OBN. The rates
that the Company pays under Contract Tariff No. 5776 are more favorable to the
Company than under previous tariffs. During its term, Contract Tariff No. 5776
enables the Company to minimize possible attrition that might result from moving
existing end users from the AT&T network to OBN. Contract Tariff No. 5776 also
permitted 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. Contract Tariff
No. 5776 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 international
service. The Company can terminate Contract Tariff No. 5776 without liability to
AT&T effective April 30, 1998 if the Company has generated at least $105 million
in usage charges, including at least $15 million in international usage charges;
the Company had exceeded these thresholds by the end of 1997. If minimum usage
requirements are not met, the Company is obligated to pay shortfall fees to AT&T
based on a percentage of the difference between the minimum requirement and the
actual billed usage. In addition, if the contract tariffs with AT&T are
terminated prior to the end of the contract tariff term, either by the Company
or by AT&T for non-payment, the Company may be liable for "termination with
liability" or "termination charges" and subject to material monetary
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penalties. The Company also may discontinue Contract Tariff No. 5776 without
liability if, prior to April 30, 1998, the Company and AT&T enter into a new
contract tariff or another contract with a revenue commitment of at least $7.5
million per month and a term of at least the difference between 18 months and
the number of months that the Company subscribed to the contract tariff,
provided that the Company must purchase or pay for AT&T services under the
contract tariff of at least $6.7 million per month for the months prior to such
termination, including $1 million per month of international usage.
The Company is considering terminating Contract Tariff No. 5776 as of
April 30, 1998, since, based on its traffic growth to date, the Company has a
one-time opportunity to do so without termination liability and the Company
believes that it will be able to replace the services thereunder on more
favorable terms. Such termination would free the Company from the minimum usage
and other financial obligations to AT&T under that contract tariff. It also,
however, would require the Company to make other arrangements to obtain critical
services for the Company's operation and provision of service to its customers
with AT&T or with another carrier, either another large customer of AT&T or
another facilities-based carrier. The Company is in the process of negotiating a
new Master Carrier Agreement (MCA) with AT&T which would replace all of the
Company's existing tariffs with AT&T (including the interim agreement for
provision of CSP services) and is expected to include certain minimum usage
commitments. The Company has also engaged in discussions with other carriers to
explore alternative arrangements. There can be no assurance that the Company
will be successful in these negotiations with AT&T or other carriers. Should the
Company terminate Contract Tariff No. 5776 and not reach a new agreement with
AT&T by such termination, the Company could be forced to move its traffic to
other AT&T tariffs at rates significantly higher than the Company is paying
today. If the Company concludes an agreement with another carrier, the rates
could be higher or lower than the Company is paying today. If the other carrier
provides these services to the Company over its own network, end-user customers
of the Company who want to keep their service on an AT&T network-based carrier,
and partitions who want to remain on an AT&T network-based carrier, may choose
to terminate their service with the Company. In that circumstance, the Company
may also be obliged to notify customers of a change in underlying
facilities-based carrier and the Company's billing arrangements with AT&T and
ACUS would have to be replaced.
As a nondominant carrier, AT&T is subject to the same regulations as
other long distance service providers. AT&T remains subject to Title II of the
Communications Act (47 U.S.C. Section 151, et seq.) and is required to offer
service under rates, terms and conditions that are just, reasonable and not
unreasonably discriminatory. AT&T is also subject to the FCC's complaint process
and is required to file tariffs, though under streamlined procedures. In
addition, AT&T is also required to give notice to the FCC and to affected
customers prior to discontinuing, reducing, or impairing any services.
COMPETITION
The long distance telecommunications industry is highly competitive and
affected by the introduction of new services by, and the market activities of,
major industry participants. Competition in the long distance business is based
upon pricing, customer service, billing services and perceived quality. The
Company competes against various national and regional long distance carriers
composed of both facilities-based providers and switchless resellers offering
essentially the same services as the Company. Several of the Company's
competitors are substantially larger and have greater financial, technical and
marketing resources. Although the Company believes it has the human and
technical resources to pursue its strategy and compete effectively in this
competitive environment, its success will depend upon its continued ability to
provide profitably high quality, high value services at prices generally
competitive with, or lower than, those charged by its competitors.
End users are not obligated to purchase any minimum usage amount and
can discontinue service, without penalty, at any time. There can be no assurance
that end users will continue to buy their long distance telephone service
through the Company or through partitions that purchase service from the
Company. In the event that a significant portion of the Company's end users
decides to purchase long distance service from another long distance service
provider, there can be no assurance that the Company will be able to replace its
end user base from other sources.
A high level of attrition is inherent in the long distance industry,
and the Company's revenues are affected by such attrition. Attrition is
attributable to a variety of factors, including termination of customers by the
Company for non-payment and the initiatives of existing and new competitors as
they engage in, among other things, national advertising campaigns,
telemarketing programs and cash payments and other incentives.
AT&T and other carriers have announced new price plans aimed at
residential customers (the Company's primary target audience under the AOL
Agreement) with significantly simplified rate structures, 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
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the small to medium-sized businesses that the Company also serves. Additional
pricing pressure may come from a new technology, Internet telephony, which uses
packet switching to transmit voice communications at a cost today apparently
below that of traditional circuit-switched long distance service. While Internet
telephony is not yet available in all areas, requires the dialing of additional
digits, and produces sound quality inferior to traditional long distance
service, it could eventually be perceived as a substitute for traditional long
distance service, and put additional downward pricing pressure on long distance
rates. Although OBN makes the Company more price competitive, a reduction in
long distance prices still may have a material adverse impact on the Company's
profitability.
One of the Company's principal competitors, AT&T, is also a major
supplier of services to the Company. The Company links its switching equipment
with transmission facilities and services purchased or leased from AT&T and
resells services obtained from AT&T. The Company also utilizes AT&T and ACUS to
provide billing services. There can be no assurance that either AT&T or ACUS
will continue to offer services to the Company at competitive rates or on
attractive terms.
The Telecommunications Act of 1996 (the "Telecommunications Act") was
intended to introduce more competition to U.S. telecommunications markets. The
legislation opens the local services market by requiring LECs to permit
interconnection to their networks and establishing, among other things, LEC
obligations with respect to access, resale, number portability, dialing parity,
access to rights-of-way, and mutual compensation. The legislation also codifies
the LECs' equal access and nondiscrimination obligations and preempts most
inconsistent state regulation. The Company in the future may take advantage of
the opportunities provided by the Telecommunications Act for competition in the
local services market by reselling local services.
The Telecommunications Act also was intended to increase competition in
the market for long distance services by overturning the prohibition in the
Consent Decree on RBOC provision of interLATA interexchange telecommunications
services. See "INDUSTRY BACKGROUND." Under Section 271 of the Telecommunications
Act, RBOCs may provide certain interLATA services immediately, and other
interLATA services after state and federal regulators certify that the RBOCs
have satisfied certain conditions. No RBOC has yet been certified by both state
and federal regulators as having satisfied the conditions for provision of all
interLATA services. However, the FCC recently has indicated that it will work
more cooperatively with the RBOCs in helping them to satisfy the conditions
necessary for certification. Several members of Congress also have expressed
dissatisfaction over the slow pace of certification, and legislation is being
considered to speed up RBOC entry into the long distance market. In addition,
one federal district court has found that the restrictions on RBOC provision of
interLATA services are an unconstitutional bill of attainder, but this decision
has been stayed and is under appeal.
RBOC entry into the long distance market means that the Company will
face new competition from well-capitalized, well-known companies. The
Telecommunications Act includes certain safeguards against anticompetitive
conduct by the RBOCs in the provision of interLATA service. Anticompetitive
conduct could result, among other things, from a RBOC's access to all
subscribers on its existing network as well as its potentially lower costs
related to the termination and origination of calls within its territory. It is
impossible to predict whether such safeguards will be adequate to protect
against anticompetitive conduct by the RBOCs and the impact that any
anticompetitive conduct would have on the Company's business and prospects.
Because of the name recognition that the RBOCs have in their existing markets
and the established relationships that they have with their existing local
service customers, and their ability to take advantage of those relationships,
as well as the possibility of interpretations of the Telecommunications Act
favorable to the RBOCs, it may be more difficult for other providers of long
distance services, such as the Company, to compete to provide long distance
services to RBOC customers. At the same time, as a result of the
Telecommunications Act, RBOCs have become potential customers for the Company's
long distance services.
Consolidation and alliances across geographic regions (e.g., Bell
Atlantic/Nynex and SBC Communications Inc./Pacific Telesis Group) and in the
interexchange market (e.g., WorldCom/MCI domestically and France
Telecom/Deutsche Telekom/Sprint internationally) and across industry segments
(e.g., WorldCom/MFS/UUNet and AT&T/Teleport) may also intensify competition in
the telecommunications market from significantly larger, well-capitalized
carriers and materially adversely affect the position of the Company. Such
consolidation and alliances are providing some of the Company's competitors with
the capacity to offer a wide range of services, including local, long distance,
and wireless telephone service, as well as Internet access. The Company, which
currently offers only long distance service, may be at a competitive
disadvantage because of its inability to offer so-called "one stop shopping."
The Company's online marketing of long distance service is spawning
imitators that are attempting to copy its major features, including online
sign-up and billing and automatic payment through a credit card. The Company
cannot predict what effect these competitors will have on its online marketing
of long distance service.
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INDUSTRY BACKGROUND
The $82 billion U.S. long distance industry is dominated by the
nation's four largest long distance providers, AT&T, MCI, Sprint and WorldCom,
which together generated approximately 83% of the aggregate revenues of all U.S.
long distance interexchange carriers in 1996. Other long distance companies,
some with national capabilities, accounted for the remainder of the market.
Based on published FCC estimates, toll service revenues of U.S. long distance
interexchange carriers have grown from $38.8 billion in 1984 to $82 billion in
1996. The aggregate market share of all interexchange carriers other than AT&T,
MCI and Sprint has grown from 2.6% in 1984 to 22.5% in 1996. During the same
period, the market share of AT&T declined from 90.1% to 47.9%.
Prior to the Telecommunications Act, the long distance
telecommunications industry had been principally shaped by a court decree
between AT&T and the United States Department of Justice, known as the
Modification of Final Judgment (the "Consent Decree") that in 1984 required the
divestiture by AT&T of its 22 Bell operating companies and divided the country
into some 200 Local Access and Transport Areas ("LATAs"). The 22 operating
companies, which were combined into the RBOCs, were given the right to provide
local telephone service, local access service to long distance carriers and
intraLATA toll service (service within LATAs), but were prohibited from
providing interLATA service (service between LATAs). The right to provide
interLATA service was maintained by AT&T and other carriers.
To encourage the development of competition in the long distance
market, the Consent Decree and the FCC required most LECs to provide all
carriers with access to local exchange services that is "equal in type, quality
and price" to that provided to AT&T and with the opportunity to be selected by
customers as their preferred long distance carrier. These so-called "equal
access" and related provisions are intended to prevent preferential treatment of
AT&T. Further market opening, access and non-discrimination provisions were
built into the Telecommunications Act.
Regulatory, legislative, judicial and technological factors have helped
to create the foundation for smaller companies to emerge as competitive
alternatives to AT&T, MCI, and Sprint for long distance telecommunication
services. The FCC requires that AT&T not restrict the resale of its services,
and the Consent Decree, the Telecommunications Act and regulatory proceedings
have ensured that access to LEC networks is, in most cases, available to all
long distance carriers.
Long distance companies that have their own transmission facilities and
switches, such as AT&T, are referred to as facilities-based carriers.
Facilities-based carriers are switch-based carriers, meaning that they have at
least one switch to direct their long distance traffic. Nonfacilities-based
carriers either (i) depend upon facilities-based carriers for switching and
transmission facilities ("switchless resellers") or (ii) install and operate
their own switches but depend on facilities-based carriers for transmission
facilities ("switch-based resellers").
The relationship between resellers and the major long distance carriers
is predicated primarily upon the fact that the pricing strategies and cost
structures of the major long distance carriers have resulted historically in
their charging higher rates to the small to medium-sized business customer.
Small to medium-sized business customers typically are not able to make the
volume commitments necessary to negotiate reduced rates under individualized
contracts. By committing to large volumes of traffic, the reseller is
guaranteeing traffic to the major long distance carrier but the major long
distance carrier is relieved of the administrative burden of qualifying and
servicing large numbers of medium to small accounts. The successful reseller has
lower overhead costs and is able to market efficiently the long distance
product, process orders, verify credit and provide customer service to large
numbers of accounts.
REGULATION
The Company's provision of communications services is subject to
government regulation. Federal law regulates interstate and international
telecommunications, while states have jurisdiction over telecommunications that
originate and terminate within the same state. Changes in existing policies or
regulations in any state or by the federal government could
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materially adversely affect the Company's financial condition or results of
operations, particularly if those policies make it more difficult for the
Company to obtain service from AT&T or other long distance companies at
competitive rates, make it more difficult for customers to change carriers or
otherwise increase the cost and regulatory burdens of marketing and providing
service. There can be no assurance that the regulatory authorities in one or
more states or the FCC will not take action having an adverse effect on the
business or financial condition or results of operations of the Company.
Regulatory action by the FCC or the states also could adversely affect the
partitions, or otherwise increase the partitions' cost and regulatory burdens of
marketing and providing long distance services.
The Company is classified by the FCC as a nondominant carrier. After
the recent reclassification of AT&T as nondominant, only the LECs are classified
as dominant carriers among domestic carriers. As a consequence, the FCC
regulates many of the rates, charges, and services of the LECs to a greater
degree than the Company's. Because AT&T is no longer classified as a dominant
carrier, certain pricing restrictions that formerly applied to AT&T have been
eliminated, which could make it easier for AT&T to compete with the Company for
low volume long distance subscribers.
The FCC generally does not exercise direct oversight over charges for
service of nondominant carriers, although it has the statutory power to do so.
Nondominant carriers are required by statute to offer interstate services under
rates, terms, and conditions that are just, reasonable and not unreasonably
discriminatory. The FCC has the jurisdiction to act upon complaints filed by
third parties, or brought on the FCC's own motion, against any common carrier,
including nondominant carriers, for failure to comply with its statutory
obligations. Nondominant carriers have been required to file tariffs listing the
rates, terms and conditions of service, which were filed pursuant to streamlined
tariffing procedures. The FCC also has the authority to impose more stringent
regulatory requirements on the Company and change its regulatory classification
from nondominant to dominant. In the current regulatory atmosphere, the Company
believes, however, that the FCC is unlikely to do so.
The FCC imposes only minimal reporting, accounting and record-keeping
obligations. International nondominant carriers, including the Company, must
maintain international tariffs on file with the FCC. The FCC has issued an order
requiring non-dominant carriers to withdraw their domestic tariffs, but as of
the date hereof, a court has stayed the FCC's order. The Company currently has
two tariffs on file with the FCC. Although the tariffs of nondominant carriers,
and the rates and charges they specify, are subject to FCC review, they are
presumed to be lawful and are seldom contested. The Company is permitted to make
tariff filings on a single day's notice and without cost support to justify
specific rates. IXCs are also subject to a variety of miscellaneous regulations
that, for instance, govern the documentation and verifications necessary to
change a subscriber's long distance carrier, limit the use of 800 numbers for
pay-per-call services, require disclosure of certain information if operator
assisted services are provided and govern interlocking directors and management.
The Telecommunications Act grants explicit authority to the FCC to "forbear"
from regulating any telecommunications services provider in response to a
petition and if the agency determines that enforcement is unnecessary and the
public interest will be served.
At present, the FCC exercises its regulatory authority to set rates
primarily with respect to the rates of dominant carriers, and it has
increasingly relaxed its control in this area. Even when AT&T was classified as
a dominant carrier, the FCC most recently employed a "price cap" system, which
essentially exempted most of AT&T's services, including virtually all of its
commercial and 800 services, from traditional rate of return regulation because
the FCC believes that these services were subject to adequate competition.
Similarly, the FCC is in the process of changing the regulation and pricing of
access charges including the local transport component of access charges (i.e.,
the fee for use of the LEC transmission facilities connecting the LECs' central
offices and the IXC's access points). In addition, the LECs have been afforded a
degree of pricing flexibility in setting interstate access charges where
adequate competition exists. The impact of such repricing and pricing
flexibility on IXCs, such as the Company, cannot be determined at this time.
The Company is subject to varying levels of regulation in the states in
which it is currently authorized to provide intrastate telecommunications
services. The vast majority of the states require the Company to apply for
certification to provide intrastate telecommunications services, or at least to
register or to be found exempt from regulation, before commencing intrastate
service. The vast majority of states also require the Company to file and
maintain detailed tariffs listing its rates for intrastate service. Many states
also impose various reporting requirements and/or require prior approval for
transfers of control of certified carriers, corporate reorganizations,
acquisitions of telecommunications operations, assignments of carrier assets,
including subscriber bases, carrier stock offerings and incurrence by carriers
of significant debt obligations. Certificates of authority can generally be
conditioned, modified, canceled, terminated or revoked by state regulatory
authorities for failure to comply with state law and the rules, regulations and
policies of the state regulatory authorities. Fines and other penalties,
including the return of all monies received for intrastate traffic from
residents of a state, may be imposed for such violations. In certain states,
prior regulatory approval may be required for acquisitions of telecommunications
operations. Currently, the Company is certificated and tariffed to provide
intrastate interLATA service in substantially all states where such
authorization can be obtained.
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The Company's prior direct marketing efforts, the Company's marketing
of its AOL and CompuServe-based services and the marketing efforts of the
Company's partitions require compliance with relevant federal and state
regulations that govern
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direct sales of telecommunications services. FCC rules prohibit switching a
customer from one long distance carrier to another without the customer's
consent and specify how that consent can be obtained and must be verified. Most
states also have consumer protection laws that further define the framework
within which the Company's marketing activities must be conducted. The
constraints of federal and state restrictions could impact the success of the
Company's direct marketing efforts.
Federal and state restrictions on the marketing of telecommunications
services are becoming stricter in the wake of widespread consumer complaints
throughout the industry about "slamming" (the unauthorized conversion of a
customer's preselected telecommunications carrier) and "cramming" (the
unauthorized provision of additional telecommunications services). Section 258
of the Telecommunications Act of 1996 authorized strengthened penalties against
slamming, and the FCC is expected shortly to issue rules implementing Section
258 and overhauling federal rules on the verification of orders for
telecommunications services. Congress is considering additional legislation that
would further increase penalties for slamming and cramming. Several states also
have been active in combating abusive marketing practices through new
legislation and regulation, as well as through enhanced enforcement activities.
In addition, to combat slamming, many local exchange carriers have initiated
"PIC freeze" programs that, once selected by the customer, then require a
customer seeking to change long distance carriers to contact the local carrier
directly in lieu of having the long distance carrier contact the local carrier
on behalf of the customer. While the Company vigorously supports curbs on
abusive marketing practices, such measures, unless carefully designed, can have
the incidental effect of entrenching incumbent carriers and hindering the
emergence of new competitors, such as the Company.
Statutes and regulations designed to protect consumer privacy also may
have the incidental effect of hindering the growth of newer telecommunications
carriers, such as the Company. The FCC recently released rules to implement
Section 222 of the Telecommunications Act of 1996 that severely restrict the use
of "customer proprietary network information" (information that a carrier
obtains about its customers through their use of the carrier's services). These
rules may make it more difficult for the Company to market additional services
(such as local and wireless) to its existing customers if and when the Company
begins to offer such services.
The FCC has announced rules implementing Section 254 of the
Telecommunications Act of 1996 that require the Company and other providers of
telecommunications services to contribute to the universal service fund, which
helps to subsidize the provision of local telecommunications services and other
services to low-income consumers, schools, libraries, health care providers, and
rural and insular areas that are costly to serve. The Company's required
contributions to the universal service fund could increase over time, and some
of the Company's potential competitors (such as providers of Internet telephony)
are not currently, and in the future may not be, required to contribute to the
universal service fund.
To the extent that the Company makes additional telecommunications
service offerings, the Company may encounter additional regulatory constraints.
EMPLOYEES
As of December 31, 1997, the Company employed 235 persons, of whom 5
were engaged in marketing and sales, 179 were engaged in partition and end user
support, and 51 were engaged in systems development, finance, administration and
management. None of the Company's employees is covered by collective bargaining
agreements. The Company considers relations with its employees to be good.
13
<PAGE>
GLOSSARY
ACUS: AT&T College and University Systems, a wholly owned strategic business
unit of AT&T Corp.
AIN: Advanced Intelligent Network.
Consent Decree: A 1984 U.S. Department of Justice decree that, among other
things, ordered AT&T to divest its wholly-owned local Bell operating
subsidiaries.
End users: Customers that utilize long distance telephone services.
Equal Access: Connection provided by a LEC permitting a customer to be
automatically connected to the IXC of the customer's choice when the customer
dials "1."
Facilities-based provider: Long distance service providers who own transmission
facilities.
5ESS-2000: The switching equipment manufactured by AT&T (now Lucent), which the
Company acquired from AT&T (now Lucent).
FCC: Federal Communications Commission.
Inbound "800" Service: A service that bills long distance telephone charges to
the called party.
IXC: Interexchange carrier, a long distance carrier providing services between
local exchanges.
LATA: Local Access and Transport Areas, the approximately 200 geographic areas
defined pursuant to the Consent Decree between which the RBOCs are generally
prohibited from providing long distance service.
LEC: Local Exchange Carrier, a company providing local telephone services.
MEGACOM: An outbound long distance service offering by AT&T that requires
dedicated access.
MEGACOM 800: An inbound 800 service offering provided by AT&T that requires
dedicated access.
MCI: MCI Communications Corporation.
MLCP: AT&T's multi-location calling plan (a discounted long distance program).
Network: An integrated system composed of switching equipment and transmission
facilities designed to provide for the direction, transport and recording of
telecommunications traffic.
Nonfacilities-based provider: Long distance service providers that do not own
transmission facilities.
OBN: One Better Net, the Company's nationwide long distance network.
Partition: An independent long distance and marketing company that contracts
with the Company to purchase or otherwise provide to end users the long distance
services provided by the Company.
Private Line: A full-time leased line directly connecting two points.
Provisioning: The process of initiating a carrier's service to an end user.
PUC: A state regulatory body empowered to establish and enforce rules and
regulations governing public utility companies and others, such as the Company
in many of its state jurisdictions.
RBOC: Regional Bell Operating Company -- Any of seven regional Bell holding
companies that the Consent Decree established to serve as parent companies for
the Bell operating companies.
14
<PAGE>
Readyline: An Inbound 800 service offering provided by AT&T.
SDN: The AT&T Software Defined Network.
Sprint: Sprint Corporation.
Switching Equipment: A computer that directs telecommunication traffic in
accordance with programmed instructions.
Tariff: The schedule of rates and regulations set by communications common
carriers and filed with the appropriate Federal and state regulatory agencies;
the published official list of charges, terms and conditions governing provision
of a specific communication service or facility, which functions in lieu of or
with a contract between the user and the supplier or carrier.
15
<PAGE>
ITEM 2. PROPERTIES
The Company owns the 24,000 square foot facility in New Hope,
Pennsylvania which serves as the Company's headquarters. The Company leases
properties in the cities in which OBN switches have been installed.
With respect to the Company's customer service operations with respect
to the AOL Agreement, the Company owns the 32,000 square foot facility located
in Clearwater, Florida.
With respect to the Company's Symetrics operations, Symetrics'
corporate office and primary engineering and manufacturing facility is a 40,000
square foot building, which it owns, on approximately five acres in Melbourne,
Florida. Symetrics uses 40% of this facility for its own business and leases
and/or offers for lease the balance of the building for terms typically of one
to five years. Rental rates charged by Symetrics are consistent with rates for
similar type buildings in the area. The Company also owns the adjoining property
to the east which consists of a 50,000 square foot building on a five-acre lot.
The Company leases a 14,500 square foot building for $6,360 per month, with 27
months remaining on the term thereof, for the Symetrics commercial contract
manufacturing operations. Symetrics' subsidiary leases a 14,428 square foot
building for approximately $7,500 per month, with 47 months remaining on the
lease.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to certain legal actions arising in the ordinary
course of business. The Company believes that the ultimate outcome of these
actions will not result in any liability that would have a material adverse
effect on the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Stockholders was held on
December 1, 1997 ("Annual Meeting");
(b) Not applicable;
(c) At the Annual Meeting, the stockholders of the Company
considered and approved the following proposals:
(i) At the Annual Meeting, the stockholders approved a
proposal to amend the Company's Certificate of
Incorporation to increase the number of shares of
Common Stock that may be issued by the Company from
100,000,000 to 300,000,000. This proposal received
51,571,254 votes in favor, 4,483,173 votes opposed
such proposal and 27,485 votes abstained from such
matter.
(ii) Election of Directors. The following sets forth the
nominees who were elected directors of the Company
for the term expiring in the year indicated as well
as the number of votes cast for, against or withheld:
<TABLE>
<CAPTION>
VOTES
-----
Term (year expires) Name For Against Withheld
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 Gary W. McCulla 55,981,895 0 100,017
2000 George P. Farley 55,981,952 0 99,960
1999 Harold First 55,981,952 0 99,960
</TABLE>
(iii) At the Annual Meeting the stockholders approved the
appointment of BDO Seidman LLP as independent
certified public accounts of the Company. The
appointment received 56,047,874 votes in favor, 6,180
votes in opposition and 27,858 votes abstained from
such matter.
16
<PAGE>
(iv) At the Annual Meeting the stockholders approved a
proposal to approve the grant of an option to
purchase 800,000 shares of the Company's Common Stock
to Edward B. Meyercord, III. This proposal received
55,776,343 votes in favor, 273,819 votes in
opposition and 31,750 votes abstained from such
matter.
17
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- --------------------------------------------------------------
<S> <C> <C>
Daniel Borislow 36 Chairman of the Board, Chief Executive Officer and Director
Gary W. McCulla 38 President and Director of Sales and Marketing and Director
Emanuel J. DeMaio 38 Chief Operations Officer and Director
George P. Farley 59 Chief Financial Officer, Treasurer and Director
Edward B. Meyercord, III 32 Executive Vice President, Marketing and Corporate Development
Mary Kennon 38 Director of Customer Care and Human Resources
Aloysius T. Lawn, IV 39 General Counsel and Secretary
Kevin R. Kelly 33 Controller
</TABLE>
DANIEL BORISLOW. Mr. Borislow founded the Company and has served as a
director and as Chief Executive Officer of the Company since its inception in
1989. Prior to founding the Company, Mr. Borislow formed and managed a cable
construction company.
GARY W. MCCULLA. Mr. McCulla currently serves as President and Director
of Sales and Marketing. In 1991, Mr. McCulla founded GNC and was its President.
Until March 1994, GNC was a privately-held independent marketing company and one
of the Company's partitions. At that time, the Company acquired certain assets
of GNC.
EMANUEL J. DEMAIO. Mr. DeMaio joined the Company in February 1992 and
currently serves as Chief Operations Officer. Prior to joining the Company, from
1981 through 1992, Mr. DeMaio held various technical and managerial positions
with AT&T.
GEORGE P. FARLEY. Mr. Farley became Chief Financial Officer and
Treasurer of Tel-Save effective October 29, 1997. Mr. Farley is formerly Group
Vice President of Finance/Chief Financial Officer of Twin County Grocers, Inc.
("Twin County"), a food distribution company. Prior to joining Twin County in
September 1995, Mr. Farley was a partner of BDO Seidman, LLP, where he had
served as a partner since 1974.
EDWARD B. MEYERCORD, III. Mr. Meyercord joined the Company in September
1996 and currently serves as Executive Vice President, Marketing and Corporate
Development. From 1993 until joining the Company, Mr. Meyercord worked in the
corporate finance department of Salomon Brothers, where he held various
positions, the most recent of which was Vice President. Prior to joining Salomon
Brothers, Mr. Meyercord worked in the corporate finance department at Paine
Webber Incorporated.
MARY KENNON. Ms. Kennon joined the Company in October 1994 and
currently serves as Director of Customer Care and Human Resources. Prior to
joining the Company, from 1984 through 1994, Ms. Kennon held various managerial
positions with AT&T.
ALOYSIUS T. LAWN, IV. Mr. Lawn joined the Company in January 1996 and
currently serves as General Counsel and Secretary of the Company. Prior to
joining the Company, from 1985 through 1995, Mr. Lawn was an attorney in private
practice.
KEVIN R. KELLY. Mr. Kelly joined the Company in April 1994 and
currently serves as Controller. From 1987 to 1994, Mr. Kelly held various
managerial positions with a major public accounting firm. Mr. Kelly is a
certified public accountant.
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, $.01 par value per share ("Common Stock"),
is traded on the Nasdaq National Market, and high and low quotations listed
below are actual sales prices as quoted in the Nasdaq National Market under the
symbol "TALK." The price per share in the following table sets forth the high
and low price in the Nasdaq National Market for the quarter indicated as
reported by Bloomberg L.P.:
<TABLE>
<CAPTION>
Price Range of Common Stock
High Low
---- ---
<S> <C> <C>
1995
First Quarter (from September 20, 1995) $ 5 21/64 $ 4 27/64
1996
First Quarter 8 7/16 4 5/64
Second Quarter 11 7/8 8 1/4
Third Quarter 14 3/4 9 5/8
Fourth Quarter 14 1/2 10 3/8
1997
First Quarter 20 1/2 12 5/8
Second Quarter 17 1/4 13 9/16
Third Quarter 24 1/16 14 1/4
Fourth Quarter 26 1/16 16 5/16
1998
First Quarter (through March 30, 1998) 30 19 1/4
</TABLE>
As of March 30, 1998, there were approximately 299 record holders of
Common Stock.
The Company has never declared or paid any cash dividends on its
capital stock. The Company currently intends to retain any future earnings to
finance the growth and development of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
On November 26, 1997, the Company acquired all of the outstanding
shares of Compco for $15,000,000, comprised of a cash payment of $7,500,000 and
the issuance to Compco's stockholders of 339,982 shares of the Company's Common
Stock. The Company believes that such sale of stock was exempt from registration
under Section 4(2) under the Securities Act.
On December 10, 1997, the Company sold $200,000,000 aggregate principal
amount of 5% Convertible Subordinated Notes due 2004 (the "5% Notes") to Smith
Barney Inc., Deutsche Morgan Grenfell Inc. and UBS Securities LLC, who acted as
Initial Purchasers in an offering relying on the exemption in ss. 4(2) of the
Securities Act of 1933, as amended. Proceeds to the Company were $195,000,000.
The 5% Notes are convertible, at the option of the holder thereof, at any time
after 90 days following the date of issuance thereof and prior to maturity, into
shares of Common Stock at a conversion price of $25.47, subject to adjustment in
certain events.
19
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data should be read in conjunction
with, and are qualified in their entirety by, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Sales $304,768 $232,424 $180,102 $82,835 $31,940
Cost of sales 355,169 200,597 156,121 70,104 26,715
Gross profit (loss) (50,401) 31,827 23,981 12,731 5,225
Selling, general and administrative
expenses 34,650 10,039 6,280 3,442 2,060
Operating income (loss) (85,051) 21,788 17,701 9,289 3,165
Investment and other income, net 50,715 10,585 331 66 108
Income (loss) before income taxes (34,336) 32,373 18,032 9,355 3,273
Provision (benefit) for income taxes(1) (13,391) 12,205 7,213 3,742 1,309
Net income (loss) (1) $(20,945) $ 20,168 $ 10,819 $ 5,613 $ 1,964
Net income (loss) per share - Basic (1) $ (0.33) $ 0.38 $ 0.34 $ 0.20 $ 0.07
Weighted average common shares
outstanding-Basic 64,168 52,650 31,422 28,650 28,650
Net income (loss) per share - Diluted(1) $ (0.33) $ 0.35 $ 0.32 $ 0.18 $ 0.07
Weighted average common and common
equivalent shares outstanding -Diluted 64,168 57,002 33,605 30,663 29,452
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheets Data:
Working capital $634,788 $175,597 $38,171 $12,265 $4,502
Total assets 814,891 257,008 71,388 21,435 6,694
Convertible debt 500,000 -- -- -- --
Total stockholders' equity 222,828 230,720 41,314 14,042 4,687
</TABLE>
- ----------
(1) For the years and period ended December 31, 1993, 1994 and September 19,
1995, the Predecessor Corporation elected to report as an S corporation
for federal and state income tax purposes. Accordingly, the Predecessor
Corporation's stockholders included their respective shares of the
Company's taxable income in their individual income tax returns. The pro
forma income taxes reflect the taxes that would have been accrued if the
Company had elected to report as a C corporation. See Note 12 to the
Consolidated Financial Statements.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements included elsewhere in this Form 10-K.
OVERVIEW
In 1997, the Company raised approximately $500 million in connection
with two private placements of convertible notes. In addition, as part of its
efforts to expand its business into the online market, the Company entered into
the AOL Agreement, under which the Company provides long distance
telecommunications services to be marketed by AOL. The Company's results of
operations for 1997 were negatively impacted by the pre-tax charges of $60.7
million primarily related to the AOL Agreement, $30.0 million primarily related
to the restructuring of its sales and marketing efforts and $11.5 million
primarily as a result of the Company's change in accounting for customer
acquisition costs. These charges were offset by $32 .1 million of other income,
net of related costs, associated with the break-up of a proposed merger between
the Company and Shared Technologies Fairchild, Inc. ("STF").
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
financial data as a percentage of sales:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 116.5 86.3 86.7
----- ----- -----
Gross profit (loss) (16.5) 13.7 13.3
Selling, general and administrative expenses 11.4 4.3 3.5
----- ----- -----
Operating income (loss) (27.9) 9.4 9.8
Investment and other income, net 16.6 4.5 0.2
----- ----- -----
Income (loss) before income taxes (11.3) 13.9 10.0
Provision (benefit) for income taxes (4.4) 5.2 4.0(A)
----- ----- -----
Net income (loss) (6.9)% 8.7% 6.0%
===== ===== =====
</TABLE>
- ----------
(A) Pro forma tax provisions have been calculated as if the Company's results
of operations were taxable as a C corporation (the Company's current tax
status) for the year ended December 31, 1995. Prior to September 20, 1995,
the Company was an S Corporation with all earnings taxed directly to its
shareholders.
21
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Sales. Sales increased by 31.1% to $304.8 million in 1997 from $232.4
million in 1996. The increase in sales resulted primarily from the marketing of
the Company's OBN services and the addition of new partitions. One partition,
Group Long Distance Inc., accounted for approximately 13% of the Company's sales
in 1997.
Although the Company expects sales to increase by virtue of the AOL
Agreement and, based on its experience to date, to have attracted approximately
1,000,000 lines to its service by June 30, 1998 as a result of its marketing
campaign under the AOL Agreement in view of the intense competition in this
industry, there can be no assurance that the Company will increase sales on a
quarter-to-quarter or year-to-year basis.
Cost of Sales. The Company's cost of sales increased by 77.1% to $355.2
million in 1997 from $200.6 million in 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 3), $60.7 million primarily
related to the AOL Agreement (Note 4) and $30.0 million primarily related to the
restructuring of its sales and marketing efforts (Note 3).
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.
During 1997, the Company acquired most of the services purchased from
AT&T for resale or use in OBN under AT&T Contract Tariff No. 5776, which was
entered into in late 1996 and provides rates that are more favorable than under
previous tariffs. The Company has the opportunity to terminate this AT&T tariff
without termination liability effective as of April 30, 1998 and currently
expects it will do so since it believes that it can replace these services at
more favorable rates. While the Company is currently negotiating a new master
services contract with AT&T, which would replace all of the Company's existing
AT&T tariffs with what the Company expects would be lower rate tariffs, there
can be no assurance that such agreement can be reached. If the Company
terminates Contract Tariff No. 5776 and is unsuccessful in reaching a more
favorable agreement with AT&T, it would be required to pay more to obtain these
services from AT&T or negotiate an agreement with another carrier (either
another large customer of AT&T or another facilities-based carrier) which may be
at rates higher or lower than the Company is paying today.
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 significantly above
the levels historically experienced by the Company as a switchless reseller of
AT&T services. However, these per call costs, in combination with "unbundled"
charges paid to LECs and AT&T, were, in 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 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 (See Note 4). Of the prepaid AOL marketing
costs, approximately $57.0 million was charged to expense in 1997. The remaining
portion of the prepaid AOL marketing costs (approximately $63.6 million at
December 31, 1997) 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 may incur up to $100 million in additional AOL
marketing expenses in 1998 for such marketing efforts as direct mail, media
campaigns and special pricing and other promotions.
22
<PAGE>
The Company has traditionally operated primarily as a wholesale
reseller of long distance services. With the introduction of the AOL Agreement,
the Company has begun to focus on a more retail-oriented business plan. As
discussed above, the Company has incurred, and expects to continue to incur,
significant upfront expenses for marketing under the AOL Agreement, the revenues
from which may not be realized for some period of time after the expenditures.
In addition, approximately 15-20% of the orders under the AOL Agreement have
required special attention by the Company because of PIC freezes imposed by the
regional Bell operating companies. See "ITEM 1--BUSINESS--REGULATION." As the
Company focuses more on the retail market in 1998, continuing its activities
under the AOL and CompuServe Agreements and venturing into other
telecommunications services such as dial-around and local service, with the
increased development and promotional expenses, such as special pricing and
other promotion and retention devices, entailed in retail marketing and the
greater time period between expenditures and resulting revenues, the Company
anticipates that its 1998 revenues and income could be adversely affected.
Gross Margin. Gross margin decreased to (16.5)% in 1997 from 13.7% in
1996. The decrease in gross margin was primarily due to the charges discussed
above. Absent these charges, gross margin increased to 17.0% in 1997 from 13.7%
in 1996, due to lower network costs for OBN services which were lower on a per
call basis when compared to those paid to AT&T. 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.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 245.2% to $34.7 million in 1997 from $10.0
million in 1996. The increase in selling, general and administrative expenses
was due primarily to compensation expenses related to the issuance of options to
and the purchase of shares of Company Common Stock by executive officers of the
Company in connection with the commencement of their employment with the
Company, 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 operates and maintains OBN and as it markets the AOL
service offering. The additional selling, general and administrative expenses
may be offset by the increased sales and gross 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.
The Company granted options to purchase 810,000 shares of Company
Common Stock at an exercise price of $17.50 per share to an executive officer
and two outside directors. The options granted are subject to the approval of
the stockholders and are being submitted for approval at the Company's
stockholder meeting scheduled in May of 1998. Approval of the option grants 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.
Other Income. Other income was $50.7 million in 1997 versus $10.6
million in 1996. Other income consists primarily of fees for customer service
and support for the marketing operations of the Company's carrier partitions in
1997 of $8.1 million and investment income earned by the Company. In 1997, other
income also includes $32.1 million, net of related costs, associated with the
break-up of a proposed merger between the Company and STF.
Provision for income taxes. The Company's effective tax rate increased
to 39.0% in 1997 from the effective tax rate of 37.7% in 1996 primarily due to
an anticipated higher effective state tax rate in 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Sales. Sales increased by 29.1% to $232.4 million in 1996 from $180.1
million in 1995. The increase in sales related primarily to the continued
expansion of the Company's distribution network of partitions, as well as
increases in the number of orders submitted by the Company's existing
partitions. One partition, The Furst Group, Inc., accounted for approximately
11% of the Company's sales in 1996 versus zero in 1995. In addition, significant
partition marketing efforts focused on inbound 800 service resulted in sales of
$75.3 million for the year ended December 31, 1996 versus $55.6 million for the
year ended December 31, 1995.
Cost of Sales. The Company's cost of sales, consisting primarily of
network usage charges for AT&T long distance services, increased by 28.5% to
$200.6 million in 1996 from $156.1 million in 1995 and is directly related to
the 29.1% increase in sales.
Gross Margin. Gross margin, the gross profit as a percentage of sales,
increased to 13.7% for the year ended December 31, 1996 from 13.3% for the year
ended December 31, 1995. The increase in gross margin was due to greater
discounts obtained from AT&T on network usage partially offset by direct
marketing expenses and higher volume discounts granted to certain partitions.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 59.9% to $10.0 million in 1996 from $6.3
million in 1995. The increase in selling, general and administrative expenses
was due primarily to the costs associated with hiring additional management
personnel to support the Company's continuing growth and increased fees for
professional services.
<PAGE>
Other Income. Other income was $10.6 million in 1996 versus $331,000 in
1995. Other income for the year ended December 31, 1996 includes two
nonrecurring gains: a $1.4 million gain on the sale of securities of another
long distance
23
<PAGE>
company and a $1.5 million gain on the sale of short term U.S. Treasury
securities. The remainder of other income consists primarily of investment
income earned on the Company's cash balances resulting primarily from the
unapplied proceeds of the Company's public offering in April and May 1996 and
excess cash from operations.
Provision for income taxes. The Company's effective tax rate declined
to 37.7% in 1996 from the pro forma effective tax rate of 40.0% in 1995 due to
the lower effective state tax rate in 1996.
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.
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 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 $7.8 million. 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 are held as treasury shares,
for approximately $72.0 million. The tax benefit realized from the options and
warrants was approximately $21.3 million in 1996 and $25.7 million in 1997 and
is reflected as an adjustment to additional paid-in capital.
The Company's working capital was $634.8 million and $175.6 million at
December 31, 1997 and December 31, 1996, respectively. The significant increase
in working capital is primarily a result of the sale of the 2002 and 2004
Convertibles Notes, discussed above. In the first quarter of 1998, the Company
invested $300 million in a tax exempt bond fund, $245 million in government bond
funds and incurred $155 million of margin account indebtedness in connection
with these investments.
While the Investment Company Act of 1940, as amended (the "Investment
Company Act"), principally regulates vehicles for pooled investments in
securities, such as mutual funds, it also may be deemed to be applicable to
companies that are not organized for the purpose of investing or trading in
securities but nonetheless have more than a specified percentage of their assets
in investment securities. The Company is engaged in the telecommunications
business, and the availability of cash and liquid securities is important to the
Company's ability to take advantage of opportunities to acquire other
telecommunications businesses, assets and technologies from time to time. The
Company believes, therefore, that its activities do not and will not subject the
Company to regulation under the Investment Company Act. However, if the Company
were to be deemed to be an investment company within the meaning of the
Investment Company Act, the Company would become subject to certain restrictions
relating to the Company's activities, including, but not limited to,
restrictions on the conduct of its business, the nature of its investments, the
issuance of securities and transactions with affiliates. Therefore, the
characterization of the Company as an investment company would have a material
adverse effect on the Company. In the Indenture governing the 2002 Convertible
Notes, the Company has covenanted that it will not become an investment company
within the meaning of the Investment Company Act and that it will take all such
actions as are necessary in order to continue not to be deemed an investment
company.
In light of the Company's cash position, the Company recently notified
its bank of its intention to terminate its line of credit.
The Company invested $28.9 million in capital equipment during 1997, of
which $17.1 million was used for the acquisition of capital equipment and
installation costs relating to the deployment of OBN and the remainder of which
was primarily used for the acquisition of computer equipment utilized in
connection with the offering of the Company's services on AOL. To date, through
December 31, 1997, the Company has invested $41.9 million for the acquisition of
capital equipment and installation costs relating to the deployment of OBN.
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.
The Company has announced that its Board has authorized the repurchase
up to eight million shares of its Common Stock. It is anticipated that the
repurchased shares will be held in treasury for issuance upon exercise of
outstanding options and warrants and upon conversion, if any, of convertible
notes, and for other general corporate purposes. As noted above in connection
with the AOL Agreement, the Company issued two warrants to AOL to purchase
shares of the Company's Common Stock, including a warrant to purchase 5 million
shares at an exercise price of $15.50 per share. AOL is exercising this warrant
as to 1 million shares of Company Common Stock on a net issuance basis and the
Company is repurchasing from AOL all of the 380,624 shares issued upon such net
issuance exercise for $23 1/4 per share. In connection with such purchases, AOL
agreed not to dispose of any shares of the Company's Common Stock acquired by
AOL under any of these warrants until March 30, 1999.
24
<PAGE>
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.
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 after January 1, 2000 could be
misidentified, and such programs could fail. The Company has examined its
computer-based systems and believes that the "Year 2000" problem is not present
in such systems. However, the Company is dependent upon computer systems
operated by third parties, such as LECs, AT&T, AOL and other vendors. If those
systems were to malfunction due to the "Year 2000" problem, the Company's
services could fail, as well. Such failures could have a material adverse effect
upon the Company's business, results of operations and financial condition. The
Company is inquiring of such third parties to determine the effect, if any, of
the "Year 2000" problem on the systems upon which the Company is dependent, and
to obtain appropriate assurances that no such problem exists.
* * * * *
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 or AOL, increased price competition for long distance services, failure of
the marketing of long distance services under the AOL Agreement, attrition in
the number of end users, and changes in government policy, regulation and
enforcement. The Company undertakes no obligation to update its forward-looking
statements.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Certified Public Accountants 27
Consolidated balance sheets as of December 31, 1997 and 1996 28
Consolidated statements of operations for the years ended December 31, 1997, 1996, and 1995 29
Consolidated statements of stockholders' equity for the years ended December 31, 1997, 1996 and 1995 30
Consolidated statements of cash flows for the years ended December 31, 1997, 1996 and 1995 31
Notes to consolidated financial statements 32
</TABLE>
26
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and Stockholders of Tel-Save Holdings, Inc.
We have audited the accompanying consolidated balance sheets of
Tel-Save Holdings, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tel-Save
Holdings, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
New York, New York
February 5, 1998
27
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1997 1996
---- ----
ASSETS
<S> <C> <C>
CURRENT:
Cash and cash equivalents $316,730 $ 8,023
Marketable securities 212,269 149,237
Accounts receivable, trade net of allowance for uncollectible
accounts of $2,419 and $987, respectively 44,587 19,971
Advances to partitions and note receivables 26,110 13,410
Due from broker 21,087 867
Prepaid AOL marketing costs - current 30,857 --
Deferred taxes - current 30,916 --
Prepaid expenses and other current assets 8,495 10,377
-------- --------
Total current assets 691,051 201,885
Property and equipment, net 55,835 30,097
Intangibles, net 10,590 21,102
Prepaid AOL marketing costs 32,722 --
Other assets 24,693 3,924
-------- --------
Total assets $814,891 $257,008
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable and accrued expenses:
Trade and other $ 16,858 $ 19,404
Partitions 7,740 4,398
Interest and other 10,578 1,619
Securities sold short 21,087 867
--------- ---------
Total current liabilities 56,263 26,288
Convertible debt 500,000 --
Deferred revenue 35,800 --
--------- ---------
Total liabilities 592,063 26,288
--------- ---------
Commitments and Contingencies
Stockholders' equity
Preferred stock, $.01 par value, 5,000,000 shares authorized;
no shares outstanding -- --
Common stock - $.01 par value, 300,000,000 shares authorized;
67,249,635 and 62,237,998 issued, respectively 672 622
Additional paid-in capital 291,952 210,616
Retained earnings 3,097 24,042
Treasury stock (72,893) (4,560)
-------- --------
Total stockholders' equity 222,828 230,720
-------- --------
Total liabilities and stockholders' equity $814,891 $257,008
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales $304,768 $232,424 $180,102
Cost of sales 355,169 200,597 156,121
-------- -------- --------
Gross profit (loss) (50,401) 31,827 23,981
Selling, general and administrative expenses 34,650 10,039 6,280
-------- -------- --------
Operating income (loss) (85,051) 21,788 17,701
Investment and other income, net 50,715 10,585 331
-------- -------- --------
Income (loss) before provision for income taxes (34,336) 32,373 18,032
Provision (benefit) for income taxes (13,391) 12,205 8,997
-------- -------- --------
Net income (loss) $(20,945) $ 20,168 $ 9,035
======== ======== ========
Net income (loss) per share - Basic $ (.33) $ .38
======== ========
Weighted average common shares outstanding - Basic 64,168 52,650
======== ========
Net income (loss) per share - Diluted $ (.33) $ .35
======== ========
Weighted average common and common equivalent shares
outstanding - Diluted 64,168 57,002
========= ========
Pro forma:
Income before provision for income taxes $ 18,032
Pro forma provision for income taxes 7,213
--------
Pro forma net income $ 10,819
========
Pro forma net income per share - Basic $ .34
========
Weighted average common share outstanding - Basic 31,422
========
Pro forma net income per share - Diluted $ .32
========
Weighted average common and common equivalent shares
outstanding - Diluted 33,605
========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(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, 1995 9,550 $ 95 $ -- $ 13,947 -- $ -- $ 14,042
Net income -- -- -- 9,035 -- -- 9,035
Cash distributions -- -- -- (13,200) -- -- (13,200)
Stock redemption -- -- -- (11,400) -- -- (11,400)
Reclassification of S
Corporation deficit -- -- (5,492) 5,492 -- -- --
Sale of common stock 3,450 35 42,802 -- -- -- 42,837
Three-for-two stock
split 6,500 65 (65) -- -- --
--------- ------ --------- -------- ----- -------- ---------
Balance, December 31,
1995 19,500 195 37,245 3,874 -- -- 41,314
Net income -- -- -- 20,168 -- -- 20,168
Issuance of warrants
to partitions -- -- 1,077 -- -- -- 1,077
Sale of common stock 8,534 85 138,984 -- -- -- 139,069
Exercise of common
stock options 1,079 11 4,927 -- -- -- 4,938
Exercise of
warrants 2,006 20 7,383 -- -- -- 7,403
Income tax benefit
related to
exercise of common -- -- 21,311 -- -- -- 21,311
stock options and
warrants
Acquisition of
treasury stock -- -- -- -- (428) (4,560) (4,560)
Two-for-one stock
split 31,119 311 (311) -- -- -- --
-------- --------- ---------- -------- ----- -------- --------
Balance, December 31, 62,238 622 210,616 24,042 (428) (4,560) 230,720
1996
Net loss -- -- -- (20,945) -- -- (20,945)
Issuance of warrants
to AOL -- -- 21,200 -- -- -- 21,200
Issuance of common
stock for acquired business 141 1 2,217 -- -- -- 2,218
Exercise of common
stock warrants 2,662 27 11,977 -- -- -- 12,004
Exercise of common
stock options 2,209 22 9,318 -- -- -- 9,340
Purchase of common
stock warrants -- -- (4,400) -- -- -- (4,400)
Issuance of common
stock options for
compensation -- -- 13,372 -- -- -- 13,372
Acquisition of -- -- -- -- (3,520) (71,959) (71,959)
treasury stock
Issuance of treasury
stock for acquired business -- -- 1,999 -- 340 3,626 5,625
Income tax benefit
related to
exercise of common
stock options and
warrants -- -- 25,653 -- -- -- 25,653
-------- -------- --------- -------- ------- --------- ---------
Balance, December 31,
1997 67,250 $672 $291,952 $ 3,097 (3,608) $(72,893) $222,828
======== ========= ========= ======== ======= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (20,945) $ 20,168 $ 9,035
Adjustment to reconcile net income to net cash
provided by operating activities:
Unrealized loss on securities 1,865 179 234
Provision for bad debts 1,579 38 (28)
Depreciation and amortization 5,429 2,462 1,287
Charge for customer acquisition costs 11,550 -- --
Write-off of intangibles 23,032 -- --
Compensation charges 13,372 -- --
AOL marketing costs 58,185 -- --
Deferred credits -- (280) --
Income tax benefit related to exercise of options
and warrants 25,653 21,311 --
(Increase) decrease in:
Accounts receivable, trade (26,048) (1,065) (2,996)
Advances to partitions and note receivables (12,700) (20,797) (1,700)
Prepaid AOL marketing costs (100,564)
Prepaid expenses and other current assets (38,259) (10,183) 1,400
Other assets (20,769) (3,924) --
Increase (decrease) in:
Accounts and partition payables and accrued
expenses 9,608 7,978 12,047
Deferred revenue 35,800 -- --
Income taxes payable -- (5,184) 5,184
--------- ------- --------
Net cash (used in) provided by operating
activities (33,212) 10,703 24,463
--------- ------- --------
Cash flows from investing activities:
Acquisition of intangibles (9,293) (9,800) (1,057)
Capital expenditures, net (28,876) (27,679) (2,330)
Securities sold short 17,700 (411) 866
Due from broker (20,220) 233 (1,100)
Loans to stockholder -- (3,034) (2,075)
Repayment of stockholder loans -- 5,109 --
Purchase of marketable securities, net (62,377) (149,238) --
--------- -------- --------
Net cash used in investing activities (103,066) (184,820) (5,696)
--------- -------- --------
Cash flows from financing activities:
Proceeds from sale of convertible subordinated notes 500,000 -- --
Payments to related parties -- -- (1,725)
Payment of note payable to stockholder -- (5,921) (979)
Proceeds from sale of common stock -- 139,069 42,837
Proceeds from exercise of options and warrants 21,344 12,341 --
Purchase of common stock warrants (4,400) -- --
Acquisition of treasury stock (71,959) (4,560) --
Distributions to stockholders -- -- (13,200)
Stock redemption -- -- (4,500)
--------- --------- --------
Net cash provided by financing activities 444,985 140,929 22,433
--------- --------- --------
Net increase (decrease) in cash and cash equivalents 308,707 (33,188) 41,200
Cash and cash equivalents, at beginning of period 8,023 41,211 11
--------- ---------- --------
Cash and cash equivalents, at end of period $316,730 $ 8,023 $ 41,211
========= ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES
(a) Business
Tel-Save Holdings, Inc. (the "Company"), which is incorporated in Delaware,
provides long distance services throughout the United States to small and
medium-sized businesses, and to increasing numbers of residential customers as a
result of the Company's recent online marketing efforts. The Company's long
distance service offerings include outbound service, inbound toll-free 800
service and dedicated private line services for data.
(b) Reorganization
On September 21, 1995, the Company consummated its initial public
offering ("IPO") (Note 10(b)). The shares of Tel-Save, Inc., a Pennsylvania
corporation (the "Predecessor Corporation"), owned by the two founding
stockholders were contributed to the Company as of the date of the IPO. The
majority stockholder exchanged all of his shares of the Predecessor Corporation
for 21,060,000 shares of the common stock of the Company plus loans of up to
$5,000,000. The majority stockholder repaid his outstanding indebtedness,
including interest, using a portion of his proceeds from the sale of 1,500,000
shares of common stock in connection with the Company's public offering in April
1996 (Note 10(a)).
The minority stockholder exchanged all his shares of the Predecessor
Corporation for 7,590,000 shares of the common stock of the Company, $4,500,000
in cash plus a note (the "Cash Flow Note") in the original principal amount of
$6,900,000 bearing interest at 10% per annum which was guaranteed by the
majority stockholder. The payment and the issuance of the Cash Flow Note to the
minority stockholder are accounted for as a distribution of capital. In January
1996, the Company paid the remaining balance of $5,921,000 due under the Cash
Flow Note. The transactions described above are collectively referred to as the
"Reorganization."
(c) Basis of financial statements 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.
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
(d) Recognition of revenue
The Company recognizes revenue upon completion of telephone calls by
end users. Allowances are provided for estimated uncollectible usage.
(e) Cash and cash equivalents
The Company considers all temporary cash investments purchased with a
maturity of three months or less to be cash equivalents.
(f) Marketable securities
The Company buys and holds securities principally for the purpose of
selling them in the near term and therefore, they are classified as trading
securities and carried at market. Unrealized holding gains and losses
(determined by specific identification) on investments classified as trading
securities are included in earnings.
(g) Advances to partitions and note receivables
The Company makes advances to partitions to support their marketing
activities. The advances are secured by partition assets, including contracts
with end users and collections theron.
(h) Property and equipment and depreciation
Property and equipment are recorded at cost. Depreciation and
amortization is calculated using the straight-line method over the estimated
useful lives of the assets, as follows:
Buildings and building improvement 39 years
Switching equipment 15 years
Equipment, vehicles and other 5-7 years
32
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(i) Intangibles and amortization
Intangibles include the costs to acquire billing bases of customer
accounts, long-distance service contract pricing plans and goodwill arising from
business acquisitions. Amortization is computed on a straight-line basis over
the estimated useful lives of the intangibles which is 15 years.
(j) Deferred revenue
Deferred revenue is recorded for a non-refundable prepayment received
in connection with an amended telecommunications services agreement with Shared
Technologies Fairchild, Inc. ("STF") and is amortized over the five year term of
the agreement. This agreement is terminable by either party on thirty days
notice. Termination by either party would accelerate recognition of the deferred
revenue.
(k) Long-lived assets
The Company adopted SFAS No. 121, "Accounting For the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" as of January 1,
1996 and its implementation did not have a material effect on the consolidated
financial statements.
(l) Income taxes
Deferred tax assets and liabilities are recorded for the estimated
future tax effects attributable to temporary differences between the basis of
assets and liabilities recorded for financial and tax reporting purposes (Note
12).
(m) Net income per share
During 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS No. 128"). "Earnings per
Share," which provides for the calculation of "basic" and "diluted" earnings per
share. This Statement is effective for financial statements issued for periods
ending after December 15, 1997. Basic earnings per share includes no dilution
and is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflect, in periods in which they have a dilutive effect, the
effect of common shares issuable upon exercise of stock options. As required by
this Statement, all periods presented have been restated to comply with the
provisions of SFAS No. 128.
The computation of basic net income per share is based on the weighted
average number of common shares outstanding during the period. In 1996 and 1995,
diluted earnings per share also includes the effect of 4,352,000 and 2,183,000
common shares, respectively, issuable upon exercise of common stock options and
warrants. Net income per share for the year ended December 31, 1995 is based on
pro forma net income.
All references in the consolidated financial statements with regard to
average number of common stock and related per share amounts have been
calculated giving retroactive effect to the exchange of shares in the
Reorganization and the stock splits.
(n) Financial instruments and risk concentration
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash investments and marketable securities. At
December 31, 1997, a large majority of the Company's cash investments and
marketable securities were invested in money market funds and commercial paper.
The carrying amount of these cash investments approximates the fair value due to
their short maturity. The Company believes no significant concentration of
credit risk exists with respect to these cash investments and marketable
securities.
The carrying values of accounts receivable, advances to partitions and note
receivables, accounts payable and accrued expenses, and convertible debt
approximate fair values.
In the first quarter of 1998, the Company invested $300 million in a
tax exempt bond fund, $245 million in government bond funds and incurred $155
million of margin account indebtedness in connection with these investments.
(o) Securities sold short/financial investments with off-balance sheet
risk
At December 31, 1997, securities sold short by the Company, which
consist of equity securities valued at market, resulted in an obligation to
purchase such securities at a future date. Securities sold short may give rise
to off-balance sheet market risk. The Company may incur a loss if the market
value of these securities subsequently increases.
(p) Stock-based Compensation
The Company accounts for its stock option awards under the intrinsic
value based method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic
value based method, compensation cost is the excess. if any, of the quoted
market price of the stock at grant date or other measurement date over the
amount an employee must pay to acquire the stock. The Company makes pro forma
disclosures of net income and earnings per share as if the fair value based
method of accounting had been applied as required by Statement of Financial
Accounting Standards ("SFAS") 123, "Accounting for Stock-Based Compensation."
(q) New Accounting Pronouncements
In June 1997, the FASB issued SFAs No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income, its components and accummulated 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 rocognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominance 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 disclosures. Results of operations and financial
position, however, will be unaffected by implementation of this standard.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131. Disclosures about Segments of an Enterprise and Related Information, (SFAS
131) which supercedes 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 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 is 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 relatively 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.
33
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2 -- MAJOR PARTITIONS
Partitions who provided end user accounts, which in the aggregate
account for more than 10% of sales, are as follows:
<TABLE>
<CAPTION>
Number of Total Percentage
Partitions Of Sales
----------------------- -----------------------
<S> <C> <C>
Year ended December 31, 1997 1 13%
Year ended December 31, 1996 1 11%
Year ended December 31, 1995 -- --
</TABLE>
NOTE 3 -- CUSTOMER ACQUISITION
The Company determined in the second quarter of 1997 to de-emphasize
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 $8.1 million for the year ended
December 31, 1997, included in other income, from the services net of related
costs of $14.6 million for the year ended December 31, 1997.
The Company recorded a one-time charge of $11.5 million as cost of
sales 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 wrote-off, as cost
of sales, approximately $23.0 million of intangible assets.
NOTE 4 -- 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, 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. With respect to the Second Warrant, as vesting occurs, the fair value
of the incremental vested portion of the warrant will be changed to expense in
the consolidated statement of operations. As of December 31, 1997 the second
warrant was vested as to approximately 120,000 shares and $1,200,000 was charged
to expense in the 1997 consolidated statement of operations. 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, the $20.0 million value of the First
Warrant and $0.6 million of agreement related costs was accounted for as
follows: (i) $35.9 million was 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 was treated as production
of advertising costs and was charged to expense on October 9, 1997, the
Commercial Launch Date; and (iii) $71.5 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. For the year ended December 31, 1997,
the Company recognized $57.0 million of expense, related to items discussed
above.
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 offset up to $4.3 million in each of the 10 quarters
ending after December 31, 1997 and to offset 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. The fair value of any
such additional warrants that may be granted to AOL will be charged as an
expense in the statement of operations.
34
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 5 -- PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1997 1996
--------------------- ----------------------
(In thousands)
<S> <C> <C>
Land $ 220 $ 220
Buildings and building improvements 4,259 3,398
Switching equipment 41,915 --
Switching equipment under construction -- 24,861
Equipment, vehicles and other 13,078 2,117
-------- ---------
59,472 30,596
Less: Accumulated depreciation (3,637) (499)
-------- ---------
$ 55,835 $30,097
======== =========
</TABLE>
NOTE 6 -- INTANGIBLES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1996
--------------------- ----------------------
(In thousands)
<S> <C> <C>
Goodwill $10,590 $18,356
Other -- 6,533
------- -------
10,590 24,889
Less: Accumulated amortization -- 3,787
------- -------
$10,590 $21,102
======= =======
</TABLE>
NOTE 7 -- ACQUISITIONS
In November 1997 the Company acquired Compco, Inc. ("Compco") a
provider of communications software in the college and university marketplace,
for a total purchase price of $13,125,000, comprised of a cash payment of
$7,500,000 and 339,982 shares of Company common stock. This transaction was
accounted for as a purchase with the results of Compco included in the
consolidated financial statements from acquisition date. The cost in excess of
the net asset acquired (goodwill) was approximately $10,590,000.
In February 1998, the Company completed the acquisition of Symetrics
Industries, Inc. ("Symetrics"), a Florida corporation for approximately $25
million in cash, plus assumed liabilities. Symetrics designs, develops and
manufactures electronic systems, system components and related software for
defense-related products and for telecommunication applications. This
transaction will be accounted for as a purchase. The Company is in the process
of allocating the purchase price among the assets of Symetrics.
35
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 8 -- CONVERTIBLE DEBT
In September 1997, the Company 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 are 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 sold $200 million of 5% Convertible
Subordinated Notes which mature on December 15, 2004 (the "2004 Convertible
Notes"). Interest on the 2004 Convertible Notes are 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.
NOTE 9 -- RELATED PARTY TRANSACTIONS
At December 31, 1997, executive officers of the Company had outstanding
loans from the Company of $4,237,000 which were repaid during the first quarter
of 1998.
In connection with the Reorganization (Note 1(b)), the Company made
distributions of the Company's 1995 taxable income through September 19, 1995 of
approximately $13,200,000 in 1995 to its two founding stockholders.
NOTE 10 -- STOCKHOLDERS' EQUITY
(a) 1996 Public Offering
The Company consummated a public offering (the "1996 Offering") of
18,568,000 shares of common stock (adjusted to reflect the most recent stock
split, Note 10(c)), including the underwriter's over-allotment, at a price of
$8.75 per share in April and May, 1996. Of the 18,568,000 shares offered,
17,068,000 were sold by the Company and 1,500,000 were sold by the majority
stockholder. Proceeds of the 1996 Offering to the Company, less underwriting
discounts of approximately $9,302,000, were approximately $140,043,000. Expenses
for the 1996 Offering were approximately $974,000 resulting in net proceeds to
the Company of approximately $139,069,000. The majority stockholder used a
portion of his proceeds to repay his outstanding indebtedness, including
interest, to the Company.
(b) Initial Public Offering
In September and October, 1995, the Company consummated its IPO of
10,350,000 shares of common stock (adjusted to reflect stock splits, Note
10(c)), including the underwriter's overallotment option, at a price of $4.59
per share. Proceeds of the offering less underwriting discounts of approximately
$3,151,000 were $44,287,000. Expenses for the IPO totaled approximately
$1,450,000, resulting in net proceeds to the Company of approximately
$42,837,000.
In connection with the IPO, the Company issued warrants to purchase
900,000 shares of common stock to the underwriter. The exercise price of the
warrants is $5.73 per share of common stock and such warrants expire on
September 21, 2000.
(c) Stock Splits
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 and the consolidated
statement of stockholders' equity for the year ended December 31, 1996 reflect
the recording of the stock split as if it had occurred on December 31, 1996.
36
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On February 16, 1996, the Company's Board of Directors approved a
three-for-two split of the common stock in the form of a 50% stock dividend. The
additional shares resulting from the stock split were distributed on March 15,
1996, to all stockholders of record at the close of business on February 29,
1996. The consolidated balance sheet as of December 31, 1995 and the
consolidated statement of stockholders' equity for the year ended December 31,
1995 reflect the recording of the stock split as if it had occurred on December
31, 1995.
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 splits.
(d) Authorized Shares
During 1997, the Board of Directors and stockholders approved the
increase in the number of authorized shares of the Company's $0.01 par value
common stock to 300,000,000 shares.
NOTE 11 -- STOCK OPTIONS AND WARRANTS
(a) Stock Options
The Company has both qualified and non-qualified stock option
agreements with most of its key employees.
Prior to the Company's Initial Public Offering in September, 1995, the
Company granted ten key employees options to purchase shares of the Company's
common stock. The exercise price of the options, was based on the fair market
value of the Company at the date of grant. The options vest 22 months from the
date of issuance and expire five years from the date of grant. All options were
vested as of December 31, 1996.
In 1995, 1996 and 1997, the Company granted options to purchase a total
of 100,000 shares of common stock to each of the two nonemployee directors of
the Company.
In September 1995, the Company's Board of Directors and stockholders
adopted the Company's 1995 Employee Stock Option Plan (the "Option Plan") which
provided for the granting of up to 1,950,00 shares of common stock. An amendment
to the Option Plan was approved by the Board of Directors and stockholders in
April 1996 increasing the authorized number of options which can be granted
under the Option Plan to 5,000,000 shares of common stock. As of December 31,
1997, 4,985,000 options had been granted under the Option Plan.
In 1996 and 1997 the Company granted certain employees 3,561,000 and
2,741,000, respectively, non-qualified options to purchase shares of the
Company's common stock. These options become exercisable from one to three years
from the date of the grant. During 1997, The company recognized $13,371,785 of
compensation expenses related to the grant of options or the purchase of the
Company's stock at prices below the quoted market price at date of grant or
purchase date.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
Company to provide pro forma information regarding net income and earnings per
share as if compensation cost for the Company's stock options had been
determined in accordance with the fair value-based method prescribed in SFAS No.
123. The Company estimates the fair value of each stock option at the grant date
by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1995, 1996 and 1997,
respectively: no dividends paid for all years; expected volatility of 40.4% in
1995 and 1996 and 55.8% in 1997; weighted average risk-free interest rates of
5.8%, 5.7%, and 5.49%, respectively; and expected lives of 1 to 5 years.
37
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Under the accounting provisions of SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands, except for per share data)
<S> <C> <C> <C>
NET INCOME:
As reported $ (20,945) $20,168 $10,819
Pro forma (30,942) $16,521 $10,436
BASIC EARNINGS PER SHARE:
As reported $ (.33) $ .38 $ .34
Pro forma $ (.48) $ .31 $ .33
DILUTED EARNINGS PER SHARE:
As reported $ (.33) $ .35 $ .32
Pro forma $ (.48) $ .29 $ .31
</TABLE>
The following tables contain information on stock options for the three year
period ended December 31, 1997:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED
OPTION PRICE RANGE AVERAGE
SHARES PER SHARE EXERCISE PRICE
---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1994 2,455,800 $ .32-$1.57 $ .48
Granted 1,950,000 $ 4.58 $ 4.58
---------------- ---------------- ----------------
Outstanding, December 31, 1995 4,405,800 $ .32-$4.58 $ 2.30
Granted 6,736,000 $ 4.09-$12.00 $ 7.96
Exercised (2,158,000) $ .32-$5.67 $ 2.28
---------------- ---------------- ----------------
Outstanding, December 31, 1996 8,983,800 $ .32-$12.00 $ 6.54
Granted 2,801,000 $ 5.67-$22.06 $16.02
Exercised (2,208,812) $ .32-$12.78 $ 4.25
Cancelled (690,000) $ 5.67-$13.25 $11.98
---------------- ---------------- ----------------
Outstanding, December 31, 1997 8,885,988 .32-$22.06 $ 9.26
================ ================ ================
<CAPTION>
EXERCISE WEIGHTED
OPTION PRICE RANGE AVERAGE
EXERCISABLE AT YEAR ENDED DECEMBER 31, SHARES PER SHARE EXERCISE PRICE
- ------------------------------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
1995 1,515,600 $ .32 $ .32
1996 2,649,800 $ .32-$4.58 $ 2.82
1997 3,866,987 $ .32-$14.50 $ 7.24
<CAPTION>
WEIGHTED-AVERAGE
OPTIONS GRANTED IN FAIR VALUE
- ------------------ ----------
1995 $1.14
1996 $2.39
1997 $6.99
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
RANGE OF EXERCISE PRICE
---------------------------------------------------------------------------------------
$.32-$5.00 $5.01-$10.00 $10.01-$15.00 $15.00-$22.06 $.32-$22.06
------------- ------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
OUTSTANDING OPTIONS:
Number outstanding at
December 31, 1997 2,776,988 2,382,000 1,989,500 1,742,500 8,885,988
Weighted-Average remaining
contractual life (Years) 1.94 1.69 2.11 3.12 2.18
Weighted-average exercise price $ 3.48 $ 8.52 $ 11.47 $ 17.57 $ 9.26
EXERCISABLE OPTIONS:
Number outstanding at
December 31, 1997 1,596,988 779,000 1,490,999 - 3,866,987
Weighted-average exercise price $ 2.68 $ 8.66 11.37 - $ 7.23
</TABLE>
(b) Warrants
38
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At December 31, 1996, the Company had warrant agreements with certain
partitions and the underwriter for its IPO (Note 10(b)). All warrants were
issued with exercise prices equal to or above the market price of the underlying
stock at the date of the grant. These warrants are accounted for based on their
fair value. At December 31, 1996, 3,712,000 warrants were outstanding with
exercise prices ranging from $4.67 to $5.73 and an average weighted exercise
price of $5.00 and 600,000 which were currently exercisable at a weighted
exercise price of $5.73. The remaining warrants are exercisable over a one to
two year period beginning in January 1997. In January 1997, 800,000 of these
warrants were purchased by the Company and recorded as a reduction in additional
paid-in capital and 2,662,000 warrants were exercised. At December 31, 1997,
warrants to purchase 12,250,000 shares were outstanding; these consisted of the
12,000,000 AOL warrants (Note 4) and 250,000 of the warrants issued to the
underwriter for the Company's IPO (Note 10(b)).
NOTE 12 -- INCOME TAXES
On June 1, 1991, the Company, with the consent of its stockholders,
elected to be taxed as an S Corporation. As a result of the election, all
earnings of the Predecessor Corporation were taxed directly to the stockholders.
Accordingly, the statements of operations prior to September 20, 1995 did not
include provisions for income taxes. In connection with the Company's IPO, as
described in Note 10(b), on September 19, 1995, the Company terminated its S
Corporation status. Pro forma tax provisions have been calculated as if the
Company's results of operations were taxable as a C Corporation under the
Internal Revenue Code for the year ended December 31, 1995.
The following summarizes the provision for pro forma income taxes:
YEAR ENDED
DECEMBER 31,
---------------
1995
----
(In thousands)
Current:
Federal $5,574
State and local 1,639
-------
Pro forma provision for income taxes $7,213
=======
39
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The provision for pro forma income taxes on adjusted historical income
for the year ended December 31, 1995 differs from the amounts computed by
applying the applicable Federal statutory rates due to the following:
YEAR ENDED
DECEMBER 31,
----------------
1995
----
(In thousands)
Provision for Federal income taxes at the statutory rate $6,311
State and local income taxes, net of Federal benefit 1,082
Other (180)
-------
Pro forma provision for income taxes $7,213
========
As a result of the termination, the Company was required to provide for
taxes on income for the period subsequent to September 19, 1995 and for the
previously earned and untaxed S Corporation income which has been deferred
primarily as a result of reporting on a cash basis.
The provision (benefit) for income taxes for the years ended December
31, 1997, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ - $10,995 $4,379
State and local - 1,817 1,809
------- ------- ------
Total current - 12,812 6,188
======= ======= ======
Deferred:
Federal (11,111) (607) 2,201
State and local (2,280) - 608
------- ------- ------
Total deferred (13,391) (607) 2,809
------- ------- ------
$(13,391) $12,205 $8,997
======= ======= ======
</TABLE>
A reconciliation of the Federal statutory rate to the provision
(benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995
----------------------- --------------------------- -------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal income taxes computed at the
statutory rate $(12,018) (35.0)% $11,331 35.0% $6,311 35.0%
Increase (decrease):
Federal income taxes at the statutory rate
from January 1, 1995 to September 19, 1995 - - - - (4,086) (22.7)
Federal and state taxes resulting from cash
to Accrual basis for tax reporting - - - - 6,399 35.5
State income taxes less Federal benefit (1,482) (4.3) 1,199 3.7 373 2.1
Other 109 .3 (325) (1.0) - -
-------- ------ ------- ------ ------- ------
Total provision (benefit) for income taxes $(13,391) (39.0)% $12,205 37.7% $ 8,997 49.9%
======== ====== ======= ====== ======= ====
</TABLE>
40
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Deferred tax (assets) liabilities at December 31, 1997, 1996 and 1995
are comprised of the following elements:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Taxable loss carryforwards $ (21,548) $ (3,705) $ --
Deferred revenue taxable currently (13,897) -- --
Stock based compensation (4,951) -- --
Allowance for uncollectible accounts (2,198) -- --
Federal and state taxes resulting from cash to accrual
basis for tax reporting 1,337 2,342 3,130
Amortization of certain intangibles - (85) (227)
Other 869 (55) (94)
------------ ------------ ----------
Deferred tax (assets) liabilities $ (40,388) $ (1,503) $ 2,809
============ ============ ==========
</TABLE>
Long-term deferred tax assets of $9,472,000 are included in other assets in
the consolidated balance sheet at December 31, 1997.
The Company has recorded net deferred tax assets at December 31, 1997
and 1996 primarily representing net operating loss carryforwards and other
temporary differences. Management believes that no valuation allowance is
required for these assets due to future reversals of existing taxable temporary
differences and the exception that the Company will generate taxable income in
future years.
NOTE 13 -- STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $915 $ 47 $ 24
Income taxes $ -- $ 1,090 $ 3,813
</TABLE>
During 1997, the Company recorded an asset of $20,000,000 in connection
with the issuance of warrants to AOL (Note 4). In connection with the
acquisition of Compco in 1997, the Company issued 339,982 shares of Company
common stock with a value of $5,625,000 (Note 7).
In connection with the acquisition of the assets of ABA in 1996, the
Company released ABA of its outstanding obligations to the Company of
$10,949,000. During 1996, the Company recorded an intangible of $1,077,000 in
connection with the issuance of warrants to certain partitions (Note 11(b)).
During 1995, the Company issued the Cash Flow Note in the amount of
$6,900,000 to the minority stockholder of the Predecessor Corporation in
connection with the IPO and Reorganization (Note 1(b)).
NOTE 14 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER(2)
------- ------- ------- -------
(In thousands, except for per share data)
<S> <C> <C> <C> <C>
1997
Sales $71,160 $75,032 $80,314 $78,262
Gross profit (loss) 9,375 (9,264)(1) 2,097 (52,609)(1)
Operating income (loss) 6,082 (13,924) (3,243) (73,966)
Net income (loss) 5,430 (5,865) 721 (21,231)
Net income (loss) per share - Basic 0.09 (0.09) 0.01 (0.32)
Net income (loss) per share - Diluted 0.08 (0.09) 0.01 (0.32)
1996
Sales $51,065 $57,015 $60,079 $64,265
Gross profit 6,832 7,387 8,323 9,285
Operating income 4,546 4,882 5,871 6,489
Net income 3,377 4,058 7,032 5,701
Net income per share - Basic 0.09 0.08 0.12 0.10
Net income per share - Diluted 0.08 0.07 0.11 0.09
</TABLE>
(1) See Note 3.
(2) Includes $32.1 million (pre-tax) of other income associated with the break-
up of a proposed merger between the Company and STF.
41
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10 THROUGH 13
Information required by Part III (Items 10 through 13) of this Form
10-K is incorporated by reference to the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held in May, 1998, which will be
filed with the Securities and Exchange Commission not later than 120 days after
the end of the fiscal year to which this Form 10-K relates.
42
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on
Form 10-K.
1. Consolidated Financial Statements:
The Consolidated Financial Statements filed as part of this Form 10-K
are listed in the "Index to Consolidated Financial Statements" in Item 8.
2. Consolidated Financial Statement Schedule:
The Consolidated Financial Statement Schedule filed as part of this
report is listed in the "Index to S-X Schedule."
Schedules other than those listed in the accompanying Index to S-X
Schedule are omitted for the reason that they are either not required, not
applicable, or the required information is included in the Consolidated
Financial Statements or notes thereto.
43
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO S-X SCHEDULE
PAGE
----
Report of Independent Certified Public Accountants 55
Schedule II -- Valuation & Qualifying Accounts 56
44
<PAGE>
[LOGO]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and Stockholders of Tel-Save Holdings, Inc.
The audits referred to in our report dated February 5, 1998 relating to
the consolidated financial statements of Tel-Save Holdings, Inc. and
subsidiaries, which is contained in Item 8 of this Form 10-K, included the
audits of the financial statement schedule listed in the accompanying index for
each of the three years in the period ended December 31, 1997. This financial
statement schedule is the responsibility of management. Our responsibility is to
express an opinion on this schedule based on our audits.
In our opinion, the financial statement Schedule II -- Valuation and
Qualifying Accounts, presents fairly, in all material respects, the information
set forth therein.
BDO Seidman, LLP
New York, New York
February 5, 1998
45
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES CHANGES DEDUCTIONS PERIOD
----------- ------ -------- ------- ---------- ------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Reserves and allowances deducted from as-
set accounts:
Allowance for uncollectible accounts $987 $1,285 $ 147 (a) $-- $2,419
==== ====== ========== === ======
Year ended December 31, 1996:
Reserves and allowances deducted from as-
set accounts:
Allowance for uncollectible accounts $804 $ 38 $ 145 (a) $-- $ 987
==== ======= ========== === ======
Year ended December 31, 1995:
Reserves and allowances deducted from as-
set accounts:
Allowance for uncollectible accounts $987 $ (13) $(170)(a) $-- $ 804
==== ========= ========= === ======
</TABLE>
- ----------
(a) Amount represents portion of change in allowance for uncollectible accounts
applied against Accounts Payable Partitions.
46
<PAGE>
(3) EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Plan of Reorganization between and among Tel-Save Holdings, Inc., a
Delaware corporation, Tel-Save, Inc., a Pennsylvania corporation,
Daniel Borislow and Paul Rosenberg, and Exhibits Thereto (incorporated
by reference to Exhibit 2.1 to the Company's registration statement on
Form S-1 (File No. 33-94940)).
3.1 Amended and Restated Certificate of Incorporation of the Company, as
amended (incorporated by reference to Exhibit 3.1 to the Company's
registration statement on Form S-4 (File No. 333-38943)).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Company's registration statement on Form S-1 (File No. 33-94940)).
9.1 Voting Trust Agreement between Daniel Borislow and Paul Rosenberg
(included as part of Exhibit 2.1).
10.1* Employment Agreement between the Company and Daniel Borislow and
related Agreement (incorporated by reference to Exhibit 10.1 to the
Company's registration statement on Form S-1 (File No. 33-94940)).
10.2 * Employment Agreement between the Company and Emanuel J. DeMaio
(incorporated by reference to Exhibit 10.2 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.3 * Employment Agreement between the Company and Gary W. McCulla
(incorporated by reference to Exhibit 10.3 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.4 * Employment Agreement between the Company and George P. Farley
(incorporated by reference to Exhibit 10 to the Company's report on
Form 10-Q for the Quarter ended September 30, 1997).
10.5 * Employment Agreement between the Company and Aloysius T. Lawn, IV
(incorporated by reference to Exhibit 10.5 to the Company's
registration statement on Form S-1 (File No. 333-2738)).
10.6 * Employment Agreement between the Company and Edward B. Meyercord, III
(incorporated by reference to Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996).
10.7 Indemnification Agreement between the Company and Daniel Borislow
(incorporated by reference to Exhibit 10.4 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.8 Indemnification Agreement between the Company and Emanuel J. DeMaio
(incorporated by reference to Exhibit 10.5 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.9 Indemnification Agreement between the Company and Gary W. McCulla
(incorporated by reference to Exhibit 10.6 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.10 Indemnification Agreement between the Company and Joseph M. Morena
(incorporated by reference to Exhibit 10.7 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.11 Indemnification Agreement between the Company and Peter K. Morrison
(incorporated by reference to Exhibit 10.8 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.12 Indemnification Agreement between the Company and Kevin R. Kelly
(incorporated by reference to Exhibit 10.9 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.13 Indemnification Agreement between the Company and Aloysius T. Lawn, IV
(incorporated by reference to Exhibit 10.12 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995).
10.14 Indemnification Agreement between the Company and Edward B. Meyercord,
III (incorporated by reference to Exhibit 10.14 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996).
10.15 Agreement dated as of March 15, 1994 between the Company and Global
Network Communications (incorporated by reference to Exhibit 10.10 to
the Company's registration statement on Form S-1 (File No. 33-94940)).
10.16 AT&T Contract Tariff No. 516 (incorporated by reference to Exhibit
10.11 to the Company's registration statement on Form S-1 (File No.
33-94940)).
10.17 AT&T Contract Tariff No. 1715 (incorporated by reference to Exhibit
10.15 to the Company's registration statement on Form S-1 (File No.
333-2738)).
10.18 AT&T Contract Tariff No. 2039 (incorporated by reference to Exhibit
10.16 to the Company's registration statement on Form S-1 (File No.
333-2738)).
10.19 AT&T Contract Tariff No. 2432 (incorporated by reference to Exhibit
10.17 to the Company's registration statement on Form S-1 (File No.
333-2738)).
10.20 AT&T Contract Tariff No. 3628 (incorporated by reference to Exhibit
10.18 to the Company's registration statement on Form S-1 (File No.
333-2738)).
10.21 AT&T Contract Tariff No. 5776 (incorporated by reference to Exhibit
10.21 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996).
47
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.22 General Agreement between Tel-Save, Inc. and AT&T Corp. dated June 26,
1995 (incorporated by reference to Exhibit 10.14 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.23* Tel-Save Holdings, Inc. 1995 Employee Stock Option Plan (incorporated
by reference to Exhibit 10.15 to the Company's registration statement
on Form S-1 (File No. 33-94940)).
10.24* Tel-Save Holdings, Inc. Employee Bonus Plan (incorporated by reference
to page 13 of the Company's Proxy Statement for the Company's 1996
Annual Meeting of Stockholders dated April 3, 1996).
10.25* Non-Qualified Stock Option Agreement between the Company and Daniel
Borislow (incorporated by reference to Exhibit 10.17 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.26* Non-Qualified Stock Option Agreement between the Company and Emanuel J.
DeMaio (incorporated by reference to Exhibit 10.18 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.27* Non-Qualified Stock Option Agreement between the Company and Mary
Kennon (incorporated by reference to Exhibit 10.19 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.28* Non-Qualified Stock Option Agreement between the Company and Gary W.
McCulla (incorporated by reference to Exhibit 10.20 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.29* Non-Qualified Stock Option Agreement between the Company and Peter K.
Morrison (incorporated by reference to Exhibit 10.22 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.30+ Telecommunications Marketing Agreement by and among the Company,
Tel-Save, Inc. and America Online, Inc., dated February 22, 1997
(incorporated by reference to Exhibit 10.32 to the Company's Form 10-K
for the year ended December 31, 1996).
10.31++ Amendment No 1, dated as of January 25, 1998, to the Telecommunications
Marketing Agreement dated as of February 22, 1997 by and among the
Company, Tel-Save, Inc. and America Online, Inc.
10.32 Indenture dated as of September 9, 1997 between the Company and First
Trust of New York, N.A. (incorporated by reference to Exhibit 4.3 to
the Company's registration statement on Form S-3 (File No. 333-39787)).
10.33 Registration Agreement dated as of September 3, 1997 between the
Company and Salomon Brothers Inc, Deutsche Morgan Grenfell Inc., Bear,
Stearns & Co. Inc., Smith Barney Inc., Robertson Stephens & Company LLC
(incorporated by reference to the Company's registration statement on
Form S-3 (File No. 333-39787)).
10.34 Indenture dated as of December 10, 1997 between the Company and First
Trust of New York, N.A. (incorporated by reference to Exhibit 10.34 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1997)
10.35 Registration Agreement dated as of December 10, 1997 between the
Company and Smith Barney Inc. (incorporated by reference to Exhibit
10.35 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997)
11.1 Net Income Per Share Calculation.
21.1 Subsidiaries of the Company.
23.1 Consent of BDO Seidman, LLP. (incorporated by reference to Exhibit 23.1
to the Company's Annual Report on Form 10-K for the year ended December
31, 1997)
27 Financial Data Schedule. (incorporated by reference to Exhibit 27 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1997)
- ----------
* Management contract or compensatory plan or arrangement.
+ Confidential treatment previously has been granted for a portion of this
exhibit.
++ Confidential treatment has been requested for portions of this exhibit.
(b) Reports on Form 8-K.
The following Current Reports on Form 8-K were filed by the Company during
the three months ended December 31, 1997:
1. Current Report on Form 8-K dated December 5, 1997.
2. Current Report on Form 8-K dated November 25, 1997.
3. Current Report on Form 8-K dated November 20, 1997.
4. Current Report on Form 8-K dated October 29, 1997.
5. Current Report on Form 8-K dated October 26, 1997.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: April 16, 1998 TEL-SAVE HOLDINGS, INC.
By: /s/ Daniel Borislow
---------------------------
Daniel Borislow
Chairman of the Board of
Directors, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C>
/s/ Daniel Borislow Chairman of the Board
- ----------------------------- of Directors, Chief Executive Officer and April 16, 1998
Daniel Borislow Director (Principal Executive Officer)
/s/ Gary W. McCulla President, Director of Sales and April 16, 1998
- ----------------------------- Marketing and Director
Gary W. McCulla
/s/ Emanuel J. DeMaio Chief Operations Officer and Director April 16, 1998
- -----------------------------
Emanuel J. DeMaio
/s/ George P. Farley Chief Financial Officer and Director April 16, 1998
- ----------------------------- (Principal Financial Officer)
George P. Farley
/s/ Kevin R. Kelly Controller (Principal Accounting Officer) April 16, 1998
- -----------------------------
Kevin R. Kelly
/s/ Harold First Director April 16, 1998
- -----------------------------
Harold First
/s/ Ronald R. Thoma Director April 16, 1998
- -----------------------------
Ronald R. Thoma
</TABLE>
49
"***" indicates text omitted pursuant to a request for confidential
treatment. Such material has been filed separately with the Securities and
Exchange Commission.
AMENDMENT NO. 1
This AMENDMENT NO. 1 (the "Amendment"), dated as of January 25, 1998
(the "Amendment Effective Date"), by and among Tel-Save, Inc. ("TS"), a
Pennsylvania corporation, and Tel-Save Holdings, Inc. ("Holdings"), a Delaware
corporation, with their principal offices at 6805 Route 202, New Hope,
Pennsylvania 18938, on the one hand, and America Online, Inc., a Delaware
corporation with its principal offices at 22000 AOL Way, Dulles, Virginia 20166
("AOL"), on the other hand (each a "party" and, collectively, the "parties").
INTRODUCTION
TS, Holdings and AOL are parties to the Telecommunications Marketing
Agreement, dated as of February 22, 1997, as heretofore corrected and amended by
letter, dated April 23, 1997 (as so corrected and amended to the date hereof,
but without giving effect to this Amendment, the "Agreement"). Capitalized terms
used in this Amendment without other definition are defined as in the Agreement.
The parties have since considered further the marketing and advertising
expenditures provided in the Agreement, and, in light of both parties' desire to
increase the number of End Users of the Long Distance Telecommunications
Services, hereby agree as follows:
TERMS
1. The Agreement is amended to provide that references in the Agreement to
"this Agreement" or "the Agreement" (including indirect references such as
"hereunder," "hereby," "herein" and "hereof") shall be deemed to be
references to the Agreement as amended hereby.
2. Section I.A of the Agreement is hereby amended to add the following
definitions:
"1.A. "Additional Promotion Period" means the period from the
Amendment Effective Date through March 31, 1998 (as such period may be
shortened as provided herein).
"5.A. "Amendment" means the Amendment No. 1 to the Agreement dated as
of the Amendment Effective Date.
"5.B. "Amendment Effective Date" means January 25, 1998."
3. Section I.A.19 of the Agreement is amended to read in its entirety as
follows:
"19. "Gross Revenues" for any calendar quarter shall mean the sum of
(a) total billings by TS to End Users for the provision of Services
during such quarter and (b) if such billings are in a material amount,
total billings by TS to any other end users of telecommunications
services provided by TS that would meet the definition of "Restricted
Services," which such other end users became such as a direct result
of marketing by TS that used the AOL Marks or any variation of the
<PAGE>
AOL name (whether or not such marketing has been approved by AOL or is
otherwise in compliance with this Agreement, and without waiver of
AOL's rights hereunder with respect to such approval or compliance)
("Other End Users"), less * * * "
4. Section III.A.1 of the Agreement is amended to add "(a)" before "During
each" at the beginning of such section and to add the following at the end
of such section:
"(b) Notwithstanding anything to the contrary in this Agreement, the
parties agree that, commencing February 1, 1998 and until the end of
the Additional Promotion Period, AOL shall provide TS with additional
online promotions and advertisements, including Pop-Up Ads, in form
and substance as determined pursuant to the foregoing portion of this
Section III.A.1, with an Ad Value of at least * * * per month (or the
pro-rata amounts thereof for portions of months) in addition to the Ad
Values to be provided pursuant to Section III.A.1(a) (the "Additional
Promotions"). Pop-Up Ads during the Additional Promotion Period shall
be made available onscreen for at least * * * days (instead of the
number required pursuant to Section I.A.31 hereof), and any Pop-Up Ads
included by AOL during the Additional Promotion Period in excess of *
* * Pop-Up Ads per month and any Pop-Up Ads included by AOL with TS's
approval during the remainder of the Introductory Period in excess of
* * * per month shall be counted toward AOL's satisfaction of the * *
* monthly requirement set forth in Section III.A.1(a) above. Following
the expiration of the Additional Promotion Period, AOL shall not be
obligated to provide any promotions or advertisements other than those
promotions or advertisements that were required of AOL pursuant to the
Agreement, but without regard to this Section III.A.1.(b).
(c) In the event that AOL has not delivered each of the "AOL
Deliverables" (as set forth in Attachment A) in accordance with the
terms hereof or has not delivered the Ad Values of promotions and
advertisements required by Sections III.A.1(a) and (b) to be provided
during the Additional Promotion Period, in each case, on or before
February 28, 1998, TS may elect in its sole discretion that the
Additional Promotion Period end as of February 28, 1998 so long as TS
has provided AOL with written notice of such election by fascimile to
the attention of David Colburn (fax no. 703-265-1202) no later than
5:00 p.m. EST on February 28, 1998. In such case: (i) TS will be
relieved of any obligation to pay AOL the bounties provided for
hereunder with respect to any customers who first signed up for
Services subsequent to February 28, 1998, (ii) the additional
guaranteed amount to be paid by TS pursuant to this Amendment shall be
as adjusted as described below and (iii) AOL will not deliver the
additional promotions contemplated hereunder thereafter.
(d) Except for those AOL Deliverables noted as "ongoing" obligations
on Attachment A ("Ongoing Deliverables"), an AOL Deliverable shall be
deemed delivered in the event AOL completes delivery of the AOL
Deliverable on or before the due date specified on Attachment A;
provided that AOL shall be
2
<PAGE>
entitled to a cure period of five (5) business days following such due
date within which to complete its delivery. Any Ongoing Deliverable
shall be deemed delivered if AOL has commenced delivery of such item
and is continuing without default its delivery as of February 28,
1998; provided that AOL shall be entitled to a cure period of five (5)
business days following any interruption in delivery of such AOL
Deliverable within which to restore its ongoing delivery of such item.
Notwithstanding the foregoing, the cure periods with respect to the
AOL Deliverable relating to * * * requirements and the AOL Deliverable
relating to * * * shall be only one (1) day. AOL shall be entitled to
only one (1) cure period with respect to each AOL Deliverable;
provided that (i) AOL shall be entitled to two (2) one-day cure
periods with respect to the AOL Deliverable relating to * * * and (ii)
there shall be no cure period with respect to the AOL Deliverable
relating to* * *.
(e) In the event that TS fails to deliver any "TS Deliverable" (as set
forth in Attachment A), AOL may extend the due date set forth on
Attachment A for any AOL Deliverable that (as indicated in Attachment
A) depends on receipt of a TS Deliverable specified in Attachment A
for a period equal to the number of days by which TS's delivery is
overdue. AOL may toll its delivery of any Ongoing Deliverable until TS
has delivered the TS Deliverable specified on Attachment A as
necessary for the delivery of such AOL Deliverable. In the event that
TS has not delivered any TS Deliverable as of February 28, 1998, any
AOL Deliverable specified on Attachment A as corresponding to such TS
Deliverable shall be deemed delivered by AOL as of such date. Except
as otherwise expressly provided herein, (a) either party's failure to
deliver its respective deliverables set forth in Attachment A shall
not be deemed a breach of the Agreement and (b) following the
expiration of the Additional Promotion Period, neither party shall be
obligated with respect to any deliverables set forth on Attachment A
other than (x) those deliverables that were required of such party
pursuant to the Agreement (other than by reason of the Amendment) and
(y) the * * * or the * * * program (each, as described herein), if
any, that may be provided in the Extended Offline Promotion Period (as
defined in Section V.C.1)."
(f) Notwithstanding anything to the contrary herein, in connection
with any * * * efforts directed to subscribers to the AOL Service that
may be provided hereunder, AOL reserves the right to (i) approve all
procedures, scripts and other materials used in connection with any
such effort, such approval not to be unreasonably withheld, (ii)
subject to the proviso at the end of this clause (ii), cease, or
otherwise limit the amount, duration or frequency of, any such effort
in the event AOL determines in its reasonable discretion that such
effort (including, without limitation, any statement or claim made by
TS in connection with such effort or the Services (e.g., comments made
during a * * *call) is false or inaccurate or misrepresents or
mischaracterizes the true nature of the Services or of any party's
role in providing the Services and has resulted or is resulting in
significant complaints by recipients of such efforts or material
disruptions of AOL's relations with existing and potential customers,
provided that AOL shall
3
<PAGE>
have provided to TS at least five (5) days prior written notice of its
intention so to cease or limit such effort, which notice shall include
a specific statement of the basis for such action, including
reasonable evidence of such basis, and TS shall not have, within five
(5) days of such notice, modified the terms of such effort or taken
such other actions as shall be reasonably likely, in AOL's discretion,
to (x) prevent a continuation or recurrence of the circumstances
forming the basis of such notice or (y) remedy material harm to AOL's
business arising from such prior occurrence (as the case may be); and
(iii) monitor such efforts for quality assurance and for compliance
with the terms and conditions hereof.
5. Section III.A.2 of the Agreement is amended to add at the end thereof the
following:
"Notwithstanding anything to the contrary in this Agreement, the
parties agree that any Pop-Up Ads included by AOL with TS's approval
subsequent to the Introductory Period and during the Term in excess of
* * * shall be counted toward AOL's satisfaction of the * * * monthly
requirement set forth in this Section III.A.2. The total Ad Value of
all promotions and advertisements to be provided by AOL pursuant to
this Section III.A.2 during the period from July 1, 1999, through June
30, 2000, shall be reduced by the amount of the Ad Value of the
Additional Promotions provided by AOL pursuant to Section III.A.1
above, such reduction to be applied ratably to the Ad Value to be
provided during such period."
6. Section III.A.4(a) of the Agreement is amended to add at the end thereof
the following:
"Notwithstanding the preceding sentence, during the Additional
Promotion Period, AOL shall not deploy Pop-Up Ads having * * * ."
7. Section III.A.4 of the Agreement is amended to add the following new
Section III.A.4(d):
"(d) Notwithstanding anything to the contrary in this Agreement, the
parties agree that AOL may in its sole discretion replace any Pop-Up
Ad required hereunder (or otherwise scheduled to be provided by AOL)
with * * * (e.g., for purposes of fulfilling requirements of law or
court order or issuing announcements regarding AOL members or AOL
policies) (each an "Excluded Pop-Up"); provided that AOL delivers the
replaced Pop-Up Ad as soon as reasonably possible thereafter (without
resulting in simultaneous Pop-Up Ads) * * * ."
8. Section V of the Agreement is amended to add the following new Section
V.B.6:
"6. TS shall provide AOL biweekly with information with respect to any
* * * efforts during the Additional Promotion Period and the Extended
Offline Promotion Period (as defined herein) which is reasonably
required for (a) measuring TS's efforts hereunder or (b) delivery of
the applicable AOL Deliverable (and any other information mutually
agreed upon by the parties), but
4
<PAGE>
in no event less information than would be required of TS pursuant to
Section V.B.4 hereof."
9. Section V of the Agreement is amended to add the following new Section V.C:
"C. Additional Promotion Period.
1. In addition to any other payments required hereunder (and in addition
to any Warrant Shares due AOL pursuant to the Supplemental Warrant and
any amendments thereto), TS shall pay to AOL Bounty Fees (as defined
below) as follows:
a. TS shall pay to AOL the applicable Bounty Fee for each Qualified
End User (as defined below) who subscribes to the Long Distance
Telecommunications Services (i) during the Additional Promotion
Period or (ii) following the Additional Promotion Period but only
insofar as such subscription following the Additional Promotion
Period is the result of * * * efforts directed to subscribers to
the AOL Service that may be provided hereunder; provided however,
that, from and after the total number of Qualified End Users for
which TS has paid AOL a Bounty Fee pursuant to this Amendment
equals one million (1,000,000), , TS shall not, subsequent to
such date, be required to pay any further Bounty Fees with
respect to End Users acquired as a result of any such * * *
efforts.
b. A "Qualified End User" is an End User who remains an End User for
at least thirty (30) consecutive days.
c. On the first day of each month commencing March 1, 1998, TS shall
pay AOL the aggregate amount of such Bounty Fees owing to AOL
with respect to the preceding month (or the preceding 35 days, in
the case of the first such payment).
2. "Bounty Fee" means (i) with respect to any Qualified End User who
subscribed to the Services on or before the Change Time (as defined below),
$* * * and (ii) with respect to any Qualified End User who subscribed to
the Services after the Change Time, $* * * , provided that the amount of
any Bounty Fee payable to any Qualified End User (i) whose subscription is
the result of * * * efforts directed to subscribers to the AOL Service and
(ii) who subscribes to any Services at any time after the 120th day after
the commencement of such * * * efforts will be one-half (1/2) of the amount
set forth in clause (i) or (ii), as the case may be. "Change Time" means
the time at which an aggregate of * * * persons or entities shall have
subscribed to the Services since the Effective Date and become End Users
(and regardless of whether such persons or entities shall then be End
Users).
3. In addition to any other payments required hereunder (and in
addition to any Warrant Shares due AOL pursuant to the Supplemental Warrant
and any amendments thereto) and provided that AOL shall have delivered the
Ad Values of promotions and advertisements required by Sections III.A.1(a)
and (b)
5
<PAGE>
to be provided during the Additional Promotion Period, on April 3, 1998, in
consideration of the Additional Promotions and any additional promotion or
marketing provided by AOL to TS during the Additional Promotion Period, TS
shall pay to AOL a guaranteed, non-refundable amount (the "Excess Amount")
equal to (i) $10,000,000 (or $3,000,000 in the event that the Additional
Promotion Period is terminated as of February 28, 1998 pursuant to Section
III.A.1(c) hereof) less (ii) the sum of (x) the aggregate Bounty Fees, if
any, paid to AOL by TS prior to April 3, 1998, and (y) the product of (i)
the Adjustment Value (as defined below) times (ii) the number of the
Warrant Shares, if any, that shall have vested pursuant to the Supplemental
Warrant as of March 31, 1998, with respect to the period between the
Amendment Effective Date and the end of the Additional Promotion Period.
"Holdings Share Price" shall mean the average of the closing prices (as
defined in Section 6(d) of the Supplemental Warrant) for one (1) share of
Holdings' Common Stock during each of the four (4) consecutive business
days prior to April 3, 1998. The "Adjustment Value" shall mean the dollar
figure that shall be determined using the schedule set forth in Attachment
B. The Excess Amount shall be credited against any subsequent TS
obligations to pay Bounty Fees pursuant to the Agreement on or after April
3, 1998 until the full amount of such Excess Amount shall have been so
credited and, following payment of the Excess Amount to AOL, TS shall not
be required to pay the Bounty Fees otherwise payable to AOL hereunder until
such time as the aggregate amount of otherwise payable Bounty Fees equals
the Excess Amount. TS shall thereafter commence payment of Bounty Fees to
AOL as otherwise provided herein."
10. The following new Section V.D is added to Section V of the Agreement:
"D. Offline Marketing Costs. TS shall be responsible for all costs and
expenses associated with (a) any * * * efforts by TS or AOL or either
party's agents, (b) any * * * efforts by AOL or its agents (including,
without limitation, any related * * * efforts) and (c) any * * * efforts by
AOL or its agents (specifically including Incentive Payments, as defined
below, if any, and specifically excluding any television or print media
marketing campaigns) (collectively, the "Offline Marketing Costs");
provided that all Offline Marketing Costs incurred by AOL shall be approved
in writing in advance by TS. The Offline Marketing Costs shall not be
included in the calculation of Actual Services Costs. Except with respect
to the Estimated * * * Costs (as defined below), TS shall pay AOL within
thirty (30) days of receipt of a monthly invoice from AOL detailing the
Offline Marketing Costs for the preceding month. Subject to TS' right to
approve in advance all Offline Marketing Costs, as provided above, TS shall
pay AOL in advance with respect to the Offline Marketing Costs for any * *
* efforts in an amount equal to AOL's reasonable estimate for the costs of
each effort that AOL provides to TS reasonably in advance of the dates
payments are due (such estimated costs, the "Estimated * * * Costs"). which
Estimated * * * Costs shall be payable on the first day of each month
(subject to AOL's having provided the estimate for such month), commencing
March 1, 1998, with respect to Estimated * * * Costs for such
6
<PAGE>
month. As promptly as reasonably possible after the end of each month, AOL
shall provide TS with a statement detailing the Offline Marketing Costs
incurred for any * * * efforts in such month and, to the extent the
aggregate Costs included on such statement are less than the Estimated * *
* Costs previously paid by TS to AOL with respect to such month, AOL shall
promptly pay to TS the amount of such difference and, to the extent the
aggregate Costs included on such statement are greater than the Estimated *
* * Costs previously paid by TS to AOL with respect to such month, TS shall
promptly pay to AOL the amount of such difference. The parties will
mutually agree on how to allocate any costs and expenses other than the
Offline Marketing Costs associated with any further offline marketing and
promotional activities occurring during the remainder of the Term,
including, without limitation, any joint promotional offers with respect to
both the AOL Service and the Long Distance Telecommunications Services."
"Incentive Payments" shall mean such payments as TS may elect to fund, at
its option, pursuant to incentive programs to be implemented for * * *
agents, which programs will be in form and substance to be mutually agreed
upon by the parties.
11. The following new Sections V.F.1 and V.F.2 are added to Section V of the
Agreement:
"1. Substantially concurrently herewith, TS and Holdings are entering
into a written agreement with CompuServe Interactive Services, Inc.
("CompuServe") with respect to the exclusive marketing of TS's
telecommunications services by CompuServe (the "CompuServe Agreement") on
the CompuServe Service (as defined in the CompuServe Agreement). In the
event a Change Event occurs, AOL shall pay, or shall cause CompuServe to
pay, TS within thirty (30) days of such Change Event an amount (the
"Repayment Amount") which shall be calculated in accordance with Attachment
E hereto; provided that, with respect to that portion of the Repayment
Amount allocable to the Base Payment (the "Base Payment Portion"),, AOL
may, at its option, elect, in lieu of paying the Base Payment Portion, to
provide TS with an additional amount of promotion and marketing with
respect to either the AOL Service or the CompuServe Service (as mutually
agreed upon by the parties) (the "Change Event Promotions") with a value,
as measured and calculated using the Ad Value, as defined herein, if the
parties elect to deliver the Change Event Promotions with respect to the
AOL Service, and the "Ad Value" (as defined in the CompuServe Agreement),
if the parties elect to deliver such promotions with respect to the
CompuServe Service, equal to (a) * * * times (b) the amount of the Base
Payment Portion. For purposes of Attachment E: (i) "Credit Amount" shall
mean, as of the date of the Change Event, the aggregate amounts theretofore
credited to TS pursuant to Sections V.C.1(b) and (c); (ii) "Measurement
Date" means the date sixty (60) days subsequent to the Effective Date; and
(iii) "Change Event" means * * *. Immediately following the Change Event,
the parties shall cause the CompuServe Agreement to be terminated; provided
that such termination shall not affect the advertising to be delivered
pursuant to Section V.F.1 (in the event AOL elects to deliver such
advertising in lieu of paying the Base Payment Portion due to TS in
connection with a Change Event). TS hereby expressly
7
<PAGE>
acknowledges and agrees that neither the CompuServe online service (however
defined in this Agreement or the CompuServe Agreement) nor the end users
thereof (including, without limitation, "End Users" as defined in the
CompuServe Agreement) are or shall be deemed to be within the scope of this
Agreement (including, without limitation, the exclusivity provisions set
forth in Section VI.A hereof), (i) by reason of the consummation of AOL's
recent acquisition of CompuServe Interactive Services, Inc. (or the fact of
such acquisition) or (ii) based on the facts known to TS existing as of the
execution date of this Amendment.
3. Unless and until a Change Event shall have occurred, (a) no user of
the TS telecommunications services marketed thereunder pursuant to the
CompuServe Agreement (the "TS/CS Services") shall for any purposes of this
Agreement (excluding any purpose related to the Supplemental Warrant) be,
or be deemed to be, an "End User" as defined and used herein, (b) the TS/CS
Services shall not be, or be deemed to be, "Services" as defined and used
herein, (c) no revenues generated under or by reason of the CompuServe
Agreement shall form a part of, or in any respect be included in, "Gross
Revenues" as defined and used herein, and (d) TS's exclusivity rights set
forth in Section VII.A herein shall not apply in any manner to CompuServe's
marketing of the TS/CS Services.
4. From and after the date a Change Event shall have occurred, (a)
each user of the TS/CS Services shall for all purposes of this Agreement
and the Warrants be, and shall be deemed to be, an "End User" as defined
and used herein, (b) the TS/CS Services shall be, and shall be deemed to
be, "Services" as defined and used herein, (c) all revenues generated under
or by reason of the CompuServe Agreement shall form a part of, and be
included in, "Gross Revenues" as defined and used herein, and (d) TS's
exclusivity rights set forth in Section VII.A herein shall apply to
CompuServe's marketing of the TS/CS Services; provided that, to the extent
that the CompuServe Service shall be operated as a separately accessible
online service (e.g., subscribers are not required to access the service by
first accessing the America Online brand service) (and without
acknowledgment or agreement by AOL that such CompuServe Service satisfies
the definition of AOL Service set forth Section I.A.9 hereof), AOL agrees
that TS shall continue to have the access, linkage, designated area,
display and other similar rights within and with respect to such CompuServe
and the billing and servicing of any End Users thereon that are provided in
the CompuServe Agreement."
5. AOL hereby consents to TS' and Holdings' entering into, and
performing under, the CompuServe Agreement and agrees that, in and of
itself, such conduct shall not constitute a breach by TS or Holdings of
Section VII.A.6 of this Agreement or require the payment of any override
pursuant thereto.
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<PAGE>
12. The following clause (iv) is added to the end of Section XI.A.2 of the
Agreement:
"and (iv) any claim relating to (a) the content of any statement or
claim made by TS in connection with the Services or (b) the content of
any promotion, advertisement or other marketing (whether offline or
online, including * * *) relating to the Services (excluding any
content that was submitted by AOL), which content AOL (x) advised TS
that it was not reviewing, (y) did not receive from TS or was not
otherwise provided a reasonable opportunity to review or (z) reviewed
and provided comments, suggestions or input that were not reflected by
TS in the content (and the claim is based on the content that was not
reflected)."
13. The parties hereby agree to execute an amendment to the Supplemental
Warrant (the "Warrant Amendment"), as soon as reasonably practicable
following the Amendment Effective Date, which shall provide that each "End
User" (as defined in the CompuServe Agreement) acquired through the
CompuServe Service shall be included in the calculation of Warrant Shares
pursuant to Section 1(a) of the Supplemental Warrant. Until such time as
the parties have executed the Warrant Amendment, this paragraph shall serve
as a valid amendment to the Supplemental Warrant and shall be fully
self-executing in all respects.
14. The parties hereby agree that (a) the number of End Users who subscribed to
the Long Distance Telecommunications Services between the Effective Date
and December 31, 1997, is a minimum of * * * and (b) the number of End
Users who subscribed to the Long Distance Telecommunications Services
between December 31, 1997, and January 25, 1998 is * * *. The parties
acknowledge that AOL is utilizing the figure of * * * net End Users as of
December 31, 1997 for purposes of calculating the number of Warrant Shares
due to AOL as of such date; provided that, to the extent the actual number
of net End Users from the period between the Effective Date and December
31, 1997 is greater than * * * (the "Excess End Users"), then TS shall
continue to be responsible to provide AOL Warrant Shares in consideration
of such actual Excess End Users as of December 31, 1998.
15. This Amendment does not, and shall not be construed to, modify any term or
condition of the Agreement (including, without limitation, any payment
obligations under the Agreement) other than those specific terms and
conditions expressly referenced in this Amendment. Except as herein
provided, the Agreement shall remain unchanged and in full force and
effect. In the event of any inconsistency or discrepancy between the
Agreement and this Amendment, the terms and conditions set forth in this
Amendment shall control. Neither party shall be bound by, and each party
specifically objects to, any term, condition or other provision that is
different from or in addition to the provisions of this Amendment and the
Agreement (whether or not it would materially alter this Amendment or the
Agreement) and which is proffered by the other party in any correspondence
or other document, unless the party to be bound thereby specifically agrees
to such provision in writing in accordance with the terms of the Agreement.
This Amendment may be executed in multiple counterparts, each of which
shall be deemed an original, but all of which together shall constitute one
and the same document. This
9
<PAGE>
Amendment shall be governed by the internal laws of the State of New York,
without giving effect to the principles of conflict of laws thereof.
10
EXHIBIT 11.1
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1997 1996 1995(A)
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss) $(20,945) $20,168 $10,819
======== ======= =======
BASIC
Weighted average common shares - Basic 64,168 52,650 31,422
======== ======= =======
Net income (loss) per share - Basic $ (0.33) $ 0.38 $ 0.34
======== ======= =======
DILUTED
Weighted average common and common equivalent
shares outstanding - Diluted:
Weighted average shares 64,168 52,650 31,422
Weighted average equivalent shares -- 4,352 2,183
-------- ------- -------
Weighted average common and common equivalent
shares - Diluted 64,168 57,002 33,605
======= ======= =======
Net income (loss) per share - Diluted $ (0.33) $ 0.35 $ 0.32
======= ======= =======
</TABLE>
- ----------
(A) Pro forma tax provisions have been calculated as if the Company's
results of operations were taxable as a C corporation (the Company's
current tax status) for the year ended December 31, 1995. Prior to
September 20, 1995, the Company was an S corporation with all earnings
taxed directly to its shareholders.
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Name State of Incorporation
- ---- ----------------------
Tel-Save, Inc. ................................................Pennsylvania
Emergency Transport, Inc. .....................................Delaware
Compco, Inc. ..................................................Delaware
Symetrics Industries, Inc. ....................................Florida
