UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999.
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
---------- ---------
COMMISSION FILE NUMBER 0 - 26728
TALK.COM INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
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(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
23-2827736
------------------------------------------------
(I.R.S. EMPLOYER IDENTIFICATION NO.)
12020 SUNRISE VALLEY DRIVE, RESTON, VIRGINIA 22091
-------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES - ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 703-391-7500
TEL-SAVE.COM INC.
6805 ROUTE 202
NEW HOPE, PENNSYLVANIA 18938
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(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE
LAST REPORT.)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTION 13, OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN CONFIRMED
BY A COURT
YES NO
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS: INDICATE THE NUMBER OF SHARES OUTSTANDING
OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE
DATE.
AS OF APRIL 26, 1999, 60,141,892 SHARES OF COMMON STOCK WERE ISSUED AND
OUTSTANDING.
<PAGE>
TALK.COM INC.
FORM 10-Q
MARCH 31, 1999
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998
Consolidated Statements of Operations for the three
months ended March 31, 1999 and 1998
Consolidated Statement of Stockholders' Equity
(Deficit) for the three months ended March
31, 1999
Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II - OTHER INFORMATION
Signatures
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TALK.COM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
- ------------------------------------------------------------------------------ --------- -----------
<S> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents $ 31,064 $ 3,063
Marketable securities -- 89,649
Accounts receivable, trade net of allowance for uncollectible accounts of
$1,540 and $1,669, respectively 43,152 46,587
Advances to partitions and notes receivable 1,150 1,870
Prepaid expenses and other current assets 6,893 8,600
- ------------------------------------------------------------------------------- --------- ---------
TOTAL CURRENT ASSETS 82,259 149,769
Property and equipment, net 57,536 56,703
Intangibles, net 1,129 1,150
Other assets 7,577 64,938
- ------------------------------------------------------------------------------- --------- ---------
TOTAL ASSETS $ 148,501 $ 272,560
=============================================================================== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT:
Margin account indebtedness $ -- $ 49,621
Accounts payable and accrued expenses:
Trade and other 40,578 64,794
Partitions 4,908 4,380
Interest and other 15,758 17,913
- ------------------------------------------------------------------------------- --------- ---------
TOTAL CURRENT LIABILITIES 61,244 136,708
Convertible debt 94,285 242,387
Deferred revenue 26,550 28,400
Other liabilities -- 1,850
- ------------------------------------------------------------------------------- --------- ---------
TOTAL LIABILITIES 182,079 409,345
- ------------------------------------------------------------------------------- --------- ---------
COMMITMENTS AND CONTINGENCIES
Contingent redemption value of common stock 35,289 --
- ------------------------------------------------------------------------------- --------- ---------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares
outstanding -- --
Common stock - $.01 par value, 100,000,000 shares authorized; 66,934,635
and 66,934,635 issued, respectively 669 669
Additional paid-in capital 215,189 265,325
Accumulated deficit (186,898) (218,229)
Treasury stock (97,827) (184,550)
- ------------------------------------------------------------------------------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (68,867) (136,785)
=============================================================================== --------- ---------
TOTAL LIABILITIES, CONTINGENCIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 148,501 $ 272,560
=============================================================================== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
TALK.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------------
1999 1998
- ---------------------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
SALES $ 110,572 $ 91,146
COST OF SALES 74,698 76,580
- ---------------------------------------------------------------------------------- --------- ---------
GROSS PROFIT 35,874 14,566
GENERAL AND ADMINISTRATIVE EXPENSES 10,139 9,628
PROMOTIONAL, MARKETING AND ADVERTISING
EXPENSES - PRIMARILY AOL 14,598 47,322
SIGNIFICANT OTHER CHARGES (INCOME) (1,218) 21,318
- ---------------------------------------------------------------------------------- --------- ---------
OPERATING INCOME (LOSS) 12,355 (63,702)
INVESTMENT AND OTHER INCOME (EXPENSE), NET (21) (4,814)
- ---------------------------------------------------------------------------------- --------- ---------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 12,334 (68,516)
PROVISION (BENEFIT) FOR INCOME TAXES -- (26,721)
- ---------------------------------------------------------------------------------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN 12,334 (41,795)
EXTRAORDINARY GAIN 18,997 --
- ---------------------------------------------------------------------------------- --------- ---------
NET INCOME (LOSS) $ 31,331 $ (41,795)
================================================================================== ========= =========
BASIC EPS:
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN $ 0.21 $ (0.65)
EXTRAORDINARY GAIN 0.32 --
- ---------------------------------------------------------------------------------- --------- ---------
NET INCOME (LOSS) $ 0.53 $ (0.65)
================================================================================== ========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 58,909 64,153
================================================================================== ========= =========
DILUTED EPS:
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN $ 0.20 $ (0.65)
EXTRAORDINARY GAIN 0.30 --
- ---------------------------------------------------------------------------------- --------- ---------
NET INCOME (LOSS) $ 0.50 $ (0.65)
================================================================================== ========= =========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING - DILUTED 62,335 64,153
================================================================================== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
TALK.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
------------------------ PAID-IN ACCUMULATED -------------------------
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
----------- ----------- ------------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 66,935 $669 $265,325 $(218,229) (12,949) $(184,550) $(136,785)
Net income -- -- -- 31,331 -- -- 31,331
AOL investment -- -- (3,730) -- 4,121 58,730 55,000
Exercise of common stock
options -- -- (9,788) -- 1,390 19,807 10,019
Issuance of common stock
for convertible debt -- -- (1,329) -- 575 8,186 6,857
Contingent redemption
value of common stock -- -- (35,289) -- -- -- (35,289)
============================ =========== =========== ============= ============ =========== ============ ============
Balance, March 31, 1999 66,935 $669 $215,189 $(186,898) (6,863) $(97,827) $(68,867)
============================ =========== =========== ============= ============ =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
TALK.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------------
1999 1998
- -------------------------------------------------------------------------------- ------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 31,331 $ (41,795)
Adjustment to reconcile net income (loss) to net cash used in operating
activities:
Unrealized loss on securities -- 4,739
Provision for bad debts (79) (230)
Depreciation and amortization 1,451 1,369
Vested AOL warrants and amortization of prepaid AOL marketing costs -- 35,839
Purchased research and development -- 21,034
Deferred revenue (1,850) (1,850)
Extraordinary gain (18,997) --
Income tax benefit related to exercise of options and warrants -- 8,443
(Increase) decrease in:
Accounts receivable, trade 3,564 (10,042)
Advances to partitions and notes receivable 720 (5,554)
Prepaid expenses and other current assets 1,707 (58,115)
Other assets 536 387
Increase (decrease) in:
Accounts and partition payables and accrued expenses (25,893) 14,762
Other liabilities (1,850) --
- -------------------------------------------------------------------------------- --------- ---------
Net cash used in operating activities (9,360) (31,013)
- -------------------------------------------------------------------------------- --------- ---------
Cash flows from investing activities:
Acquisition of intangibles -- (285)
Acquisition of ADS Holdings, Inc. -- (26,707)
Capital expenditures (2,263) (3,026)
Securities sold short -- (260)
Due from broker -- (6,058)
Sale (purchase) of securities, net 89,649 (382,018)
- -------------------------------------------------------------------------------- --------- ---------
Net cash provided by (used in) investing activities 87,386 (418,354)
- -------------------------------------------------------------------------------- --------- ---------
Cash flows from financing activities:
Repayment of margin account indebtedness (49,621) --
Proceeds from margin account indebtedness -- 161,967
Acquisition of convertible debt (65,423) --
Proceeds from exercise of options and warrants 10,019 6,627
AOL investment 55,000 --
Acquisition of treasury stock -- (8,850)
- -------------------------------------------------------------------------------- --------- ---------
Net cash (used in) provided by financing activities (50,025) 159,744
- -------------------------------------------------------------------------------- --------- ---------
Net increase (decrease) in cash and cash equivalents 28,001 (289,623)
Cash and cash equivalents, at beginning of period 3,063 316,730
================================================================================ ========= =========
Cash and cash equivalents, at end of period $ 31,064 $ 27,107
================================================================================ ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
TALK.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basic Presentation
The consolidated financial statements include the accounts of Talk.com Inc.
and its wholly-owned subsidiaries, and have been prepared as if the entities had
operated as a single consolidated group since their respective dates of
incorporation. All intercompany balances and transactions have been eliminated.
The consolidated financial statements and related notes thereto as of March
31, 1999 and for the three months ended March 31, 1999 and 1998 are presented as
unaudited but in the opinion of management include all adjustments necessary to
present fairly the information set forth therein. These adjustments consist
solely of normal recurring accruals. The consolidated balance sheet information
for December 31, 1998 was derived from the audited financial statements included
in the Company's Form 10-K, as amended. These interim financial statements
should be read in conjunction with that Form 10-K report. The interim results
are not necessarily indicative of the results for any future periods.
2. AOL Agreements
The Company has negotiated a number of amendments to its marketing
agreements with AOL based on the experience gained by the Company in the
marketing and sale of telecom services to AOL subscribers during 1998. A
substantial amendment to the AOL agreement in January 1999 in which the Company
agreed to fixed quarterly payments ranging from $10 to $15 million during the
exclusivity period of the agreement resulted in: the elimination of the
Company's obligation to make bounty and profit-sharing payments to AOL;
alteration of the terms of the online and offline marketing arrangements between
the Company and AOL; extension of the term of the AOL agreement, including the
long distance exclusivity period, until June 2003, although AOL can end the
Company's long distance exclusivity period on or after June 30, 2000 by
foregoing the fixed quarterly payments described above; elimination of AOL's
rights to receive further common stock warrants based upon customers gained from
the AOL subscriber base; AOL's contribution of up to $4.0 million per quarter
for offline marketing; and establishment of the framework for the Company to
offer additional services and products to AOL subscribers. The fixed payments to
AOL are being amortized based on estimated benefits from the AOL subscriber
base.
On January 5, 1999, pursuant to an Investment Agreement between AOL and the
Company, AOL purchased a total of 4,121,372 shares of common stock of the
Company for $55.0 million in cash and the surrender of rights to purchase
5,076,016 shares of common stock of the Company pursuant to various warrants
held by AOL. AOL agreed to end further vesting under the outstanding performance
warrant and retained vested warrants exercisable for 2,721,984 shares of Company
common stock. See Note 4(a) for a discussion of certain reimbursement
obligations of the Company in favor of AOL.
3. Related Party Transactions
On January 5, 1999, Mr. Daniel Borislow, a founder of the Company and its
Chairman of the Board and Chief Executive Officer, resigned as a director and
officer of the Company. The Company entered into various agreements and engaged
in various transactions with Mr. Borislow and certain entities in which he or
his family had an interest.
The Company paid $1.0 million to Mr. Borislow, assigned certain automobiles
to him, and continued certain of his health and medical benefits and director
and officer insurance. The Company also agreed that, as long as Mr. Borislow
owns beneficially at least two percent (2%) of the common stock (on a fully
diluted basis), Mr. Borislow and trusts for the benefit of his children would be
entitled to: registration rights with respect to their shares of common stock;
the right to require the Company to use a portion of the proceeds from any
public or private sale of debt securities, by the Company (excluding borrowings
from commercial banks or other financial institutions) to repurchase debt
securities of the Company owned by Mr. Borislow or the trusts for the benefit of
his children (see Note 4 (b)); and the right to require the Company to use the
proceeds from the exercise of stock
7
<PAGE>
options or share purchase rights to repurchase common stock owned by Mr.
Borislow or the trusts for the benefit of his children. The Company also agreed
that, as long as Mr. Borislow had such beneficial ownership, the Company would
not, without the prior written consent of Mr. Borislow and subject to certain
exceptions: (a) engage in certain significant corporate transactions, including
the sale or encumbrance of substantially all of its assets, mergers and
consolidations and certain material acquisitions, or, (b) for a period of 18
months from the agreement date, offer or sell any of its common stock unless and
until Mr. Borislow and the trusts have sold or otherwise disposed of all the
shares of common stock held by him on the agreement date. In turn, Mr. Borislow
terminated his employment with the Company and agreed not to compete with the
Company for at least one year. Mr. Borislow also agreed to guarantee up to $20.0
million of the Company's obligations in connection with the AOL investment
discussed below.
On January 5, 1999, the Company assigned to a trust for the benefit of Mr.
Borislow's children the Company's interest in $53,700,000 principal amount of
subordinated notes of Communication TeleSystems International d/b/a WorldxChange
Communications, in exchange for $62,545,000 aggregate principal amount of the
Company's 2002 Convertible Notes and 2004 Convertible Notes owned by the trust.
The exchange rate was determined based on the Company's assessment of the fair
values of the WorldxChange Notes and of the Company's Convertible Notes given in
exchange, which assessment was supported by the opinion of an independent
investment banking firm as to the fairness to the Company of the consideration
received.
On January 5, 1999, the Company, in open market transactions, purchased
from two trusts for the benefit of Mr. Borislow's children $65,080,000 aggregate
principal amount of the Company's 2002 Convertible Notes and 2004 Convertible
Notes owned by the trusts for $55.4 million in cash.
On March 18, 1999, the Company purchased from Mr. Borislow $11,477,000
aggregate principal amount of the Company's 2004 Convertible Notes for $10.0
million in cash.
4. Stockholders' Equity
(a) Contingent Redemption Value of Common Stock
On January 5, 1999, pursuant to an Investment Agreement between AOL
and the Company, AOL acquired 4,121,372 shares of common stock for $55.0 million
in cash and the surrender of rights to acquire up to 5,076,016 shares of common
stock pursuant to various warrants held by AOL. Under the terms of the
Investment Agreement with AOL, the Company has agreed to reimburse AOL for
losses AOL may incur on the sale of any of the 4,121,372 shares during the
period from June 1, 1999 through September 30, 2000. The reimbursement amount
would be determined by multiplying the number of shares, if any, that AOL sells
during the applicable period by the difference between the purchase price per
share paid by AOL, or $19 per share, and the price per share that AOL sells the
shares for, if less than $19 per share. The reimbursement amount may not exceed
$14 per share for 2,894,737 shares or $11 per share for 1,226,635 shares.
Accordingly, the maximum amount payable to AOL as reimbursement on the sale of
AOL's shares would be approximately $54.0 million plus AOL's reasonable expenses
incurred in connection with the sale. Assuming AOL were to sell all of its
shares subject to the Company's reimbursement obligation at the closing price of
the Company's common stock as of March 31, 1999, the reimbursement amount would
be approximately $35.3 million or, if the closing price on April 26, 1999, $19.6
million. At March 31, 1999, the Company recorded $35.3 million for the
contingent redemption value of this common stock with a corresponding reduction
in additional paid-in capital. AOL also has the right on termination of long
distance exclusivity under the AOL marketing agreements to require the Company
to repurchase the warrants to purchase 2,721,984 shares of common stock of the
Company held by AOL for a minimum price of $36.3 million, which repurchase price
can be paid in Company common stock. The Company has pledged the stock of its
subsidiaries and has agreed to fund an escrow account of up to $35 million from
50% of the proceeds of any debt financing, other than a bank, receivable or
other asset based financing of up to $50 million, to secure its obligations
under the Investment Agreement with AOL. AOL has not advised the Company that it
intends to sell any shares during the relevant period. Mr. Borislow has agreed
to guarantee up to $20,000,000 of the Company's reimbursement obligations under
the Investment Agreement with AOL.
8
<PAGE>
(b) Restriction on Future Sales of Common Stock
The Company is subject to certain restrictions under the terms of
certain registration rights agreements that could affect the Company's ability
to raise capital. Under these agreements, entered into by the Company for the
benefit of Mr. Borislow and two trusts for the benefit of his children (the
"Trusts"), the Company has agreed that as long as Mr. Borislow continues to own
at least 2% of the Company's outstanding common stock, the Company will use up
to 40% of the proceeds from the sale of any public or private debt securities,
excluding borrowings from a commercial bank or financial institution, to
repurchase the Company's Convertible Notes held by Mr. Borislow or the Trusts
and that until June 2000, the Company will not sell any shares of common stock
of the Company without the consent of Mr. Borislow (other than sales of common
stock on exercise of options or rights as long as the proceeds are used to
repurchase common stock of the Company held by Mr. Borislow or the Trusts). Mr.
Borislow has agreed to subordinate his rights to require the Company to
repurchase the Company's Convertible Notes held by him or the Trusts until the
AOL escrow is fully funded.
9
<PAGE>
TALK.COM INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following tables set forth for the periods indicated certain
financial data as a percentage of sales:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
------------------------------------
1999 1998
---- ----
<S> <C> <C>
Sales 100.0% 100.0%
Cost of sales 67.6 84.0
----- -----
Gross profit 32.4 16.0
General and administrative expenses 9.1 10.6
Promotional, marketing and advertising expenses - primarily AOL 13.2 51.9
Significant other charges (income) (1.1) 23.4
----- -----
Operating income (loss) 11.2 (69.9)
Investment and other income (expense), net -- (5.3)
----- -----
Income (loss) before income taxes 11.2 (75.2)
Provision (benefit) for income taxes -- (29.3)
----- -----
Income (loss) before extraordinary gain 11.2 (45.9)
Extraordinary gain 17.1 --
----- -----
Net income (loss) 28.3% (45.9)%
===== =====
</TABLE>
10
<PAGE>
TALK.COM INC. AND SUBSIDIARIES
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Sales. Sales increased by 21.3% to $110.6 million in the first quarter
of 1999 from $91.1 million in the first quarter of 1998. The increase in sales
resulted from the Company's marketing directed at generating new customers under
the AOL Agreement. This AOL-related sales increase offset a decrease in the
Company's non-AOL sales, and reflected, to a lesser extent, the Company's focus
on marketing under the AOL Agreement.
Cost of Sales. Cost of sales decreased by 2.5% to $74.7 million in the
first quarter of 1999 from $76.7 million in the first quarter of 1998. This
decrease was primarily due to lower network usage costs for OBN services on a
per call basis and lower partition costs due to the Company's decrease in
non-AOL sales.
Gross Margin. Gross margin increased to 32.4% in the first quarter of
1999 from 16.0% in the first quarter of 1998. The increase in gross margin was
primarily due to lower network usage costs for OBN services and lower local and
international access charges, in each case on a per call basis and lower
partition costs due to the Company's decrease in non-AOL sales. The Company
anticipates that gross margins will continue to increase; however, 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.
Other Operating Expenses. General and administrative expenses
increased by 5.3% to $10.1 million in the first quarter of 1999 from $9.6
million in the first quarter of 1998. The increase in general and administrative
expenses was due primarily to the costs associated with hiring additional
personnel to support the Company's continuing growth and increased fees for
professional services. During the first quarter of 1999, the Company incurred
$14.6 million of promotional, marketing and advertising expense to expand its
online customer base. During the first quarter of 1998, the Company expensed
$24.9 million related to the AOL Agreement, $10.9 million for the performance
warrants issued to AOL on March 31, 1998 and $11.5 million of other AOL related
marketing and advertising efforts. During the first quarter of 1999, the Company
sold a division of TSFL Holdings, Inc. (formerly Symetrics Industries, Inc.),
resulting in a gain of $1.2 million which was included in significant other
charges (income). During the first quarter of 1998, the Company allocated $21.0
million of the acquisition cost of TSFL Holdings, Inc. to purchased research and
development expense.
Investment and Other Income (Expense), Net. Investment and other
income (expense), net was $(21,000) in the first quarter of 1999 versus $(4.8)
million in the first quarter of 1998. During the first quarter of 1999,
investment and other income (expense), net consists primarily of investment
income offset by interest expense related to the Company's convertible debt.
Extraordinary gain. During the first quarter of 1999, the Company
recorded an extraordinary gain of $19.0 million from the acquisition of the
Company's convertible debt at a discount from its aggregate principal amount.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $21.0 million and $13.1 million at
March 31, 1999 and December 31, 1998, respectively. This increase in working
capital is primarily a result of the cash generated during the first quarter
1999 from the Company's income before extraordinary gain of $12.3 million,
offset by $2.3 million the Company invested in capital equipment.
The Company expended an aggregate of $126.0 million of cash, Company
common stock and other consideration for the repurchase of Convertible Notes
during the first quarter of 1999. The Company (a) purchased from Mr. Borislow
and two trusts for the benefit of Mr. Borislow's children $76,557,000 aggregate
principal amount of the Company's Convertible Notes for $65.4 million in cash;
(b) exchanged the $53.7 million remaining on the WorldxChange Notes to a trust
for the benefit of Mr. Borislow's children for $62,545,000 aggregate principal
amount of the Company's Convertible Notes and (c) purchased $9,000,000 aggregate
principal amount of the Company's Convertible Notes for $6.9 million in Company
common stock. As of March 31, 1999, the Company had reduced the principal amount
outstanding of its Convertible Notes to $94.3 million ($66.9 million of 4 1/2%
notes and $27.4 million of 5% notes) of which approximately $52.4 million
continues to be held by one of such trusts.
On January 5, 1999, pursuant to an Investment Agreement between AOL
and the Company, AOL acquired 4,121,372 shares of common stock for $55.0 million
in cash and the surrender of rights to acquire up to 5,076,016 shares of common
stock pursuant to various warrants held by AOL. Under the terms of the
Investment Agreement with AOL, the Company has agreed to reimburse AOL for
losses AOL may incur on the sale of any of the 4,121,372 shares during the
period from June 1, 1999 through September 30, 2000. The reimbursement amount
would be determined by multiplying the number of shares, if any, that AOL sells
during the applicable period by the difference between the purchase price per
share paid by AOL, or $19 per share, and the price per share that AOL sells the
shares for, if less than $19 per share. The reimbursement amount may not exceed
$14 per share for 2,894,737 shares or $11 per share for 1,226,635 shares.
Accordingly, the maximum amount payable to AOL as reimbursement on the sale of
AOL's shares would be approximately $54.0 million plus AOL's reasonable expenses
incurred in connection with the sale. Assuming AOL were to sell all of its
shares subject to the Company's reimbursement obligation at the closing price of
the Company's common stock as of March 31, 1999, the reimbursement amount would
be approximately $35.3 million or, if the closing price on April 26, 1999, $19.6
million. At March 31, 1999, the Company recorded $35.3 million for the
contingent redemption value of this common stock with a corresponding reduction
in additional paid-in capital. AOL also has the right on termination of long
distance exclusivity under the AOL marketing agreements to require the Company
to repurchase the warrants to purchase 2,721,984 shares of common stock of the
Company held by AOL for a minimum price of $36.3 million, which repurchase price
can be paid in Company common stock. The Company has pledged the stock of its
subsidiaries and has agreed to fund an escrow account of up to $35 million from
50% of the proceeds of any debt financing, other than a bank, receivable or
other asset based financing of up to $50 million, to secure its obligations
under the Investment Agreement with AOL. AOL has agreed that it will subordinate
its security interests to permit the securitization of certain future financings
by the Company. AOL has not advised the Company that it intends to sell any
shares during the relevant period. Mr. Borislow has agreed to guarantee up to
$20,000,000 of the Company's reimbursement obligations under the Investment
Agreement with AOL.
The Company is subject to certain restrictions under the terms of
certain registration rights agreements that could affect the Company's ability
to raise capital. Under these agreements, entered into by the Company for the
benefit of Mr. Borislow and two trusts for the benefit of his children (the
"Trusts"), the Company has agreed that as long as Mr. Borislow continues to own
at least 2% of the Company's outstanding common stock, the Company will use up
to 40% of the proceeds from the sale of any public or private debt securities,
excluding borrowings from a commercial bank or financial institution, to
repurchase the Company's Convertible Notes held by Mr. Borislow or the Trusts
and that until June 2000, the Company will not sell any shares of common stock
of
12
<PAGE>
TALK.COM INC. AND SUBSIDIARIES
the Company without the consent of Mr. Borislow (other than sales of common
stock on exercise of options or rights as long as the proceeds are used to
repurchase common stock of the Company held by Mr. Borislow or the Trusts). Mr.
Borislow has agreed to subordinate his rights to require the Company to
repurchase the Company's Convertible Notes held by him or the Trusts until the
AOL escrow is fully funded.
The Company generally does not have a significant concentration of
credit risk with respect to accounts receivable due to the large number of end
users comprising the Company's customer base and their dispersion across
different geographic regions. The Company maintains reserves for potential
credit losses and, to date, such losses have been within the Company's
expectations.
The Company does not, and has not historically, required significant
amounts of working capital for its day-to-day operations. The Company believes
that its current cash position 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. The Company
believes that, assuming the current market price of its common stock, its cash
flow from operations will be sufficient to fund any reimbursement amount in the
event that AOL elects after May 31, 1999 to sell its shares of the Company's
common stock at a price below $19 per share and that, alternatively, it has the
ability to obtain the necessary financing to fund its obligations under the AOL
Investment Agreement. Should the Company seek to raise additional capital, there
can be no assurance that, given current market conditions, the Company would be
able to raise such additional capital on terms acceptable to the Company.
YEAR 2000
The "Year 2000 issue" refers to the potential harm from computer
programs that identify dates by the last two digits of the year rather than
using the full four digits. Such programs could fail due to misidentification of
dates on or after January 1, 2000. If such a failure were to occur to the
Company's internal computer-based systems or to the computer-based systems
operated by third parties that are critical to the Company's operations, the
Company could be unable to continue to provide telecommunications services, to
sign up new customers or to bill existing customers for services. Such failures,
if they occurred, would have a material adverse effect on the Company's
business, results of operations and financial condition. However, because of the
complexity of the issues, the number of parties involved and the fact that many
of the issues are outside the Company's control, the Company cannot reasonably
predict with certainty the nature or likelihood of such effects.
The Company, using its internal staff, has conducted a review and test
of most of the internal computer-based systems. Most of the Company's systems
are relatively new. Much of the software used by the Company has been developed
internally and is regularly modified and updated to meet the changing
requirements of its business. The Company expects that its critical internal
systems will be able to process relevant date information in the future to
permit the Company to continue to provide its services without significant
interruption or material adverse effect on its business, results of operations
and financial condition. However, there can be no assurances that the Company
will not experience unanticipated negative consequences caused by undetected
errors or defects in the technology used in its internal systems.
Notwithstanding the Company's expectation that its own systems will be
able to process Year 2000 date information, the Company's business depends
significantly on receiving uninterrupted services by other parties. The
principal service suppliers to the Company include other switch-based
long-distance providers, the local exchange carriers throughout the country and
AOL. Other parties whose ability to deal with Year 2000 issues could affect the
Company include the Company's partitions and the credit and debit card companies
through which most of the Company's AOL customers are billed. The Company has
made inquiry of some of these parties regarding their respective levels of
preparedness for Year 2000 issues as they may affect the Company. The Company
will continue to make such inquiries and will monitor the public disclosures of
such companies regarding their Year 2000 status. So far, the responses to such
inquiries have been generally non-committal regarding levels of preparedness or
willingness to provide assurances to the Company. In almost all cases, the
Company is not in a position to require either affirmative action or assurances
by these parties regarding continued provision of services in the Year 2000.
Accordingly, while the Company has not been advised by any of these other
companies on which it depends that they do not expect to be ready for Year 2000
issues, the
13
<PAGE>
TALK.COM INC. AND SUBSIDIARIES
Company does not believe it is in a position to project the likelihood of such
parties' abilities to provide uninterrupted services to the Company. The Company
has considered possible contingency plans. Although the Company has entered into
multiple contracts with long-distance service providers to support its OBN
network the failure of any of the significant suppliers to provide uninterrupted
service to the Company would likely have a material adverse effect on the
Company's business and its results of operations and financial condition.
The Company does not separately identify costs incurred in connection
with Year 2000 compliance activities. To date, however, the Company does not
believe such costs to be significant because they generally have been incurred
in the normal course of internally modifying and updating the Company's software
programs. Future expenditures are not expected to be significant and will be
funded out of operating cash flows.
* * * * *
Certain of the statements contained herein may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such
statements are identified by the use of forward-looking words or phrases,
including, but not limited to, "estimates," "expects," "expected,"
"anticipates," and "anticipated." These forward-looking statements are based on
the Company's current expectations. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, there
can be no assurance that such expectations will prove to have been correct.
Forward-looking statements involve risks and uncertainties and the Company's
actual results could differ materially from the Company's expectations. In
addition to those factors discussed elsewhere herein, important factors that
could cause such actual results to differ materially include, among others,
adverse developments in the Company's relationship with 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 obligations to update its forward-looking statements.
14
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities
ISSUANCES OF UNREGISTERED SECURITIES
On January 5, 1999, Registrant, pursuant to an Investment
Agreement between Registrant and America Online, Inc. ("AOL"),
issued 4,121,372 shares of Registrant's common stock to AOL in
exchange for $55.0 million in cash and the surrender of rights to
acquire up to 5,076,016 shares of Registrant's common stock
pursuant to various warrants held by AOL.
On February 5, 1999, in connection with the conversions of certain
outstanding convertible notes of Registrant, Registrant issued to
Donaldson, Lufkin & Jenrette an aggregate of 214,338 shares of
Registrant's common stock in addition to the shares that were
issuable upon such conversion in accordance with the terms of such
convertible notes (the issuance of which conversion shares was
registered).
Each of the above issuances was made by Registrant in reliance on
Section 4(2) of the Securities Act of 1933.
Item 5. Other Information
Registrant announced on April 16, 1999, the change of its
corporate name to Talk.com Inc., and the move of its principal
executive offices to Reston, Virginia.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Ownership and Merger merging Talk.com
Inc. into Tel-Save.com, Inc. (changing the name of
Registrant).
3.2 Composite form of Amended and Restated Certificate of
Incorporation of Registrant, as amended through April
26, 1999.
10.1 Letter Agreement, dated as of April 6, 1999, with
respect to the Employment Agreement, dated as of
October 13, 1999, between Registrant and Emanuel
DeMaio.
11 Computation of Net Income Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
Since December 31, 1998, the Company has filed the following
Current Report on Form 8-K:
Current Report on Form 8-K, dated January 20, 1999,
reporting changes in the Chief Executive Officer and
Chairman of the Board of Registrant, certain transactions
between the outgoing Chief Executive Officer and related
parties and Registrant, the signing of certain
telecommunications services agreements, the execution of
amendments to Registrant's agreements with America Online,
Inc. ("AOL") and an investment by AOL in Registrant's common
stock.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 4, 1999 TALK.COM INC.
---------------------------------
(Registrant)
By: /s/ Gabriel Battista
---------------------------------------
Gabriel Battista
Chairman of the Board,
Chief Executive Officer and President
By: /s/ George P. Farley
---------------------------------------
George P. Farley
Chief Financial Officer and Treasurer
By: /s/ Kevin R. Kelly
--------------------------------------
Kevin R. Kelly
Controller
16
EXHIBIT 3.1
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
TALK.COM INC.
INTO
TEL-SAVE.COM, INC.
(to be renamed Talk.com Inc.)
Tel-Save.com, Inc., a corporation organized and existing under and by
virtue of the laws of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That this corporation was incorporated on the 13th day of June,
1995, pursuant to the General Corporation Law of the State of Delaware.
SECOND: That this corporation owns all of the outstanding shares of the
stock of Talk.com Inc., a corporation incorporated on or about the 21st day of
April, 1999, pursuant to the General Corporation Law of the State of Delaware.
THIRD: That this corporation, by the following resolutions of its Board of
Directors, duly adopted by unanimous written consent of the Board as of the 21st
day of April, 1999, determined to and did merge into itself said Talk.com Inc.:
RESOLVED, that Tel-Save.com, Inc. merge, and it hereby does merge into
itself said Talk.com Inc., and that Tel-Save.com, Inc., as the surviving
corporation, assumes all of its obligations; and
RESOLVED, that the merger shall be effective upon the date of filing
with the Secretary of State of Delaware; and
RESOLVED, that upon such date of filing, the name of the surviving
corporation (Tel-Save.com, Inc.) shall be changed to Talk.com Inc.; and
RESOLVED, that the terms and conditions of the merger are as follows:
1. Upon the occurrence of such merger, all shares of Talk.com
Inc. shall be cancelled, and the shares of Tel-Save.com, Inc. (renamed
Talk.com Inc.) shall thereafter constitute the shares of the surviving
corporation.
2. The Certificate of Incorporation of Tel-Save.com, Inc. shall
remain and be the Certificate of Incorporation of the surviving corporation
until the same shall be altered or amended according to the provisions
thereof and in the manner permitted by the statutes of the State of
Delaware.
<PAGE>
3. The By-laws of Tel-Save.com, Inc. shall remain and be the
By-laws of the surviving corporation until the same shall be altered or
amended according to the provisions thereof and in the manner permitted by
the statutes of the State of Delaware.
4. The first annual meeting of the shareholders of the surviving
corporation to be held after the effective date of the merger shall be the
annual meeting provided, by the Bylaws of the said corporation, for the
fiscal year 1999.
5. All persons who at the date when the merger shall become
effective shall be the executive or administrative officers of
Tel-Save.com, Inc. shall be and remain like officers of the surviving
corporation until the board of directors of such corporation shall elect
their respective successors.
6. The surviving corporation shall pay all expenses of carrying
this agreement into effect and of accomplishing this merger.
FURTHER RESOLVED, that the proper officers of this corporation be, and
they hereby are, directed to make and execute a Certificate of Ownership
and Merger setting forth a copy of the resolutions to merge said Talk.com
Inc. and assume its liabilities and obligations, and the date of adoption
thereof, and to cause the same to be filed with the Secretary of State and
a certified copy recorded in the office of the Recorder of Deeds of New
Castle County and to do all acts and things whatsoever, whether within or
without the State of Delaware, which may be in anywise necessary or proper
to effect said merger.
FOURTH: That upon filing of this Certificate, the name of this corporation
shall be changed to Talk.com Inc. pursuant to Subsection (b) of ss.253 of the
General Corporation Law of the State of Delaware.
FIFTH: Anything herein or elsewhere to the contrary notwithstanding, this
merger may be amended or terminated and abandoned by the Board of Directors of
Tel-Save.com, Inc. at any time prior to the date of filing the merger with the
Secretary of State.
2
<PAGE>
IN WITNESS WHEREOF, said Tel-Save.com, Inc. has caused this Certificate to
be signed and attested to by its duly authorized officers this 26th day of
April, 1999.
TEL-SAVE.COM, INC.
(to be renamed Talk.com Inc.)
By: /s/Gabriel A. Battista
----------------------------------
Name: Gabriel A. Battista
Title: President, CEO and Chairman
ATTEST:
By: /s/Aloysius T. Lawn IV
----------------------------------
Name: Aloysius T. Lawn
Title: General Counsel and Secretary
3
EXHIBIT 3.2
Composite
Amended and Restated
Certificate of Incorporation of Talk.com Inc.
FIRST: The name of the corporation is Talk.com Inc. (the "Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is No. 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of the Corporation's registered agent at such address is
The Corporation Trust Company.
THIRD: The purposes for which the Corporation was formed are to engage in
any lawful act or activity for which corporations may be organized under the
Delaware General Corporation Law.
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 305,000,000 shares, consisting of
5,000,000 shares of Preferred Stock, par value $.01 per share, as more fully
described in Section A. below (the "Preferred Stock"), and 300,000,000 shares of
Common Stock, par value $.01 per share, as more fully described in Section B.
below (the "Common Stock").
A. Preferred Stock. The shares of Preferred Stock may be divided and issued
from time to time in one or more series as may be designated by the Board of
Directors of the Corporation, each such series to be distinctly titled and to
consist of the number of shares designated by the Board of Directors. All shares
of any one series of Preferred Stock so designated by the Board of Directors
shall be alike in every particular, except that shares of any one series issued
at different times may differ as to the dates from which dividends thereon (if
any) shall accrue or be cumulative (or both). The designations, preferences and
relative, participating, optional or other special rights (if any), and the
qualifications, limitations or restrictions thereof (if any), of any series of
Preferred Stock may differ from those of any and all other series at any time
outstanding. The Board of Directors of the Corporation is hereby expressly
vested with authority to fix by resolution the powers, designations, preferences
and relative, participating, optional or other special rights (if any), and the
qualifications, limitations or restrictions and (if any), of the Preferred Stock
and each series thereof which may be designated by the Board of Directors,
including, but without limiting the generality of the foregoing, the following:
(1) The voting rights and powers (if any) of the Preferred Stock and
each series thereof;
(2) The rates and times at which, and the terms and conditions on
which, dividends (if any) on the Preferred Stock, and each series thereof, will
be paid and any dividend preferences or rights of cumulation;
<PAGE>
(3) The rights (if any) of holders of the Preferred Stock, and each
series thereof, to convert the same into, or exchange the same for, shares of
other classes (or series of classes) of capital stock of the Corporation and the
terms and conditions for such conversion or exchange, including provisions for
adjustment of conversion or exchange prices or rates in such events as the Board
of Directors shall determine;
(4) The redemption rights (if any) of the Corporation and of the
holders of the Preferred Stock, and each series thereof, and the times at which,
and the terms and conditions on which, the Preferred Stock, and each series
thereof, may be redeemed; and
(5) The rights and preferences (if any) of the holders of the
Preferred Stock, and each series thereof, upon the voluntary or involuntary
liquidation, dissolution or winding up of the Corporation.
B. Common Stock. All shares of Common Stock shall be identical and shall
entitle the holders thereof to the same rights and privileges.
(1) Dividends. When and as dividends are declared upon the Common
Stock, whether payable in cash, in property or in shares of stock of the
Corporation, the holders of Common Stock shall be entitled to share equally,
share for share, in such dividends.
(2) Voting Rights. Each holder of Common Stock shall be entitled to
one vote per share.
(3) Liquidation. In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, after payment
shall have been made to holders of the Preferred Stock of the full amounts to
which they shall be entitled as stated and expressed herein or as may be stated
and expressed pursuant hereto, the holders of Common Stock shall be entitled, to
the exclusion of the holders of the Preferred Stock, to share ratably according
to the number of shares of the Common Stock held by them in all remaining assets
of the Corporation available for distribution to its stockholders.
C. Other Provisions. No holder of any of the shares of any class or series
of stock or options, warrants or other rights to purchase shares of any class of
stock or of other securities of the Corporation shall have any preemptive right
to purchase or subscribe for any unissued stock of any class or series or any
additional shares of any class or series to be issued by reason of any increase
of the authorized capital stock of the Corporation of any class or series, or
bonds, certificates of indebtedness, debentures or other securities convertible
into or exchangeable for stock of the Corporation of any class or series, or
carrying any right to purchase stock of any class or series, but any such
unissued stock, additional authorized shares of any class or series of stock,
securities convertible into or exchangeable for stock, or carrying any right to
purchase stock, may be issued and disposed of pursuant to resolution of the
Board of Directors to such persons, firms, corporations or associations, whether
any such persons, firms,
2
<PAGE>
corporations or associations are holders or others, and upon such terms as may
be deemed advisable by the Board of Directors in the exercise of its sole
discretion.
FIFTH: The Board of Directors shall consist of not less than one (1) nor
more than fifteen (15) persons, the exact number to be fixed and determined from
time to time by resolution of the Board of Directors or, prior to the election
of an initial Board of Directors, by the Incorporator.
SIXTH: Prior to the first closing date for the initial public offering of
the common stock of the Corporation, the directors shall be elected for such
term as is specified by the Incorporator (prior to the issuance of shares) who
elected such directors or by the shareholders which elected such directors, as
the case may be. On and after the first closing date for the initial public
offering of the common stock of the Corporation, the directors shall be divided
into three (3) classes, as nearly equal in number as possible, known as Class 1,
Class 2, and Class 3. The initial directors of Class 1 shall serve until the
third (3rd) annual meeting of shareholders. At the third (3rd) annual meeting of
the shareholders, the directors of Class 1 shall be elected for a term of three
(3) years and, after expiration of such term, shall thereafter be elected every
three (3) years for three (3) year terms. The initial directors of Class 2 shall
serve until the second (2nd) annual meeting of shareholders. At the second (2nd)
annual meeting of the shareholder, the directors of Class 2 shall be elected for
a term of three (3) years and, after the expiration of such term, shall
thereafter be elected every three (3) years for three (3) year terms. The
initial directors of Class 3 shall serve until the first (1st) annual meeting of
shareholders. At the first (1st) annual meeting of shareholders, the directors
of Class 3 shall be elected for a term of three (3) years and, after the
expiration of such term, shall thereafter be elected every three (3) years for
three (3) year terms. Each director shall serve until his successor shall have
been elected and shall qualify, even though his term of office as herein
provided has otherwise expired, except in the event of his earlier death,
resignation, removal or disqualification. This Article Sixth, or any portion
thereof, may be changed by a by-law amendment which is adopted by all of the
then members of Board of Directors.
SEVENTH: In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware, the Board of Directors of the Corporation is
expressly authorized and empowered to make, alter or repeal the By-laws of the
Corporation, subject to the power of the stockholders of the Corporation to
alter or repeal any By-law made by the Board of Directors.
EIGHTH: The Corporation reserves the right at any time and from time to
time to amend, alter, change or repeal any provisions contained in this
Certificate of Incorporation; and other provisions authorized by the laws of the
State of Delaware at the time in force may be added or inserted, in the manner
now or hereafter prescribed by law; and all rights, preferences and privileges
of whatsoever nature conferred upon stockholders, directors or any other persons
whomsoever by and pursuant to this Certificate of Incorporation in its present
form or as hereafter amended are granted subject to the right reserved in this
Article.
3
<PAGE>
NINTH: To the fullest extent permitted by the Delaware General Corporation
Law as the same exists or may hereafter be amended, a director of this
Corporation shall not be liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director.
TENTH: The name and mailing address of the Incorporator is:
Mr. Daniel Borislow
Tel-Save
22 Village Square
New Hope, PA 18938
4
EXHIBIT 10.1
As of April 6, 1999
Mr. Emanuel DeMaio
Dear Manny:
We are writing to confirm our agreements and understandings regarding your
status under your Employment Agreement, dated as of October 13, 1998 (the
"Employment Agreement"), among you, as "Employee", Tel-Save, Inc., as "Company",
and Tel-Save.com, Inc. (formerly, Tel-Save Holdings, Inc.), as "Holdings", from
and after May 14, 1999 (the "Change Date") (except as otherwise defined herein,
capitalized terms shall be defined as in the Employment Agreement):
1. From and after the Change Date, you, as "Employee" under the
Employment Agreement, will cease to be an employee of Company. The
Company agrees that you terminated your employment under the
Employment Agreement for "Good Reason" as defined in Section 5.4 of
such Agreement and that you are entitled to be compensated (or
continue to be compensated) as provided in Section 6.1 of the
Employment Agreement.
2. You will be entitled to no additional compensation for serving as a
director of Holdings. While you may, of course, resign as a director
of Holdings at any time, you hereby agree to resign as a director of
Holdings as and when requested by the Chairman of the Board of
Holdings, but not earlier than August 15, 1999. Furthermore, you agree
that you will, prior to your resignation as a director, vote in favor
of the election or nomination of your successor as a director or such
other person as shall have been designated as a nominee for director
by Company's Chairman of the Board.
3. In addition, you agree that for a period of eighteen months (18)
commencing on the Change Date (the "Consulting Period"), that you will
provide consulting services to the Company (the "Services"). We shall
compensate you for the Services at the rate of two hundred dollars
($200) per hour. You shall provide the Company with an invoice for
Services rendered not more frequently than each calendar month. If the
Company does not dispute such invoice, the Company shall pay the
amount of such invoice promptly after receipt of such invoice by the
Company. In addition, you agree that during the Consulting Period that
you will not enter into any agreement, understanding, or relationship
that would prohibit the performance of the Services by you or that
would create a conflict of interest with regard to the performance of
the Services.
4. You will make yourself available and shall cooperate, in each case to
the extent reasonably requested by Company or Holdings, in respect of
any litigation or other proceedings that arise out of or by reason of
the conduct of Company's or Holding's business or operations during
any time that you were a director or officer thereof, without further
compensation or payment except the payment of your reasonable
out-of-pocket costs and expenses in connection therewith.
<PAGE>
5. Except as specifically provided herein, the Employment Agreement shall
continue in full force and effect.
If the foregoing correctly sets forth our agreements and understandings,
please so acknowledge by signing the enclosed copy of this letter agreement in
the space provided and returning it to us, whereupon this shall be a valid and
binding agreement by and among us. Very truly yours,
Tel-Save, Inc.
By:/s/ Aloysius T. Lawn, IV
----------------------------
Name: Aloysius T. Lawn, IV
Title: General Counsel and
Secretary
Tel-Save.com, Inc.
By:/s/ Aloysius T. Lawn, IV
----------------------------
Name: Aloysius T. Lawn, IV
Title: General Counsel and
Secretary
Accepted and agreed as of the date first above written:
/s/ Emanuel DeMaio
- ---------------------------------
Emanuel DeMaio
EXHIBIT 11
TALK.COM INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income (loss) before extraordinary gain $ 12,334 $(41,795)
Extraordinary gain 18,997 --
-------- --------
Net income (loss) $ 31,331 $(41,795)
======== ========
BASIC
Weighted average common shares outstanding - Basic: 58,909 64,153
======== ========
Income (loss) before extraordinary gain $ 0.21 $ (0.65)
Extraordinary gain 0.32 --
-------- --------
Net income (loss) $ 0.53 $ (0.65)
======== ========
DILUTED
Weighted average common and common equivalent shares outstanding - Diluted:
Weighted average shares 58,909 64,153
Effect of assumed conversion of common stock options 3,426 --
-------- --------
Weighted average common and common equivalent shares - Diluted 62,335 64,153
======== ========
Income (loss) before extraordinary gain $ 0.20 $ (0.65)
Extraordinary gain 0.30 --
-------- --------
Net income (loss) $ 0.50 $ (0.65)
======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999 AND THE UNAUDITED
CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1999 OF
TALK.COM INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> $31,064,000
<SECURITIES> 0
<RECEIVABLES> 44,692,000
<ALLOWANCES> 1,540,000
<INVENTORY> 0
<CURRENT-ASSETS> 82,259,000
<PP&E> 66,530,000
<DEPRECIATION> 8,994,000
<TOTAL-ASSETS> 148,501,000
<CURRENT-LIABILITIES> 61,244,000
<BONDS> 94,285,000
0
0
<COMMON> 669,000
<OTHER-SE> (69,536,000)
<TOTAL-LIABILITY-AND-EQUITY> 148,501,000
<SALES> 0
<TOTAL-REVENUES> 110,572,000
<CGS> 0
<TOTAL-COSTS> 74,698,000
<OTHER-EXPENSES> 23,519,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 997,000
<INCOME-PRETAX> 12,334,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 12,334,000
<DISCONTINUED> 0
<EXTRAORDINARY> 18,997,000
<CHANGES> 0
<NET-INCOME> 31,331,000
<EPS-PRIMARY> 0.53
<EPS-DILUTED> 0.50
</TABLE>
