A very interesting article about our poster child for corporate fraud...TALK (from TheStreet.com).
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Top Stories: Tel-Save Tells All
By Alex Berenson
Senior Writer
8/17/98 11:03 AM ET
God may look after fools and drunkards, but Daniel Borislow is on his own.
That's the message in an ugly, ugly earnings report from Tel-Save Holdings (TALK:Nasdaq), a Pennsylvania telco that has the exclusive right to market long-distance service to America Online (AOL:NYSE) subscribers.
For months, short-sellers have circled around Tel-Save and Borislow, its quick-tempered chairman. On Friday night, long after the close of trading, on the last day to file second-quarter earnings with the Securities and Exchange Commission, the company gave them everything they hoped for.
"The charade has ended," says David Rocker, a well-known hedge fund manager who is short Tel-Save.
Indeed, Tel-Save's earnings report contained so much bad news it's hard to know where to start. The company's pretax loss tripled in the quarter to $29 million, or 45 cents per share, while shareholders' equity plunged from $223 million at the end of 1997 to $85 million at the end of June. And Tel-Save warned that more losses were likely because of spiraling marketing expenses.
Still, Borislow, who did not return repeated calls for comment, kept a brave face in a press release discussing the company's earnings. "Tel-Save will have the opportunity to earn over $1.50 per share in 1999," the chairman bragged in a press release. Opportunity to earn? That's language only Bill Clinton could love. The company's 10-Q, also filed Friday, paints an even grimmer picture of Tel-Save's prospects:
After six months of promising that a takeover of Tel-Save was imminent, Borislow admits he's been unable to find a buyer. "The company has been exploring the possibility of being acquired by larger entities and had discussion with a number of potential suitors. Such discussions have not resulted in any acquisition agreement and have ceased."
Tel-Save took an extraordinary write-down of its "deferred tax assets." Generally, companies are allowed to offset prior losses against corporate profits when paying taxes. The idea is that a company that loses $50 million one year, then makes $150 million the next for a total profit of $100 million, should pay the same amount of tax as a company that makes $50 million in both years.
So companies that lose money usually carry a portion of the loss on their books as a "deferred tax asset," because it will be available to reduce future taxes. But in the second quarter, Tel-Save wrote off all its deferred tax assets, resulting in a one-time loss of an additional $78.4 million.
The company said it wrote off the tax assets because it found it was "more likely than not" that it would never be able to realize them. "It's an accounting requirement that you cannot recognize an asset if you don't think it's an asset," Rocker says. "You eliminate a tax-loss carry-forward when you don't think you're going to have future profits."
Tel-Save said its marketing expenses are likely to approach $200 million for the rest of 1998 alone, resulting in "a significant operating loss for fiscal 1998," with much of that money going to market Tel-Save to AOL subscribers. The company also noted that "competitive factors intensified during the period, making gains in subscriber base more costly and more time-consuming."
Borislow said he's negotiating the possible acquisition of little-known WorldxChange Communications, which Tel-Save described as "a privately held telecommunications company with 1997 revenues of approximately $325 million," for $500 million to $600 million in stock. Tel-Save has already lent WorldxChange $40 million.
Even by the rough-and-tumble standards of second-tier long-distance companies, which often face customer complaints, WorldxChange's record is dismal: Last year, California revoked WorldxChange's license to provide service within the state for at least three years and fined the company almost $20 million because the company repeatedly "slammed" customers, changing their long-distance service providers without authorization.
WorldxChange also earned a Standard & Poor's debt rating of triple-C -- a low junk rating -- for a proposed $180 million May offering. "WorldxChange's rating reflects the company's historically marginal business practices, which resulted in alleged regulatory violations in six states; its aggressive financial policy; and the intensely competitive environment of the domestic and international long-distance markets," the rating agency said.
"However, no agreement has been reached," Tel-Save concluded in disclosing the WorldxChange talks. Maybe that's for the best.
For the quarter, Tel-Save's gross margin -- before marketing and administrative expenses -- was a dismal 16%. That compares to gross margins of close to 50% for companies like Sprint (FON:NYSE).
After opening at 10 3/8, Tel-Save rose in early trading Monday. Just after 10 a.m., it traded at 12 3/16, up 5/8.
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