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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1994
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _________________
Commission File Number 0-11258
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LDDS COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
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Georgia 58-1521612
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
515 East Amite Street, Jackson, Mississippi 39201-2702
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (601) 360-8600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
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
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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 to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 17, 1995 was:
Common Stock, $.01 par value: $ 3,239,450,426
Series 2 6.50% Cumulative Senior Perpetual Convertible Preferred Stock:
$105,033,496
There were 160,886,966 shares of the registrant's Common Stock outstanding as
of March 17, 1995.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement of the registrant for the
registrant's 1995 Annual Meeting of Shareholders, which definitive proxy
statement will be filed with the Securities and Exchange Commission not later
than 120 days after the registrant's fiscal year end of December 31, 1994, are
incorporated by reference into Part III.
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GLOSSARY
ACCESS CHARGES -- Expenses incurred by an IXC and paid to LECs for accessing
the local networks of the LECs in order to originate and terminate long
distance calls.
AT&T -- AT&T COMMUNICATIONS, INC. -- An IXC wholly owned by American Telephone
and Telegraph Company which provides interexchange services and facilities on a
nationwide and international basis.
AT&T DIVESTITURE DECREE -- Entered on August 24, 1982, by the United States
District Court for the District of Columbia. The AT&T Divestiture Decree,
among other things, ordered AT&T to divest its wholly owned BOCs from its Long
Lines Division and manufacturing operations and generally prohibited BOCs from
providing long distance telephone service between LATAs.
BOC -- BELL SYSTEM OPERATING COMPANY -- A local exchange carrier owned by any
of the seven Regional Bell Operating Companies, which are holding companies
established following the AT&T Divestiture Decree to serve as parent companies
for the BOCs.
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".
FCC -- Federal Communications Commission.
INBOUND "800" SERVICE -- A service that assesses long distance telephone
charges to the called party.
IXC -- INTEREXCHANGE CARRIER -- A long distance carrier providing services
between local exchanges.
LATAS -- LOCAL ACCESS AND TRANSPORT AREAS -- The approximately 200 geographic
areas defined pursuant to the AT&T Divestiture Decree between which the BOCs
are generally prohibited from providing long distance service.
LEC -- LOCAL EXCHANGE CARRIER -- A company providing local telephone services.
Each BOC is a LEC.
LINE COSTS -- Primarily includes the sum of access charges and transport
charges.
LOCAL EXCHANGE -- A geographic area generally determined by a PUC, in which
calls generally are transmitted without toll charges to the calling or called
party.
MCI -- MCI TELECOMMUNICATIONS CORPORATION -- An IXC which provides
interexchange services on a nationwide and international basis.
NETWORK SWITCHING CENTER -- A location where installed switching equipment
routes long distance calls and records information with respect to calls such
as the length of the call and the telephone numbers of the calling and called
parties.
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GLOSSARY
(Continued)
OSP -- OPERATOR SERVICE PROVIDER -- Any common carrier or other person
providing any automatic or live assistance to a consumer to arrange for billing
or completion, or both, of a telephone call initiated from an aggregator
location, other than by means of automatic completion of the call with billing
to the originating telephone or completion through an access code used by the
consumer with billing to a previously established account.
PTT - POST TELEPHONE AND TELEGRAPH ADMINISTRATION -- The PTTs, usually
controlled by their governments, provide telephone and telecommunications
services in most foreign countries.
PUC -- PUBLIC UTILITY COMMISSION -- 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 (sometimes
referred to as Public Service Commissions, or PSCs).
RBOC -- REGIONAL BELL OPERATING COMPANY -- Any of seven regional Bell holding
companies which the AT&T Divestiture Decree established to serve as parent
companies for the BOCs.
SPRINT -- SPRINT CORPORATION - An IXC which provides interexchange services on
a nationwide and international basis.
SUBSCRIBERS -- Commercial and residential customers for which an IXC provides
direct dial long distance telephone service. For operator assisted long
distance telephone service, "Subscribers" refer to owners of pay telephones,
owners of premises on which pay telephones are located, and multi-telephone
facilities such as hotels and hospitals with which an OSP contracts to process
and transmit operator assisted long distance telephone calls.
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 communications service or facility, which functions in
lieu of a contract between the Subscriber or user and the supplier or carrier.
TRANSPORT CHARGES -- Expenses paid to facilities-based carriers for
transmission of calls between or within LATAs.
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TABLE OF CONTENTS
PART I
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Page
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Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . 15
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters . . . . . . . . . . . 16
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . 28
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . 30
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . 30
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . 30
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K . . . . . . . . . . . . . . . 31
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1
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PART I
ITEM 1. BUSINESS
GENERAL
LDDS Communications, Inc., a Georgia corporation ("LDDS" or the "Company"), is
one of the four largest long distance telecommunications companies in the United
States based on 1993 revenues. The Company provides long distance
telecommunications services through its network of fiber optic cables, digital
microwave and fixed and transportable satellite earth stations to business and
residential customers, with service to points throughout the nation and is a
full service provider of international telecommunications services as well as
specialized broadcasting services. The products and services provided by LDDS
include: switched and dedicated long distance products, 800 services, calling
cards, operator services, private lines, frame relays, debit cards, conference
calling, advanced billing systems, facsimile and data connections, television
and radio transmission and mobile satellite communications.
LDDS was organized in 1983. Its operations have grown as a result of
management's emphasis on a four-point growth strategy, which includes internal
growth, the selective acquisition of smaller long distance companies with
limited geographic service areas and market shares, the consolidation of
certain third tier long distance carriers with larger market shares, and
international expansion. On September 15, 1993, a three-way merger occurred
whereby (i) Metromedia Communications Corporation, a Delaware corporation
("MCC"), merged with and into Resurgens Communications Group, Inc., a Georgia
corporation ("Resurgens"), and (ii) LDDS Communications, Inc., a Tennessee
corporation ("LDDS-TN"), merged with and into Resurgens (the "Prior Mergers").
At the time of the Prior Mergers, the name of Resurgens, the legal survivor,
was changed to LDDS Communications, Inc. and the separate corporate existences
of LDDS-TN and MCC terminated. For accounting purposes, however, LDDS-TN was
the survivor because the former shareholders of LDDS-TN acquired majority
ownership of LDDS. Accordingly, unless otherwise indicated, all historical
information presented herein reflects the operations of LDDS-TN. Information
in this document has also been revised to reflect the stock splits of the
Company's common stock. See Note 1 of Notes to Consolidated Financial
Statements.
BUSINESS COMBINATIONS
The Company's continued emphasis on acquisitions has taken the Company from a
small regional long distance carrier to one of the largest long distance
telecommunications companies in the industry, serving customers domestically
and internationally.
On January 5, 1995, LDDS completed the acquisition of Williams
Telecommunications Group, Inc. ("WilTel"), a subsidiary of The Williams
Companies, Inc. ("Williams"), for approximately $2.5 billion in cash (the
"WilTel Acquisition"). Through this purchase, the Company acquired a
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nationwide common carrier network of approximately 11,000 miles of fiber optic
cable and digital microwave facilities. The WilTel Acquisition was effected
pursuant to a Stock Purchase Agreement dated as of August 22, 1994, by and
among LDDS, Williams and WTG Holdings, Inc. The WilTel Acquisition is being
accounted for as a purchase for financial reporting purposes. The funds paid
to Williams were obtained by LDDS under a new credit facility entered into on
December 21, 1994. See Note 4 of Notes to Consolidated Financial Statements.
On December 30, 1994, LDDS, through a wholly owned subsidiary, merged with IDB
Communications Group, Inc., a Delaware corporation ("IDB"). IDB operates a
domestic and international communications network providing international and
private line and public switched long distance telecommunications services,
facsimile and data connections, television and radio transmission services and
mobile satellite communications capabilities. As a result of this merger (the
"IDB Merger"), each share of common stock of IDB was converted into the right
to receive 0.476879 shares of LDDS common stock (the "Common Stock") resulting
in the issuance of approximately 35,881,000 shares of Common Stock. In
addition, LDDS assumed, on a subordinated basis, jointly and severally with
IDB, the obligations of IDB to pay the principal of and interest on $195.5
million 5% convertible subordinated notes due 2003, issued by IDB. The IDB
Merger was accounted for as a pooling-of-interests and accordingly, the LDDS
financial statements for the periods prior to the IDB Merger have been restated
to include the results of IDB for all periods presented.
In 1993, upon effectiveness of the Prior Mergers, each share of the outstanding
common stock of LDDS-TN was converted into the right to receive 0.9595 shares
of Common Stock. The 500,000 shares of LDDS-TN Series B 6.5% Cumulative Senior
Perpetual Convertible Preferred Stock outstanding were converted into 2,000,000
shares of LDDS Series 2 6.5% Cumulative Senior Perpetual Convertible Preferred
Stock having a liquidation value of $25 per share and a conversion price of
$11.81171 per share (the "Series 2 Preferred Stock"). As a result of the
consummation of the Prior Mergers, Metromedia Company ("Metromedia"), the sole
stockholder of MCC, received 2,758,620 shares of the Common Stock, 10,896,785
shares of LDDS Series 1 $2.25 Cumulative Senior Perpetual Convertible Preferred
Stock having a liquidation value of $50 per share and a conversion price of
$24.9046875 per share (the "Series 1 Preferred Stock"), warrants to purchase
5,000,400 shares of the Common Stock at an average price of $8.35 per share,
and $150.0 million in cash. The common stock of Resurgens was unchanged in the
Prior Mergers.
On December 4, 1992, LDDS-TN, through a wholly owned subsidiary, merged with
Advanced Telecommunications Corporation ("ATC"). As a result of this merger
(the "ATC Merger"), each share of common stock of ATC was converted into the
right to receive 0.83 shares of common stock of LDDS-TN. The ATC Merger was
accounted for under the pooling-of-interests method.
The following table sets forth certain data concerning the Company's
acquisitions, during the past five years, of companies with annual revenues
exceeding $50.0 million, other than the WilTel Acquisition, the IDB Merger and
the ATC Merger.
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Revenues for Fiscal Year
Preceding Acquisition
Name Acquisition Date (In thousands)
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MidAmerican Communications Corporation July 1991 $ 75,924
AmeriCall and First Phone ("AmeriCall") February 1992 65,028
World Communications, Inc. ("WorldCom") December 1992 90,602
Dial-Net, Inc. ("Dial-Net") March 1993 69,328
Metromedia Communications Corporation September 1993 368,532
Resurgens Communications Group, Inc. September 1993 151,963
TRT Communications, Inc. ("TRT") September 1993 175,057
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In addition to the acquisitions reflected in the above table, LDDS and its
predecessors have completed a number of other acquisitions involving companies
each with annual revenues of less than $50.0 million.
COMPANY STRATEGY
The Company follows a four-point growth strategy, consisting of internal
growth, the selective acquisition of smaller long distance companies with
limited geographic service areas and market shares, the consolidation of
certain third tier long distance carriers with larger market shares and
international expansion.
A decentralized management system allows regional managers responsibility and
authority for the development of area customers. Regional management directs
resources toward attracting new accounts as well as expanding product usage by
current customers.
A predominant share of the Company's total revenues is derived from commercial
customers. Commercial customers typically use higher volumes of
telecommunications services than residential customers and concentrate that
usage on weekdays during business hours when rates are highest. Consequently,
commercial customers, on average, generate higher revenues per account than
residential customers.
The Company anticipates that it will continue to experience growth both
internally and through selective acquisitions. During 1995, the Company will
complete the assimilation of recent acquisitions and will also continue to
pursue new services and the expansion of present product lines. The Company's
management continues to explore opportunities for further acquisitions within
its existing service areas as well as international markets.
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SERVICES
GENERAL. The Company is one of the largest U.S. based long distance
telecommunications companies in the industry, based on revenues, and serves its
customers domestically and internationally. The products and services provided
by the Company include switched and dedicated long distance products, 800
services, calling cards, operator services, private lines, frame relays, debit
cards, conference calling, advanced billing systems, facsimile and data
connections, television and radio transmission and mobile satellite
communications.
DOMESTIC LONG DISTANCE. There are several ways in which a customer can access
the Company's network. In areas where equal access has been made available, a
customer who has selected the Company as its IXC can utilize the Company's
network for inter-LATA long distance calls through "one plus" dialing of the
desired call destination. Equal access customers can access the Company's
network only for inter-LATA long distance calls, because under equal access,
all intra-LATA calls are routed through the LEC.
Customers in areas without equal access or customers in equal access areas who
do not select the Company as their IXC can utilize the Company's network for
all their long distance calls through three methods of "dial-up access." They
can dial a local telephone number to access the Company's computerized
switching equipment and then enter a personal authorization code and the area
code and telephone number of the desired call destination. Alternatively,
customers can access the Company's network by using its automatic dialers,
which eliminate the need for the customer to dial the local access number and
personal authorization code, effectively giving the customer "one plus"
dialing. Customers may also access the Company's network by dialing 10 plus
the three digit Carrier Identification Number belonging to the Company and the
area code and telephone number of the desired call location. Regardless of the
method used, dial-up customers can access the Company's network for all of
their long distance calls, both intra-LATA and inter-LATA.
High-volume customers can access the LDDS network through the use of
high-capacity dedicated circuits.
The Company provides each of its customers a detailed monthly call report and
invoice for services setting forth the date, number called, duration of call
and time and charges for each call. The Company also offers specialized
billing services which include a variety of custom features, including account
coding which permits identification of long distance calls in a single account
by caller or project.
Customer bills are primarily prepared by Electronic Data Systems Corporation
("EDS"), through a facilities management agreement under which EDS performs
most of the Company's data processing functions. See Note 6 of Notes to
Consolidated Financial Statements.
INTERNATIONAL LONG DISTANCE. The Company offers international private line and
public switched long distance telecommunications services to government and
commercial organizations worldwide.
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The Company has over 200 operating agreements in foreign countries, thereby
making the Company a leading participant in the international
telecommunications market.
Through these operating agreements, international long distance traffic is both
delivered and received. Under these agreements, foreign carriers are
obligated to adhere to the policy of the FCC whereby traffic from the foreign
country is routed to international carriers of which the Company is one, in the
same proportion as traffic carried into the foreign country.
The Company provides permanent and temporary domestic and international private
line services to customers for a number of applications. These applications
generally involve establishing private, international point-to-point
communications links for customers who need special services, such as heavy
data and voice usage, lower cost and greater security. The Company has private
line operating agreements with 160 foreign countries and is the carrier for
many of the world's most critical communications links, including the
Washington-Moscow hotline, the nuclear risk reduction circuit and launch
control circuits for the NASA Space Program. The Company also provides
international private line services for a range of financial, airline,
commercial and governmental communications networks.
The Company also offers public switched international telecommunications
services worldwide and provides direct services to 59 foreign countries. The
Company sells telecommunications services to both corporate customers and to
domestic long distance carriers that lack transmission facilities to locations
served by the Company or need more transmission capacity. Accessing the
Company's international switching center via permanent domestic connections or
via dial-up access code, customers can make international telephone calls.
Such operations are subject to certain risks such as changes in foreign
government regulations and telecommunications standards, licensing
requirements, tariffs or taxes and other trade barriers and political and
economic instability. In addition, the Company's revenues and costs of sales
are sensitive to changes in international settlement rates.
OTHER SERVICES. LDDS provides its billing and collection and operator services
to other IXCs. Due to the time and expense associated with the negotiation of
billing and collection agreements, many IXCs choose not to establish operator
services or to obtain billing and collection agreements. Using LDDS' operator
services enables IXCs to retain revenues by carrying operator assisted traffic
over their own networks.
In addition, the Company offers a broad range of related services which enhance
customer convenience, add value and provide additional revenue sources.
Advanced "800" service offers features for caller and customer convenience,
including a variety of call routing and call blocking options, customer
reconfiguration, termination overflow to switched or dedicated lines, Dialed
Number Identification Service (DNIS) and real-time Automatic Number
Identification (ANI), and flexible after-hours call handling services. The
Company's OnLine travel card offers worldwide calling services, caller-friendly
voice mail with message waiting signal, message storage and
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delivery, conference calling, personal greetings, speed dialing, customer
deactivation and reactivation of cards, customer card and private-label card
options.
The Company through its broadcast operations, provides radio and television
broadcast transmission services for major network, cable, syndication,
pay-per-view, sports and special event programmers. Services are provided
domestically and internationally on a full-time or occasional-use basis using
C-band and Ku-band technology, and include uplink and downlink services, tape
playback, scrambling and resale of satellite transponder time. The Company
also provides point-to-multipoint transmissions, or program distribution, in
which, for example, the Company transmits a data signal to a network of small
antennas or transmits the radio or television programming of a network or
program syndicator to its affiliated stations. For point-to-multipoint
transmission, satellites generally are superior to other technologies because
they disperse a signal throughout a large geographic area for cost- effective
transmission. Satellites also permit signal transmission from remote sites
where no other communications facilities are available and are used
particularly for television signals that cannot be transmitted through
conventional phone lines. Although the Company offers the aforementioned
broadcast services, such services are not a part of the Company's core business
operations. Accordingly, subsequent to December 31, 1994, the Company sold its
simulcasting operations and entered into an agreement to outsource the
management of the remaining broadcast operations.
The Company also designs, installs and integrates "turnkey" transmission
facilities and communications networks primarily for international customers.
Services provided include fixed customer premise earth stations, network
management systems, system integration consulting and project management.
TRANSMISSION FACILITIES
Domestically, the Company owns a 1,300 mile digital fiber optic network serving
Florida and Georgia, a 45 tower, 400 mile digital microwave network in Texas
and a 127 tower, 2,678 mile digital microwave network which runs from New York
City to Houston, with extensions to Dallas and Pittsburgh. In January 1995,
the Company acquired through the purchase of WilTel, a network of approximately
11,000 miles of fiber optic cable and digital microwave facilities with access
to approximately 30,000 miles of additional fiber optic network through lease
agreements with other carriers. The new combined network, consisting of more
than 15,000 miles of fiber optic cable and microwave equipment with access to
an additional 40,000 miles of fiber optic network through lease agreements with
other carriers, is one of the four nationwide fiber optic networks in the
country.
Internationally, the Company owns fiber optic facilities on most major
international cable systems in the Pacific and Atlantic Ocean regions,
providing fiber optic cable connections between the United States and the
Pacific Rim and the United States and Europe. LDDS also owns fiber optic cable
for services to the former Soviet Union and to Latin America.
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Additionally, the Company owns 22 international gateway earth stations and
approximately 50 domestic earth stations, which enable LDDS to provide radio,
television, private line and public switched telecommunications services to and
from locations throughout the world. LDDS also owns fixed earth stations
located in 33 metropolitan areas, including seven international gateway earth
stations in San Francisco and Washington D.C., which serve as central
collection points for domestic traffic and connect the network with
international satellites.
The Company's ability to generate profits is largely dependent upon its ability
to optimize the different types of transmission facilities used to process and
complete calls. These facilities are complemented by a highly efficient least
cost routing plan which is accomplished through state-of-the-art digital
switching technology and dynamic network routing software. Calls can be routed
over fixed cost transmission facilities or variable cost transmission
facilities. Fixed cost facilities, including the Company's owned networks are
typically most cost effective for routes that carry high volumes of traffic.
The Company's expansion has been to contiguous geographic areas which has
enabled the Company to concentrate a significant portion of its traffic over
fixed cost transmission facilities and thereby achieve an overall lower network
cost. In addition, a variety of lease agreements for fixed and variable cost
(usage sensitive) services ensure maximum diversity in processing calls.
NETWORK SWITCHING
The Company owns or leases computerized network switching equipment that routes
all of its customers' long distance calls. The Company presently maintains
approximately 50 digital switching centers. The Company's state-of-the-art
digital switching equipment is fully interconnected with digital transmission
lines. The Company has upgraded its entire network with the addition of SS7
common channel signalling, which increases efficiencies by eliminating connect
time delays and provides "look ahead" routing. In addition to networking, the
Company's switching equipment verifies customers' pre-assigned authorization
codes, records billing data and monitors system quality and performance.
In addition to the switching centers, the Company has a number of other offices
which are known as points of presence. These points of presence allow the
Company to concentrate customers' traffic at locations where the Company has
not installed switching equipment. The traffic is carried to switching centers
over the Company's digital transmission network.
RATES AND CHARGES
LONG DISTANCE. The Company charges customers on the basis of minutes or
partial minutes of usage at rates that vary with the distance, duration and
time of day of the call. The rates charged are not affected by the particular
transmission facilities selected by the Company's network switching centers for
transmission of the call. Additional discounts are available to customers who
generate higher volumes of monthly usage.
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Domestic business services are billed in six-second increments; others are
billed in partial minutes rounded to the next minute. Long distance services
are billed in arrears, with monthly billing statements itemizing date, time,
duration and charges; private line services are billed monthly in advance, with
the invoice indicating the number of circuits and applicable rates.
The Company's rates are generally designed to be competitive with those charged
by other long distance carriers. The rates offered by the Company may be
adjusted in the future if other IXCs continue to adjust their rates.
OPERATOR ASSISTED LONG DISTANCE. The Company has billing and collection
services agreements with each of the RBOCs and BOCs, as well as all major
independent telephone companies, under which these companies bill the callers
for operator assisted telephone calls processed and transmitted by the Company.
Since January 1990, the Company has maintained access through a third party to
the billing validation data bases of credit card issuers, the RBOCs and certain
LECs. These data bases enable the Company to verify the validity of charge
cards used by callers to pay for operator assisted long distance telephone
calls. Validation reduces the Company's unbillable and uncollectible call
expense because the operator can verify the validity of credit card numbers and
collect or third party billing instructions before transmitting the call, which
saves network expenses.
MARKETING AND SALES
LDDS markets its long distance services primarily through a direct sales force
of approximately 1,700 employees worldwide which are targeted at specific
geographic markets. LDDS markets its operator assisted services through
telemarkets and trade shows. LDDS' sales force also provides advanced sales
specialization for the data and international marketplaces, including domestic
and international private line services.
In each of its geographic markets, the Company employs full service support
teams that provide its customers with prompt and personal attention. A
customer service representative is assigned to each customer account whose
monthly business exceeds $750. With offices nationwide, LDDS' localized
management, sales and customer support are designed to engender a high degree
of customer loyalty and service quality.
COMPETITION
The Company faces intense competition in providing long distance
telecommunications services. Domestically, LDDS competes for interLATA
services with other national and regional IXCs, including AT&T, MCI and Sprint;
with respect to intraLATA long distance services, with AT&T, MCI, Sprint, the
LECs and other IXCs, where permissible; and with respect to operator service,
with AT&T and other operator service providers. Internationally, the Company
competes for services with other IXCs, including AT&T, MCI and Sprint. Certain
of these companies have substantially greater market share and financial
resources than LDDS, and some of them are the source of communications capacity
used by LDDS to provide its own services.
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For most of the Company's communications services, the factors critical to a
customer's choice of a service provider are cost, ease of use, speed of
installation, quality, reputation and, in some cases, geography and network
size. LDDS' objective is to be one of the most responsive service providers,
particularly when providing customized communications services. LDDS' array of
communications facilities and international relationships, together with its
extensive engineering and operations capability, provide LDDS with considerable
flexibility in tailoring cost-effective communications services to meet its
customers' requirements. This network allows LDDS to implement complex
permanent and temporary communications circuits to and from virtually any
location in the world. LDDS relies on its decentralized management structure
and the local orientation of its operations and personnel to distinguish itself
from larger, less personalized operations. In addition, LDDS' understanding of
international telecommunications technical and regulatory issues has often
allowed LDDS to provide prompt solutions to the diverse communications needs of
multinational corporations, government entities and other organizations.
LDDS expects to encounter continued competition from major domestic and
international communications companies, including AT&T, MCI and Sprint. In
addition, the Company may be subject to additional competition due to the
development of new technologies. The telecommunications industry is in a
period of rapid technological evolution, marked by the introduction of new
product and service offerings. The Company cannot predict which of many
possible future product and service offerings will be important to maintain its
competitive position or what expenditures will be required to develop and
provide such products and services.
REGULATION
The Company operates in a highly regulated industry. The FCC regulates
international communications services and interstate telephone service, and
certain states, through the appropriate regulatory agency, regulate intrastate
telephone service. In addition, the Company is subject to regulation in
various foreign countries in connection with certain overseas business
activities.
The regulation of the telecommunications industry is changing rapidly and the
regulatory environment varies substantially from state to state. There can be
no assurance that future regulatory changes will not have a material adverse
impact on LDDS. Recent developments include, without limitation, consideration
by Congress of legislation that would modify the AT&T Divestiture Decree
restrictions on the provision of long distance services by the BOCs between
LATAs as defined in the AT&T Divestiture Decree, consideration by the Justice
Department and courts of related BOC requests for waiver of the AT&T
Divestiture Decree to permit them to provide significant interLATA services
(such as service outside their respective regions, to mobile customers, and in
other circumstances) or for the elimination of the AT&T Divestiture Decree
altogether; FCC and PUC action changing access rates charged by LECs and making
other related changes to access and interconnection policies, certain of which
could have adverse consequences for the Company; related FCC and state
regulatory proceedings considering additional deregulation of LEC access
pricing; a pending FCC rulemaking on "billed party preference" that could
affect
9
<PAGE> 14
LDDS' provision of operator services; and various legislative and regulatory
proceedings that would result in new local exchange competition.
FCC REGULATION. As a non-dominant IXC, the Company is not required to obtain a
certificate of public convenience and necessity from the FCC for its domestic
interexchange services. The FCC retains general regulatory jurisdiction over
the sale of interstate telecommunications services by IXCs, including the
requirement that calls be charged on a nondiscriminatory, just and reasonable
basis. Until recently, the FCC did not require the Company to file tariffs.
In mid-1993, pursuant to appellate court decisions overturning its forbearance
policy, the FCC adopted rules that required nondominant IXCs to file
tariffs containing either actual rates or a reasonable range of rates. The
Company filed tariffs that on a service specific basis contained either actual
rates or a range of rates. In early 1995, an appellate court held that tariffs
could only contain actual rates, and vacated the FCC's rules authorizing range
of rate filings. The Company is in the process of making tariff modifications
to specify actual rates for its services. The Company does not believe that
the requirement of specifying actual rates in its tariffs with respect to the
sale of interstate telecommunications services will have a material adverse
effect on the Company's consolidated results of operations or financial
position.
The Company, or one of its operating subsidiaries, could be subject to
complaints seeking damages, assessment of monetary forfeitures and/or
injunctive relief filed by any party claiming to be injured by the Company's
past practices that relied upon the FCC's tariff filing policies and rules.
One such complaint has been filed by AT&T against WilTel, Inc. (now known as
WorldCom Network Services, Inc.). At this time, the Company cannot predict
either the likelihood of the filing of other such complaints or the likelihood
that such complainants would prevail in any complaint proceeding. (See "Item 3
- Legal Proceedings; Regulatory Matters.")
Transmissions from earth stations to all satellites, transmissions from
microwave and other transmitters, reception from international satellites, and
transmission of international traffic by any means, including operator assisted
long distance service, satellite and undersea cable, must be pursuant to
license or other authorizations issued by the FCC. The Company, or an
affiliate of the Company, has operating authority or has made other suitable
arrangements to transmit and/or receive signals from all locations where it
currently offers satellite transmission and/or reception service.
Although the Company has never had a license application denied by the FCC,
there can be no assurance that it will receive all authorizations or licenses
necessary for new communications services or that delays in the licensing
process will not adversely affect the Company's business. LDDS monitors
compliance with federal, state and local regulations governing the discharge
and disposal of hazardous and environmentally sensitive materials, including
the emission of electromagnetic radiation. LDDS believes that it is in
compliance with such regulations, however, there can be no assurance that any
such discharge, disposal or emission might not expose LDDS to claims or actions
that could have a material adverse effect on the Company's consolidated results
of operations or financial position.
10
<PAGE> 15
In conjunction with its approval of the transfer of control of IDB to the
Company, the FCC indicated that a protest filed by Comsat Corporation raised
sufficient question that there might have been a prior unauthorized transfer of
control of IDB Mobile Communications, Inc. ("IDB Mobile"), an affiliate of IDB,
to Teleglobe Inc., a Canadian corporation ("Teleglobe"), for it to initiate an
investigation into IDB and Teleglobe's ownership and control of IDB Mobile.
The Company is cooperating with the investigation. Although the Company cannot
predict the outcome of the investigation, it believes that it will not result
in a material adverse effect upon the Company's consolidated results of
operations or financial position.
In October 1988, Judge Harold Greene, who oversees compliance with the AT&T
Divestiture Decree, ordered the RBOCs to provide for equal access to the BOC
owned pay telephone long distance markets. The opinion accompanying the
federal court order mandating presubscription of public pay telephones
envisions that presubscription will be an interim measure pending perfection of
a technical system permitting all "0 plus" calls from public payphones to be
automatically routed to the billed party's presubscribed OSP. If implemented,
"billed party preference" could route some previously presubscribed public
traffic away from the Company. However, the technical and economic barriers to
implementation of a "billed party preference" system are such that the RBOCs
have been unable and unwilling to effect its implementation to date. A
rulemaking proceeding is currently being conducted by the FCC on "billed party
preference" to determine whether such a system will be required or if
appropriate alternatives to "billed party preference" exist. The Company
cannot predict the outcome of this proceeding. The Company is unaware of any
other regulatory proceedings related to operator services that could have a
material adverse effect upon its consolidated results of operations or
financial position.
STATE REGULATION. The Company's intrastate long distance telecommunications
operations are subject to various state laws and regulations including, in many
jurisdictions, certification requirements. Generally, the Company must obtain
and maintain certificates of public convenience and necessity from regulatory
authorities in most states in which it offers intrastate long distance
services. In most of these jurisdictions the Company must also file and obtain
prior regulatory approval of tariffs for its intrastate offerings. The Company
provides intrastate services in 45 states. The Company has applied for a
certificate of public convenience and necessity in three additional states.
Upon grant of those applications, the Company will be authorized to provide
intrastate services in each of the 48 contiguous states.
EMPLOYEES
As of March 17, 1995, the Company employed approximately 7,500 persons.
Substantially all of the Company's employees are not represented by any labor
union. Approximately 85 employees are part of a collective bargaining
agreement which expires on October 31, 1995. The Company believes its
relations with its employees are good.
11
<PAGE> 16
ITEM 2. PROPERTIES
The tangible assets of the Company include a substantial investment in
telecommunications equipment. The aggregate value of the Company's
transmission equipment and communications equipment, which include network
switches and dialers, was $388.9 million and $372.0 million, respectively, at
December 31, 1994. Approximately $295.0 million has been budgeted for
telecommunications equipment purchases and other capital items in 1995 without
regard to any future acquisitions.
Through the purchase of WilTel in January 1995, the Company acquired a
nationwide common carrier network of approximately 11,000 miles of fiber optic
cable and digital microwave facilities, giving it the fourth largest nationwide
network. Through network sharing and lease agreements with other carriers,
WilTel has access to approximately 30,000 miles of additional digital
transmission network facilities. With a total network consisting of
approximately 41,000 miles, WilTel reaches substantially all major cities in
the continental United States.
The Company's rights-of-way for its fiber optic cable and 172 tower microwave
transmission network are typically held under leases, easements, licenses or
governmental permits. The Company leases various offices, warehouses, terminal
sites, switch location sites and regeneration station sites. All other major
equipment and physical facilities are owned in fee and are operated,
constructed and maintained pursuant to rights-of-way, easements, permits,
licenses or consents on or across properties owned by others.
WilTel has sold to independent entities and leased back its microwave system
and its Kansas City to Los Angeles fiber optic system over primary lease terms
ranging from 15 to 20 years. The leases have renewal options permitting WilTel
to extend the leases for terms expiring during the years 2012 to 2019 and
purchase options based upon the fair market value.
The Company attempts to structure its leases of space for its network switching
centers with initial terms and renewal options so that the risk of switch
relocation is minimized. The Company anticipates that prior to termination
of any of the leases, it will be able to renew such leases or make other
suitable arrangements.
LDDS believes that all of the Company's facilities and equipment are in good
condition and are suitable for their intended purposes.
ITEM 3. LEGAL PROCEEDINGS
SHAREHOLDER LITIGATION. On May 23, 1994, Deloitte & Touche LLP ("Deloitte")
resigned as IDB's independent auditors. Deloitte has stated it resigned as a
result of events surrounding the release and reporting of IDB's financial
results for the first quarter of 1994. In submitting its resignation, Deloitte
informed IDB management and the Audit Committee of the IDB Board of Directors
that there had been a serious breakdown in IDB's process of identifying,
analyzing and recording IDB's
12
<PAGE> 17
business transactions which prohibited Deloitte from the satisfactory
completion of a quarterly review, and that Deloitte was no longer willing to
rely on IDB management's representations regarding IDB's interim financial
statements. IDB announced Deloitte's resignation on May 31, 1994. On June 24,
1994, upon the recommendation of the independent members of IDB's Audit
Committee, IDB retained Arthur Andersen LLP as its new independent auditors.
On August 1, 1994, IDB announced that it would restate its reported financial
results for the quarter ended March 31, 1994 to eliminate approximately $6.0
million of pre-tax income, approximately $5.0 million of which related to a
sale of transponder capacity and approximately $1.0 million of which related to
purchase accounting adjustments and on August 22, 1994, IDB filed Amendment No.
1 on Form 10-Q/A restating its 1994 first quarter results in order to eliminate
previously recorded items. Certain of these items were among those as to which
Deloitte had expressed disagreement. On November 21, 1994, IDB filed Form
10-Q/A amendments to its reported first and second quarter financial results
making the previously announced changes and reflecting the effect of IDB's
method of accounting for international long distance traffic, thereby reducing
its first quarter net income from $0.12 per share, as originally reported, to
$0.05 per share and, when combined with adjustments for income tax effects,
increasing its second quarter net loss from $0.20 per share, as originally
reported, to $0.27 per share.
A number of class action complaints (on behalf of persons who purchased certain
IDB securities) and stockholder derivative actions (on behalf of IDB) were
filed against IDB and its former directors and certain former officers of IDB
and other parties. The U.S. District Court for the Central District of
California ordered the class action complaints and one of the derivative
actions consolidated and styled In re IDB Communications Group, Inc. Securities
Litigation (Case No. CV-94-3618-RG (JGx)). An amended complaint was filed with
the District Court on November 18, 1994 consolidating all of the class and
derivative actions. IDB, certain of its former directors and officers and
other parties are named as defendants in the consolidated complaint. The class
action claims allege violations of federal and state securities laws and state
corporate laws for disseminating allegedly false and misleading statements
concerning IDB's earnings and accounting practices. The derivative claims
allege that IDB's former officers and directors breached their fiduciary duties
to IDB by trading on inside information, accepting bonuses based on false and
inflated IDB financial results and exposing IDB to liability under the
securities laws, and include claims for gross negligence and violation of the
state corporate laws. Plaintiffs sought damages, restitution to IDB,
injunctive relief, punitive damages, and costs and attorneys' fees.
IDB, LDDS and representatives of the plaintiffs in the foregoing litigation
entered into a Stipulation of Settlement (the "Stipulation"). The Stipulation
provides that all claims for the period April 27, 1992 through August 1, 1994,
inclusive, that were or could have been asserted by the plaintiffs against IDB
or any of the other defendants in the consolidated action, or in any court with
respect to the fairness or adequacy of the consideration paid to IDB
stockholders in the IDB Merger and the accuracy of related disclosures made by
the IDB defendants or LDDS, or on behalf of or by IDB against former IDB
directors and officers will, subject to the fulfillment of certain conditions
and the approval of the court, be settled and released and the litigation
dismissed in its entirety with prejudice in exchange for payments totalling
$75.0 million. The settlement and releases do not
13
<PAGE> 18
affect any claims of persons who purchased IDB securities outside the period
April 27, 1992 through August 1, 1994, inclusive, or who timely and validly opt
out.
Following a February 27, 1995 hearing to determine whether the settlement
should be finally approved by the District Court, on March 16, 1995, the court
entered a judgment approving the settlement, except as to fee applications
submitted by class and derivative counsel. The litigation will be settled and
dismissed on the terms described herein, provided no appeal is taken and two
related state court actions are dismissed as contemplated by the Stipulation.
The settlement is not contingent on the amount of class and derivative counsel
fees and expenses ultimately approved by the court.
IDB is a party to indemnification agreements with certain of the defendants in
the actions described above, including IDB's former officers and directors,
certain selling shareholders and certain underwriters. IDB's former officers
and directors are not covered by any applicable liability insurance. LDDS has
agreed to provide indemnification to IDB's former officers and directors under
certain circumstances pursuant to the agreement relating to the IDB Merger.
On June 9, 1994, the SEC issued a formal order of investigation concerning
certain matters, including IDB's financial position, books and records and
internal controls and trading in IDB securities on the basis of non-public
information. The SEC has issued subpoenas to LDDS, IDB and others, including
certain former officers of IDB, in connection with its investigation. The NASD
and other self-regulatory bodies have also made inquiries of IDB concerning
similar matters.
In October and November 1994, the U.S. Attorney's Office for the Central
District of California issued grand jury subpoenas to IDB seeking documents
relating to IDB's first quarter results, the Deloitte resignation, trading in
IDB securities and other matters, including information concerning certain
entities in which certain former officers of IDB are personal investors and
transactions between such entities and IDB. IDB has been informed that a
criminal investigation has commenced. In early 1995, the U.S. Attorney's
Office issued a grand jury subpoena to LDDS arising out of the same
investigation seeking certain documents relating to IDB.
The outcome of any of the foregoing litigation or investigations has not been
determined.
AT&T PATENTS. AT&T has written the Company claiming that certain of the
Company's long distance telephone services (including certain 800 services,
operator services and calling card services) make unauthorized use of AT&T
patents. Similar claims have been asserted against other long distance
carriers. AT&T has stated that it will enforce its patent rights and requested
that the Company and other carriers enter into patent license agreements. The
Company has had discussions with AT&T and is currently evaluating AT&T's
claims. The Company is not yet in a position to predict whether this matter
will lead to litigation. In a related development, MCI has brought suit
against AT&T alleging that certain of these same patents are invalid under the
patent laws or unenforceable due to representations made by AT&T to the
District Court at the time of the AT&T Divestiture Decree. AT&T has
counterclaimed against MCI alleging patent infringement. The
14
<PAGE> 19
Company could be adversely affected if, as a result of litigation or otherwise,
it was required to pay substantial patent royalties to AT&T. However, the
ultimate outcome of this issue, or the amount of any such patent royalties
which might be required, cannot be determined at this time.
REGULATORY MATTERS. As referenced in "Item 1 - Regulation" above, by virtue of
a decision of the U.S. Court of Appeals for the D.C. Circuit released November
13, 1992, concerning the FCC's policy of forebearing from tariff regulation of
non-dominant IXC's, could subject the Company to complaints seeking damages,
assessment of monetary forfeitures and/or injunctive relief filed by any party
claiming to be injured by the Company's past failure to file tariffs or specify
actual rates under certain circumstances in reliance on the FCC's forbearance
policy. The 1992 Court decision does not, however, require the FCC to assess
forfeitures or damages or take any other specific enforcement action against
those carriers who relied upon its former policy, although it does direct the
FCC to give further consideration to the issue of damages. At this time, the
Company cannot predict either the likelihood of the filing of such complaints
or the likelihood that such complainants would prevail in any complaint
proceedings. WorldCom Network Services, Inc., formerly WilTel, Inc., a
subsidiary of the Company, is the defendant in such a complaint filed by AT&T.
The financial responsibility for the actions of WilTel, Inc. in regard to this
complaint has been assumed by Williams. The Company does not believe that the
resolution of that complaint will have a material adverse effect on its
business or operations.
OTHER. The Company is involved in other legal and regulatory proceedings
generally incidental to its business. In some instances, rulings by regulatory
authorities in some states may result in increased operating costs to the
Company.
While the results of these legal and regulatory proceedings contain an element
of uncertainty, LDDS believes that the probable outcome of any of the legal or
regulatory matters, or all of them combined, will not have a material adverse
effect on the Company's consolidated results of operations or financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 30, 1994, the Company held a Special Meeting of Shareholders for
the purpose of:
1. approving the issuance of LDDS Common Stock to shareholders of IDB
in connection with the IDB Merger; and
2. considering and acting upon a proposal to adopt the LDDS
Communications, Inc. 1995 Special Performance Bonus Plan.
15
<PAGE> 20
The tabulation of the voting is as follows:
<TABLE>
<CAPTION>
For Against Abstentions Non-Votes
--- ------- ----------- ---------
<S> <C> <C> <C> <C>
Issuance of Common Stock to IDB
Shareholders 101,781,392(1) 1,190,950 228,796 25,180,024
1995 Special Performance Bonus
Plan 118,728,468(1) 9,381,429 271,265 0
----------------------------
</TABLE>
(1) Shares including 21,876,976 equivalent shares for the Series 1
Preferred Stock and 2,115,919 equivalent shares for the Series 2 Preferred
Stock (out of 4,233,087 total equivalent Series 2 shares).
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The shares of LDDS Common Stock are quoted on the Nasdaq National Market.
Before the Prior Mergers, Resurgens' common stock was traded on the American
Stock Exchange (the "AMEX") under the trading symbol RCG. At the close of
business on September 14, 1993, Resurgens' common stock ceased trading on the
AMEX and, on September 15, 1993, LDDS Common Stock started trading on the
Nasdaq National Market under the trading symbol LDDS. The name of Resurgens,
the legal survivor, was changed to LDDS Communications, Inc. at the time of
the Prior Mergers. Before the Prior Mergers, LDDS-TN common stock was traded
on the Nasdaq National Market under the trading symbol LDDSA. Upon
effectiveness of the Prior Mergers on September 15, 1993, each share of the
outstanding Class A common stock of LDDS-TN was converted into the right to
receive 0.9595 shares of LDDS Common Stock; the information below has been
adjusted to reflect this exchange ratio. The following table sets forth the
high and low sales prices per share of LDDS Common Stock (including the common
stock of Resurgens and LDDS-TN prior to September 15, 1993) as reported on the
Nasdaq National Market or the AMEX, as applicable, in each case based on
published financial sources, for the periods indicated.
16
<PAGE> 21
<TABLE>
<CAPTION>
LDDS Common Stock(1)
--------------------------------------------------------------
Resurgens Prior to 9/15/93 LDDS-TN Prior to 9/15/93
-------------------------- ------------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1993
----
First Quarter $19.81 $14.50 $19.15 $14.85
Second Quarter 20.38 17.19 20.97 17.20
Third Quarter 26.00 18.13 26.00 17.77
</TABLE>
<TABLE>
<CAPTION>
LDDS COMMON STOCK(1)
----------------------------
HIGH LOW
---- ---
<S> <C> <C>
Fourth Quarter $26.38 $20.13
1994
----
First Quarter 29.50 23.25
Second Quarter 25.25 14.00
Third Quarter 25.00 16.50
Fourth Quarter 24.38 16.38
</TABLE>
(1) At the close of business on September 14, 1993, in connection
with the Prior Mergers, Resurgens' common stock ceased trading on the AMEX. On
September 15, 1993, LDDS Common Stock, the stock of the corporation surviving
the Prior Mergers, commenced trading on the Nasdaq National Market. Accordingly,
the high and low sales prices per share shown for Resurgens and LDDS-TN
beginning on September 15, 1993 are the same and are the high and low sales
prices per share of LDDS Common Stock.
As of March 17, 1995, there were 160,886,966 shares of the Company's Common
Stock outstanding held by 7,202 shareholders of record.
Neither the Company nor Resurgens has ever paid cash dividends on its Common
Stock. The policy of the Company's Board of Directors has been to retain
earnings to provide funds for the operation and expansion of its business.
Also, the Company's credit facility restricts the payment of dividends on its
Common Stock. See Note 4 of Notes to Consolidated Financial Statements.
PREFERRED STOCK
As a result of the consummation of the Prior Mergers, Metromedia received
10,896,785 shares of the Series 1 Preferred Stock having a liquidation value of
$50 per share and a conversion price of $24.9046875 per share. There is no
established public trading market for the Series 1 Preferred Stock. The Series
1 Preferred Stock may not be redeemed by LDDS prior to September 15, 1996.
Thereafter, the Series 1 Preferred Stock may be redeemed by the Company in
whole or in part in integral multiples of $100.0 million at prices which
include premiums over the liquidation preference of $50 per share, which prices
range from 106.23% in 1996 declining to 100% on and after
17
<PAGE> 22
September 15, 2003. As of March 17, 1995, there were 10,896,785 shares of the
Series 1 Preferred Stock outstanding.
All of the issued and outstanding shares of the LDDS-TN Series B 6.5%
Cumulative Senior Perpetual Convertible Preferred Stock were converted into
2,000,000 shares of Series 2 Preferred Stock having a liquidation value of $25
per share and a conversion price of $11.81171 upon the effectiveness of the
Prior Mergers. The Series 2 Preferred Stock pays dividends at the rate of 6.5%
annually, payable quarterly. There is no established public trading market for
the Series 2 Preferred Stock. Except under certain circumstances, the Series 2
Preferred Stock may not be redeemed by the Company prior to June 5, 1996.
Thereafter, the Series 2 Preferred Stock may be redeemed in whole or in part in
integral multiples of $10.0 million, at prices which include premiums over the
liquidation preference of $25 per share, which prices range from 108% in 1996
declining to 100% on and after June 5, 2002. As of March 17, 1995, there were
2,000,000 shares of the Series 2 Preferred Stock outstanding.
See Note 5 of Notes to Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of selected financial data of the Company as of and
for the five years ended December 31, 1994. The historical financial data as
of December 31, 1994 and 1993 and for the years ended December 31, 1994, 1993,
and 1992 have been derived from the historical financial statements of the
Company, which financial statements have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report included elsewhere
herein. The report of Arthur Andersen LLP on the Consolidated Financial
Statements of the Company as of and for the three years ended December 31, 1994
refers to their reliance on the report of other auditors in rendering an
opinion on those financial statements. These data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements
appearing elsewhere in this document.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1994 1993 1992 1991 1990
------- ---------- ---------- ---------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Operating Results:
Revenues $2,220,765 $1,474,257 $948,060 $719,214 $591,559
Operating income 69,738 238,833 51,983 96,197 92,757
Income (loss) before
extraordinary item (122,158) 124,321 8,344 39,592 38,112
Extraordinary item - (7,949) (5,800) (1,283) -
Net income (loss) (122,158) 116,372 2,544 38,309 38,112
Preferred dividend
requirement 27,766 11,683 2,112 - -
</TABLE>
18
<PAGE> 23
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1994 1993 1992 1991 1990
------- ---------- ---------- ---------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Earnings (loss) per common share:
Income (loss)
before extraordinary item --
Primary $ (0.95) $ 0.82 $ 0.06 $ 0.39 $ 0.40
Fully diluted (0.95) 0.80 0.06 0.38 0.39
Net income (loss)--
Primary (0.95) 0.76 0.00 0.37 0.40
Fully diluted (0.95) 0.74 0.00 0.37 0.39
Weighted average shares --
Primary 157,805 137,927 112,653 102,658 96,231
Fully diluted 157,805 140,796 113,053 103,103 96,726
Financial position:
Total assets 3,430,192 3,236,718 1,241,278 959,909 674,465
Long-term debt (excluding
current maturities) 788,005 721,480 440,076 413,335 327,591
Shareholders' investment 1,827,170 1,911,800 478,823 347,940 226,515
</TABLE>
NOTES TO SELECTED FINANCIAL DATA:
(1) On January 5, 1995, LDDS completed the acquisition of WilTel for
approximately $2.5 billion in cash. The WilTel Acquisition is being
accounted for as a purchase. Accordingly, the results of WilTel are
not reflected above and will be included with LDDS from the date of
acquisition.
(2) As a result of the IDB Merger and the ATC Merger, the Company
initiated plans to reorganize and restructure its management and
operational organization and facilities to eliminate duplicate
personnel, physical facilities and service capacity, to abandon
certain products and marketing activities, and to further take
advantage of the synergy available to the combined entities. Also,
during the fourth quarter of 1993, plans were approved to reduce IDB's
cost structure and to improve productivity. Accordingly, in 1994,
1993 and 1992, the Company charged to operations the estimated costs
of such reorganization and restructuring activities, including
employee severance, physical facility abandonment and duplicate
service capacity. These costs totaled $43.7 million in 1994, $5.9
million in 1993 and $79.8 million in 1992.
Also, during 1994 and 1992, the Company incurred direct merger costs
of $15.0 million and $7.3 million, respectively, related to the IDB
Merger (in 1994) and the ATC Merger (in 1992). These costs include
professional fees, proxy solicitation costs, travel and related
expenses and certain other direct costs attributable to these mergers.
19
<PAGE> 24
(3) In connection with certain debt refinancing, the Company recognized in
1993 and 1992 extraordinary items of approximately $7.9 million and
$5.8 million, respectively, net of income taxes, consisting of
unamortized debt discount, unamortized issuance cost and prepayment
fees. See Note 4 of Notes to Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis relates to the financial condition and
results of operations of the Company for the three years ended December 31,
1994 after giving effect to the IDB Merger and the ATC Merger, which were
accounted for as poolings-of- interests. This information should be read in
conjunction with the "Selected Financial Data" and the Company's Consolidated
Financial Statements appearing elsewhere in this document.
GENERAL
The Company's continued emphasis on acquisitions has taken the Company from a
small regional long distance carrier to one of the largest long distance
telecommunications companies in the industry, serving customers domestically
and internationally. The Company's operations have grown significantly in each
year of its operations as a result of internal growth, the selective
acquisition of smaller long distance companies with limited geographic service
areas and market shares, the consolidation of certain third tier long distance
carriers with larger market shares and international expansion.
On January 5, 1995, LDDS completed the acquisition of Williams
Telecommunications Group, Inc. ("WilTel"), a subsidiary of The Williams
Companies, Inc. ("Williams"), for approximately $2.5 billion in cash (the
"WilTel Acquisition"). Through this purchase, the Company acquired a
nationwide common carrier network of approximately 11,000 miles of fiber optic
cable and digital microwave facilities. The WilTel Acquisition was effected
pursuant to a Stock Purchase Agreement dated as of August 22, 1994, by and
among LDDS, Williams and WTG Holdings, Inc. The WilTel Acquisition is being
accounted for as a purchase for financial reporting purposes. The funds paid
to Williams were obtained by LDDS under a new credit facility entered into on
December 21, 1994. See Note 4 of Notes to Consolidated Financial Statements.
The Company's long distance revenues are derived principally from the number of
minutes of use billed by the Company. Minutes billed are those conversation
minutes during which a call is actually connected at the Company's switch
(except for minutes during which the customer receives a busy signal or the
call is unanswered at its destination). The Company's profitability is
dependent upon, among other things, its ability to achieve line costs that are
less than its revenues. The principal components of line costs are access
charges and transport charges. Access charges are expenses incurred by all
IXCs for accessing the local networks of the LECs in order to originate and
20
<PAGE> 25
terminate calls and payments made to PTTs to complete calls made from the U.S.
by the Company's customers. Transport charges are the expenses incurred in
transmitting calls between or within LATAs.
The most significant portion of the Company's line costs is access charges
which are highly regulated. The FCC regulates international communications
services and interstate telephone service and certain states, through the
appropriate regulatory agency, regulate intrastate telephone service.
Accordingly, the Company cannot predict what effect continued regulation and
increased competition between LECs and other IXCs will have on future access
charges. However, the Company believes that it will be able to continue to
reduce transport costs through effective utilization of its network, favorable
contracts with carriers and network efficiencies made possible as a result of
expansion of the Company's customer base by acquisitions and internal growth.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the Company's
statement of operations as a percentage of its operating revenues.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
----- ----- -----
Line costs 65.2 59.8 58.3
Selling, general and administrative 19.5 16.7 20.0
Depreciation and amortization 7.4 6.9 7.1
Direct merger costs, restructuring and other charges 4.8 0.4 9.2
----- ----- -----
Operating income 3.1 16.2 5.5
Other income (expense):
Interest expense -2.1 -2.4 -3.2
Shareholder litigation settlement -3.4 0.0 0.0
Miscellaneous 0.2 0.5 0.1
----- ----- -----
Income (loss) before income taxes and
extraordinary item -2.2 14.2 2.4
Provision for income taxes 3.3 5.8 1.5
----- ----- -----
Net income (loss) before extraordinary item -5.5 8.4 0.9
Extraordinary item - -0.5 -0.6
------ ----- -----
Net income (loss) -5.5 7.9 0.3
Preferred dividend requirement 1.3 0.8 0.2
----- ----- -----
Net income (loss) applicable to common shareholders -6.8% 7.1% - %
===== ===== =====
</TABLE>
21
<PAGE> 26
YEAR ENDED DECEMBER 31, 1994 VS.
YEAR ENDED DECEMBER 31, 1993:
Revenues increased by 50.6% to $2.2 billion on 10.76 billion revenue minutes in
1994 from $1.5 billion on 6.94 billion revenue minutes in 1993. The overall
increase in total revenues was primarily attributable to the inclusion of a
full year's revenues from the 1993 acquisitions of Dial-Net, MCC, Resurgens and
TRT and internal growth. See Note 2 of Notes to Consolidated Financial
Statements.
Line costs increased from $881.5 million in 1993 to $1.4 billion in 1994. This
increase is due to increased traffic volumes, partially offset by network
efficiencies and rate reductions resulting from favorable contract
negotiations. As a percentage of revenues, line costs increased to 65.2% in
1994 from 59.8% in 1993. This increase is attributable to the change in
product mix including increased international traffic, which carries higher
line costs. Additionally, IDB's margins decreased in 1994 as IDB was unable to
deliver all of its inbound traffic over its existing facilities and had to use
other carriers at a higher cost to deliver this overflow traffic. Also in
1994, IDB's carrier revenue as a proportion of total international traffic
increased and these rates are typically lower than rates charged to commercial
customers. Certain of these IDB carrier contracts provided either a break even
or negative margin to the Company and accordingly, service to these customers
was discontinued in December 1994.
In 1995, the Company anticipates that line costs as a percentage of revenues
will decline as the result of synergies and economies of scale resulting from
network efficiencies achieved from the assimilation of recent acquisitions,
primarily the IDB Merger and the WilTel Acquisition, into LDDS' operations.
Selling, general and administrative expenses ("SG&A") increased to $432.4
million in 1994 from $246.1 million in 1993, and as a percentage of revenues,
these expenses increased to 19.5% in 1994 from 16.7% in 1993. The increase in
SG&A as a percentage of revenues is attributable to various IDB-related
one-time adjustments which were recorded in 1994. These adjustments included
$40.9 million to adjust the provision for doubtful accounts receivable, $8.0
million in accounting and legal expenses incurred in connection with the
resignation of IDB's prior auditors and $29.4 million related to various
investment write-downs and other balance sheet accruals.
In 1994, the Company determined that adjustments to certain IDB Broadcast
assets were appropriate to properly reflect estimated net realizable values.
Accordingly, the Company recorded adjustments of $48.5 million, to reduce the
carrying value of these broadcast assets (primarily intangible assets and
property and equipment) to the Company's best estimate of the net realizable
value. See Note 3 of Notes to Consolidated Financial Statements. Although the
Company continues to offer IDB Broadcast services, such services are not a part
of the Company's core business operations. Accordingly, subsequent to December
31, 1994, the Company sold its simulcasting operations and entered into an
agreement to outsource the management of the remaining IDB Broadcast
operations.
22
<PAGE> 27
As a result of the IDB Merger, the Company initiated plans to reorganize and
restructure its management and operational organization and facilities.
Accordingly, the Company charged to operations in 1994, the estimated costs of
the IDB Merger and restructuring of $15.0 million and $43.7 million,
respectively. In 1993, plans were approved to reduce IDB's cost structure and
to improve productivity. Such plans included a reduction in the number of
employees and the disposition of certain assets. In connection with this plan,
$5.9 million was charged to operations in 1993. See Note 3 of Notes to
Consolidated Financial Statements.
Depreciation and amortization expense, which includes depreciation of the
Company's call transmission facilities increased to $163.8 million from $101.9
million in 1993 or 7.4% and 6.9% of revenues in 1994 and 1993, respectively.
The increase in such expenses was due primarily to depreciation and
amortization of the additional property and equipment, customer bases and
goodwill resulting from acquisitions by the Company during 1993. In 1995, LDDS
expects depreciation and amortization expense as a percentage of revenues to
increase as a result of the WilTel Acquisition.
Interest expense in 1994 was $47.3 million or 2.1% of revenues, as compared to
$35.6 million or 2.4% of revenues in 1993. This decrease as a percentage of
revenues was a result of several factors, including the Company's prepayment of
long-term debt with funds obtained through the public offering of IDB common
stock in May 1993 and the issuance by IDB in August 1993 of $195.5 million of
5% convertible subordinated notes due 2003. Additionally, as some of the
Company's acquisitions were funded by a combination of stock and debt, the
percentage has not grown as rapidly as the percentage of revenues. For each of
the years ended December 31, 1994 and 1993, weighted average annual interest
rates were 6.2%. Weighted average annual interest rates remained essentially
unchanged due to the issuance of the 5% convertible subordinated notes during a
period in which the market experienced higher prevailing interest rates. For
the years ended December 31, 1994 and 1993, weighted average annual levels of
debt were $795.8 million and $621.4 million, respectively. See Note 4 of Notes
to Consolidated Financial Statements.
In the third quarter of 1994, the Company recorded a $76.0 million charge which
represents an estimated shareholder litigation settlement of $75.0 million and
$1.0 million in related legal costs. See Note 7 of Notes to Consolidated
Financial Statements.
The Company recorded a provision for income taxes of $73.8 million on a pretax
loss of $48.3 million in 1994. Although the Company generated a consolidated
pre-tax loss in 1994, permanent items aggregating approximately $113.0 million
contributed to an overall situation of taxable income. Also, because the
current year net operating loss ("NOL") generated by IDB prior to the IDB
Merger may be offset only by future taxable income generated at the IDB level
of the Company's operations, the Company believed that only a portion of the
current year NOL could be benefitted under a "more likely than not" scenario.
Accordingly, the Company placed a valuation allowance on the deferred tax asset
attributable to approximately $90.0 million of the NOL.
The Company believes the IDB Merger and the WilTel Acquisition will result in
decreased operating costs to the consolidated organization through realization
of the economies of scale resulting from
23
<PAGE> 28
network and operational efficiencies. The combination of LDDS, one of the four
largest domestic carriers (based on 1993 revenues), with IDB, one of the four
largest international carriers (based on 1992 revenues), has enhanced LDDS'
current position as one of the largest long distance telecommunications
companies in the industry, serving customers domestically and internationally.
The WilTel Acquisition is expected to create additional efficiencies and growth
opportunities for the combined operations of LDDS and IDB. These opportunities
include network efficiencies associated with owning the WilTel nationwide fiber
optic cable network rather than leasing similar capacity from other providers
at a higher cost, and marketing growth opportunities associated with providing
more services to customers. In addition, the increased volume of long distance
traffic is expected to permit the greater use of lower rate fixed-cost or
larger capacity facilities, greater volume discounts on usage sensitive
facilities and greater utilization of owned and leased network capacity.
However, no assurance can be given that LDDS will be able to successfully
integrate the operations of IDB or WilTel or obtain the expected networking and
other operating efficiencies or growth opportunities.
YEAR ENDED DECEMBER 31, 1993 VS.
YEAR ENDED DECEMBER 31, 1992:
Revenues increased by 55.5% to $1.5 billion on 6.94 billion revenue minutes in
1993 from $948.1 million on 4.87 billion revenue minutes in 1992. The overall
increase in total revenues was primarily due to the inclusion of the 1993
acquisitions of Dial-Net (March), MCC (September), Resurgens (September) and
TRT (September), the inclusion of a full year's revenues from the 1992
acquisitions of AmeriCall, Prime, TFN, TMI and WorldCom and internal growth.
See Note 2 of Notes to Consolidated Financial Statements.
Line costs as a percentage of revenues increased to 59.8% in 1993 from 58.3% in
1992 primarily due to changes in the product mix and price decreases during the
year.
SG&A expenses increased to $246.1 million in 1993 from $189.4 million in 1992
and, as a percentage of revenues, these expenses declined to 16.7% from 20.0%,
respectively. The increase in total expenses reflects the increase in revenue
base. The decrease in expense as a percent of revenues reflects economies of
scale and the assimilation of acquisitions into the Company's strategy of cost
control.
Depreciation and amortization expense, which includes depreciation of the
Company's call transmission facilities, increased to $101.9 million in 1993
from $67.0 million in 1992. Such expense as a percentage of revenues did not
change significantly, decreasing from 7.1% in 1992 to 6.9% in 1993. The
increase in such expenses was due primarily to depreciation and amortization of
the additional property and equipment, customer bases and goodwill resulting
from acquisitions by the Company during 1993 and 1992.
As a result of the ATC Merger, the Company restructured its management and
operational organization and facilities. Accordingly, the Company charged to
operations the estimated costs of
24
<PAGE> 29
the ATC Merger and restructuring of $7.3 million and $31.2 million,
respectively. In addition, the Company determined to resolve certain legal,
regulatory and administrative matters which were outstanding prior to the ATC
Merger and reflected the estimated cost of $48.6 million to resolve such
matters in 1992 operations. See Note 3 of Notes to Consolidated Financial
Statements.
Interest expense in 1993 was $35.6 million or 2.4% of revenues, as compared to
$30.3 million or 3.2% of revenues in 1992. This decrease in interest as a
percentage of revenues was a result of several factors, including the Company's
prepayment of long-term debt with funds obtained through the offering of IDB
common stock in May 1993 and the issuance by IDB in August 1993 of $195.5
million of 5% convertible subordinated notes due 2003. Moreover, as some of
the Company's acquisitions were funded by a combination of stock and debt, the
percentage of debt has not grown as rapidly as the percentage of revenue.
Also, lower interest rates were in effect on the Company's long-term debt,
reflecting lower prevailing interest rates in the market generally.
Miscellaneous income increased from $0.8 million in 1992 to $6.6 million in
1993 primarily due to finance charges. During 1993 the Company changed its
credit and collection policy to provide for the charging of late fees on all
past due accounts. Prior to 1993, ATC customers were not allocated finance
charges.
The effective income tax rate for 1993 was 40.8% of income before tax versus a
rate of 62.9% in 1992. The unusual rate in 1992 resulted from the combination
of low pretax earnings and the non-deductible amortization expense attributable
to certain of the intangible costs incurred by the Company in its numerous
business combinations. The 1993 rate includes the effect of an increase in the
statutory federal income tax rate. See Note 9 of Notes to Consolidated
Financial Statements.
In the third quarter of 1993, IDB repaid certain debt amounts which resulted in
an extraordinary charge of $7.9 million, net of income tax benefit of $5.6
million, representing payment of debt redemption premiums and the write-off of
unamortized debt issuance costs. See Note 4 of Notes to Consolidated Financial
Statements.
In December 1992, LDDS restructured and refinanced substantially all of its
credit facilities. As part of such refinancing, LDDS incurred prepayment
penalties and wrote off the unamortized issue costs attributable to its prior
facilities, resulting in an extraordinary item of $5.8 million, net of related
income tax benefit. See Note 4 of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
In December 1994, LDDS entered into a new credit facility to finance the WilTel
Acquisition, refinance LDDS' existing credit facilities and provide additional
working capital. The credit facility is comprised of a $2.16 billion, six-year
reducing revolving credit facility (the "Revolving Facility Commitment") and a
$1.25 billion, two-year term facility (the "Term Principal Debt"). The maximum
principal amount permitted to be outstanding under the Revolving Facility
Commitment will be reduced at the end of each fiscal quarter, commencing
September 30, 1996, in varying
25
<PAGE> 30
amounts, and the outstanding balance must be paid in full on December 31, 2000.
The Term Principal Debt matures in a single installment on December 31, 1996.
The Revolving Facility Commitment and the Term Principal Debt bear interest,
payable quarterly, at a rate per annum equal to the lesser of: a Base Rate
plus applicable margin, the London Interbank Offering Rate ("LIBOR") plus
applicable margin, any Competitive Bid Rate or the Money Market Rate. The
applicable margin varies from 0% to 3/8% for Base Rate Borrowings and 1/2% to
1.5% for LIBOR Rate Borrowings from time to time based upon the lower of a
specified financial test or LDDS' long-term debt rating. The credit facility
is unsecured and requires compliance with certain financial and other operating
covenants which require the maintenance of certain minimum operating ratios and
which limit, among other things, the incurrence of additional indebtedness by
LDDS and restrict the payment of cash dividends to LDDS' shareholders.
The $3.41 billion long-term debt facility was utilized by the Company on
January 5, 1995, in conjunction with the WilTel Acquisition and all debt
outstanding under LDDS' previous credit facilities and the $123.0 million in
senior notes was repaid. At that time, the Company had access to an additional
$205.6 million under its new long-term bank facility.
On February 24, 1995, the Company entered into financial hedging agreements
with various financial institutions, in connection with the credit facility.
The hedging agreements establish fixed rates of interest ranging from 8.25% to
8.3125% on an aggregate notional value of $1.7 billion. These contracts range
in duration from one to two years with $845.4 million maturing in each of the
years ending 1996 and 1997.
LDDS believes that the combined operations of LDDS, IDB and WilTel will
generate sufficient cash flow to service LDDS' debt under the new credit
facility; however, economic downturns, increased interest rates and other
adverse developments, including factors beyond LDDS' control, could impair its
ability to service its indebtedness. In addition, the cash flow required to
service LDDS' debt will reduce its liquidity, which in turn may reduce its
ability to fund internal growth, additional acquisitions and capital
improvements.
LDDS anticipates it will need to refinance a portion of the Term Principal Debt
thereby requiring LDDS to seek financing alternatives such as public or private
debt or equity offerings, or refinancing with the existing or new lenders. The
Company is committed to a priority plan of accelerating operating cash flow to
reduce debt. LDDS anticipates that the remaining debt balances will be
refinanced with a combination of commercial bank debt and public market debt.
Successful execution of this priority plan would provide continued compliance
with required operating ratio convenants and would eliminate any type of
equity financing other than equity issued in connection with acquisitions. No
assurance can be given that the Company will achieve its priority plan or any
refinancing will be available on terms acceptable to LDDS.
LDDS has historically utilized cash flow from operations to finance capital
expenditures and a mixture of cash flow, debt and stock to finance
acquisitions. LDDS will continue to analyze acquisitions utilizing primarily
equity financing until the additional leverage from the WilTel Acquisition is
reduced.
26
<PAGE> 31
In 1994, the Company's cash flow from operations was $261.4 million, increasing
from $159.0 million in 1993 and $102.9 million in 1991. The increases in cash
flow from operations were primarily attributable to cash flow from acquired
operations and internal growth.
Cash used in investing activities in 1994 totaled $350.5 million, of which
$203.2 million related to capital expenditures (including payments for line
installation costs). Primary capital expenditures include purchases of
switching, transmission, communication and other equipment. Capital
expenditures for 1995 are anticipated to total approximately $295.0 million.
Cash paid in 1994 for acquisitions and related costs of $91.8 million primarily
included additional costs paid in 1994 related to 1993 acquisitions. In 1994,
an additional $77.6 million was borrowed against the Company's long-term bank
facilities to help fund investing activities of the Company.
Included in cash flows from financing activities are payments of $27.8 million
for preferred dividend requirements. The Series 1 Preferred Stock has a total
annual dividend requirement of $24.5 million payable quarterly. The Series 2
Preferred Stock has an annual dividend requirement of $3.3 million payable at
the end of each calendar quarter. The Company believes that no event will
occur in 1995 to interfere with these dividend requirements.
In March 1995, LDDS amended WilTel's existing $80.0 million receivables
purchase agreement to include certain LDDS receivables and received additional
proceeds of $120.0 million. The Company used these proceeds to reduce the
Revolving Facility Commitment and provide additional working capital. As of
that date, the purchaser owned a 99.35% undivided interest in a $385.0 million
pool of receivables which includes the $200.0 million sold. The aggregate
purchase limit under this agreement is $200.0 million at March 31, 1995 to be
increased to $280.0 million by June 30, 1995.
Absent significant capital requirements for other acquisitions, the Company
believes that cash flow from operations, including the operations of IDB and
WilTel, and funds available under the new credit facility and from the sale of
the Company's receivables will be adequate to meet the Company's capital needs
for the remainder of 1995.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1993, the Financial Accounting Standards Board ("FASB") issued SFAS No.
116, "Accounting for Contributions Received and Contributions Made." In
October 1994, the FASB issued SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures." SFAS No. 116 and
SFAS No. 118 are effective for fiscal years beginning after December 15, 1994.
LDDS believes that adoption of these standards will not have a material effect
on the Company's consolidated results of operations or financial position.
27
<PAGE> 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and notes thereto are included elsewhere in
this report on Form 10-K as follows:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of independent public accountants F-2
Consolidated financial statements-
Consolidated balance sheets - December 31, 1994
and 1993 F-4
Consolidated statements of operations for the three
years ended December 31, 1994 F-5
Consolidated statements of shareholders' investment
for the three years ended December 31, 1994 F-6
Consolidated statements of cash flows for the
three years ended December 31, 1994 F-7
Notes to consolidated financial statements F-8
Financial Statement Schedule F-29
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Upon effectiveness of the Prior Mergers and change in control of the Company,
the Company's Board of Directors authorized the Audit Committee of the Board of
Directors to select an auditor to perform the audit of the books and accounts
of the registrant and its subsidiaries for the fiscal year ending December 31,
1993. On October 7, 1993, the Audit Committee engaged Arthur Andersen LLP
("Andersen"), as the Company's auditor and certifying accountant.
Before the Prior Mergers, Andersen was the certifying accountant of LDDS-TN,
which, for accounting purposes, was the surviving corporation in the Prior
Mergers. From an accounting perspective, therefore, there has not been a
change in certifying accountant. From a corporate law perspective, Ernst &
Young, as the certifying accountant of Resurgens, was dismissed pursuant to
resolutions of the Audit Committee on October 7, 1993. Ernst & Young's reports
on the financial statements of Resurgens for the fiscal years ended June 30,
1992 and 1991 did not contain an adverse opinion or a disclaimer of opinion,
nor were they qualified or modified as to uncertainty,
28
<PAGE> 33
audit scope, or accounting principles. Ernst & Young has not reported on the
financial statements of the Company for any period subsequent to June 30, 1992.
The Company provided the former accountant with a copy of the disclosure and
requested that the former accountant furnish the Company a letter addressed to
the Commission stating whether it agrees with the statements made by the
Company in response to Item 304 (a) of Regulation S-K. A letter stating that
Ernst & Young concurred with the points presented above as to why they were
dismissed was filed with the Commission as an amendment to the Company's
Transition Report on Form 10-K for the period from December 31, 1992 to June
30, 1993 (File No. 1-10415).
29
<PAGE> 34
PART III
The information required by this Part III will be provided in the Company's
definitive proxy statement for the Company's 1995 Annual Meeting of
Shareholders (involving the election of directors), which definitive proxy
statement will be filed pursuant to Regulation 14A not later than 120 days
following the Company's fiscal year ended December 31, 1994, and is
incorporated herein by this reference to the following extent:
(a) ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT - the
information under the captions "ELECTION OF DIRECTORS
- Information About Nominees and Executive Officers"
and "EXECUTIVE COMPENSATION - Compliance with Section
16 of the Securities Exchange Act of 1934."
(b) ITEM 11. EXECUTIVE COMPENSATION - the information under the
captions "INFORMATION CONCERNING BOARD OF DIRECTORS -
Compensation of Directors" and "EXECUTIVE
COMPENSATION."
(c) ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT - the information under the captions
"PRINCIPAL HOLDERS OF VOTING SECURITIES" AND
"SECURITY OWNERSHIP OF MANAGEMENT."
(d) ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - the
information under the caption "EXECUTIVE COMPENSATION
- Transactions With Management."
30
<PAGE> 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1 and 2
Financial statements and financial statement schedules
See Index to Consolidated Financial Statements and Financial Statement
Schedules on page F-1 hereof.
(a) 3
Exhibits required by Item 601 of Regulation S-K
See Exhibit Index for the exhibits filed as part of this Report. There are
omitted from the exhibits filed with this Annual Report on Form 10-K certain
promissory notes and other instruments and agreements with respect to long-term
debt of the Company, none of which authorizes securities in a total amount that
exceeds 10% of the total assets of the Company on a consolidated basis.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the Company hereby agrees to
file with the Securities and Exchange Commission copies of any such omitted
promissory notes or other instruments or agreements as the Commission requests.
(b) Reports on Form 8-K
During the fourth quarter of 1994, the Company filed the following reports on
Form 8-K:
(i) Current Report on Form 8-K/A dated August 22, 1994 (filed November 17,
1994), reporting information required to be reported under Item 7(a),
Financial Statements of businesses to be acquired, the following
financial statements:
WilTel Network Services - for the nine month period ended September
30, 1994 (unaudited)
Combined balance sheet
Combined statement of income
Combined statement of stockholder's equity
Combined statement of cash flows
Notes to financial statements
31
<PAGE> 36
WilTel Network Services - for the nine month period ended September
30, 1993 (unaudited) and September 30, 1994 (unaudited)
Combined statements of income
Abbreviated cash flow statements
(ii) Current Report on Form 8-K/A dated August 22, 1994 (filed November 28,
1994), reporting information required to be reported under Item 7(b),
Pro Forma financial information, the following financial statements:
LDDS Communications, Inc. - for the nine month period ended September
30,1994 and 1993 and for the fiscal years ended December 31, 1993,
1992 and 1991:
Pro forma combining financial statements
Pro forma combining balance sheet as of September 30, 1994
Pro forma combining income statement for the nine months ended
September 30, 1994
Pro forma combining income statement for the nine months ended
September 30, 1993
Pro forma combining income statement for the fiscal years
ended December 31, 1993, 1992 and 1991
Notes to pro forma combining financial statements
(iii) Current Report on Form 8-K dated December 15, 1994 (filed December 19,
1994) which includes under Item 5, financial statements of IDB,
related notes and report thereon and related pro forma combining
financial statements and related notes.
(iv) Current Report on Form 8-K dated December 30, 1994 (filed January 13,
1995) reporting under Item 2, among other things, the Company's
acquisitions of IDB and WilTel.
32
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 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.
LDDS COMMUNICATIONS, INC.
By: /s/ Scott D. Sullivan
-----------------------------------
Date: March 30, 1995 Scott D. Sullivan,
Treasurer and Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Carl J. Aycock Director March 30, 1995
-----------------------------
Carl J. Aycock
/s/ Max E. Bobbitt Director March 30, 1995
-----------------------------
Max E. Bobbitt
/s/ Danny M. Dunnaway Director March 30, 1995
-----------------------------
Danny M. Dunnaway
Director,
/s/ Bernard J. Ebbers President and March 30, 1995
----------------------------- Chief Executive
Bernard J. Ebbers Officer
/s/ Francesco Galesi Director March 30, 1995
-----------------------------
Francesco Galesi
</TABLE>
33
<PAGE> 38
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Stiles A. Kellett, Jr. Director March 30, 1995
-----------------------------
Stiles A. Kellett, Jr.
/s/ Silvia Kessel Director March 30, 1995
-----------------------------
Silvia Kessel
/s/ John W. Kluge Director March 30, 1995
-----------------------------
John W. Kluge
/s/ Gregory A. LeVert Director March 30, 1995
-----------------------------
Gregory A. LeVert
/s/ John A. Porter Director March 30, 1995
-----------------------------
John A. Porter
/s/ Stuart Subotnick Director March 30, 1995
-----------------------------
Stuart Subotnick
Treasurer, Principal
/s/ Scott D. Sullivan Financial Officer March 30, 1995
----------------------------- and Principal Accounting Officer
Scott D. Sullivan
/s/ Roy A. Wilkens Director March 30, 1995
-----------------------------
Roy A. Wilkens
</TABLE>
34
<PAGE> 39
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of independent public accountants F-2
Consolidated financial statements-
Consolidated balance sheets - December 31, 1994
and 1993 F-4
Consolidated statements of operations for the
three years ended December 31, 1994 F-5
Consolidated statements of shareholders' investment
for the three years ended December 31, 1994 F-6
Consolidated statements of cash flows for the
three years ended December 31, 1994 F-7
Notes to consolidated financial statements F-8
Financial Statement Schedule:
II. Valuation and qualifying accounts F-29
</TABLE>
Schedules other than the schedule listed above have been omitted because of the
absence of conditions under which they are required or because the information
is included in the financial statements or notes thereto.
F-1
<PAGE> 40
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To LDDS Communications, Inc.
and Subsidiaries:
We have audited the accompanying consolidated balance sheets of LDDS
Communications, Inc. (a Georgia corporation) and subsidiaries as of December
31, 1994, and the related consolidated statements of operations, shareholders'
investment and cash flows for each of the years in the three-year period ended
December 31, 1994. We did not audit the financial statements of IDB
Communications Group, Inc., a company acquired during 1994 in a transaction
accounted for as a pooling-of-interests, as of December 31, 1993, and for each
of the years in the two-year period ended December 31, 1993. Such statements
are included in the consolidated financial statements of LDDS Communications,
Inc. and reflect total assets and total revenues of 22 percent and 23 percent,
respectively, of the related consolidated totals as of December 31, 1993, and
for the year then ended, and 16 percent of total revenues for the year ended
December 31, 1992. These statements were audited by other auditors whose
report has been furnished to us and our opinion, insofar as it relates to the
amounts included for IDB Communications Group, Inc., is based solely upon the
report of the other auditors. 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 audits 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 and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of LDDS Communications, Inc. and subsidiaries
as of December 31, 1994 and 1993, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1994, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Financial Statements and Financial Statement Schedule is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not
part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic financial statements
and, in our opinion, based on our audits and the report of other auditors,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Jackson, Mississippi,
March 8, 1995.
F-2
<PAGE> 41
INDEPENDENT AUDITORS' REPORT
IDB COMMUNICATIONS GROUP, INC.:
We have audited the consolidated balance sheet of IDB Communications Group,
Inc. and its subsidiaries as of December 31, 1993, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
ended December 31, 1993 and 1992 (not presented separately herein). Our audits
also included the financial statement schedule listed at Item 14 (not presented
separately herein). These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule 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, such consolidated financial statements present fairly, in all
material respects, the financial position of IDB Communications Group, Inc. and
its subsidiaries at December 31, 1993, and the results of their operations and
their cash flows for the years ended December 31, 1993 and 1992 in conformity
with generally accepted accounting principles. Also in our opinion, such
financial statement schedule when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
Los Angeles, California
March 7, 1994
F-3
<PAGE> 42
LDDS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Per Share Data)
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1994 1993
-------------------- --------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,259 $ 60,780
Short-term investments 1,000 12,672
Accounts receivable, net of allowance for bad debts of $52,949 and $26,613 at
December 31, 1994 and 1993, respectively 470,175 390,700
Income taxes receivable - 9,275
Deferred tax asset 62,687 24,568
Other current assets 36,305 36,757
-------------------- --------------------
Total current assets 589,426 534,752
-------------------- --------------------
Property and equipment:
Transmission equipment 388,941 382,165
Communications equipment 371,998 317,234
Furniture, fixtures and other 183,326 145,704
-------------------- --------------------
944,265 845,103
Less - accumulated depreciation (317,598) (230,742)
-------------------- --------------------
626,667 614,361
-------------------- --------------------
Excess of cost over net tangible assets acquired, net of accumulated amortization 2,070,709 1,927,080
Line installation costs, net of accumulated amortization 28,768 26,811
Deferred income taxes 14,120 75,628
Other assets 100,502 58,086
-------------------- --------------------
$ 3,430,192 $ 3,236,718
==================== ====================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Short-term debt and current maturities of long-term debt $ 5,996 $ 8,543
Accounts payable 138,101 126,996
Accrued line costs 258,053 231,006
Accrued restructuring costs 25,837 1,530
Shareholder litigation reserve 75,000 -
Income taxes payable 11,940 -
Other current liabilities 195,728 115,804
-------------------- --------------------
Total current liabilities 710,655 483,879
-------------------- --------------------
Long-term liabilities, less current portion:
Long-term debt 788,005 721,480
Other liabilities 104,362 119,559
-------------------- --------------------
Total long-term liabilities 892,367 841,039
-------------------- --------------------
Commitments and contingencies
Shareholders' investment:
Series 1 preferred stock, par value $.01 per share; authorized: 10,896,785 shares;
issued and outstanding: 10,896,785 shares in 1994 and 1993 (liquidation
preference of $544,839) 109 109
Series 2 preferred stock, par value $.01 per share; authorized: 2,000,000 shares;
issued and outstanding: 2,000,000 shares in 1994 and 1993 (liquidation
preference of $50,000) 20 20
Preferred stock, 1994 and 1993: par value $.01 per share; authorized: 37,103,215 shares;
none issued - -
Common stock, par value $.01 per share; authorized: 500,000,000 shares; issued
and outstanding: 159,643,312 shares in 1994 and 153,453,548 in 1993 1,596 1,535
Additional paid-in capital 1,772,882 1,700,714
Retained earnings 52,563 209,422
-------------------- --------------------
Total shareholders' investment 1,827,170 1,911,800
-------------------- --------------------
$ 3,430,192 $ 3,236,718
==================== ====================
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 43
LDDS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------------
1994 1993 1992
------------------- ------------------ ------------------
<S> <C> <C> <C>
Revenues $ 2,220,765 $ 1,474,257 $ 948,060
------------------- ------------------ ------------------
Operating expenses:
Line costs 1,447,633 881,540 552,632
Selling, general and administrative 432,360 246,105 189,355
Depreciation and amortization 163,828 101,859 66,990
Provision to reduce carrying value of certain assets 48,500 - -
Direct merger costs 15,002 - 7,262
Restructuring and other charges 43,704 5,920 79,838
------------------- ------------------ ------------------
Total 2,151,027 1,235,424 896,077
------------------- ------------------ ------------------
Operating income 69,738 238,833 51,983
Other income (expense):
Interest expense (47,303) (35,557) (30,311)
Shareholder litigation settlement (76,000) - -
Miscellaneous 5,223 6,644 841
------------------- ------------------ ------------------
Income (loss) before income taxes and extraordinary item (48,342) 209,920 22,513
Provision for income taxes 73,816 85,599 14,169
------------------- ------------------ ------------------
Net income (loss) before extraordinary item (122,158) 124,321 8,344
Extraordinary item (net of income taxes of $5,639 in 1993 and
$ 3,600 in 1992) - (7,949) (5,800)
------------------- ------------------ ------------------
Net income (loss) (122,158) 116,372 2,544
Preferred dividend requirement 27,766 11,683 2,112
------------------- ------------------ ------------------
Net income (loss) applicable to common shareholders $ (149,924) $ 104,689 $ 432
=================== ================== ==================
Earnings (loss) per common share -
Income (loss) before extraordinary item:
Primary $ (0.95) $ 0.82 $ 0.06
Fully diluted (0.95) 0.80 0.06
Extraordinary item 0.00 (0.06) (0.05)
Net income (loss):
Primary (0.95) 0.76 0.00
Fully diluted (0.95) 0.74 0.00
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 44
LDDS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
For the Three Years Ended December 31, 1994
(In Thousands)
<TABLE>
<CAPTION>
Series 1 Preferred Series 2 Preferred Preferred
Stock Stock Stock
--------------------- --------------------- ---------------------
Shares Amount Shares Amount Shares Amount
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1991 - $ - - $ - - $ -
Preferred stock issued net of
issuance cost - - - - 534 64,014
Exercise of stock options - - - - - -
5% stock dividend - IDB - - - - - -
Shares issued from treasury for
acquisition subsidiary - - - - - -
Shares issued from treasury for
retirement savings plan - - - - - -
Tax adjustment resulting from
exercise of stock options - - - - - -
Retirement of treasury shares - - - - - -
Shares issued for acquisitions - - - - - -
Net income - - - - - -
Cash dividends on preferred
stock - - - - - -
Adjustment for change in fiscal year
of pooled company - - - - - -
-----------------------------------------------------------------------
Balances, December 31, 1992 - - - - 534 64,014
Exercise of stock options - - - - - -
Conversion of preferred stock - - - - (34) (17,444)
Conversion of preferred stock into
Series 2 Preferred Stock - - 2,000 20 (500) (46,570)
Common stock issued - - - - - -
Common stock issued to
repurchase debt - - - - - -
Tax adjustment resulting from
exercise of stock options - - - - - -
Cash for fractional shares - - - - - -
Shares issued for acquisitions 10,897 109 - - - -
Net income - - - - - -
Cash dividends on preferred
stock - - - - - -
-----------------------------------------------------------------------
Balances, December 31, 1993 10,897 109 2,000 20 - -
Exercise of stock options - - - - - -
Common stock issued - - - - - -
Tax adjustment resulting from
exercise of stock options - - - - - -
Shares issued for acquisitions - - - - - -
Net loss - - - - - -
Cash dividends on preferred
stock - - - - - -
-----------------------------------------------------------------------
Balances, December 31, 1994 10,897 $ 109 2,000 $ 20 - $ -
=======================================================================
<CAPTION>
Common Stock Additional
------------------------ Paid-in Retained Treasury
Shares Amount Capital Earnings Stock
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1991 109,126 $ 1,091 $ 249,257 $ 117,795 $(20,078)
Preferred stock issued net of
issuance cost - - - - -
Exercise of stock options 1,366 13 5,479 - 2,699
5% stock dividend - IDB 780 8 7,165 (7,173) -
Shares issued from treasury for
acquisition subsidiary - - 1,171 - 5,294
Shares issued from treasury for
retirement savings plan - - 222 - 232
Tax adjustment resulting from
exercise of stock options - - 1,383 - -
Retirement of treasury shares (3,013) (30) (17,450) - 17,480
Shares issued for acquisitions 8,603 87 62,630 - -
Net income - - - 2,544 -
Cash dividends on preferred
stock - - - (2,112) -
Adjustment for change in fiscal
year of pooled company - - (950) (6,321) (5,627)
-------------------------------------------------------------------
Balances, December 31, 1992 116,862 1,169 308,907 104,733 -
Exercise of stock options 5,048 50 20,174 - -
Conversion of preferred stock 2,937 29 17,415 - -
Conversion of preferred stock
into Series 2 Preferred Stock - - 46,550 - -
Common stock issued 2,253 23 50,977 - -
Common stock issued to
repurchase debt 160 2 5,987 - -
Tax adjustment resulting from
exercise of stock options - - 20,770 - -
Cash for fractional shares (3) - (76) - -
Shares issued for acquisitions 26,197 262 1,230,010 - -
Net income - - - 116,372 -
Cash dividends on preferred
stock - - - (11,683) -
-------------------------------------------------------------------
Balances, December 31, 1993 153,454 1,535 1,700,714 209,422 -
Exercise of stock options 3,209 32 15,895 - -
Common stock issued 2,195 22 22,971 (6,935) -
Tax adjustment resulting from
exercise of stock options - - 15,918 - -
Shares issued for acquisitions 785 7 17,384 - -
Net loss - - - (122,158) -
Cash dividends on preferred
stock - - - (27,766) -
Balances, December 31, 1994 159,643 $ 1,596 $1,772,882 $ 52,563 $ -
===================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 45
LDDS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------------------------
1994 1993 1992
------------------- ------------------- -------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (122,158) $ 116,372 $ 2,544
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary item - 7,949 5,800
Depreciation 97,089 64,239 45,721
Amortization 66,739 37,620 21,269
Provision for losses on accounts receivable 58,952 25,231 33,033
Provision for shareholder litigation 76,000 - -
Provision to reduce the carrying value of certain assets 48,500 - -
Provision for deferred income taxes 24,961 53,259 6,069
Change in assets and liabilities, net of effect of
business combinations:
Accounts receivable (148,053) (79,981) (54,589)
Income taxes receivable 9,275 18,362 (10,399)
Other current assets 9 3,622 1,276
Accounts payable and other current liabilities 132,170 (87,480) 52,620
Other 17,905 (185) (421)
------------------- ------------------- -------------------
Net cash provided by operating activities 261,389 159,008 102,923
------------------- ------------------- -------------------
Cash flows from investing activities:
Capital expenditures (192,162) (83,957) (84,650)
Sale (purchase) of short-term investments, net 11,672 (12,672) -
Acquisitions and related costs (91,750) (284,397) (64,506)
Increase in intangible assets (14,877) (17,070) (15,244)
Increase in other assets (23,333) (9,161) (12,996)
Increase (decrease) in other liabilities (30,947) (7,379) 7,579
Payment for line installation costs (11,071) (13,936) (4,554)
Other 2,000 6,118 7,954
------------------- ------------------- -------------------
Net cash used in investing activities (350,468) (422,454) (166,417)
------------------- ------------------- -------------------
Cash flows from financing activities:
Borrowings 77,600 391,050 421,294
Principal payments on debt (40,707) (126,178) (426,173)
Common stock issuance 38,431 71,238 8,052
Net proceeds - preferred stock - - 46,570
Dividends paid on preferred stock (27,766) (11,683) (2,112)
Other - (5,667) 12,707
------------------- ------------------- -------------------
Net cash provided by financing activities 47,558 318,760 60,338
------------------- ------------------- -------------------
Net increase (decrease) in cash and cash equivalents (41,521) 55,314 (3,156)
Effect of change in fiscal year - - (513)
Cash and cash equivalents at beginning of period 60,780 5,466 9,135
------------------- ------------------- -------------------
Cash and cash equivalents at end of period $ 19,259 $ 60,780 $ 5,466
=================== =================== ===================
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 46
LDDS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994
(1) THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES -
DESCRIPTION OF BUSINESS AND ORGANIZATION:
LDDS Communications, Inc., a Georgia corporation, is one of the largest U.S.
based long distance telecommunications companies in the industry, serving
customers domestically and internationally. The products and services provided
by LDDS Communications, Inc. include: switched and dedicated long distance
products, 800 services, calling cards, operator services, private lines, frame
relays, debit cards, conference calling, advanced billing systems, facsimile
and data connections, television and radio transmission and mobile satellite
communications.
The operations of LDDS Communications, Inc. have grown significantly as a
result of internal growth, the selective acquisition of smaller long distance
companies with limited geographic service areas and market shares, the
consolidation of certain third tier long distance carriers with larger market
shares, and international expansion.
THE MERGERS:
On December 30, 1994, LDDS Communications, Inc., through a wholly owned
subsidiary, merged with IDB Communications Group, Inc., a Delaware corporation
("IDB"), and in connection therewith issued approximately 35,881,000 shares of
LDDS Communications, Inc. common stock, $.01 par value per share (the "Common
Stock"), for all of the outstanding shares of IDB common stock, $.01 par value
per share (the "IDB Merger"). In addition, LDDS Communications, Inc. assumed,
on a subordinated basis, jointly and severally with IDB, the obligations of IDB
to pay the principal of and interest on $195.5 million 5% convertible
subordinated notes due 2003, issued by IDB. The IDB Merger was accounted for
as a pooling-of-interests and, accordingly, the LDDS Communications, Inc.
financial statements for periods prior to the IDB Merger have been restated to
include the results of IDB for all periods presented. Separate and combined
results of operations are as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------
1994 1993 1992
---------- ----------- ----------
(In thousands)
<S> <C> <C> <C>
Revenues:
IDB $ 523,359 $ 339,364 $ 155,344
LDDS Communications, Inc. 1,708,614 1,144,714 800,753
Intercompany elimination (11,208) (9,821) ( 8,037)
---------- ----------- ----------
Combined $2,220,765 $ 1,474,257 $ 948,060
========== =========== ==========
Income (loss) from
continuing operations:
IDB $ (284,490) $ 20,139 $ 8,528
LDDS Communications, Inc. 162,332 104,182 (184)
---------- ----------- ----------
Combined $ (122,158) $ 124,321 $ 8,344
========== =========== ==========
</TABLE>
F-8
<PAGE> 47
In 1994 and 1992, the Company charged to operations merger and restructuring
costs in connection with various mergers. These costs totaled $58.7 million
and $87.1 million, respectively, See Note 3. The combined companies of LDDS
Communications, Inc. and IDB are hereinafter referred to as "LDDS" or the
"Company."
On September 15, 1993, a three-way merger occurred whereby (i) Metromedia
Communications Corporation, a Delaware corporation ("MCC"), merged with and
into Resurgens Communications Group, Inc., a Georgia corporation ("Resurgens"),
and (ii) LDDS Communications, Inc., a Tennessee corporation ("LDDS-TN"), merged
with and into Resurgens (the "Prior Mergers").
At the time of the Prior Mergers, the name of Resurgens, the legal survivor,
was changed to LDDS Communications, Inc., and the separate corporate existences
of LDDS-TN and MCC terminated. For accounting purposes, however, LDDS-TN was
the survivor because the former shareholders of LDDS-TN acquired majority
ownership of the Company. The Prior Mergers have been accounted for as
purchases.
Additionally, on December 4, 1992, LDDS-TN, through a wholly owned subsidiary,
merged with Advanced Telecommunications Corporation ("ATC"). This merger (the
"ATC Merger") was accounted for as a pooling-of-interests and, accordingly, the
LDDS financial statements for periods prior to the ATC Merger have been
restated to include the results of ATC for all periods presented.
Subsequent to December 31, 1994, LDDS completed the acquisition of Williams
Telecommunications Group, Inc. ("WilTel"), a subsidiary of The Williams
Companies, Inc. ("Williams"), for approximately $2.5 billion in cash (the
"WilTel Acquisition"). Through this purchase, the Company acquired a network
of approximately 11,000 miles of fiber optic cable and digital microwave
facilities with access to approximately 30,000 miles of additional fiber optic
network through lease agreements with other carriers. See Note 2 and Note 4.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation. Investments in joint ventures and other
equity investments in which the Company owns a 20% to 50% ownership interest,
are accounted for by the equity method. Investments of less than 20% ownership
are carried at fair value. At December 31, 1994, the fair value of these
investments approximate their cost.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount for cash, short-term investments, accounts receivable,
notes receivable, accounts payable and accrued liabilities approximate their
fair value. The fair value of the long-term debt is determined based on the
cash flows from such financial instruments discounted at the Company's
estimated current interest rate to enter into similar financial instruments.
At December 31, 1994, the fair value of the 5.0% convertible subordinated notes
was $164.0 million. The recorded amounts for all other long-term debt of the
Company approximate fair values.
F-9
<PAGE> 48
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation is provided for
financial reporting purposes using the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Transmission equipment 5 to 25 years
Communications equipment 5 to 25 years
Furniture, fixtures and other 3 to 25 years
</TABLE>
Maintenance and repairs are expensed as incurred. Replacements and betterments
are capitalized. The cost and related reserves of assets sold or retired are
removed from the accounts, and any resulting gain or loss is reflected in
results of operations.
The Company constructs certain of its own transmission systems and related
facilities. All internal costs directly related to the construction of such
facilities, including interest and salaries of certain employees, are
capitalized. Such costs were $6.8 million ($1.2 million in interest), $8.3
million ($3.1 million in interest), and $7.7 million ($3.5 million in interest)
in 1994, 1993, and 1992, respectively.
EXCESS OF COST OVER NET TANGIBLE ASSETS ACQUIRED:
The major classes of intangible assets are summarized below (in thousands of
dollars):
<TABLE>
<CAPTION>
December 31,
Amortization -----------------------------
Period 1994 1993
---------------- ----------- ----------
<S> <C> <C> <C>
Goodwill 40 years $2,076,174 $1,889,955
Customer acquisition cost 7 to 10 years 75,245 69,343
Other intangibles 5 years 61,290 56,223
----------- -----------
2,212,709 2,015,521
Less accumulated amortization 142,000 88,441
---------- ----------
$2,070,709 $1,927,080
========== ==========
</TABLE>
Intangible assets are amortized using the straight-line method for the periods
noted above.
Goodwill is recognized for the excess of the purchase price of the various
business combinations over the value of the identifiable net assets and
customer bases. See Note 2. Realization of acquisition-related intangibles,
including goodwill, is periodically assessed by the management of the Company
based on the current and expected future profitability and cash flows of
acquired companies and their contribution to the overall operations of LDDS.
Customer acquisition costs represent costs incurred as a result of purchase
business combinations and are recorded based upon the estimated value of the
customer bases acquired. See Note 2.
F-10
<PAGE> 49
LINE INSTALLATION COSTS:
The Company defers the costs associated with the installation of local access
lines and other network facilities. Amortization of these costs is provided
over five years using the straight-line method. Accumulated amortization on
line installation costs was $29.5 million and $23.3 million as of December 31,
1994 and 1993, respectively.
OTHER LONG-TERM LIABILITIES:
At December 31, 1994 and 1993, other long-term liabilities includes $80.1
million and $60.7 million, respectively, related to estimated costs of closing
duplicate facilities, and other non-recurring duplicative costs expected to be
incurred as the result of various acquisitions and mergers. See Note 2. Also
included in long-term liabilities at December 31, 1994 and 1993, are
approximately $7.9 million and $19.0 million, respectively, which are estimates
of the excess of the accumulated post-retirement benefit obligation over the
fair value of the plan assets and other pension obligations related to a
defined post-retirement benefit plan of an acquired company.
RECOGNITION OF REVENUES:
The Company records revenues for long distance telecommunications sales at the
time of customer usage. The Company also performs systems integration services
consisting of design and installation of transmission equipment and systems for
its customers. Revenues and related costs for these services are recorded
under the percentage of completion method.
The Company has retroactively reclassified charges in 1993 from foreign
telephone companies to complete calls made from the United States by the
Company's customers. These charges in the amount of $28.7 million, which
previously were classified as direct reductions of revenues, are now classified
as line costs. Operating income (loss), net income (loss) available to common
shareholders and the balance sheet are not affected. This change was made to
conform with industry reporting practices. The amount of revenues reported for
the years ended prior to December 31, 1993 do not reflect this reclassification
because the amounts subject to reclassification were not material.
ACCOUNTING FOR INTERNATIONAL LONG DISTANCE TRAFFIC:
The Company enters into operating agreements with telecommunications carriers
in foreign countries under which international long distance traffic is both
delivered and received. Under these agreements, the foreign carriers are
obligated to adhere to the policy of the Federal Communications Commission
("FCC") whereby traffic from the foreign country is routed to international
carriers, of which the Company is one, in the same proportion as traffic
carried into the foreign country. Mutually exchanged traffic between the
Company and foreign carriers is settled in cash through a formal settlement
policy that generally extends over a six-month period at an agreed upon tariff
rate. Although the Company can estimate the amount of inbound traffic it will
receive, under the FCC's proportional share policy, it generally must wait up
to six months before it actually receives the inbound traffic.
The Company utilizes the net settlement concept that is inherent in the
operating agreements as the basis for its accounting policy for international
long distance traffic. Under this approach, the margin on
F-11
<PAGE> 50
outbound calls (recognizing that the proportionate return of the actual inbound
call is received generally on a six-month lag) are normalized to reflect the
implicit overall earning rate concept of the contract. Accordingly, a portion
of the outbound call fee due the foreign carrier is deferred and accounted for
as a cost attributable to the revenue associated with the inbound call. All
costs deferred are expensed six months later and offset against the revenues
recognized upon receipt of return traffic. The amount of cost deferral at
December 31, 1994 was $14.7 million, and is included in other assets in the
accompanying consolidated financial statements.
LINE COSTS:
Line costs primarily include right-of-way payments and all payments to local
exchange carriers ("LECs"), interexchange carriers and post telephone and
telegraph administrations ("PTTs") primarily for access and transport charges.
Line costs for 1994, 1993 and 1992 were reduced by estimated refunds receivable
relating to earnings in excess of authorized levels by LECs. During 1986, the
FCC adopted rules to monitor interstate access earnings of LECs and to require
refunds to interexchange carriers of these overearnings. These estimated
refunds receivable relate to the monitoring periods through 1990. The total
estimated refunds receivable by the Company for both of these matters were
approximately $9.0 million and $3.2 million at December 31, 1994 and 1993,
respectively.
INCOME TAXES:
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. SFAS 109
has as its basic objective the recognition of current and deferred income tax
assets and liabilities based upon all events that have been recognized in the
consolidated financial statements as measured by the provisions of the enacted
tax laws. See Note 9.
EARNINGS PER SHARE:
For the years ended December 31, 1993 and 1992, earnings per share are
calculated based on the weighted average number of shares outstanding during
the period plus the dilutive effect of stock options and warrants determined
using the treasury stock method. For the year ended December 31, 1994,
earnings per share were calculated based on the weighted average number of
shares outstanding during the period. The effect of common stock equivalents
was not considered in this period because the effect of such options and
warrants would have been anti-dilutive. For all periods presented, conversion
of the LDDS convertible preferred stock and convertible subordinated debt was
not assumed because the effect is anti-dilutive.
Average common shares and common equivalent shares utilized were 157,805,000;
137,927,000; and 112,653,000, respectively, for primary earnings per share and
157,805,000; 140,796,000; and 113,053,000, respectively, for fully diluted
earnings per share, for the years ended December 31, 1994, 1993 and 1992.
F-12
<PAGE> 51
STOCK SPLITS:
On December 7, 1992, the Board of Directors authorized a 3-for-2 stock split in
the form of a 50% stock dividend which was distributed on January 14, 1993 to
shareholders of record on December 21, 1992. On November 18, 1993, the Board
of Directors authorized a 2-for-1 stock split in the form of a 100% stock
dividend which was distributed on January 6, 1994, to shareholders of record on
December 7, 1993. Upon effectiveness of the Prior Mergers on September 15,
1993, each share of the outstanding common stock of LDDS-TN was converted into
the right to receive 0.9595 shares of the Common Stock.
During the periods presented, IDB authorized a 5% stock dividend paid in 1992
as well as a 3.15-to-1 common stock split effective on February 4, 1994.
All per share data and numbers of common shares have been retroactively
restated to reflect the effect of the stock splits, stock dividends and the
exchange ratio of 0.9595.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
The Company considers cash in banks and short-term investments with original
maturities of three months or less as cash and cash equivalents. Highly liquid
investments with original maturities beyond three months are classified as
short-term investments and carried at fair value, which approximates cost.
Short-term investments principally consist of tax exempt municipal bonds and
corporate bonds.
RECENTLY ISSUED ACCOUNTING STANDARDS:
In June 1993, the Financial Accounting Standards Board ("FASB") issued SFAS No.
116, "Accounting for Contributions Received and Contributions Made." In
October 1994, the FASB issued SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures." SFAS No. 116 and
SFAS No. 118 are effective for fiscal years beginning after December 15, 1994.
Management believes that adoption of these standards will not have a material
effect on the Company's consolidated results of operations or financial
position.
RECLASSIFICATIONS:
Certain consolidated financial statement amounts have been reclassified for
consistent presentation.
(2) BUSINESS COMBINATIONS -
Upon effectiveness of the Prior Mergers, each share of the outstanding common
stock of LDDS-TN was converted into the right to receive 0.9595 shares of
Common Stock. The 500,000 shares of LDDS-TN Series B 6.5% Cumulative Senior
Perpetual Convertible Preferred Stock outstanding were converted into 2,000,000
shares of LDDS Series 2 6.5% Cumulative Senior Perpetual Convertible Preferred
Stock having a liquidation value of $25 per share and a conversion price of
$11.81171 per share (the "Series 2 Preferred Stock"). As a result of the
consummation of the Prior Mergers, Metromedia Company ("Metromedia"), the sole
stockholder of MCC, received 2,758,620 shares of the Common Stock, 10,896,785
shares of LDDS Series 1 $2.25 Cumulative Senior Perpetual Convertible Preferred
Stock
F-13
<PAGE> 52
having a liquidation value of $50 per share and a conversion price of
$24.9046875 per share (the "Series 1 Preferred Stock"), warrants to purchase
5,000,400 shares of the Common Stock, and $150.0 million in cash. The common
stock of Resurgens was unchanged in the Prior Mergers.
For accounting purposes, LDDS-TN was the survivor because the former
shareholders of LDDS-TN acquired majority ownership of the Company. The Prior
Mergers have been accounted for as purchases, and the excess purchase price
over net tangible assets acquired has been recorded based upon an estimate of
fair values of assets acquired and liabilities assumed.
The Company has acquired other long distance companies offering similar or
complementary services to those offered by the Company. Such acquisitions have
been accomplished through the purchase of the outstanding stock or assets of
the acquired entity for cash, notes, shares of the Company's common stock, or a
combination thereof. The cash portion of acquisition costs has generally been
financed through the Company's bank loan agreements. See Note 4.
Most of the acquisitions have been accounted for as purchases and resulted in
an excess of the purchase costs over the net tangible assets acquired. These
costs, composed primarily of goodwill, are amortized over 40 years using the
straight-line method. The results of those purchased businesses have been
included since the dates of acquisition. Business combinations which have been
accounted for as poolings-of-interests have been included in all periods
presented. The table below sets forth information concerning certain other
recent acquisitions which were accounted for as purchases.
<TABLE>
<CAPTION>
Allocation of Excess Costs
Purchase Price Over Tangible Assets Acquired
------------------------ -----------------------------
Shares Issued
Acquisition ------------------ Customer
Acquired Entity Date Cash Number Value Acquisition Cost Goodwill
--------------- -------------- ------ ------ ------ ---------------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
AmeriCall/First Phone ("AmeriCall") February 1992 $28,500 973 $ 6,500 $ - $ 40,400
Prime Telecommunications ("Prime") March 1992 - 946 10,257 1,321 11,901
TFN Group Communications, Inc. August 1992 500 1,015 11,391 1,639 14,750
("TFN")
TelaMarketing Investments, Ltd. September 1992 22,400 - - 2,452 22,066
("TMI")
World Communications, Inc. December 1992 - * 59,300 - 38,600
("WorldCom")/Houston International
Teleport ("HIT")
Dial-Net, Inc. March 1993 31,200 2,746 50,095 10,139 91,255
("Dial-Net")
MCC/Resurgens September 1993 150,000 ** 1,097,915 - 1,269,105
TRT Communications, Inc. ("TRT") September 1993 1,000 6,760 79,000 - 39,000
</TABLE>
F-14
<PAGE> 53
--------------------
* Represents 6,233,250 shares of Common Stock and 34,000 shares of IDB's
convertible preferred stock having an aggregate liquidation preference of $34.0
million and an annual cash dividend yield of 4%.
** See the first paragraph of Note 2 for a description of the common and
preferred shares and warrants issued.
In addition to those acquisitions listed above, the Company or its predecessors
completed several smaller acquisitions during 1992 through 1994.
On January 5, 1995, LDDS completed the WilTel Acquisition for approximately
$2.5 billion in cash. The WilTel Acquisition was effected pursuant to a Stock
Purchase Agreement dated as of August 22, 1994, by and among LDDS, Williams and
WTG Holdings, Inc. The WilTel Acquisition is being accounted for as a purchase
for financial reporting purposes. The funds paid to Williams were obtained by
LDDS under a new credit facility entered into on December 21, 1994. See Note
4.
The following unaudited pro forma combined results of operations for the
Company assume that the WilTel Acquisition as well as the 1993 acquisitions of
Dial-Net, Resurgens, MCC and TRT were completed on January 1, 1993.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1994 1993
----------- ----------
(In thousands, except per share data)
<S> <C> <C>
Revenues $ 3,067,994 $ 2,631,740
Loss before extraordinary item (202,933) (3,385)
Loss applicable to common
shareholders (202,933) (11,334)
Loss per common share:
Loss before extraordinary item (1.29) (0.02)
Net loss (1.29) (0.08)
</TABLE>
The following unaudited pro forma combined results of operations for the
Company assume that the acquisitions of Dial-Net, Resurgens, MCC and TRT and
the 1992 acquisitions of AmeriCall, Prime, TFN, TMI, WorldCom and HIT were
completed at the beginning of 1992.
<TABLE>
<CAPTION>
For the Year Ended December 31, 1992
------------------------------------
(In thousands, except per share data)
<S> <C>
Revenues $1,727,361
Loss before extraordinary item (83,336)
Loss applicable to common
shareholders (89,136)
Loss per common share:
Loss before extraordinary item (0.59)
Net loss (0.63)
</TABLE>
These pro forma amounts represent the historical operating results of these
acquired entities combined with those of the Company with appropriate
adjustments which give effect to interest expense,
F-15
<PAGE> 54
amortization and the common shares issued. These pro forma amounts are not
necessarily indicative of operating results which would have occurred if
AmeriCall, Prime, TFN, TMI, WorldCom, HIT, Dial-Net, Resurgens, MCC, TRT and
the WilTel Acquisition had been operated by current management during the
periods presented because these amounts do not reflect full network
optimization and the synergistic effect on operating, selling, general and
administrative expenses.
(3) DIRECT MERGER COSTS, RESTRUCTURING AND OTHER CHARGES -
RESTRUCTURING AND OTHER CHARGES:
As a result of the IDB Merger and the ATC Merger, the Company initiated plans
to reorganize and restructure its management and operational organization and
facilities to eliminate duplicate personnel, physical facilities and service
capacity, to abandon certain products and marketing activities, and to further
take advantage of the synergy available to the combined entities. Accordingly,
the Company charged to operations during the fourth quarter of 1994 for the IDB
Merger and during the fourth quarter of 1992 for the ATC Merger, the estimated
costs of such reorganization and restructuring activities, including employee
severance, physical facility abandonment, and duplicate service capacity.
In addition, in 1992 the Company determined to resolve certain legal,
regulatory and administrative matters which were outstanding prior to the ATC
Merger and reflected as other charges the amounts estimated as the cost to
ultimately resolve such issues.
The following table reflects the components of the significant items shown as
Restructuring and other charges in 1994, 1993 and 1992 (in thousands):
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Severance costs $18,702 $ 691 $ 3,878
Duplicate facilities and other restructuring 13,990 - 27,321
Provision for settlement of certain legal issues 8,000 - 7,200
Write-off of receivables from other telecommunications providers - - 7,341
Settlement of disputes with other providers - - 4,900
Additional provision for uncollectible receivables - - 17,499
Reduction in carrying amount of certain assets 2,423 4,954 5,220
Other 589 275 6,479
------- ------ --------
$43,704 $5,920 $ 79,838
======= ====== ========
</TABLE>
As of December 31, 1994, $25.8 million and $14.7 million related to
restructuring and other charges in connection with the IDB Merger are included
in accrued restructuring costs and other long-term liabilities, respectively,
in the accompanying consolidated financial statements. In 1994, 70.4% of the
severance costs recorded as restructuring and other charges relates to accruals
made in relation to three former executive officers of IDB pursuant to change
of control provisions in pre-existing employment agreements.
F-16
<PAGE> 55
During 1993, plans were approved to reduce IDB's cost structure and to improve
productivity. Such plans included a reduction in the number of employees and
the disposition of certain assets. The Consolidated Statement of Operations
for 1993 includes a charge of $5.9 million relating to this program.
DIRECT MERGER COSTS:
Direct merger costs of $15.0 million and $7.3 million were related to the IDB
Merger (in 1994) and the ATC Merger (in 1992), respectively. These costs
include professional fees, proxy solicitation costs, travel and related
expenses and certain other direct costs attributable to these mergers.
PROVISION TO REDUCE THE CARRYING VALUE OF CERTAIN ASSETS:
During 1994 several events occurred which caused the Company to evaluate the
realization of its investment in the assets of IDB Broadcast. These events
included a proposed but never consummated sale of IDB Broadcast at amounts
significantly below book value, and the continued emergence of
telecommunications as the core business of IDB (making IDB Broadcast a non-core
operation). These factors, combined with broad economic factors adversely
impacting broadcast assets in general, have caused a decline in the value of
the Company's investment in these assets.
The Company has assessed the impact of these factors relative to its ability to
recover the recorded values of these assets, and determined that such values
should be reduced. Accordingly, the Company recorded adjustments of $48.5
million, to reduce the carrying value of these broadcast assets (primarily
intangible assets and property and equipment) to the Company's best estimate of
the net realizable value. Subsequent to December 31, 1994, the Company sold
its simulcasting operations and entered into an agreement to outsource the
management of the remaining IDB Broadcast operations.
(4) LONG-TERM DEBT -
Long-term debt outstanding consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------
1994 1993
---------- ----------
<S> <C> <C>
Reducing revolving credit agreements $ 468,850 $ 391,250
Convertible subordinated notes 195,500 195,500
Senior notes 123,000 123,000
Other debt (maturing through 1997) 6,651 20,273
---------- ----------
794,001 730,023
Less: Short-term debt and current maturities 5,996 8,543
---------- ----------
$ 788,005 $ 721,480
========== ==========
</TABLE>
In December 1994, LDDS entered into a new credit facility to finance the WilTel
Acquisition, refinance LDDS' existing credit facilities and provide additional
working capital. The credit facility is comprised of a $2.16 billion, six-year
reducing revolving credit facility (the "Revolving Facility Commitment") and a
$1.25 billion, two-year term facility (the "Term Principal Debt"). The maximum
principal amount permitted to be outstanding under the Revolving Facility
Commitment will be reduced at the end of each fiscal quarter, commencing
September 30, 1996, in varying amounts, and the outstanding balance must
F-17
<PAGE> 56
be paid in full on December 31, 2000. The Term Principal Debt matures in a
single installment on December 31, 1996. The Revolving Facility Commitment and
the Term Principal Debt bear interest, payable quarterly, at a rate per annum
equal to the lesser of: a Base Rate plus applicable margin, the London
Interbank Offering Rate ("LIBOR") plus applicable margin, any Competitive Bid
Rate or the Money Market Rate. The applicable margin varies from 0% to 3/8%
for Base Rate Borrowings and 1/2% to 1.5% for LIBOR Rate Borrowings from time
to time based upon the lower of a specified financial test or LDDS' long-term
debt rating. The credit facility is unsecured and requires compliance with
certain financial and other operating covenants which limit, among other
things, the incurrence of additional indebtedness by LDDS and restricts the
payment of cash dividends to LDDS' shareholders. The credit facility is also
subject to an annual commitment fee not to exceed 0.375% of any unborrowed
portion of the credit facility.
The $3.41 billion credit facility was utilized by the Company on January 5,
1995, in conjunction with the WilTel Acquisition and all debt outstanding under
LDDS' previous credit facilities and the $123.0 million in senior notes was
repaid. At December 31, 1994, the weighted average interest rate under the
previous credit facilities was 6.86%. Based on the balance outstanding at
December 31, 1994, and the underwritten commitment available to the Company
under the credit facility, the entire balance outstanding under the Company's
previous credit facilities has been classified as long-term debt in the
accompanying consolidated financial statements at December 31, 1994. The
aggregate principal repayments and reductions required in each of the years
ending December 31, 1995 through December 31, 1999 and thereafter are as
follows (in thousands):
<TABLE>
<S> <C>
1995 $ 5,996
1996 592,170
1997 135
1998 150
1999 50
Thereafter 195,500
--------
$794,001
========
</TABLE>
At December 31, 1994, the Company also had various uncommitted short-term note
facilities available at negotiated rates.
On February 24, 1995, the Company entered into financial hedging agreements
with various financial institutions, in connection with the credit facility.
The hedging agreements establish fixed rates of interest ranging from 8.25% to
8.3125% on an aggregate notional value of $1.7 billion. These contracts range
in duration from one to two years with $845.4 million maturing in each of the
years ending 1996 and 1997.
On August 20, 1993, IDB issued $195.5 million of convertible subordinated notes
(the "Notes"), proceeds of which were approximately $189.6 million net of
direct fees and expenses. Interest on the Notes is payable semiannually on
February 15 and August 15 of each year at an interest rate of 5% per annum.
The Notes are convertible at the option of the holder at anytime prior to
maturity into LDDS Common Stock at approximately $38.07 per share. The Notes
include certain anti-dilution rights and rights with
F-18
<PAGE> 57
regard to changes in control. At its option, the Company may redeem the Notes
at any time after August 1996, but will incur a redemption premium. The Notes
mature and are due in full on August 15, 2003.
IDB used the proceeds of this issue, together with the proceeds of a May 1993
common stock issuance to repay and defease substantially all of its then
existing debt. The repayment and defeasance of this debt resulted in an
extraordinary charge of $7.9 million, net of income tax benefit of $5.6
million, which represents payment of debt redemption premiums and the write-off
of unamortized debt issuance costs.
In December 1992, the Company refinanced its existing debt with a senior bank
credit facility and senior notes of the Company. As a result of this
refinancing, the Company incurred prepayment penalties and wrote off the
unamortized portion of costs associated with the refinanced debt, resulting in
an extraordinary charge of $5.8 million, net of related tax benefits of $3.6
million.
(5) PREFERRED STOCK -
As a result of the Prior Mergers, 10,896,785 shares of the Series 1 Preferred
Stock were issued to Metromedia, the sole stockholder of MCC. Also in 1993,
the IDB convertible preferred stock issued in connection with the acquisition
of WorldCom and HIT was converted into common stock of IDB. See Note 2.
In May 1992, the Company issued 500,000 shares of no par, 6.5% cumulative
senior perpetual convertible preferred stock for $50 million. The net proceeds
of the issue ($46.6 million after issuance costs) were used to reduce
outstanding indebtedness. These shares were converted into 2,000,000 shares of
the Series 2 Preferred Stock upon effectiveness of the Prior Mergers.
The holders of the Series 1 and 2 Preferred Stock generally have the right to
vote together as a single class with holders of Common Stock based on one vote
for each share of Common Stock issuable upon conversion of the respective
series of preferred stock. In addition, the holders of the Series 1 Preferred
Stock have certain class voting rights with respect to certain voting matters.
The approval of the holders of two-thirds of the shares of Series 2 Preferred
Stock is required for certain extraordinary transactions or, alternatively,
such shares must be redeemed at a specified premium.
(6) LEASES AND OTHER COMMITMENTS -
The Company leases office facilities and certain equipment under noncancellable
operating leases having initial or remaining terms of more than one year. In
addition, the Company leases a right-of-way from a railroad company under a
fifteen-year lease with three fifteen-year renewal options. The base rent is
adjusted periodically by the increase in the consumer price index and
additional charges are incurred equal to 1% of the gross intrastate revenues
(in excess of $7.5 million) generated by the operations of the transmission
system on the right-of-way. Rental expense under these operating leases was
$30.9 million, $29.9 million, and $14.5 million in 1994, 1993 and 1992,
respectively.
At the end of 1994, minimum lease payments under noncancellable operating
leases were as follows (in thousands):
F-19
<PAGE> 58
<TABLE>
<CAPTION>
Minimum
Year Lease Payments
----- --------------
<S> <C>
1995 $40,307
1996 32,885
1997 28,543
1998 24,476
1999 18,302
</TABLE>
Certain of the Company's facility leases include renewal options, and all
leases include provisions for rent escalation to reflect increased operating
costs and/or require the Company to pay certain maintenance and utility costs.
Under certain transponder agreements, the Company receives favorable rates if
its purchases of transponder capacity exceed certain minimum requirements. The
Company is charged, and accrues expenses, for transponder capacity at a price
computed based upon the assumption that its purchases will exceed the minimum
levels. If the Company's subsequent use of transponder capacity falls below
the minimum levels, the Company will be subject to retroactive charges for the
transponder capacity. To date, the Company has met all minimum usage
requirements.
At December 31, 1994, the Company was also committed under noncancellable,
noncapitalized service agreements for fixed cost transmission facilities that
require minimum payments of approximately $71.4 million in 1995, $68.9 million
in 1996, $65.4 million in 1997, $65.4 million in 1998 and $15.0 million in
1999.
LDDS also has agreements with a company that installs, operates and maintains
certain LDDS data processing, telecommunications and billing systems. The
agreements expire in 2000 and are renewable on an annual basis thereafter. The
agreements require minimum annual payments of approximately $16.6 million.
(7) CONTINGENCIES -
SHAREHOLDER LITIGATION. On May 23, 1994, Deloitte & Touche LLP ("Deloitte")
resigned as IDB's independent auditors. Deloitte has stated it resigned as a
result of events surrounding the release and reporting of IDB's financial
results for the first quarter of 1994. In submitting its resignation, Deloitte
informed IDB management and the Audit Committee of the IDB Board of Directors
that there had been a serious breakdown in IDB's process of identifying,
analyzing and recording IDB's business transactions which prohibited Deloitte
from the satisfactory completion of a quarterly review, and that Deloitte was
no longer willing to rely on IDB management's representations regarding IDB's
interim financial statements. IDB announced Deloitte's resignation on May 31,
1994. On June 24, 1994, upon the recommendation of the independent members of
IDB's Audit Committee, IDB retained Arthur Andersen LLP as its new independent
auditors. On August 1, 1994, IDB announced that it would restate its reported
financial results for the quarter ended March 31, 1994 to eliminate
approximately $6.0 million of pre-tax income, approximately $5.0 million of
which related to a sale of transponder capacity and approximately $1.0 million
of which related to purchase accounting adjustments and on August 22, 1994,
F-20
<PAGE> 59
IDB filed Amendment No. 1 on Form 10-Q/A restating its 1994 first quarter
results in order to eliminate previously recorded items. Certain of these
items were among those as to which Deloitte had expressed disagreement. On
November 21, 1994, IDB filed Form 10- Q/A amendments to its reported first and
second quarter financial results making the previously announced changes and
reflecting the effect of IDB's method of accounting for international long
distance traffic, thereby reducing its first quarter net income from $0.12 per
share, as originally reported, to $0.05 per share and, when combined with
adjustments for income tax effects, increasing its second quarter net loss from
$0.20 per share as originally reported, to $0.27 per share.
A number of class action complaints (on behalf of persons who purchased certain
IDB securities) and stockholder derivative actions (on behalf of IDB) were
filed against IDB and its former directors and certain former officers of IDB
and other parties. The U.S. District Court for the Central District of
California ordered the class action complaints and one of the derivative
actions consolidated and styled In re IDB Communications Group, Inc. Securities
Litigation (Case No. CV-94-3618-RG (JGx)). An amended complaint was filed with
the District Court on November 18, 1994 consolidating all of the class and
derivative actions. IDB, certain of its former directors and officers and
other parties are named as defendants in the consolidated complaint. The class
action claims allege violations of federal and state securities laws and state
corporate laws for disseminating allegedly false and misleading statements
concerning IDB's earnings and accounting practices. The derivative claims
allege that IDB's former officers and directors breached their fiduciary duties
to IDB by trading on inside information, accepting bonuses based on false and
inflated IDB financial results and exposing IDB to liability under the
securities laws, and include claims for gross negligence and violation of the
state corporate laws. Plaintiffs sought damages, restitution to IDB,
injunctive relief, punitive damages, and costs and attorneys' fees.
IDB, LDDS and representatives of the plaintiffs in the foregoing litigation
entered into a Stipulation of Settlement (the "Stipulation"). The Stipulation
provides that all claims for the period April 27, 1992 through August 1, 1994,
inclusive, that were or could have been asserted by the plaintiffs against IDB
or any of the other defendants in the consolidated action, or in any court with
respect to the fairness or adequacy of the consideration paid to IDB
stockholders in the IDB Merger and the accuracy of related disclosures made by
the IDB defendants or LDDS, or on behalf of or by IDB against former IDB
directors and officers will, subject to the fulfillment of certain conditions
and the approval of the court, be settled and released and the litigation
dismissed in its entirety with prejudice in exchange for payments totalling
$75.0 million. The settlement and releases do not affect any claims of persons
who purchased IDB securities outside the period April 27, 1992 through August
1, 1994, inclusive, or who timely and validly opt out.
In the third quarter of 1994, the Company recorded a $76.0 million charge,
representing the estimated settlement liability of $75.0 million plus $1.0
million in related legal costs.
Following a February 27, 1995 hearing to determine whether the settlement
should be finally approved by the District Court, on March 16, 1995, the court
entered a judgment approving the settlement, except as to fee applications
submitted by class and derivative counsel. The litigation will be settled and
dismissed on the terms described herein, provided no appeal is taken and two
related state court actions
F-21
<PAGE> 60
are dismissed as contemplated by the Stipulation. The settlement is not
contingent on the amount of class and derivative counsel fees and expenses
ultimately approved by the court.
IDB is a party to indemnification agreements with certain of the defendants in
the actions described above, including IDB's former officers and directors,
certain selling shareholders and certain underwriters. IDB's former officers
and directors are not covered by any applicable liability insurance. LDDS has
agreed to provide indemnification to IDB's former officers and directors under
certain circumstances pursuant to the agreement relating to the IDB Merger.
On June 9, 1994, the SEC issued a formal order of investigation concerning
certain matters, including IDB's financial position, books and records and
internal controls and trading in IDB securities on the basis of non-public
information. The SEC has issued subpoenas to LDDS, IDB and others, including
certain former officers of IDB, in connection, with its investigation. The
NASD and other self-regulatory bodies have also made inquiries of IDB
concerning similar matters.
In October and November 1994, the U.S. Attorney's Office for the Central
District of California issued grand jury subpoenas to IDB seeking documents
relating to IDB's first quarter results, the Deloitte resignation, trading in
IDB securities and other matters, including information concerning certain
entities in which certain former officers of IDB are personal investors and
transactions between such entities and IDB. IDB has been informed that a
criminal investigation has commenced. In early 1995, the U.S. Attorney's
Office issued a grand jury subpoena to LDDS arising out of the same
investigation seeking certain documents relating to IDB.
The outcome of any of the foregoing litigation or investigations has not been
determined.
AT&T PATENTS. AT&T has written the Company claiming that certain of the
Company's long distance telephone services (including certain 800 services,
operator services and calling card services) make unauthorized use of AT&T
patents. Similar claims have been asserted against other long distance
carriers. AT&T has stated that it will enforce its patent rights and requested
that the Company and other carriers enter into patent license agreements. The
Company has had discussions with AT&T and is currently evaluating AT&T's
claims. The Company is not yet in a position to predict whether this matter
will lead to litigation. In a related development, MCI has brought suit
against AT&T alleging that certain of these same patents are invalid under the
patent laws or unenforceable due to representations made by AT&T to the
District Court at the time of the AT&T Divestiture Decree. AT&T has
counterclaimed against MCI alleging patent infringement. The Company could be
adversely affected if, as a result of litigation or otherwise, it was required
to pay substantial patent royalties to AT&T. However, the ultimate outcome of
this issue, or the amount of any such patent royalties which might be required,
cannot be determined at this time.
REGULATORY MATTERS. By virtue of a decision of the U.S. Court of Appeals for
the D.C. Circuit released November 13, 1992, concerning the FCC's policy of
forebearing from tariff regulation of non-dominant IXC's, could subject the
Company to complaints seeking damages, assessment of monetary forfeitures
and/or injunctive relief filed by any party claiming to be injured by the
Company's past failure to file tariffs or specify actual rates under certain
circumstances in reliance on the FCC's forbearance policy. The Court 1992
decision does not, however, require the
F-22
<PAGE> 61
FCC to assess forfeitures or damages or take any other specific enforcement
action against those carriers who relied upon its former policy, although it
does direct the FCC to give further consideration to the issue of damages. At
this time, the Company cannot predict either the likelihood of the filing of
such complaints or the likelihood that such complainants would prevail in any
complaint proceedings. WorldCom Network Services, Inc., formerly WilTel, Inc.,
a subsidiary of the Company, is the defendant to such a complaint filed by
AT&T. The financial responsibility for the actions of WilTel, Inc. in regard
to this complaint has been assumed by Williams. The Company does not believe
that the resolution of that complaint will have a material adverse effect on
its business or operations.
OTHER. The Company is involved in other legal and regulatory proceedings
generally incidental to its business. In some instances, rulings by regulatory
authorities in some states may result in increased operating costs to the
Company.
While the results of these legal and regulatory proceedings contain an element
of uncertainty, LDDS believes that the probable outcome of any of the legal or
regulatory matters, or all of them combined, will not have a material adverse
effect on the Company's consolidated results of operations or financial
position.
(8) EMPLOYEE BENEFIT PLANS -
STOCK OPTION PLANS:
The Company has several stock option plans under which options to acquire up to
30.3 million shares may be granted to directors, officers and certain employees
of the Company. Terms and conditions of the Company's options, including
exercise price and the period in which options are exercisable, generally are
at the discretion of the Compensation and Stock Option Committee of the Board
of Directors; however, no options are exercisable for more than 10 years after
date of grant. As of December 31, 1994, 17.4 million options had been granted
under these plans.
The Company has granted options to an investment banker to purchase a total of
1.6 million shares of Common Stock as compensation for services received in
connection with certain acquisitions. The Company granted Metromedia warrants
to purchase 2.5 million shares of Common Stock at $7.75 per share and warrants
to purchase an additional 2.5 million shares at $8.95 per share. Additionally,
there are outstanding warrants to acquire 3.7 million shares of Common Stock at
prices ranging from $1.76 to $8.00 which were granted by Resurgens prior to the
Prior Mergers. All of the aforementioned warrants and options are reflected in
the table below.
Additional information regarding options and warrants granted and outstanding
is summarized below:
<TABLE>
<CAPTION>
Number of Exercise
Options Price
------------ -----------------
<S> <C> <C>
Balance, December 31, 1991 8,763,656 $ 0.59 - $ 9.83
Granted to employees/directors 2,212,046 1.60 - 10.85
Exercised (2,080,984) 0.59 - 9.21
Expired or canceled (1,107,364) 3.17 - 5.76
-----------
</TABLE>
F-23
<PAGE> 62
<TABLE>
<CAPTION>
Number of Exercise
Options Price
------------ -----------------
<S> <C> <C>
Balance, December 31, 1992 7,787,354 0.59 - 10.85
Granted to employees/directors 2,665,875 17.46 - 30.13
Assumed in connection with acquisition 5,986,934 1.76 - 8.00
Granted in connection with acquisition 5,200,400 7.75 - 23.25
Exercised (5,650,547) 1.45 - 17.46
Expired or canceled (28,571) 0.29 - 26.46
------------
Balance, December 31, 1993 15,961,445 0.59 - 30.13
Granted to employees/directors 1,750,710 17.75 - 19.25
Granted in connection with acquisition 61,550 22.02 - 23.00
Exercised (3,209,233) 0.59 - 17.88
Expired or canceled (167,417) 1.76 - 8.00
------------
Balance, December 31, 1994 14,397,055 $ 0.59 - $30.13
==========
</TABLE>
401(K) PLANS:
The Company and its subsidiaries offer its qualified employees the opportunity
to participate in one of its defined contribution retirement plans qualifying
under the provisions of Section 401(k) of the Internal Revenue Code. Each
employee may contribute on a tax deferred basis a portion of annual earnings
not to exceed $9,240. The Company matches individual employee contributions up
to a maximum level which in no case exceeds 6% of the employee's compensation.
Expenses recorded by the Company relating to its 401(k) plans were $3.1
million, $2.2 million, and $1.2 million for the years ended December 31, 1994,
1993, and 1992, respectively.
(9) INCOME TAXES -
The Company accounts for income taxes in accordance with SFAS No. 109
"Accounting for Income Taxes." When SFAS No. 109 was adopted, the cumulative
effect of this change in accounting principle was not material to the Company.
The provision for income taxes is composed of the following (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
------- -------- --------
<S> <C> <C> <C>
Current $48,855 $ 32,340 $ 10,118
Deferred 24,961 53,259 4,051
------- -------- --------
Total provision for income taxes $73,816 $ 85,599 $ 14,169
======= ======== ========
</TABLE>
F-24
<PAGE> 63
The following is a reconciliation of the provisions for income taxes to the
expected amounts using the statutory rate:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Expected statutory amount (35.0)% 35.0% 34.0%
Nondeductible amortization of excess of
cost over net tangible assets acquired 37.1 3.8 16.7
State income taxes 5.7 2.0 3.8
Effect of Company Owned Life Insurance (3.4) (.6) (6.6)
Direct merger, restructuring and other charges 20.7 - 14.0
Write-down of assets 26.1 - -
Valuation allowance 96.6 - -
Gain on disposal of assets - - (.8)
Dividend - - (1.0)
Other 4.9 .6 2.8
----- ----- ----
Actual tax provision 152.7 % 40.8 % 62.9 %
===== ==== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes and the impact of available
net operating loss carryforwards.
At December 31, 1994 , the Company had unused net operating loss ("NOL")
carryforwards of approximately $497.2 million which expire in various amounts
during the years 2000 through 2009. These NOL carryforwards which include
$90.0 million generated by IDB in 1994 are primarily attributable to the
preacquisition operations of acquired subsidiaries. These NOL carryforwards
result in a deferred tax asset of approximately $192.3 million at December 31,
1994. A valuation allowance of $113.0 million has been established related to
deferred tax assets due to the uncertainty of realizing the full benefit of the
NOL carryforwards. In evaluating the amount of valuation allowance needed, the
Company considers the acquired company's prior operating results and future
plans and expectations. The utilization period of the NOL carryforwards and
the turnaround period of other temporary differences are also considered.
Approximately $158.0 million of the Company's deferred tax assets are related
to preacquisition NOL carryforwards or temporary differences attributable to
entities acquired in transactions accounted for as purchases. Accordingly, any
future reductions in the valuation allowance related to such deferred tax
assets will result in a corresponding reduction in goodwill. If, however,
subsequent events or conditions dictate an increase in the valuation allowance
attributable to such deferred tax assets, income tax expense for the period of
the increase will be increased accordingly.
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities as of December 31, 1994 and 1993 (in
thousands).
F-25
<PAGE> 64
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1994 1993
------------------------ ------------------------
Assets Liabilities Assets Liabilities
------- ----------- ------ -----------
<S> <C> <C> <C> <C>
Allowance for bad debts $ 7,097 $ - $ 8,053 $ -
Depreciation/amortization - 57,509 - 35,625
Acquisition base differences 45,791 - 64,570 -
Leases 6,632 - 2,534 -
Line installation costs - 10,817 - 3,457
NOL carryforwards 192,309 - 127,253 -
Restructuring and other charges 11,339 - 1,945 -
Other 7,158 12,177 11,720 15,572
-------- ------- -------- -------
270,326 80,503 216,075 54,654
Valuation allowance (113,016) - (61,225) -
-------- ------- -------- -------
$157,310 $80,503 $154,850 $54,654
======== ======= ======== =======
</TABLE>
The change in the valuation allowance for the year ended December 31, 1994 was
an increase of $51.8 million. This change was made to provide for
uncertainties surrounding the realization of a portion of the NOL carryforwards
generated by IDB in 1994 and preacquisition NOL carryforwards attributable to
entities acquired by IDB in transactions accounted for as purchases in prior
years.
(10) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Interest paid by the Company during the years ended December 31, 1994, 1993 and
1992 amounted to $48.5 million, $35.7 million and $35.0 million, respectively.
Income taxes paid during the years ended December 31, 1994, 1993 and 1992 were
$12.8 million, $10.6 million and $19.9 million, respectively.
In conjunction with business combinations during the years ended December 31,
1994, 1993, and 1992 (see Note 2), assets acquired, liabilities assumed and
common stock issued were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Fair value of assets acquired $ 13,522 $ 503,449 $116,276
Excess of cost over net
tangible assets acquired 157,934 1,401,290 142,578
Liabilities assumed (62,322) (389,961) (104,893)
Common and treasury
stock issued (17,384) (1,230,381) (89,455)
-------- ---------- --------
Cash paid $ 91,750 $ 284,397 $ 64,506
======== ========== ========
</TABLE>
F-26
<PAGE> 65
(11) UNAUDITED QUARTERLY FINANCIAL DATA -
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
-------- ------- ------------ -----------
1994 1993 1994 1993 1994 1993 1994 1993
--------- -------- -------- -------- --------- -------- --------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
IDB $ 114,487 $ 68,491 $132,593 $ 75,901 $ 131,020 $ 76,978 $ 145,259 $117,994
LDDS 411,280 219,011 424,485 251,514 439,771 281,788 433,078 392,401
Intercompany
elimination (1,872) (2,416) (1,760) (1,944) (2,233) (2,366) (5,343) (3,095)
--------- -------- -------- -------- --------- -------- --------- --------
Combined 523,895 285,086 555,318 325,471 568,558 356,400 572,994 507,300
========= ======== ======== ======== ========= ======== ========= ========
Operating income:
IDB 8,578 9,388 (18,850) 10,511 (56,827) 11,692 (170,571) 9,010
LDDS 67,735 33,980 75,598 41,254 81,889 52,785 82,186 70,213
--------- -------- -------- -------- --------- -------- --------- --------
Combined 76,313 43,368 56,748 51,765 25,062 64,477 (88,385) 79,223
========= ======== ======== ======== ========= ======== ========= ========
Income (loss) before
extraordinary item:
IDB 4,150 4,444 (19,987) 5,358 (154,683) 6,003 (113,970) 4,334
LDDS 35,941 17,189 39,799 21,323 42,927 28,441 43,665 37,229
--------- -------- -------- -------- --------- -------- --------- --------
Combined 40,091 21,633 19,812 26,681 (111,756) 34,444 (70,305) 41,563
========= ======== ======== ======== ========= ======== ========= ========
Net income (loss):
IDB 4,150 4,444 (19,987) 5,358 (154,683) (1,946) (113,970) 4,334
LDDS 35,941 17,189 39,799 21,323 42,927 28,441 43,665 37,229
--------- -------- -------- -------- --------- -------- --------- --------
Combined 40,091 21,633 19,812 26,681 (111,756) 26,495 (70,305) 41,563
========= ======== ======== ======== ========= ======== ========= ========
Preferred dividend
requirement:
IDB - 378 - 340 - 340 - 174
LDDS 6,938 813 6,952 813 6,938 1,887 6,938 6,938
--------- -------- -------- -------- --------- -------- --------- --------
Combined 6,938 1,191 6,952 1,153 6,938 2,227 6,938 7,112
========= ======== ======== ======== ========= ======== ========= ========
Earnings (loss) per
common share:
Income (loss) before
extraordinary item:
IDB 0.05 0.07 (0.27) 0.09 (2.08) 0.09 (1.52) 0.06
LDDS 0.23 0.16 0.26 0.20 0.28 0.25 0.28 0.24
Combined 0.20 0.17 0.08 0.20 (0.75) 0.24 (0.49) 0.21
Net income (loss):
IDB 0.05 0.07 (0.27) 0.09 (2.08) (0.03) (1.52) 0.06
LDDS 0.23 0.16 0.26 0.20 0.28 0.25 0.28 0.24
Combined 0.20 0.17 0.08 0.20 (0.75) 0.18 (0.49) 0.21
</TABLE>
In the fourth quarter of 1994, the Company undertook restructuring and
reorganizational activities in connection with the IDB Merger. As a result,
direct merger costs of $15.0 million and restructuring charges of $43.7 million
were charged to operations. See Note 3.
In the third quarter of 1994, the Company recorded a $76.0 million charge
related to a shareholder litigation settlement. See Note 7. Also, in the
third and fourth quarters of 1994, the Company recorded adjustments of $35.0
million and $13.5 million, respectively, related to the write-down of certain
IDB Broadcast assets. See Note 3.
F-27
<PAGE> 66
During the fourth quarter of 1993, plans were approved to reduce IDB's cost
structure and to improve productivity. Accordingly, the consolidated statement
of income for 1993 includes a charge of $5.9 million relating to this program.
See Note 3.
In the third quarter of 1993, IDB repaid certain debt amounts which resulted in
an extraordinary charge of $7.9 million, net of income tax benefit of $5.6
million, which represented payment of debt redemption premiums and the
write-off of unamortized debt issuance costs. See Note 4.
F-28
<PAGE> 67
LDDS COMMUNICATIONS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
----------------------------
Balance at Charged to Deductions Balance at
Beginning Costs and From Purchase Accounts Adjust- End of
Description of Period Expenses Transactions Written Off ments Period
----------- --------- ---------- ------------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Accounts Receivable
1994 $ 26,613 $ 58,952 $ 1,090 $ 33,706 $ - $ 52,949
1993 12,338 25,231 26,750 37,706 - 26,613
1992 16,182 33,033 4,854 35,060 6,671(1) 12,338
</TABLE>
__________________________________
(1) Represents the adjustment for change in fiscal year of pooled company.
See Note 2 to Notes to Consolidated Financial Statements appearing elsewhere in
this document.
F-29
<PAGE> 68
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page
----------- ----------- ----
<S> <C>
2.1 Agreement and Plan of Merger by and among IDB Communications Group, Inc., 123 Corp.
and LDDS dated as of August 1, 1994 (incorporated herein by reference to Exhibit
2.1 to the Quarterly Report on Form 10-Q filed by LDDS (File No. 0-11258) for the
quarter ended September 30, 1994) *
2.2 Stock Purchase Agreement by and among LDDS, The Williams Companies, Inc. and WTG
Holdings, Inc., dated as of August 22, 1994 (incorporated herein by reference to
Exhibit 2.2 to the Quarterly Report on Form 10-Q filed by LDDS (File No. 0-11258)
for the quarter ended September 30, 1994) *
2.3 Amendment Number 1 to the Stock Purchase Agreement by and among LDDS, The Williams
Companies, Inc. and WTG Holdings, Inc., dated as of December 27, 1994 (incorporated
herein by reference to Exhibit 2.3 to LDDS' Current Report on Form 8-K dated
December 30, 1994 (File No. 0-11258))
4.1 Amended and Restated Articles of Incorporation of LDDS (including preferred stock
designations) as of September 15, 1993 (incorporated herein by reference to Exhibit
3(i) to Amendment No. 1 to LDDS' Registration Statement on Form S-3 (File No. 33-
67340)), as amended by Articles of Amendment dated May 26, 1994 (incorporated
herein by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q filed by
LDDS (File No. 1-10415) for the quarter ended June 30, 1994)
4.2 Bylaws of LDDS (incorporated herein by reference to Exhibit 3(ii) to Amendment No.
1 to LDDS' Registration Statement on Form S-3 (File No. 33-67340))
4.3 Stock Purchase Agreement between LDDS Communications, Inc., a Tennessee corporation
("LDDS-TN"), and The 1818 Fund, L.P., dated as of March 20, 1992 (incorporated
herein by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q filed by
LDDS-TN (File No. 0-7116) for the quarter ended March 31, 1992)
4.4 Registration Rights Agreement between LDDS-TN and The 1818 Fund, L.P., dated as of
May 6, 1992 (incorporated herein by reference to Exhibit 4.5 to the Quarterly
Report on Form 10-Q filed by LDDS-TN (File No. 0-7116) for the quarter ended June
30, 1992)
</TABLE>
E-1
<PAGE> 69
<TABLE>
<CAPTION>
Exhibit No. Description Page
----------- ----------- ----
<S> <C>
4.5 Agreement to Amend Stock Purchase Agreement and Registration Rights Agreement and
to Exchange Preferred Stock between LDDS-TN and The 1818 Fund, L.P., dated as of
July 17, 1992 (incorporated herein by reference to LDDS-TN's Registration Statement
on Form S-4 (File No. 33-49798))
4.6 Amendment to Stock Purchase Agreement and Registration Rights Agreement between
LDDS-TN and The 1818 Fund, L.P., dated as of September 1, 1993 (incorporated herein
by reference to Exhibit 4.5 to LDDS' Registration Statement on Form S-3 (File No.
33-69122))
4.7 Registration Rights Agreement, dated as of December 4, 1992, between LDDS-TN and
ALLTEL Corporation (incorporated herein by reference to Exhibit 4.7 of LDDS'
Transition Report on Form 10-K, as amended, for the period from December 31, 1992
to June 30, 1993 (File No. 1-10415) (the "Transition Report I"))
4.8 First Amendment to Registration Rights Agreement, dated as of September 14, 1993,
between LDDS-TN and ALLTEL Corporation (incorporated herein by reference to Exhibit
4.8 of the Transition Report I)
4.9 Form of Option expiring July 7, 1996 (incorporated herein by reference to Exhibit
4.2 to LDDS-TN's Registration Statement on Form S-3 (File No. 33-46556))
4.10 Common Stock Purchase Warrant to Marshall & Co. Securities, Inc., dated June 30,
1989 (incorporated herein by reference to Exhibit 10.3 to the Current Report on
Form 8-K of Resurgens Communications Group, Inc., a Georgia corporation
("Resurgens"), dated July 28, 1989 (File No. 1-10415))
4.11 Agreement to Issue Warrants between Resurgens and John D. Phillips, dated June 30,
1989, together with related form of Common Stock Purchase Warrant (incorporated
herein by reference to Exhibit 10.4 to Resurgens' Current Report on Form 8-K dated
July 28, 1989 (File No. 1-10415))
4.12 Stock Registration Agreement among Resurgens, Marshall Interfunding and Marshall &
Co. Securities, Inc. dated June 30, 1989 (incorporated herein by reference to
Exhibit 10.5 to Resurgens' Current Report on Form 8-K dated July 28, 1989 (File No.
1-10415))
4.13 Stock Registration Agreement among Resurgens, John D. Phillips and certain other
holders of Warrants, dated June 30, 1989 (incorporated herein by reference to
Exhibit 10.6 to Resurgens' Current Report on Form 8-K dated July 28, 1989 (File No.
1-10415))
</TABLE>
E-2
<PAGE> 70
<TABLE>
<CAPTION>
Exhibit No. Description Page
----------- ----------- ----
<S> <C>
4.14 Form of Selling Stockholder Agreement between Resurgens and certain Selling
Stockholders, dated 1993 (incorporated herein by reference to Exhibit 4.16 of
LDDS' Transition Report on Form 10-K for the period from June 30, 1993 to December
31, 1993 (File No. 1-10415) (the "Transition Report II"))
4.15 Form of First Amendment to Selling Stockholder Agreement between Resurgens and
certain Selling Stockholders, dated September 13, 1993 (incorporated herein by
reference to Exhibit 4.17 of the Transition Report I)
4.16 Purchase Warrant for 2,500,200 shares of Common Stock, dated September 15, 1993,
between LDDS and Metromedia Company, expiring May 12, 1995 (incorporated herein by
reference in Exhibit 4.18 of the Transition Report I)
4.17 Purchase Warrant for 2,500,200 shares of Common Stock, dated September 15, 1993,
between LDDS and Metromedia Company, expiring May 12, 1997 (incorporated herein by
reference to Exhibit 4.19 of the Transition Report I)
4.18 Warrant Agreement between Resurgens and Citizens and Southern Trust Company
(Georgia) N.A., as Warrant Agent, dated June 26, 1989, together with related forms
of Warrant Certificates to general unsecured creditors of Central Corporation and
to shareholders of Central Corporation (incorporated herein from Exhibit 10.1 to
Resurgens' Current Report on Form 8-K dated July 28, 1989 (File No. 1-10415))
10.1 Credit Agreement among LDDS, NationsBank of Texas, N.A., (Managing Agent and
Administrative Agent), The Bank of Nova Scotia, Credit Lyonnais Cayman Island
Branch, First Union National Bank of North Carolina, The First National Bank of
Chicago and the Long-Term Credit Bank of Japan, Limited (Agents) and the Lenders
named therein (Lenders) dated as of December 21, 1994 (incorporated herein by
reference to Exhibit 10.1 to LDDS' Current Report on Form 8-K, dated December 30,
1994 (File No. 0-11258))
10.2 Agreement between LDDS-TN and MCI Telecommunications Corporation, effective as of
September 13, 1991 (incorporated herein by reference to the exhibits to LDDS-TN's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1991, as amended
under cover of Form 8 on February 3, 1992 (File No. 0-7116))
</TABLE>
E-3
<PAGE> 71
<TABLE>
<CAPTION>
Exhibit No. Description Page
----------- ----------- ----
<S> <C>
10.3 Amendment dated July 29, 1994, to the agreement between LDDS and MCI
Telecommunications Corporation (incorporated herein by reference to Exhibit 10.2 to
the Quarterly Report on Form 10-Q filed by LDDS (File No. 1-10415) for the quarter
ended June 30, 1994)
10.4 Amended and Restated Agreement for Information Technology Services between the
Company and Electronic Data Systems Corporation ("EDS"), dated December 8, 1993
("EDS Agreement") (incorporated herein by reference to Exhibit 10.5 of the
Transition Report II) *
10.5 Amendment No. 1 to the EDS Agreement dated December 8, 1993 (incorporated herein by
reference to Exhibit 10.6 of the Transition Report II)
10.6 Operator Services Agreement between Advanced Telecommunications Corporation ("ATC")
and EDS dated as of July 6, 1992 ("Operator Services Agreement") (incorporated
herein by reference to Exhibit 10.7 of the Transition Report II)
10.7 Amendment No. 1 to the Operator Services Agreement dated December 8, 1993, by and
between the Company and EDS (incorporated herein by reference to Exhibit 10.8 of
the Transition Report II)
10.8 Agreement and Plan of Merger, dated January 18, 1993, between Resurgens and
Metromedia Communications Corporation, a Delaware Corporation ("MCC") (incorporated
herein by reference to Exhibit 2.1 to Resurgens' Current Report on Form 8-K dated
January 18, 1993 (File No. 1-10415))
10.9 Amendment No. 1 to Agreement and Plan of Merger, dated March 26, 1993, between
Resurgens and MCC (incorporated herein by reference to Exhibit 2.1 to Resurgens'
Current Report on Form 8-K dated March 26, 1993 (File No. 1-10415))
10.10 Amendment No. 2 to Agreement and Plan of Merger, dated May 14, 1993, between
Resurgens and MCC (incorporated herein by reference to Exhibit 2.3 to Resurgens'
Registration Statement on Form S-4 (File No. 33-62746) filed on May 14, 1993)
10.11 Agreement and Plan of Merger, dated May 14, 1993, among Resurgens, MCC and LDDS-TN
(incorporated herein by reference to Exhibit 2.4 to Resurgens' Registration
Statement on Form S-4 (File No. 33-62746) filed on May 14, 1993)
</TABLE>
E-4
<PAGE> 72
<TABLE>
<CAPTION>
Exhibit No. Description Page
----------- ----------- ----
<S> <C> <C>
10.12 Amendment No. 1 to Agreement and Plan of Merger, dated August 4, 1993, among
Resurgens, MCC and LDDS-TN (incorporated herein by reference to Appendix B to the
Joint Proxy Statement/Prospectus included in Amendment No. 2 to Resurgens'
Registration Statement on Form S-4 (File No. 33-62746) filed on August 4, 1993)
10.13 Amended and Restated License Agreement between Metromedia Company and the Company,
dated as of September 15, 1993 (incorporated herein by reference to Exhibit 10.3 to
the Company's Current Report on Form 8-K dated September 15, 1993 (File No. 1-
10415))
10.14 Lease Agreement between Florida East Coast Railway and Microtel (formerly, a
subsidiary of ATC), dated June 30, 1983, as amended (incorporated herein from the
exhibits to ATC's Annual Report on Form 10-K for the year ended March 31, 1989
(File No. 0-14855))
10.15 LDDS Communications, Inc. Second Amended and Restated 1990 Stock Option Plan
(incorporated herein by reference to LDDS-TN's Proxy Statement used in connection
with LDDS-TN's 1993 Annual Meeting of Shareholders (File No. 0-7116))(compensatory
plan)
10.16 LDDS Communications Inc. 1988 Nonqualified Stock Option Plan (incorporated herein
by reference to the exhibits to LDDS-TN's Registration Statement on Form S-4 (File
No. 33-29051)) (compensatory plan)
10.17 LDDS Annual Performance Bonus Plan (incorporated by reference to the Company's
Proxy Statement used in connection with the Company's 1994 Annual Meeting of
Shareholders (File No. 1-10415)) (compensatory plan)
10.18 LDDS 1995 Special Performance Bonus Plan (incorporated herein by reference to
Appendix E to the Prospectus in LDDS' Amendment No. 2 to Registration Statement on
Form S-4 (File No. 33-56543)) (compensatory plan)
11.1 Computation of Per Share Earnings ______
16.1 Letter re: Change in Certifying Accountant (incorporated herein by reference to
Exhibit 16.1 of the Transition Report I)
21.1 Subsidiaries of the Company ______
23.1 Consent of Arthur Andersen LLP ______
23.2 Consent of Deloitte & Touche LLP ______
</TABLE>
E-5
<PAGE> 73
<TABLE>
<CAPTION>
Exhibit No. Description Page
----------- ----------- ----
<S> <C> <C>
27.1 Financial Data Schedule ______
</TABLE>
___________________________________________
* The Registrant hereby agrees to furnish supplementally a copy of any
omitted schedules to this Agreement to the Securities and Exchange
Commission upon its request.
E-6
<PAGE> 1
EXHIBIT 11.1
LDDS COMMUNICATIONS, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------------
1994 1993 1992
-------------------- ----------------- -----------------
<S> <C> <C> <C>
Primary:
Weighted average shares outstanding 157,805 132,986 109,372
Common stock equivalents - 4,941 3,281
-------------------- ----------------- -----------------
157,805 137,927 112,653
-------------------- ----------------- -----------------
Fully Diluted:
Weighted average shares outstanding 157,805 132,986 109,372
Common stock equivalents - 7,810 3,681
-------------------- ----------------- -----------------
157,805 140,796 113,053
-------------------- ----------------- -----------------
Income (loss) before extraordinary item and preferred
dividend requirement $ (122,158) $ 124,321 $ 8,344
Preferred dividend requirement 27,766 11,683 2,112
Income(loss) applicable to common shareholders and
before extraordinary item (149,924) 112,638 6,232
Extraordinary item - (7,949) (5,800)
-------------------- ----------------- -----------------
Net income (loss) applicable to common shareholders $ (149,924) $ 104,689 $ 432
==================== ================= =================
Earnings per share:
Primary -
Net income (loss) before extraordinary item $ (0.95) $ 0.82 $ 0.06
Extraordinary item - (0.06) (0.05)
Net income (loss) (0.95) 0.76 0.00
Fully Diluted -
Net income (loss) before extraordinary item (0.95) 0.80 0.06
Extraordinary item - (0.06) (0.05)
Net income (loss) (0.95) 0.74 0.00
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF LDDS COMMUNICATIONS, INC.(1)
<TABLE>
<CAPTION>
Jurisdiction of
Name of Subsidiary Incorporation Trade Name
------------------ ------------- ----------
<S> <C> <C>
ADCO Management Systems, Inc. Tennessee LDDS Metromedia Communications
ATC New Hampshire, Inc. New Hampshire LDDS, LDDS Communications, LDDS Metromedia
Communications
Biz-Tel Corporation Florida LDDS, LDDS Communications, LDDS Metromedia
Communications
CICI, Inc. Delaware
Com Systems, Inc. California LDDS Metromedia Communications
Digital Communications of America, Inc. Oklahoma Digital Communications
Healan Communications, Inc. Georgia Healan Communications
Houston International Teleport, Inc. Delaware Houston
IDB Communications Group, Inc. Delaware
IDB Communications Group, Limited United Kingdom WorldCom UK
IDB Media Group, Inc. Delaware
IDB Mobile Holdings, Inc. Delaware IDB Mobile
IDB Systems, Inc. Delaware IDB Systems
IDB WorldCom, Inc. Delaware IDB WorldCom
IDB WorldCom Services, Inc. Delaware WSI, TRT/FTC Communications
International Computer Systems, Inc. Virginia ICS, ICS Information Technologies
ITC Tele-Services, Inc. Washington Impact
LDDS Corporation Delaware N/A
LDDS Digital Corporation Texas LDDS, LDDS Communications, LDDS Metromedia
Communications
Metromedia Communications Corporation Virginia LDDS Metromedia Communications
of Virginia
Microtel, Inc. Florida LDDS, LDDS Communications, LDDS Metromedia
Communications
Military Communications Center, Inc. Delaware MCC, Military Communications
Niles Canyon Earth Station, Inc. Delaware
RSTV, Inc. Delaware
Resurgens West, Inc. Nevada LDDS Metromedia Communications
Satellite Transmission and Reception Delaware STARS
Specialist Company
Satellite Transmission & Reception Barbados
Specialist Ltd.
Spin TeleNetwork Corporation California LDDS Metromedia Communications
TC WorldCom AG Switzerland TC
TMC Communications, Inc. California LDDS Metromedia Communications
TRT Communications, Inc. Delaware TRT
TRT/FTC Communications, Limited United Kingdom
TRT/FTC International, Inc. Delaware
TV Reception Specialist, Inc. Texas
Touch 1 Long Distance, Inc. Alabama LDDS, LDDS Communications, LDDS Metromedia
Communications
Transcall America, Inc. Georgia LDDS, LDDS Communications, LDDS Metromedia
Communications
Undersea Cable, Inc. Delaware
Virginia WorldCom, Inc. Virginia
World Communications, Inc. New York World
World Safeguard, Inc. New York
WorldCom, Inc. New York
WorldCom International, Inc. Delaware
WorldCom International Network Delaware WilTel International
Services, Inc.
WorldCom Network Services, Inc. Delaware WilTel
WorldCom Telecommunications Germany WorldCom Germany
Services, GmBH
Name of Subsidiary
Partnerships Jurisdiction Trade Name
------------------ ------------ ----------
TMC Communications, L.P. California LDDS Metromedia Communications
</TABLE>
--------------------
(1) Excludes all inactive subsidiaries, all of which, when considered in
the aggregate as a single subsidiary, would not constitute a
"significant subsidiary" within the meaning of Rule 1-02(v) of
Regulation S-X.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in the Form 10-K, into the Company's previously filed
Registration Statements on Form S-8 (File Nos. 33-52168, 33-69322, 33-71450 and
33-89072) and Form S-3 (File Nos. 33-63810, 33-67340, 33-71450) and Form S-3
(File Nos. 33-63810, 33-67340, 33-69122, 33-71510, 33-71516, 33-87514, 33-
77964 and 33-87516).
ARTHUR ANDERSEN LLP
Jackson, Mississippi,
March 29, 1995
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-63810, 33-67340, 33-71510, 33-87514, 33-77964, 33- 69122, 33-71516 and
33-87516 on Form S-3 and Registration Statement Nos. 33-52168, 33-69322,
33-71450 and 33-89072 on Form S-8 of LDDS Communications, Inc. and Subsidiaries
("LDDS") of our report dated March 7, 1994 on the consolidated financial
statements of IDB Communications Group, Inc. appearing in the Annual Report of
LDDS for the year ended December 31, 1994.
Deloitte & Touche LLP
Los Angeles, California
March 29, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains Summary Financial Information extracted from the
Financial Statements of LDDS Communications, Inc. and is qualified in its
entirety by reference to such Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 19,259
<SECURITIES> 1,000
<RECEIVABLES> 523,124
<ALLOWANCES> 52,949
<INVENTORY> 0
<CURRENT-ASSETS> 589,426
<PP&E> 944,265
<DEPRECIATION> (317,598)
<TOTAL-ASSETS> 3,430,192
<CURRENT-LIABILITIES> 710,655
<BONDS> 788,005
<COMMON> 1,596
0
129
<OTHER-SE> 1,825,445
<TOTAL-LIABILITY-AND-EQUITY> 3,430,192
<SALES> 2,220,765
<TOTAL-REVENUES> 2,220,765
<CGS> 1,447,633
<TOTAL-COSTS> 2,151,027<F3>
<OTHER-EXPENSES> 70,777<F7>
<LOSS-PROVISION> 58,952
<INTEREST-EXPENSE> 47,303
<INCOME-PRETAX> (48,342)
<INCOME-TAX> 73,816
<INCOME-CONTINUING> (122,158)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (149,924)<F5>
<EPS-PRIMARY> (0.95)
<EPS-DILUTED> (0.95)
<FN>
<F3>
<F5>
<F7>
</FN>
</TABLE>
