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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
or
/ / TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-18195
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U.S. LONG DISTANCE CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2522103
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
9311 SAN PEDRO, SUITE 100 78216
SAN ANTONIO, TEXAS (Zip code)
(Address of principal executive offices)
(210) 525-9009
(Registrant's telephone number, including area code)
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. /X/ Yes / / No
Indicated below is the number of shares outstanding of the registrant's
only class of common stock at July 31, 1996:
TITLE OF CLASS NUMBER OF SHARES
-------------- OUTSTANDING
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Common Stock, $.01 par value 15,032,001
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U.S. LONG DISTANCE CORP. AND SUBSIDIARIES
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Interim Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - September 30, 1995
and June 30, 1996..................................................... 3
Condensed Consolidated Statements of Income - For the Three and
Nine-Month Periods Ended June 30, 1995 and 1996....................... 4
Condensed Consolidated Statements of Cash Flows - For the Nine-Month
Periods Ended June 30, 1995 and 1996.................................. 5
Notes to Interim Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................10
PART II OTHER INFORMATION
Item 1. Legal Proceedings.....................................................22
Item 6. Exhibits and Reports on Form 8-K......................................24
(a) Exhibits.........................................................24
(b) Current Reports on Form 8-K......................................24
SIGNATURES....................................................................25
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
U.S. LONG DISTANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
ASSETS
SEPTEMBER 30, JUNE 30,
1995 1996
------------- --------
Current assets:
Cash and cash equivalents...........................$ 22,949 $ 23,918
Accounts receivable, net............................ 46,752 54,881
Purchased receivables from billing customers........ 55,228 66,692
Prepaids and other.................................. 4,594 4,026
--------- ---------
Total current assets............................. 129,523 149,517
Property and equipment, net.............................. 31,923 36,777
Equipment held under capital leases, net................. 3,096 1,788
Other assets:
Excess of cost over net assets acquired, net........ 14,685 14,246
Other assets, net................................... 7,666 4,299
--------- ---------
Total assets................................. $186,893 $206,627
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade............................................ $ 18,405 $ 22,432
Third party billing customers.................... 33,866 25,361
Accrued liabilities ............................... 19,046 32,667
Revolving line of credit for purchased receivables.. 23,030 29,016
Current portion of long-term debt................... 5,432 5,459
Current portion of obligations under capital leases 770 789
--------- ---------
Total current liabilities.................... 100,549 115,724
Other liabilities........................................ 3,147 1,449
Long-term debt, less current portion..................... 13,375 8,662
Obligations under capital leases, less current portion... 1,691 1,004
--------- ---------
Total liabilities............................ 118,762 126,839
Commitments and contingencies (Note 5)
Stockholders' equity:
Preferred shares, $.01 par value, 10,000,000 shares
authorized; no shares issued or outstanding at September 30
or June 30............................................... 0 0
Common shares, $.01 par value, 50,000,000 shares
authorized; 14,281,866 issued and 14,094,634 outstanding
at September 30; 15,134,523 issued and 14,930,422
outstanding at June 30................................... 143 151
Additional paid-in capital .............................. 49,304 53,724
Retained earnings........................................ 20,473 27,820
Treasury stock........................................... (1,789) (1,907)
--------- ---------
Total stockholders' equity................... 68,131 79,788
--------- ---------
Total liabilities and stockholders' equity... $186,893 $206,627
--------- ---------
--------- ---------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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U.S. LONG DISTANCE CORP. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1995 1996 1995 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Operating revenues:
Direct dial long distance services.......... $21,210 $31,306 $61,074 $85,386
Operator services........................... 15,441 15,378 41,456 44,661
------- ------- ------- -------
Total operating revenues.................. 36,651 46,684 102,530 130,047
Operating expenses:
Cost of services............................ 24,708 30,499 67,638 85,760
Selling, general and administrative......... 10,264 13,139 29,770 37,451
Direct spinoff costs........................ 0 6,628 0 6,628
Depreciation and amortization............... 2,653 2,702 7,437 8,411
------- ------- ------- -------
Total operating expenses................. 37,625 52,968 104,845 138,250
Loss from continuing operations.............. (974) (6,284) (2,315) (8,203)
Other income (expense):
Interest income............................. 164 228 482 651
Interest expense............................ (441) (361) (1,251) (1,053)
Other, net.................................. 17 (26) (6) (160)
------- ------- ------- -------
Total other income (expense).............. (260) (159) (775) (562)
Loss from continuing operations before
provision for income taxes.................. (1,234) (6,443) (3,090) (8,765)
Income tax benefit............................ 367 2,427 919 2,823
------- ------- ------- -------
Net loss from continuing operations........... (867) (4,016) (2,171) (5,942)
Discontinued operations (Note 7):
Income from discontinued operations, net
of income taxes of $2,405, $2,645, $6,095
and $8,142, respectively................... 3,921 4,317 9,934 13,286
------- ------- ------- -------
Net income.................................... $ 3,054 $ 301 $ 7,763 $ 7,344
------- ------- ------- -------
------- ------- ------- -------
Net income (loss) per common share:
Continuing operations....................... $ (0.06) $ (0.25) $ (0.15) $ (0.39)
Discontinued operations..................... 0.27 0.27 0.69 0.87
------- ------- ------- -------
Net income per common share................. $ 0.21 $ 0.02 $ 0.54 $ 0.48
------- ------- ------- -------
------- ------- ------- -------
Weighted average common shares outstanding.... 14,759 15,715 14,488 15,252
Cash dividends declared per common share...... $ -- $ -- $ -- $ --
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
U.S. LONG DISTANCE CORP. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED
JUNE 30,
------------------
1995 1996
------ ------
Cash flows from operating activities:
Net income................................................... $ 7,763 $ 7,344
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................... 8,339 9,919
Loss on disposition of equipment............................ 133 208
Provision for losses on accounts receivable................. 4,561 5,352
Deferred compensation....................................... 207 486
Changes in operating assets and liabilities:
Increase in accounts receivable.......................... (10,156) (13,480)
Decrease (increase) in prepaids and other................ (1,090) 568
Increase (decrease) in accounts payable.................. (395) 4,027
Increase in accrued liabilities.......................... 6,390 13,621
Decrease in other liabilities............................ (539) (1,698)
------- -------
Net cash provided by operating activities..................... 15,213 26,347
------- -------
Cash flows from investing activities:
Purchase of property and equipment........................... (7,856) (11,890)
Purchase of direct dial long distance companies, net of cash
acquired.................................................... (175) 0
Payments for purchased receivables from billing customers,
net......................................................... (3,458) (11,464)
Payments made to (received from) third party customers, net.. 2,817 (8,505)
Proceeds from sale of assets................................. 601 46
Other investing activities.................................... (455) 1,857
------- -------
Net cash used in investing activities......................... (8,526) (29,956)
------- -------
Cash flows from financing activities:
Draws (payments) on revolving line of credit for purchased
receivables, net............................................ (746) 5,986
Proceeds from issuance of debt............................... 4,415 0
Payments on debt............................................. (3,881) (4,686)
Payments on capital leases................................... (1,008) (668)
Proceeds from issuance of common stock....................... 2,445 3,946
Purchase of treasury stock................................... (1,075) 0
------- -------
Net cash provided by financing activities..................... 150 4,578
------- -------
Net increase in cash and cash equivalents..................... 6,837 969
Cash and cash equivalents, beginning of period................ 16,765 22,949
------- -------
Cash and cash equivalents, end of period...................... $23,602 $23,918
------- -------
------- -------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
U.S. LONG DISTANCE CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The interim condensed consolidated financial statements included herein
have been prepared by U.S. Long Distance Corp. ("USLD") and subsidiaries
(collectively referred to as the "Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC"). All
adjustments have been made to the accompanying interim condensed consolidated
financial statements which are, in the opinion of the Company's management,
necessary for a fair presentation of the Company's operating results. All
adjustments are of a normal recurring nature. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. It is recommended that
these interim condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
September 30, 1995. Certain current period and prior period amounts have been
reclassified for comparative purposes.
NOTE 2. STOCKHOLDERS' EQUITY
During the nine months ended June 30, 1996, employees of the Company
exercised stock options to purchase an aggregate of 232,822 common shares at
exercise prices ranging from $4.62 to $11.88 per share, resulting in
aggregate consideration to the Company of approximately $2,179,000 in cash.
Also, during the nine-month period ended June 30, 1996, warrants to purchase
469,741 common shares were exercised at an exercise price of $0.01 per share.
The Company also issued an aggregate of 35,094 common shares during the nine
months ended June 30, 1996 to participants in the U.S. Long Distance Corp.
Employee Stock Purchase Plan. In addition, the Company granted 115,000 shares
of restricted common stock to certain employees during the nine months ended
June 30, 1996 under the terms of the Company's 1995 Employee Restricted Stock
Plan (see Note 6). Approximately $486,000 of compensation expense relating to
issuances of stock options and restricted stock to employees was recognized
by the Company during the nine months ended June 30, 1996. Deferred
compensation costs amounting to $1,328,000 at June 30, 1996 and $154,000 at
September 30, 1995 have been netted against additional paid-in capital.
In November 1995, the escrow agreement relating to the Company's
acquisition of the long distance commercial customer base of a company in
March 1995 and pursuant to which 16,869 shares of the Company's common stock
were held in escrow was terminated. The 16,869 shares were returned to the
Company and are being held as treasury shares.
NOTE 3. STATEMENT OF CASH FLOWS
Cash payments and non-cash activities during the periods indicated were
as follows:
NINE MONTHS ENDED
JUNE 30,
-----------------
1995 1996
------ ------
(IN THOUSANDS)
Cash payments for income taxes..........................$4,434 $7,173
Cash payments for interest.............................. 2,397 2,246
Non-cash investing and financing activities:
Assets acquired in connection with acquisitions....... 939 0
Liabilities assumed in connection with acquisitions... 351 0
Common stock issued in connection with acquisitions... 896 0
Capital lease obligations incurred.................... 1,185 0
Tax benefit recognized in connection with stock
options exercised................................... 637 1,132
6
<PAGE>
U.S. LONG DISTANCE CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REGULATORY MATTERS
MFJ LEGISLATION
On February 8, 1996, President Clinton signed the Telecommunications Act
of 1996 into law. The new law allows the Regional Bell Operating Companies
("RBOC's") to petition their respective "in-region" state regulatory agencies
to seek authority from the Federal Communications Commission ("FCC") to allow
the applicant RBOC to provide long distance services. To obtain this
authority, each state agency is required to certify to the FCC that the
applicant RBOC has satisfied a legislative "checklist" that outlines the
steps required for an RBOC to open its network to competition on a local
basis. These steps include the provision of competitive network
interconnection, unbundled access to network elements and other necessary
access to poles, ducts, conduits and rights-of-way. Furthermore, applicant
RBOCs must provide non-discriminatory access to white pages listings and
telephone number assignments. Applicant RBOCs must provide local number
portability, toll dialing parity and local service resale. The FCC is
required to consult with the Department of Justice ("DOJ") to assist in
determining if an applicant RBOC's entry into the long distance business
violates any anti-trust standard the DOJ considers appropriate. Ninety days
after receiving such an application, the FCC is required to render its
decision. RBOCs are required to establish separate subsidiaries through which
they could first offer in-region long distance services. RBOCs may provide
out-of-region long distance services subject to existing laws and regulations
governing long distance telecommunications services.
REGULATORY RATE PROCEEDINGS
During the course of normal operations, a regulated company may at any
time come under specific scrutiny with regard to any of its rates, terms or
conditions by which its services are rendered by the state or federal
regulatory agency charged with such oversight responsibility, or by an
attorney general or other jurisdictional public officials. In such cases, a
regulated company can be required to, among other things, provide cost
justification for the charges it imposes on some or all of its services, or
to address perceived consumer inequities. After review of such justification,
the regulatory agency generally has the authority to require a carrier to
modify the process by which such services are rendered or to effect changes
to its applicable rate structure. Consumer officials and attorneys general
can pursue civil action if their concerns are not adequately addressed by the
carrier. The Company operates in several jurisdictions in which its tariffs
or services may, from time to time, fall under such scrutiny at the
discretion of the governing regulatory agency or other officials. The Company
could therefore be required, as a result of such an investigation and
subsequent proceeding, to implement changes in its rate structure or
operating procedures, which could ultimately affect its revenues and
profitability. The Company cannot predict whether or not any such requirement
may be imposed in any particular jurisdiction.
TEXAS PIU ISSUE
In a Final Order released in Docket 10127 on April 12, 1993 ("Final
Order"), the Texas Public Utility Commission ("PUC") adopted new regulations
governing the method by which interexchange carriers ("IXCs") such as the
Company calculate intrastate access charges paid to local telephone
companies. These new rules required an independent auditor's review and
approval of an IXC's methodology of determining its own intrastate access
usage. The auditors' reports were to be submitted to the local telephone
companies for review and implementation beginning on June 15, 1994.
However, on June 13, 1994, Travis County Judge Hume Cofer found in
ALLCOMM LONG DISTANCE, INC. V. PUC AND SOUTHWESTERN BELL, Cause No. 94-06509,
that Allcomm was entitled to an injunction against enforcement by the PUC and
Southwestern Bell of the Final Order because the PUC improperly delegated
regulatory authority outside the PUC. Permanent injunctive relief was granted
to Allcomm in this cause on June 17, 1994. The decision was appealed by the
PUC and Southwestern Bell.
7
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U.S. LONG DISTANCE CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On June 15, 1994, the Company, along with several other IXCs
("Intervenors"), sought intervention and similar injunctive relief in a new
cause filed with Judge Cofer, Cause No. 94-06509-A, AMERICAN TELCO, INC. ET
AL. V. PUC AND SOUTHWESTERN BELL. The Intervenors reached an agreement in
accordance with Rule 11, Texas Rules of Civil Procedures, with the PUC and
Southwestern Bell which provided, among other things, that in lieu of
submitting audit reports to Southwestern Bell, Intervenors would have such
reports held under seal by a designated third party until a final,
nonappealable judgment is rendered in the Allcomm case. In the interim,
Intervenors such as the Company are not prohibited from continuing to
establish access charge levels based upon their own respective methodologies.
On June 22, 1995, the Texas Court of Appeals overturned the lower
court's decision in the Allcomm matter, concluding that the trial court erred
in finding that the PUC had exceeded its statutory authority. Further, the
Texas Court of Appeals rendered judgment that the Final Order is enforceable
against Allcomm. On September 25, 1995, Allcomm filed an Application for Writ
of Error regarding this matter with the Supreme Court of the State of Texas.
The Supreme Court denied Allcom's Application for Writ of Error on December
22, 1995. A timely Motion for Reconsideration was subsequently filed by
Allcom thereafter.
On February 14, 1996, the action of the Texas Court of Appeals was
sustained by the Supreme Court despite Allcom's Motion for Reconsideration.
On March 1, 1996, the aforementioned report filed under seal pursuant to the
Rule 11 agreement was turned over to Southwestern Bell and other LEC
representatives. The Company has subsequently engaged a Certified Public
Accounting firm to perform a new audit, per agreement with Southwestern Bell,
which is intended to provide more accurate and up-to-date information.
Depending, in part, upon the outcome of the new audit and the acceptance
thereof by Southwestern Bell and other Local Exchange Carriers, it is
possible that the Company will be required by further PUC action to adopt
modified methodologies that could subsequently obligate the Company to
compensate the local telephone companies for any resulting differences in
calculating access charges. The Company cannot predict the actions that may
be undertaken by the local telephone companies. Based on advice of legal
counsel, management believes there will be no retroactive liability to the
Company prior to the Allcomm matter becoming a final and non-appealable
order. However, management estimates that, under the most extreme application
of the independent auditors' proposed methodologies, the difference between
applying the alternative methodologies would result in prospective increased
intrastate access charge expense not exceeding $2 million annually.
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims, legal actions and regulatory
proceedings arising in the ordinary course of business. The Company believes
it is unlikely that the final outcome of any of the claims or proceedings to
which the Company is a party would have a material adverse effect on the
Company's financial position or results of operations; however, due to the
inherent uncertainty of litigation, there can be no assurance that the
resolution of any particular claim or proceeding would not have a material
adverse effect on the Company's results of operations for the fiscal period
in which such resolution occurred.
See "Item 1. Legal Proceedings" in PART II. of this report for certain
other pending matters.
8
<PAGE>
U.S. LONG DISTANCE CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6. OTHER MATTERS
On December 12, 1995, the Board of Directors adopted the U.S. Long
Distance Corp. 1995 Employee Restricted Stock Plan (the "Restricted Stock
Plan"), which provides for the awarding of restricted stock to officers and
certain key employees of the Company. An aggregate of 500,000 shares of
common stock are reserved for awards under the Restricted Stock Plan. The
number of shares of common stock to be awarded to an employee and other terms
of the award are determined by a committee of disinterested persons who will
administer the Restricted Stock Plan. The Restricted Stock Plan provides for
certain restrictions upon the sale of the stock. Subsequently, the
Restricted Stock Plan was amended to allow for immediate vesting at the
descretion of the committee.
NOTE 7. SPINOFF OF BILLING
On July 10, 1996, the Company's Board of Directors approved the spinoff
the Company's commercial billing clearinghouse and information management
services business (the "Billing Group Business") as a separate public company
(the "Distribution"). To effect the spinoff, the Board approved the
distribution of the outstanding shares of common stock of its recently formed
and wholly owned subsidiary that will own and operate the Billing Group
Business, Billing Information Concepts Corp. ("Billing"), to its
stockholders. The Distribution is expected to be tax-free for federal income
tax purposes to the stockholders of USLD, and USLD will not recognize income,
gain or loss as a result of the Distribution. The Distribution was completed
on August 2, 1996. The operating results of Billing are segregated and
reported as discontinued operations in the accompanying Condensed
Consolidated Statements of Income in accordance with Accounting Principles
Board Opinion No. 30. Prior period operating results have been restated to
reflect continuing operations. Operating revenues of the discontinued
operations were $21.4 million and $25.7 million for the three months ended
June 30, 1995 and 1996, respectively, and $56.3 million and $76.0 million for
the nine months ended June 30, 1995 and 1996, respectively. Net assets of the
discontinued operations at June 30, 1996 consisted primarily of current
assets and property and equipment amounting to $126.0 million and liabilities
of $93.6 million.
Subject to the terms of the Distribution Agreement, USLD and Billing
each remain liable as a guarantor and continue to pledge security with
respect to certain indebtedness that cannot be economically separated under
existing debt arrangements. As compensation for such commitments, each has
agreed to pay the other a credit support fee equal to 1% per annum of the
average monthly balance of indebtedness guaranteed by one on behalf of the
other for as long as such guarantees continue after the Distribution date.
As of the Distribution date, August 2, 1996, USLD is liable as a guarantor on
approximately $20.4 million of Billing's outstanding debt.
NOTE 8. TAXES
The Distribution triggered the recognition of certain income or tax
items to the Company. The Company will pay income and withholding taxes to
Revenue Canada of approximately $2.3 million and the provincial government of
British Columbia of approximately $1.1 million. These amounts have been
recognized as direct spinoff costs as of June 30, 1996 and will be paid in
November 1996.
9
<PAGE>
ITEM 2.
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS AND INFORMATION RELATING TO THE COMPANY AND ITS SUBSIDIARIES THAT
ARE BASED ON THE BELIEFS OF THE COMPANY'S MANAGEMENT AS WELL AS ASSUMPTIONS
MADE BY AND INFORMATION CURRENTLY AVAILABLE TO THE COMPANY'S MANAGEMENT. WHEN
USED IN THIS REPORT, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT"
AND "INTEND" AND WORDS OR PHRASES OF SIMILAR IMPORT, AS THEY RELATE TO THE
COMPANY OR ITS SUBSIDIARIES OR COMPANY MANAGEMENT, ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT RISKS,
UNCERTAINTIES AND ASSUMPTIONS RELATED TO CERTAIN FACTORS INCLUDING, WITHOUT
LIMITATIONS, COMPETITIVE FACTORS, GENERAL ECONOMIC CONDITIONS, CUSTOMER
RELATIONS, RELATIONSHIPS WITH VENDORS, THE INTEREST RATE ENVIRONMENT,
GOVERNMENTAL REGULATION AND SUPERVISION, SEASONALITY, DISTRIBUTION NETWORKS,
PRODUCT INTRODUCTIONS AND ACCEPTANCE, TECHNOLOGICAL CHANGE, CHANGES IN
INDUSTRY PRACTICES, ONE-TIME EVENTS AND OTHER FACTORS DESCRIBED HEREIN. BASED
UPON CHANGING CONDITIONS, SHOULD ANY ONE OR MORE OF THESE RISKS OR
UNCERTAINTIES MATERIALIZE, OR SHOULD ANY UNDERLYING ASSUMPTIONS PROVE
INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED HEREIN AS
ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED OR INTENDED. THE COMPANY DOES NOT
INTEND TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the consolidated financial condition
and results of operations of the Company for the three and nine-month periods
ended June 30, 1995 and 1996. It should be read in conjunction with the
Interim Condensed Consolidated Financial Statements of the Company, the Notes
thereto and other financial information included elsewhere in this report.
For purposes of the following discussion, references to year periods refer to
the Company's fiscal year ended September 30 and references to quarterly
periods refer to the Company's fiscal quarter ended June 30.
On July 10, 1996, the Company's Board of Directors approved a plan to
spinoff the Company's commercial billing clearinghouse and information
management services business ("Billing Group Business") as a separate public
company (the "Distribution"). To effect the spinoff, the Board approved the
distribution of the outstanding shares of common stock of its recently formed
and wholly owned subsidiary that will own and operate the Billing Group
Business, Billing Information Concepts Corp. ("Billing"), to its
stockholders. The Distribution is expected to be tax-free for federal income
tax purposes to the stockholders of USLD, and USLD will not recognize income,
gain or loss as a result of the Distribution. The Distribution was completed
on August 2, 1996.
For purposes of governing certain ongoing relationships between Billing
and USLD after the Distribution and to provide for an orderly transition,
Billing and USLD have entered into certain agreements. Such agreements
include: (i) the Distribution Agreement, providing for, among other things,
the Distribution and the division between Billing and USLD of certain assets
and liabilities and material indemnification provisions; (ii) the Benefits
Plans and Employment Matters Allocation Agreement, providing for certain
allocations of responsibilities with respect to benefit plans, employee
compensation, and labor and employment matters; (iii) the Tax Sharing
Agreement pursuant to which Billing and USLD will agree to allocate tax
liabilities that relate to periods prior to and after the Distribution Date;
(iv) the Transitional Services and Sublease Agreement pursuant to which USLD
will provide certain services on a temporary basis and sublease certain
office space to Billing and Billing will provide certain services to USLD on
a temporary basis; (v) the Zero Plus-Zero Minus Billing and Information
Management Services Agreement and the One Plus Billing and Information
Management Services Agreement pursuant to which Billing will provide billing
clearinghouse and information management services to USLD for an initial
period of three years; and (vi) the Telecommunications Agreement pursuant to
which USLD will provide long distance telecommunications services to Billing
for an initial period of three years; and (vii) the Leasing Agreement,
whereby USLD and Billing agree to pay certain usage charges. It is the
intention of USLD and Billing that the Transitional Service and Sublease
Agreement, the Zero Plus-Zero Minus Billing and Information Management
Services Agreement, the One Plus Billing And Information Management Services
Agreement, the Telecommunications Agreement, and the Leasing Agreement
reflect terms and conditions similar to those that would have been arrived at
by independent parties bargaining at arm's length; however, there can be no
assurances that such agreements are on terms at least as favorable as could
have been obtained from unaffiliated third parties.
10
<PAGE>
The accompanying Condensed Consolidated Statements of Income reflect the
operating results of Billing as discontinued operations in accordance with
Accounting Principles Board Opinion No. 30. Prior period operating results
have been restated to reflect continuing operations. A USLD Condensed
Consolidated Pro Forma Balance Sheet and USLD Condensed Consolidated Pro
Forma Statements of Income are also included and discussed in a separate
section below.
OVERVIEW
Revenues increased 27% in the third quarter of 1996 to $46.7 million
from $36.7 million in the third quarter of 1995. Revenues increased 27% in
the nine-month period ended June 30, 1996, compared to the corresponding
period of 1995. The Company's gross profit margin was 34.7% and 34.1% during
the quarter and nine months ended June 30, 1996, respectively, compared to
32.6% and 34.0% during the same periods of 1995.
The Company's selling, general and administrative ("SG&A") expenses as a
percentage of revenues in the quarter ended June 30, 1996 remained relatively
flat with the comparable quarter of the prior year at 28.1%. SG&A expenses
as a percentage of revenues were 28.8% in the first nine months of 1996
compared to 29.0% in the corresponding period of 1995. During the quarter
ended June 30, 1996, the Company incurred $6.6 million in direct spinoff
costs associated with the spinoff of Billing. Depreciation and amortization
expenses as a percentage of revenues were 5.8% and 6.5% during the quarter
and nine months ended June 30, 1996, respectively, compared to 7.2% and 7.3%
during the same periods of 1995.
Loss from continuing operations of $6.3 million was reported for the
quarter ended June 30, 1996, compared to a loss of $974,000 during the same
quarter of the prior year. For the first nine months of 1996, loss from
continuing operations was $8.2 million compared to a loss of $2.3 million
during the same period in the prior year. The Company reported net income of
$301,000, or $0.02 per share, for the third quarter of 1996 compared to $3.1
million, or $0.21 per share, in the comparable prior year quarter. Net income
for the nine-month period ended June 30, 1996 was $7.3 million, or $0.48 per
share, compared to $7.8 million, or $0.54 per share, for the same period in
1995.
RESULTS OF OPERATIONS
The following table presents certain items in the Condensed Consolidated
Statements of Income as a percentage of total revenues for the three and
nine-month periods ended June 30, 1995 and 1996:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1995 1996 1995 1996
------ ------ ------ ------
Operating revenues:
Direct dial long distance services..... 57.9% 67.1% 59.6% 65.7%
Operator services...................... 42.1 32.9 40.4 34.3
----- ----- ----- -----
Total operating revenues............100.0 100.0 100.0 100.0
Operating expenses:
Cost of services....................... 67.4 65.3 66.0 65.9
Selling, general and administrative.... 28.0 28.1 29.0 28.8
Direct spinoff costs................... 0.0 14.2 0.0 5.1
Depreciation and amortization.......... 7.2 5.8 7.3 6.5
----- ----- ----- -----
Loss from continuing operations..... (2.7)% (13.5)% (2.3)% (6.3)%
----- ----- ----- -----
----- ----- ----- -----
11
<PAGE>
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1995
OPERATING REVENUES
Revenues in the third quarter of 1996 increased by 27% to $46.7 million
from $36.7 million in the third quarter of 1996. Growth in direct dial long
distance services accounted for the increase in revenues.
DIRECT DIAL LONG DISTANCE SERVICES. Direct dial long distance services
revenue increased 48% to $31.3 million in the third quarter of 1996 compared
to $21.2 million in the third quarter of 1995. The increase in revenue is
attributable to growth in the number of customers serviced. The Company
believes that there are opportunities for continued expansion, both
internally and externally through acquisitions, in its direct dial long
distance business. Direct dial long distance services represents the largest
market in which the Company is active, therefore management believes that
this business presents the Company with its greatest revenue growth
opportunity. The Company believes that its base of operator services business
affords it the opportunity to expand its direct dial long distance business
on a more cost effective basis than many of its direct dial long distance
competitors. While the Company continues to consider potential acquisitions,
it has no agreements or pending negotiations with respect to any acquisition
at the date of this report.
OPERATOR SERVICES. Operator services revenue was $15.4 million in the
third quarter of both 1996 and 1995. The Company processed 4.5 million
operator services calls in the third quarter of 1996 compared to 4.3 million
in the third quarter of 1995. The Company serviced an average of
approximately 66,400 pay telephones and 127,400 hospitality rooms per month
for the quarter ended June 30, 1996, compared to an average of approximately
54,800 pay telephones and 134,300 hospitality rooms per month for the quarter
ended June 30, 1995. Although the volume of operator services calls has
increased, the related revenues have been, and will continue to be, affected
by several factors, including an increase in the percentage of telephones
serviced by the Company located in states that impose rate tariff regulations
on operator services providers and an increasing awareness on the part of the
consumer of the ability to select a carrier of choice by dialing access codes
of other carriers ("800 dial-around"). Additionally, changes in Federal or
State regulations could negatively impact revenues of the Company (See Note
4 to the Interim Condensed Consolidated Financial Statements).
COST OF SERVICES. The gross profit margin of 34.7% reported for the
quarter ended June 30, 1996 increased from 32.6% achieved in the comparable
prior year quarter. This increase is due to improved direct dial long
distance services gross margins. The direct dial long distance services
margin has increased primarily as a result of continued improvements in
networking efficiencies and reductions in transmission costs. This increase
was offset by an increase in the direct dial long distance services revenues
as a percentage of total revenue. Such revenues have a lower gross margin
than the operator services revenue and accounted for 67% of the Company's
total revenues for the third quarter of 1996 compared to 58% for the
corresponding quarter of 1995. Although management continues to undertake
measures to improve gross profit margins, continued pricing pressures and the
impact of regulatory issues could pressure future gross profit margins.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses for the third quarter
of 1996 were $13.1 million, representing 28.1% of revenues, compared to $10.3
million in the third quarter of 1995, or 28.0% of revenues. SG&A expenses for
the third quarter of 1996 included $413,000 of spinoff-related expenses
associated with the termination of one of the Company's fiscal 1996 employee
compensation plans that, otherwise, would have been recognized in the fourth
quarter. Had this expense not been incurred, SG&A expense as a percentage of
revenue would have decreased to 27.3%. This decrease was caused by
reductions in spending due to increased efficiencies.
DIRECT SPINOFF COSTS. Direct spinoff costs represent only direct costs
incurred in connection with the spinoff of Billing. The $6.6 million
represents certain professional and filing fees, payments relating to
employment contracts and accruals for foreign taxes payable. The Company
anticipates an estimated $2.3 million of additional spinoff charges in the
fourth quarter of fiscal 1996.
12
<PAGE>
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
$2.7 million in the third quarter of 1996, unchanged from the corresponding
prior year quarter. As a percent of revenues, depreciation and amortization
expenses declined to 5.8% in the third quarter of 1996 from 7.2% in the prior
year period. This decrease is primarily attributable to the increase in
revenues from the prior year quarter.
LOSS FROM CONTINUING OPERATIONS
Loss from continuing operations in the third quarter of 1996 increased
to $6.3 million from $974,000 in the third quarter of 1995. Exclusive of the
direct spinoff costs and spinoff-related costs, the Company would have
reported income from continuing operations of $757,000, or 1.6% of revenue,
during the third quarter of 1996.
OTHER INCOME/EXPENSE
Net other expense decreased slightly to $159,000 in the third quarter of
1996 from $260,000 in the third quarter of 1995. The decrease was primarily
attributable to the Company reducing its level of indebtedness over the past
year.
INCOME TAXES
The Company's effective tax rate is not meaningful due to the
presentation of discontinued operations in the accompanying Condensed
Consolidated Statements of Income.
NET INCOME
The Company reported net income of $301,000 in the third quarter of 1996
compared to net income of $3.1 million in the third quarter of 1995.
Excluding the direct spinoff costs and spinoff-related costs, net income in
the third quarter of 1996 would have been $4.6 million. Net income for the
third quarter of 1996, after adjusting for the direct spinoff costs,
reflected the continued growth in revenues.
NINE MONTHS ENDED JUNE 30, 1996 COMPARED TO
NINE MONTHS ENDED JUNE 30, 1995
OPERATING REVENUES
Revenues in the nine-month period ended June 30, 1996 increased by 27%
to $130.0 million from $102.5 million in the same period of 1995. Growth in
direct dial long distance services and operator services revenues accounted
for $24.3 million and $3.2 million, respectively, of the total increase in
revenues.
DIRECT DIAL LONG DISTANCE SERVICES. Direct dial long distance services
revenue increased 40% to $85.4 million in the nine-month period ended June
30, 1996 from $61.1 million in the same period of 1995. The increase in
revenue is attributable to growth in the number of customers serviced.
OPERATOR SERVICES. Operator services revenue was $44.7 million in the
first nine months of 1996 compared to $41.5 million in the same period of
1995. The increase in revenue was primarily attributable to the increase in
the number of calls processed. The Company processed 13.0 million operator
services calls in the first nine months of fiscal 1996 compared to 12.4
million in the first nine months of fiscal 1995. The Company serviced an
average of approximately 66,500 pay telephones and 127,200 hospitality rooms
per month for the nine-month period ended June 30, 1996, compared to an
average of approximately 53,700 pay telephones and 128,400 hospitality rooms
per month for the nine-month period ended June 30, 1995. Although the volume
of operator services calls has increased, the related revenues have been, and
will continue to be, affected by several factors, including an increase in
the percentage of telephones serviced by the Company located in states that
impose rate tariff regulations on operator services providers and an
increasing awareness on the part of the consumer of the ability to select a
carrier of choice by dialing access codes of other carriers ("800
dial-around"). Additionally, changes in Federal or State regulations could
negatively impact revenues of the Company (See Note 4 to the Interim Condensed
Consolidated Financial Statements).
13
<PAGE>
COST OF SERVICES. The gross profit margin reported for the nine-month
period ended June 30 remained relatively flat compared to the prior year
comparable period at 34.1%. The Company's direct dial long distance services
gross margins showed improvement; however, the improvement was offset by an
increase in the direct dial long distance services revenues as a percentage
of total revenue. Such revenues have a lower gross margin than the operator
services revenue and accounted for 66% of the Company's total revenues for
the nine months of 1996 compared to 60% for the corresponding nine months of
1995. The direct dial long distance services margin has increased primarily
as a result of continued improvements in networking efficiencies and
reductions in transmission costs.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses for the nine-month
period ended June 30, 1996 were $37.5 million, representing 28.8% of
revenues, compared to $29.8 million in the same period of 1995, or 29.0% of
revenues. SG&A expenses for the nine-month period ended June 30, 1996
included $413,000 of spinoff-related expenses associated with the termination
of one of the Company's fiscal 1996 employee compensation plans, that,
otherwise, would have been recognized in the fourth quarter. Had this
expense not been incurred, SG&A expense as a percentage of revenue would have
decreased to 28.5%. This decrease was caused by reductions in spending due
to increased efficiencies.
DIRECT SPINOFF COSTS. Direct spinoff costs represent only direct costs
incurred in connection with the spinoff of Billing Information Concepts Corp.
The $6.6 million represents certain professional and filing fees, payments
relating to employment contracts and accruals for foreign taxes payable. The
Company anticipates an estimated $2.3 million of additional spinoff charges
in the fourth quarter of fiscal 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
$8.4 million in the nine-month period ended June 30, 1996 compared with $7.4
million in the corresponding prior year period. Depreciation and amortization
expense as a percentage of revenues decreased to 6.5% in the first nine
months of 1996 from 7.3% in the same period of 1995. The decrease in such
expense as a percentage of revenues is primarily attributable to the increase
in revenues from the prior year period.
LOSS FROM CONTINUING OPERATIONS
Loss from continuing operations in the first nine months of 1996
amounted to $8.2 million, compared to a loss of $2.3 million in the same
period of 1995. Excluding direct spinoff costs and spinoff-related costs,
the Company would have reported loss from continuing operations of
$1.2 million, during the nine-month period ended June 30, 1996.
OTHER INCOME/EXPENSE
Net other expense decreased to $562,000 in the nine-month period ended
June 30, 1996 from $775,000 in the corresponding period of 1995. The decrease
was primarily attributable to the Company reducing its level of indebtedness
over the past year.
INCOME TAXES
The Company's effective tax rate is not meaningful due to the
presentation of discontinued operations in the accompanying Condensed
Consolidated Statements of Income.
NET INCOME
The Company reported net income of $7.3 million in the first nine months
of 1996 compared to a $7.8 million in the same period of 1995. Without the
direct spinoff costs and spinoff related expenses, the Company would have
reported net income of $11.6 million during the first nine months of 1996.
Net income for the nine-month period ended June 30, 1996 reflected continued
growth in revenues.
14
<PAGE>
EFFECTS OF SPINOFF OF BILLING GROUP BUSINESS
The Condensed Consolidated Statements of Income included in this report
reflect the continuing and discontinued operations of USLD for the three and
nine-month periods ended June 30, 1995 and 1996. Included below is
supplemental pro forma financial information that management believes is
important to provide an understanding of the results of USLD on a stand-alone
basis. Condensed Consolidated Pro Forma Statements of Income are presented
below for each of the last three fiscal years, the nine month periods ended
June 30, 1995 and 1996, as well as for each quarter of 1995 and 1996. These
Condensed Consolidated Pro Forma Statements of Income are based on the
historical statements of the periods presented adjusted to reflect the items
discussed in the accompanying notes to the pro forma financial statements.
The Condensed Consolidated Pro Forma Statements of Income give effect to the
Distribution as if it had occurred on September 30, 1992. A Condensed
Consolidated Pro Forma Balance Sheet at June 30, 1996 is also presented which
gives effect to the Distribution as if it had occurred on June 30, 1996. The
pro forma adjustments reflect the terms of the Distribution Agreement and the
related spinoff agreements, which are expected to have a continuing impact on
the Company. The Condensed Consolidated Pro Forma Statements of Income for
the three months ended June 30, 1996 reflects $6.6 million of direct spinoff
costs and $413,000 of additional spinoff-related expenses included in SG&A.
The Condensed Consolidated Pro Forma Balance Sheet at June 30, 1996 reflects
the payment or accrual of such costs. Management estimates that an
additional $2.3 million of direct spinoff cost will be incurred in the
three-month period that ends on September 30, 1996. This estimated range is
forward-looking in nature and is subject to certain uncertainties and
assumptions, including estimates of costs not yet incurred, that could cause
actual costs to vary materially.
The unaudited consolidated pro forma financial information is presented
for informational purposes only and should be read in conjunction with the
accompanying notes and with USLD's historical financial statements and notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" set forth herein and in USLD's Annual Report on Form
10-K for the fiscal year ended September 30, 1995. The pro forma financial
statements should not be considered indicative of the operating results or
financial position which USLD will achieve in the future if it were operated
on an independent, stand-alone basis because, among other things, these
statements are based on historical rather than prospective information and
include certain assumptions which are subject to change.
The unaudited Condensed Consolidated Pro Forma Statements of Income and
the Condensed Consolidated Pro Forma Balance Sheet of USLD reflect, in
management's opinion, all adjustments necessary to fairly state the pro forma
results of operations for the periods presented and financial position at
June 30, 1996 to make the unaudited pro forma statements not misleading.
15
<PAGE>
U.S. LONG DISTANCE CORP. and SUBSIDIARIES
CONDENSED CONSOLIDATED PRO FORMA STATEMENTS OF INCOME
Thousands of Dollars
(Unaudited)
<TABLE>
Fiscal Year Ended Nine Months
September 30, Ended June 30,
-------------------------- -----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PRO FORMA
Operating revenues:
Direct dial long distance services (A)........................ $29,673 $62,834 $84,483 $61,074 $85,386
Operator services ............................................ 50,446 54,707 59,567 41,456 44,661
------- ------- ------- ------- -------
Total operating revenues ................................... 80,119 117,541 144,050 102,530 130,047
Cost of services ............................................... 47,403 72,944 94,038 67,638 85,760
------- ------- ------- ------- -------
Gross profit ................................................. 32,716 44,597 50,012 34,892 44,287
Selling, general and administrative (B) ........................ 27,804 38,541 41,580 29,770 37,451
Direct spinoff costs ........................................... 0 0 0 0 6,628
Depreciation and amortization .................................. 5,060 8,424 10,032 7,437 8,411
------- ------- ------- ------- -------
Loss from operations ......................................... (148) (2,368) (1,600) (2,315) (8,203)
Other income (expense), net .................................... (1,561) (866) (999) (775) (562)
------- ------- ------- ------- -------
Loss before provision for income taxes ......................... (1,709) (3,234) (2,599) (3,090) (8,765)
Provision for income taxes (C) ................................. 0 0 0 0 0
Net loss before extraordinary items ............................ (1,709) (3,234) (2,599) (3,090) (8,765)
Extraordinary items ............................................ (316) 0 0 0 0
------- ------- ------- ------- -------
Net loss ....................................................... $(2,025) $(3,234) $(2,599) $(3,090) $(8,765)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Gross profit margin ............................................ 40.8% 37.9% 34.7% 34.0% 34.1%
Selling, general and administrative % of revenue ............... 34.7% 32.8% 29.2% 29.0% 28.8%
Earnings before interest, taxes, depreciation and amortization
("EBITDA") % of revenue (D) .................................. 6.1% 5.1% 5.5% 0.2 % 5.0%
</TABLE>
16
<PAGE>
U.S. LONG DISTANCE CORP. and SUBSIDIARIES
CONDENSED CONSOLIDATED PRO FORMA STATEMENTS OF INCOME
Thousands of Dollars
(Unaudited)
<TABLE>
Three Months Ended
---------------------------------------
Dec. 31, Mar. 31, June 30, Sept. 30,
1994 1995 1995 1995
-------- ------- ------- -------
<S> <C> <C> <C> <C>
PRO FORMA
Operating revenues:
Direct dial long distance services (A)........................ $19,968 $19,896 $21,210 $23,225
Operator services ............................................ 12,940 13,075 15,441 18,110
-------- ------- ------- -------
Total operating revenues ................................... 32,908 32,971 36,651 41,520
Cost of services ............................................... 21,311 21,619 24,708 26,339
-------- ------- ------- -------
Gross profit ................................................. 11,597 11,352 11,943 15,121
Selling, general and administrative (B) ........................ 9,882 9,624 10,264 11,811
Direct spinoff costs ........................................... 0 0 0 0
Depreciation and amortization .................................. 2,356 2,428 2,653 2,596
-------- ------- ------- -------
Loss from operations ......................................... (641) (700) (975) 714
Other income (expense), net .................................... (275) (240) (260) (224)
-------- ------- ------- -------
Loss before provision for income taxes ......................... (915) (940) (1,235) 491
Provision for income taxes (C) ................................. 0 0 0 0
-------- ------- ------- -------
Net loss ....................................................... $ (915) $ (940) $(1,235) $ 491
-------- ------- ------- -------
-------- ------- ------- -------
Gross profit margin ............................................ 35.2% 34.4% 32.6% 36.4%
Selling, general and administrative % of revenue ............... 30.0% 29.2% 28.0% 28.4%
Earnings before interest, taxes, depreciation and amortization
("EBITDA") % of revenue (D) .................................... 5.2% 5.2% 4.6% 7.8%
</TABLE>
17
<PAGE>
U.S. LONG DISTANCE CORP. and SUBSIDIARIES
CONDENSED CONSOLIDATED PRO FORMA STATEMENTS OF INCOME
Thousands of Dollars
(Unaudited)
<TABLE>
Three Months Ended
----------------------------
Dec. 31, Mar. 31, June 30,
1995 1996 1996
-------- ------- -------
<S> <C> <C> <C>
PRO FORMA
Operating revenues:
Direct dial long distance services (A)........................ $25,034 $29,046 $31,306
Operator services ............................................ 14,674 14,609 15,378
-------- ------- -------
Total operating revenues ................................... 39,708 43,655 46,684
Cost of services ............................................... 26,385 28,875 30,499
-------- ------- -------
Gross profit ................................................. 13,323 14,780 16,185
Selling, general and administrative (B) ........................ 11,382 12,929 13,139
Direct spinoff costs ........................................... 0 0 6,628
Depreciation and amortization .................................. 2,771 2,938 2,702
-------- ------- -------
Loss from operations ......................................... (830) (1,087) (6,284)
Other income (expense), net .................................... (188) (214) (159)
-------- ------- -------
Loss before provision for income taxes ......................... (1,018) (1,301) (6,443)
Provision for income taxes (C) ................................. 0 0 0
-------- ------- -------
Net loss ....................................................... $(1,018) $(1,301) $(6,443)
-------- ------- -------
-------- ------- -------
Gross profit margin ............................................ 33.6% 33.9% 34.7%
Selling, general and administrative % of revenue ............... 28.7% 29.6% 28.1%
Earnings before interest, taxes, depreciation and amortization
("EBITDA") % of revenue (D) .................................. 4.9% 4.2% (7.7)%
</TABLE>
18
<PAGE>
U.S. LONG DISTANCE CORP. and SUBSIDIARIES
CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
AT JUNE 30, 1996
IN THOUSANDS
(UNAUDITED)
<TABLE>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Total current assets........................... $35,607 $11,713(E) $47,320
Net property and equipment..................... 29,064 29,064
Other assets, net.............................. 18,510 18,510
------- ------- -------
Total assets................................. $83,181 $11,713 $94,894
------- ------- -------
------- ------- -------
LIABILITIES AND EQUITY
Total current liabilities...................... $25,820 $25,820
Long-term obligations.......................... 9,931 9,931
Stockholders' equity........................... 47,430 11,713 59,143
------- ------- -------
Total liabilities and stockholders' equity... $83,181 $11,713 $94,894
------- ------- -------
------- ------- -------
Working capital................................ $ 9,787 $11,713 $21,500
Current ratio.................................. 1.38:1 1.83:1
</TABLE>
NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(A) The long distance and 800 services provided by USLD to Billing have
historically been eliminated in consolidation. The pro forma statements
of income reflect an adjustment for these long distance and 800 services
revenues at an arm's length price consistent with the Telecommunications
Agreement that has been executed between USLD and Billing.
(B) The billing clearinghouse and information management services provided by
Billing to USLD have historically been eliminated in consolidation. The
pro forma statements of income reflect an adjustment for these billing
clearinghouse and information management costs at an arm's length price
consistent with the Zero Plus-Zero Minus Billing and Information
Management Services Agreement and the One Plus Billing and Information
Management Services Agreement that has been established between Billing
and USLD.
(C) On the historical Condensed Consolidated Statements of Income, USLD has
reported income on a pre-tax basis and, consequently, income tax
expense. On a pro forma basis, USLD has incurred losses. However, no tax
benefit is reflected on the Condensed Consolidated Pro Forma Statements
Of Income.
(D) EBITDA is a profitability/cash flow measurement that is commonly used in
the telecommunications industry.
(E) Cash has historically been managed by a centralized cash management
department in Billing. Consequently, cash was not allocated among USLD's
subsidiaries and was recorded on the balance sheet of Billing. The terms
of the Distribution Agreement call for Billing to transfer to USLD an
amount of cash on the Distribution Date that will result in a working
capital balance of $21,500,000 on USLD's Pro Forma balance sheet
following the transfer. The calculation of the cash amount to be
transferred by Billing to USLD was based on current assets and current
liabilities as reported on the USLD Pro Forma balance sheet on June 30,
1996. Cash in the amount of $11,713,000 was transferred by Billing to
USLD on August 2, 1996 to satisfy this working capital requirement. An
additional amount will be transferred in August 1996 to cover
approximately $2.3 million in additional estimated direct spinoff costs.
19
<PAGE>
MANAGEMENT'S PLANS FOR THE FUTURE
USLD management is in the process of developing plans and implementing a
number of actions designed to improve its overall profitability. These plans
and programs are intended to increase revenues while improving USLD's cost
structure. Management continues to evaluate and take actions to improve the
profitability of its existing products, to identify new products to better
utilize the Company's existing sales distribution channels, and to evaluate
programs that are expected to increase revenues through partnerships with
independent sales agents. The Company is in the process of implementing,
among other things, a more regionalized approach to pricing, which is
expected to result in overall higher product margins. To expand its footprint
nationally over the next few years, management is also considering and will
consider new investments in switching and related networking equipment, as
well as acquisitions. The Company has no agreement or pending negotiations
with respect to any acquisition at the date of this report. Furthermore,
management is considering expanding its product offerings to include the
provision of higher margin local access and internet services, as well as
frame relay and paging services in selected markets. The Company also plans
to expand its direct dial long distance services residential customer base in
targeted markets through direct marketing efforts, as well as by offering
long distance services to employees of commercial customers.
With regard to improving the Company's cost structure, management is
focusing its efforts on maximizing network efficiencies and reducing unit
costs. In November, the Company joined the Associated Communication
Companies of America ("ACCA") which, among other things, provides members
with opportunities to pool their purchasing power to acquire lower
transmission rates from interexchange carriers through volume discounts and
to work in partnership with other members to capitalize on resource sharing
arrangements such as switch partitioning and network sharing. The Company
has already, from this agreement, realized certain benefits during the
quarter ended June 30, 1996, and expects continued benefits as the
arrangement continues to be phased in. Lastly, management is in the process
of developing plans to streamline and reorganize certain corporate,
administrative and overhead functions and reduce other costs to better align
its infrastructure with a smaller operation. Management has identified in
excess of $3 million of cost reductions and is in the process of implementing
such cost reduction programs, as well as continuing to identify additional
cost savings. In addition, the Company anticipates incurring $2.5 million to
$3.5 million in restructuring charges in the fourth quarter of fiscal 1996.
While these actions are expected to result in continued revenue growth and
lower costs, there is no assurance that these actions will be implemented or,
if implemented, accomplish their stated goals or lead to profitability in the
future.
Statements regarding management's plans for the future are
forward-looking statements which by their nature are subject to numerous
uncertainties that could cause actual results to vary and to vary materially.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance increased to $23.9 million at June 30, 1996
from $22.9 million at September 30, 1995. At June 30, 1996, the Company had a
$45 million revolving credit receivable financing facility with FINOVA
Capital Corporation, the successor to Greyhound Financial Corporation, to
draw upon to advance funds to its billing customers prior to collection of
the funds by the Company's billing services business from the local telephone
companies. The amount borrowed by the Company under this credit facility to
fund advances to billing customers was $29.0 million at June 30, 1996.
Subsequent to the Distribution date, the $45 million revolving credit
facility is available only to Billing. However, as a customer of Billing the
Company has the ability to borrow against its own operator services and
direct dial long distance services accounts receivable. At June 30, 1996, the
Company estimates it had approximately $11.0 million available for borrowing
and no amounts borrowed against its own eligible receivables under Billing's
credit facility. Subject to the terms of the Distribution Agreement, USLD and
Billing each remain liable as a guarantor and continue to pledge security
with respect to certain indebtedness that cannot be economically separated
under existing debt arrangements. As compensation for such commitments, each
has agreed to pay each other a credit support fee equal to 1% per annum of
the average monthly balance of indebtedness guaranteed by one on behalf of
the other for as long as such guarantees continue after the Distribution
date. Working capital was $33.8 million at June 30, 1996, compared to $29.0
million at September 30, 1995. The Company's current ratio was 1.3:1 at both
June 30, 1996 and September 30, 1995. Additionally, the Company's cash flow
provided by operations was $29.8 million for the nine-month period ended June
30, 1996, compared to $15.2 million for the same period of the prior year.
20
<PAGE>
Capital expenditures amounted to approximately $11.5 million during the
first nine months of 1996. These expenditures were primarily related to the
purchase of telecommunications equipment and computer equipment and software.
During the remaining three months of 1996, the Company anticipates investing
between $2 to $3 million of additional funds to service the Company's
projected growth. These capital expenditures are expected to be purchases of
telecommunications equipment and computer hardware and software. The Company
anticipates financing these capital expenditures primarily through term notes
or capital leases with various lending institutions.
The Company's operations and expansion into new geographic markets will
continue to require substantial capital investment for the development and
procurement of transmission facilities and telecommunications and office
equipment. In addition, any acquisitions that the Company may consummate may
require substantial capital investment. The Company believes that it has the
ability to continue to secure long-term equipment financing and that this
ability, combined with cash flow generated from operations and available
borrowing capacity under its existing credit facilities, will be sufficient
to fund capital expenditures, working capital needs and debt repayment
requirements for the foreseeable future.
The Company continually evaluates business opportunities, including
potential acquisitions. The primary focus of the Company's acquisition
activities is to make additional acquisitions that will grow the Company's
direct dial long distance business. One or more of such acquisitions could
result in a substantial change in the Company's operations and financial
condition. The success of the Company's acquisition activities will depend,
among other things, on the availability of acquisition candidates, the
ability of funds to finance acquisitions and the availability of management
resources to oversee the operation of acquired businesses. As consideration
for any acquisitions, the Company may issue common stock, preferred stock,
convertible debt or other securities, in addition to or in lieu of the
payment of cash, that could result in dilution of the percentage ownership of
public stockholders. While the Company has, from time to time, had
discussions with certain companies, it has no agreements or pending
negotiations with respect to any acquisition at the date of this report.
On December 12, 1995, the Board of Directors adopted the U.S. Long
Distance Corp. 1995 Employee Restricted Stock Plan (the "Restricted Stock
Plan") which provides for the awarding of restricted stock to officers and
certain key employees of the Company. An aggregate of 500,000 shares of
common stock are reserved for awards under the Restricted Stock Plan. The
number of shares of common stock to be awarded to an employee and other terms
of the award are determined by a committee of disinterested persons who will
administer the Restricted Stock Plan. The Restricted Stock Plan provides for
certain restrictions upon the sale of the stock. Subsequently, the
Restricted Stock Plan was amended to allow for immediate vesting at the
descretion of the committee. During the nine months ended June 30, 1996,
115,000 shares of the Company's common stock were awarded pursuant to the
Restricted Stock Plan.
21
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In December 1993, the Securities and Exchange Commission (the "SEC"),
Division of Enforcement, instituted an informal inquiry relating to certain
of the Company's accounting practices, including revenue recognition and
accounting related to the Company's accounts receivable, purchased
receivables and other assets, and related disclosures. When the Company's
Board of Directors learned of the SEC's informal inquiry, Arthur Andersen
LLP, the Company's independent public accountants, was engaged to conduct a
special review of the Company's accounting policies and procedures. This
review was managed by a senior partner of Arthur Andersen LLP who was not
then involved in the annual audit process. This special review provided
strong additional assurance that the financial statements of the Company were
fairly stated and in conformity with generally accepted accounting
principles. Representatives of the Company and Arthur Andersen LLP have met
with the Enforcement Division of the SEC to discuss the issues raised by the
inquiry. On May 5, 1994, the Company was informed that the SEC had instituted
a formal order of private investigation pursuant to Section 21(a) of the
Securities Exchange Act of 1934, as amended (In The Matter of U.S. Long
Distance (HO-2852)), relating to, among other things, the Company's financial
condition, results of operations, assets and liabilities, revenues and
revenue recognition and agreements and transactions. Prior to August 1994,
the Commission issued subpoenas requesting documentation in a number of areas
from the Company, from Arthur Andersen LLP, the Company's independent
auditors, and from certain third parties, including former employees of the
Company. The Company has and will continue to cooperate fully with the SEC.
Although the Company cannot predict when the SEC's private investigation will
be concluded, based upon its review of facts and circumstances, management
does not believe that the SEC's review of this matter will result in any
adjustment to the Company's previously reported financial statements.
The Staff of the Commission is conducting an investigation relating to
trading in the securities of Value-Added Communications, Inc. ("VAC"), an
operator services provider based in Dallas, Texas, and of USLD (IN THE MATTER
OF TRADING IN THE SECURITIES OF VALUE-ADDED COMMUNICATIONS, INC. (HO-2765)).
A proposed merger between USLD and VAC was terminated in February 1993. The
investigation concerns whether certain persons may have purchased securities
while in possession of material non-public information or disclosed this
information to others. The Commission Staff is also investigating Mr.
Holmes' noncompliance with the filing requirements of Section 16(a) of the
Securities Exchange Act of 1934, as amended, in periods prior to 1994 with
respect to transactions in the securities of USLD. Section 16(a) requires
officers and directors of public companies to file reports with the
Commission regarding their personal transactions in their company's
securities. Mr. Holmes and others have appeared before the Commission Staff
and provided testimony with regard to these matters. The Company understands
that the Commission may seek to impose civil judicial or administrative
remedies and/or sanctions against some of the persons who have given
testimony, including Mr. Holmes. The Company believes, based on information
now available, that if such remedies or sanctions were sought they would have
a material adverse effect on the Company.
Section 16(b) of the Exchange Act generally provides that any profit
realized by directors, officers and beneficial owners of more than 10% of the
Company's Common Stock derived from a purchase or sale, or a sale and
purchase, of the Common Stock (or certain securities related to the Common
Stock) within any floating six-month period ("short-swing profits") must be
paid to the Company. The rule, therefore, automatically imposes a debt in
favor of the Company on any director, officer or 10% stockholder for any
short-swing profits. In August and September 1995, a Special Committee of the
Board of Directors, assisted by an outside counsel and an outside accounting
firm, conducted an investigation of short-swing profits attributable to
Parris H. Holmes, Jr. In September 1995, this investigation was concluded
with a payment of $293,637 by Mr. Holmes to the Company on account of
short-swing profits arising out of transactions in the Company's securities
during the period 1990 through 1992 by certain entities related to Mr. Holmes
and members of his family and reported on Forms 4 filed with the SEC. This
payment, when added to payments previously made by Mr. Holmes during the
second and third quarters of the fiscal year ended September 30, 1995,
resulted in aggregate payments of $485,349 in fiscal 1995 by Mr. Holmes to
the Company on account of short-swing profits. On October 23, 1995, Richard
Morales, a stockholder of the Company, commenced an action on the Company's
behalf against Mr. Holmes in the Federal District Court for the Southern
District of New York alleging that Mr. Holmes was liable for interest on the
short-swing profits paid to the Company. The plaintiff, Mr. Holmes and the
Company agreed to settle this action for payment by Mr. Holmes to the Company
of an additional $169,118 and on April 15, 1996, the action was dismissed
with prejudice.
22
<PAGE>
The Company is involved in various claims, legal actions and regulatory
proceedings arising in the ordinary course of business. The Company believes
it is unlikely that the final outcome of any of the claims or proceedings to
which the Company is a party would have a material adverse effect on the
Company's financial position or results of operations; however, due to the
inherent uncertainty of litigation, there can be no assurance that the
resolution of any particular claim or proceeding would not have a material
adverse effect on the Company's results of operations for the fiscal period
in which such resolution occurred.
23
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
A list of all exhibits filed or included as part of this Quarterly
Report on Form 10-Q is as follows:
EXHIBITS DESCRIPTION PAGE
- -------- ----------- ----
10.1 Distribution Agreement dated as of July 10, 1996 between
the Company and Billing (incorporated by reference from
Exhibit 10.1 to the Company's current report on Form 8-K
dated July 25, 1996)
10.2 Benefit Plans and Employment Matters Allocation Agreement
dated as of July 10, 1996 between the Company
(incorporated by reference from Exhibit 10.2 to the
Company's current report on Form 8-K dated July 25, 1996)
10.3 Tax Sharing Agreement dated as of July 10, 1996 between
the Company and Billing (incorporated by reference from
Exhibit 10.3 to the Company's current report on Form 8-K
dated July 25, 1996)
10.4 Transitional Services and Sublease Agreement dated as of
July 10, 1996 between the Company and Billing
(incorporated by reference from Exhibit 10.4 to the
Company's current report on Form 8-K dated July 25, 1996)
10.5 Zero Plus-Zero Minus Billing and Information Management
Services Agreement dated as of July 10, 1996 between the
Company and Billing (incorporated by reference from
Exhibit 10.5 to the Company's current report on Form 8-K
dated July 25, 1996)
10.6 Telecommunications Agreement dated as of July 10, 1996
between the Company and Billing (incorporated by
reference from Exhibit 10.6 to the Company's current
report on Form 8-K dated July 25, 1996)
11.1 U.S. Long Distance Corp. and Subsidiaries Computation 26
of Earnings per share (filed herewith)
27.1 Financial Data Schedule (filed herewith) 27
(b) Current Reports on Form 8-K:
Current Report on Form 8-K, dated July 25, 1996, relating to the
declaration of a special dividend for the Distribution of Billing
Information Concepts Corp. and consummating of the Distribution.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
U.S. LONG DISTANCE CORP.
(Registrant)
Date: August 13, 1996 By: /s/ Phillip J. Storin
--------------------------------
Phillip J. Storin
SENIOR VICE PRESIDENT
CHIEF FINANCIAL OFFICER
(Duly authorized and
principal financial officer)
25
<PAGE>
EXHIBIT 11.1
U.S. LONG DISTANCE CORP. and SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE CALCULATION:
Earnings (loss):
Continuing operations ................... $ (867) $ (4,016) $ (2,171) $ (5,942)
Discontinued operations ................. 3,921 4,317 9,934 13,286
-------- -------- -------- ---------
Net income applicable to common stock ... $ 3,054 $ 301 $ 7,763 $ 7,344
-------- -------- -------- ---------
-------- -------- -------- ---------
Shares:
Weighted average number of shares of
common stock outstanding ............... 13,445 14,854 13,163 14,466
Weighted average common stock
equivalents applicable to stock
options and warrants ................... 1,314 861 1,325 786
-------- -------- -------- ---------
Weighted average shares used for
computation ............................ 14,759 15,715 14,488 15,252
-------- -------- -------- ---------
-------- -------- -------- ---------
Primary earnings (loss) per common share:
Continuing operations ................. $(0.06) $ (0.25) $ (0.15) $ (0.39)
Discontinued operations ............... 0.27 0.27 0.69 0.87
-------- -------- -------- ---------
Net income applicable to common stock.. $ 0.21 $ 0.02 $ 0.54 $ 0.48
-------- -------- -------- ---------
-------- -------- -------- ---------
FULLY DILUTED EARNINGS PER SHARE CALCULATION:
Earnings (loss):
Continuing operations ................. $ (867) $(4,016) $(2,171) $ (5,942)
Discontinued operations ............... 3,921 4,317 9,934 13,286
-------- -------- -------- ---------
Net income applicable to common stock.. $ 3,054 $ 301 $ 7,763 $ 7,344
-------- -------- -------- ---------
-------- -------- -------- ---------
Shares:
Weighted average number of shares of
common stock outstanding ............. 13,445 14,854 13,163 14,466
Weighted average common stock
equivalents applicable to stock
options and warrants ................. 1,342 920 1,503 1,196
-------- -------- -------- ---------
Weighted average shares used for
computation .......................... 14,787 15,774 14,666 15,662
-------- -------- -------- ---------
-------- -------- -------- ---------
Fully diluted earnings per common share:
Continuing operations ................. $(0.06) $ (0.25) $ (0.15) $ (0.38)
Discontinued operations ............... 0.27 0.27 0.68 0.85
-------- -------- -------- ---------
Net income applicable to common stock.. $ 0.21 $ 0.02 $ 0.53 $ 0.47
-------- -------- -------- ---------
-------- -------- -------- ---------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENT FOR U.S. LONG
DISTANCE CORP. AND SUBSIDIARIES AS OF AND FOR THE NINE MONTHS ENDED JUNE 30,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 23,918
<SECURITIES> 0
<RECEIVABLES> 57,076
<ALLOWANCES> 2,195
<INVENTORY> 0
<CURRENT-ASSETS> 149,517
<PP&E> 70,369
<DEPRECIATION> 31,804
<TOTAL-ASSETS> 206,627
<CURRENT-LIABILITIES> 115,724
<BONDS> 9,666
0
0
<COMMON> 151
<OTHER-SE> 79,637
<TOTAL-LIABILITY-AND-EQUITY> 206,627
<SALES> 0
<TOTAL-REVENUES> 130,047
<CGS> 0
<TOTAL-COSTS> 85,760
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,352
<INTEREST-EXPENSE> 1,053
<INCOME-PRETAX> (8,765)
<INCOME-TAX> (2,823)
<INCOME-CONTINUING> (5,942)
<DISCONTINUED> 13,286
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,344
<EPS-PRIMARY> .48
<EPS-DILUTED> .47
</TABLE>
