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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<S> <C>
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
or
/ / TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF
1934
</TABLE>
For the transition period from to
Commission File Number 0-18195
------------------------
U.S. LONG DISTANCE CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 74-2522103
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
9311 SAN PEDRO, SUITE 300 78216
SAN ANTONIO, TEXAS (Zip code)
(Address of principal executive offices)
</TABLE>
(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 April 30, 1996:
<TABLE>
<CAPTION>
NUMBER OF SHARES
TITLE OF CLASS OUTSTANDING
- - ------------------------------------ -----------------
<S> <C>
Common Stock, $.01 par value 14,822,575
</TABLE>
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<PAGE>
U.S. LONG DISTANCE CORP. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Interim Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -- September 30, 1995 and March 31, 1996................ 3
Condensed Consolidated Statements of Income -- For the Three and Six-Month Periods Ended March
31, 1995 and 1996............................................................................ 4
Condensed Consolidated Statements of Cash Flows -- For the Six-Month Periods Ended March 31,
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............................................................................. 19
Item 6. Exhibits and Reports on Form 8-K.............................................................. 20
(a) Exhibits.................................................................................. 20
(b) Current Reports on Form 8-K............................................................... 20
SIGNATURES................................................................................................ 21
</TABLE>
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
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1995 1996
------------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................... $ 22,949 $ 26,597
Accounts receivable, net............................................................ 46,752 51,092
Purchased receivables from billing customers........................................ 55,228 62,381
Prepaids and other.................................................................. 4,594 3,686
------------- ----------
Total current assets............................................................ 129,523 143,756
Property and equipment, net........................................................... 31,923 31,532
Equipment held under capital leases, net.............................................. 3,096 2,549
Other assets:
Excess of cost over net assets acquired, net........................................ 14,685 14,393
Other assets, net................................................................... 7,666 4,789
------------- ----------
Total assets.................................................................... $ 186,893 $ 197,019
------------- ----------
------------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade............................................................................. $ 18,405 $ 20,720
Third party billing customers..................................................... 33,866 31,835
Accrued liabilities................................................................. 19,046 23,544
Revolving line of credit for purchased receivables.................................. 23,030 23,686
Current portion of long-term debt................................................... 5,432 5,460
Current portion of obligations under capital leases................................. 770 861
------------- ----------
Total current liabilities....................................................... 100,549 106,106
Other liabilities..................................................................... 3,147 3,003
Long-term debt, less current portion.................................................. 13,375 10,036
Obligations under capital leases, less current portion................................ 1,691 1,191
------------- ----------
Total liabilities............................................................... 118,762 120,336
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 March 31.............................................. 0 0
Common shares, $.01 par value, 50,000,000 shares authorized; 14,281,866 issued and
14,094,634 outstanding at September 30; 15,012,789 issued and 14,808,688 outstanding
at March 31.......................................................................... 143 150
Additional paid-in capital............................................................ 49,304 50,921
Retained earnings..................................................................... 20,473 27,519
Treasury stock........................................................................ (1,789) (1,907)
------------- ----------
Total stockholders' equity...................................................... 68,131 76,683
------------- ----------
Total liabilities and stockholders' equity...................................... $ 186,893 $ 197,019
------------- ----------
------------- ----------
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
3
<PAGE>
U.S. LONG DISTANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- --------------------
1995 1996 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenues:
Direct dial long distance services............................... $ 19,896 $ 29,046 $ 39,864 $ 54,080
Operator services................................................ 13,075 14,609 26,015 29,283
--------- --------- --------- ---------
Total operating revenues....................................... 32,971 43,655 65,879 83,363
Operating expenses:
Cost of services................................................. 21,619 28,875 42,930 55,260
Selling, general and administrative.............................. 9,624 12,929 19,505 24,311
Depreciation and amortization.................................... 2,428 2,938 4,784 5,709
--------- --------- --------- ---------
Total operating expenses....................................... 33,671 44,742 67,219 85,280
--------- --------- --------- ---------
Loss from continuing operations.................................... (700) (1,087) (1,340) (1,917)
Other income (expense):
Interest income.................................................. 153 201 318 423
Interest expense................................................. (380) (315) (810) (691)
Other, net....................................................... (13) (100) (24) (134)
--------- --------- --------- ---------
Total other income (expense)................................... (240) (214) (516) (402)
--------- --------- --------- ---------
Loss from continuing operations before provision for income
taxes............................................................. (940) (1,301) (1,856) (2,319)
Income tax benefit................................................. 277 223 552 396
--------- --------- --------- ---------
Net loss from continuing operations................................ (663) (1,078) (1,304) (1,923)
Discontinued operations (Note 7):
Income from discontinued operations, net of income taxes of
$1,903, $3,078, $3,690 and $5,497, respectively................. 3,102 5,022 6,013 8,969
--------- --------- --------- ---------
Net income......................................................... $ 2,439 $ 3,944 $ 4,709 $ 7,046
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per common share:
Continuing operations............................................ $ (0.04) $ (0.07) $ (0.09) $ (0.13)
Discontinued operations.......................................... 0.21 0.33 0.42 0.60
--------- --------- --------- ---------
Net income per common share...................................... $ 0.17 $ 0.26 $ 0.33 $ 0.47
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares outstanding......................... 14,497 15,189 14,352 15,021
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)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
---------------------
1995 1996
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................................................. $ 4,709 $ 7,046
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization......................................................... 5,303 6,650
Loss on disposition of equipment...................................................... 136 206
Provision for losses on accounts receivable........................................... 3,050 3,664
Deferred compensation................................................................. 138 252
Changes in operating assets and liabilities:
Increase in accounts receivable..................................................... (2,711) (8,004)
Decrease in prepaids and other...................................................... 132 908
Increase (decrease) in accounts payable............................................. (4,351) 2,315
Increase in accrued liabilities..................................................... 2,085 4,498
Decrease in other liabilities....................................................... (178) (144)
--------- ----------
Net cash provided by operating activities................................................. 8,313 17,391
--------- ----------
Cash flows from investing activities:
Purchase of property and equipment...................................................... (4,055) (4,716)
Purchase of direct dial long distance companies, net of cash acquired................... (175) 0
Collections of (payments for) purchased receivables from billing customers, net......... 5,478 (7,153)
Payments made to third party customers, net............................................. (8,319) (2,031)
Proceeds from sale of assets............................................................ 601 43
Other investing activities.............................................................. (550) 1,806
--------- ----------
Net cash used investing activities........................................................ (7,020) (12,051)
--------- ----------
Cash flows from financing activities:
Draws on revolving line of credit for purchased receivables, net........................ 1,083 656
Proceeds from issuance of debt.......................................................... 2,685 0
Payments on debt........................................................................ (2,366) (3,311)
Payments on capital leases.............................................................. (493) (409)
Proceeds from issuance of common stock.................................................. 1,028 1,372
Purchase of treasury stock.............................................................. (1,075) 0
--------- ----------
Net cash provided by (used in) financing activities....................................... 862 (1,692)
--------- ----------
Net increase in cash and cash equivalents................................................. 2,155 3,648
Cash and cash equivalents, beginning of period............................................ 16,765 22,949
--------- ----------
Cash and cash equivalents, end of period.................................................. $ 18,920 $ 26,597
--------- ----------
--------- ----------
</TABLE>
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 six months ended March 31, 1996, employees of the Company
exercised stock options to purchase an aggregate of 125,430 common shares at
exercise prices ranging from $4.62 to $11.25 per share, resulting in aggregate
consideration to the Company of approximately $1,076,000 in cash. Also, during
the six-month period ended March 31, 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 20,752 common shares on February 29, 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 six months ended March 31, 1996 under the terms of the Company's 1995
Employee Restricted Stock Plan (see Note 6). Approximately $252,000 of
compensation expense relating to issuances of stock options and restricted stock
to employees was recognized by the Company during the six months ended March 31,
1996. Deferred compensation costs amounting to $1,562,000 at March 31, 1996 and
$154,000 at September 30, 1995 have been netted against additional paid-in
capital.
In November 1995, the escrow agreement pursuant to which 16,869 shares of
the Company's common stock were held in escrow relating to the Company's
acquisition of the long distance commercial customer base of a company in March
1995 was terminated. The 16,869 shares have been 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:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash payments for income taxes..................................................... $ 2,432 $ 4,535
Cash payments for interest......................................................... 1,514 1,616
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
</TABLE>
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 consumer 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, 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
<PAGE>
U.S. LONG DISTANCE CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. REGULATORY MATTERS (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. 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.
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 may not be sold, assigned,
transferred, pledged or otherwise encumbered for a period of not less than one
year but not greater than two years.
8
<PAGE>
U.S. LONG DISTANCE CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. SUBSEQUENT EVENTS
On May 13, 1996, the Company's Board of Directors adopted a plan to 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 has approved the
distribution of the outstanding shares of common stock of its newly 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 is subject to satisfaction of
certain conditions, including receipt of professional opinions and regulatory
review by the Securities and Exchange Commission. If all conditions are
satisfied, the spinoff is expected to be completed prior to the end of fiscal
year 1996. As a result of the Board's decision, 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 $17,932,000 and $26,947,000 for the three months
ended March 31, 1995 and 1996, respectively, and $34,942,000 and $50,301,000 for
the six months ended March 31, 1995 and 1996, respectively. Net assets of the
discontinued operations at March 31, 1996 consisted primarily of current assets
and property and equipment amounting to $122,295,000 and liabilities of
$87,839,000.
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, ONETIME 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 six-month periods ended
March 31, 1996 and 1995. 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 March 31.
On May 13, 1996, the Company's Board of Directors adopted 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 has approved the distribution
of the outstanding shares of common stock of its newly 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 is subject to satisfaction of certain conditions,
including receipt of professional opinions and regulatory review by the
Securities and Exchange Commission. If all conditions are satisfied, the spinoff
is expected to be completed by the end of fiscal year 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 will enter 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 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 Expense
Sharing Agreement, whereby USLD and Billing agree to pay certain usage charges
and share certain expenses relating to the operation of an airplane. It is the
intention of USLD and Billing that
10
<PAGE>
the Transitional Service and Sublease Agreement, the Zero Plus-Zero Minus
Billing and Information Management Services Agreement, the Telecommunications
Agreement, and the Expense Sharing Agreement reflect terms and conditions
similar to those that would have been arrived at by independent parties
bargaining at arm's length.
As a result of the Board's decision to spinoff Billing, 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. The operating results of Billing for the three
and six-month periods ended March 31, 1995 and 1996 are discussed in a separate
section below. 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 32% in the second quarter of 1996 to $43.7 million from
$33.0 million in the second quarter of 1995. Revenues increased 27% in the
six-month period ended March 31, 1996, compared to the corresponding period of
1995. The Company's gross profit margin was 33.9% and 33.7% during the quarter
and six months ended March 31, 1996, respectively, compared to 34.4% and 34.8%
during the same periods of 1995.
The Company's selling, general and administrative ("SG&A") expenses as a
percentage of revenues increased in the quarter ended March 31, 1996 to 29.6%
from 29.2% in the prior year comparable quarter. SG&A expenses as a percentage
of revenues were 29.2% in the first six months of 1996 compared to 29.6% in the
corresponding period of 1995. Depreciation and amortization expenses as a
percentage of revenues were 6.7% and 6.8% during the quarter and six months
ended March 31, 1996, respectively, compared to 7.4% and 7.3% during the same
periods of 1995.
Loss from continuing operations of $1.1 million was reported for the quarter
ended March 31, 1996, compared to $700,000 during the same quarter of the prior
year. For the first six months of 1996, loss from continuing operations was $1.9
million compared to $1.3 million during the same period in the prior year. The
Company reported net income of $3.9 million, or $0.26 per share, for the second
quarter of 1996 compared to $2.4 million, or $0.17 per share, in the comparable
prior year quarter. Net income for the six-month period ended March 31, 1996 was
$7.0 million, or $0.47 per share, compared to $4.7 million, or $0.33 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
six-month periods ended March 31, 1995 and 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH SIX MONTHS ENDED MARCH
31, 31,
------------------------ ------------------------
1995 1996 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenues:
Direct dial long distance services........................ 60.3% 66.5% 60.5% 64.9%
Operator services......................................... 39.7 33.5 39.5 35.1
----- ----- ----- -----
Total operating revenues................................ 100.0 100.0 100.0 100.0
Operating expenses:
Cost of services.......................................... 65.6 66.1 65.2 66.3
Selling, general and administrative....................... 29.2 29.6 29.6 29.2
Depreciation and amortization............................. 7.4 6.7 7.3 6.8
----- ----- ----- -----
Loss from continuing amortization....................... (2.1)% (2.5)% (2.0)% (2.3)%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
11
<PAGE>
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO
THREE MONTHS ENDED MARCH 31, 1995
OPERATING REVENUES
Revenues in the second quarter of 1996 increased by 32% to $43.7 million
from $33.0 million in the second quarter of 1996. Growth in direct dial long
distance services and operator services revenues accounted for $9.2 million and
$1.5 million, respectively, of the total increase in revenues.
DIRECT DIAL LONG DISTANCE SERVICES. Direct dial long distance services
revenue increased 46% to $29.0 million in the second quarter of 1996 compared to
$19.9 million in the second 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 both its direct dial long distance and
operator services businesses. However, because direct dial long distance
services represent the largest market in which the Company is active, 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 $14.6 million in the
second quarter of 1996 compared to $13.1 million in the second quarter of 1995.
The increase in revenue was primarily attributable to the increase in the number
of calls processed. The Company processed 4.2 million operator services calls in
the second quarter of 1996 compared to 3.8 million in the second quarter of
1995. Along with the increased call volumes, revenues also increased due to an
improvement in the Company's revenue collection percentage and an increase in
fixed charges per call. These fixed charges included operator services charges
and automated call processing charges. The Company serviced an average of
approximately 67,500 pay telephones and 121,100 hospitality rooms per month for
the quarter ended March 31, 1996, compared to an average of approximately 52,400
pay telephones and 129,600 hospitality rooms per month for the quarter ended
March 31, 1995. Although the Company has managed to steadily increase operator
services revenues, these revenues have been, and will continue to be, affected
by several factors, including an increase in the percentage of pay 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").
OPERATING EXPENSES
COST OF SERVICES. The gross profit margin of 33.9% reported for the quarter
ended March 31, 1996 decreased from 34.4% achieved in the comparable prior year
quarter. This decrease is due to the increase in the Company's lower gross
margin direct dial long distance services revenues as a percentage of total
revenues. Such revenues accounted for 67% of the Company's total revenues for
the second quarter of 1996 compared to 60% for the corresponding quarter of
1995. Despite the overall margin decline caused by revenue mix, the operator
service margin remained flat from period to period while the direct dial long
distance services margin increased from the prior year. The direct dial long
distance services margin has increased as a result of continued improvements in
networking efficiencies and reductions in network costs. 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 second quarter
of 1996 were $12.9 million, representing 29.6% of revenues, compared to $9.6
million in the second quarter of 1995, or 29.2% of revenues. SG&A expenses as a
percentage of revenues increased from the prior year quarter primarily as a
result of increased bad debt expense as a percentage of revenue due to the
bankruptcy of a significant customer. This increase was slightly offset by
reductions in spending due to increased efficiencies.
12
<PAGE>
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
$2.9 million in the second quarter of 1996, representing 6.7% of revenues,
compared with $2.4 million in the corresponding prior year quarter, representing
7.4% of revenues. The decrease in such expense as a percentage of revenues is
primarily attributable to the increase in revenues from the prior year quarter.
LOSS FROM CONTINUING OPERATIONS
Loss from continuing operations in the second quarter of 1996 increased to
$1.1 million from $700,000 in the second quarter of 1995. Loss from continuing
operations as a percentage of revenue increased to 2.5% in the second quarter of
1996 from 2.1% in the prior year quarter.
OTHER INCOME/EXPENSE
Net other expense decreased slightly to $214,000 in the second quarter of
1996 from $240,000 in the second 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 $3.9 million in the second quarter of
1996 compared to net income of $2.4 million in the second quarter of 1995. Net
income for the second quarter of 1996 reflected continued growth in revenues.
SIX MONTHS ENDED MARCH 31, 1996 COMPARED TO
SIX MONTHS ENDED MARCH 31, 1995
OPERATING REVENUES
Revenues in the six-month period ended March 31, 1996 increased by 27% to
$83.4 million from $65.9 million in the same period of 1995. Growth in direct
dial long distance services and operator services revenues accounted for $14.2
million and $3.3 million, respectively, of the total increase in revenues.
DIRECT DIAL LONG DISTANCE SERVICES. Direct dial long distance services
revenue increased 36% to $54.1 million in the six-month period ended March 31,
1996 compared to $39.9 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 $29.3 million in the first
six months of 1996 compared to $26.0 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 8.5 million operator services calls in
the first six months of fiscal 1996 compared to 8.1 million in the first six
months of fiscal 1995. Along with the increased call volumes, revenues also
increased due to an improvement in the Company's revenue collection percentage
and an increase in fixed charges per call. These fixed charges included operator
services charges and automated call processing charges. The Company serviced an
average of approximately 66,800 pay telephones and 126,400 hospitality rooms per
month for the six-month period ended March 31, 1996, compared to an average of
approximately 52,700 pay telephones and 125,900 hospitality rooms per month for
the six-month period ended March 31, 1995. Although the Company has managed to
steadily increase operator services revenues, these revenues have been, and will
continue to be, affected by several factors, including an increase in the
percentage of pay 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").
OPERATING EXPENSES
COST OF SERVICES. The gross profit margin of 33.7% reported for the
six-month period ended March 31, 1996 decreased from 34.8% achieved in the
comparable prior year period. This decline is
13
<PAGE>
due to an increase in the Company's lower margin direct dial long distances
services revenue as a percentage of total revenue. Such revenues accounted for
65% of the Company's total revenues for the six-month period ended March 31,
1996 compared to 61% for the six-month period ended March 31, 1995.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses for the six-month period
ended March 31, 1996 were $24.3 million, representing 29.2% of revenues,
compared to $19.5 million in the same period of 1994, or 29.6% of revenues.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
$5.7 million in the six-month period ended March 31, 1996 compared with $4.8
million in the corresponding prior year period. Depreciation and amortization
expense as a percentage of revenues decreased to 6.8% in the first six 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 six months of 1996 amounted to
$1.9 million, compared to a loss of $1.3 million in the same period of 1995.
Loss from continuing operations as a percentage of revenues increased to 2.3%
during the six-month period ended March 31, 1996 from 2.0% during the prior year
comparable period.
OTHER INCOME/EXPENSE
Net other expense decreased to $402,000 in the six-month period ended March
31, 1996 from $516,000 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 $7.0 million in the first six months of
1996 compared to a $4.7 million in the same period of 1995. Net income for the
six-month period ended March 31, 1996 reflected continued growth in revenues.
OPERATING RESULTS OF DISCONTINUED BILLING GROUP BUSINESS
The following table reflects the operations of Billing for the three and
six-month periods ended March 31, 1995 and 1996, which are reflected as
discontinued operations on the USLD Condensed Consolidated Statements of Income.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- --------------------
1995 1996 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenues...................................... $ 17,932 $ 26,947 $ 34,942 $ 50,301
Gross profit............................................ 6,695 10,108 12,966 18,156
Selling, general and administrative expenses............ 2,200 2,963 4,319 5,356
Operating income........................................ 4,873 7,968 9,402 14,230
Net income from discontinued operations................. 3,102 5,022 6,013 8,969
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996. For the three months ended March 31,
1996, revenues increased 50% from the comparable period of the prior year. Gross
profit margins increased slightly from 37.3% to 37.5% while SG&A expenses as a
percent of revenue decreased from 12.3% to 11.0%. Operating income as a
percentage of revenue increased to 29.6% in 1996 from 27.2% during the prior
year period. Net income from discontinued operations in 1996 increased 62% from
the comparable period in 1995.
14
<PAGE>
SIX MONTHS ENDED MARCH 31, 1996. For the six months ended March 31, 1996,
revenues increased 44% from the comparable period of the prior year. Gross
profit margins declined from 37.1% to 36.1% while SG&A expenses as a percent of
revenue decreased from 12.4% to 10.6%. Operating income as a percentage of
revenue increased to 28.3% in 1996 from 26.9% during the prior year period. Net
income from discontinued operations in 1996 increased 49% from the comparable
period in 1995.
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
six-month periods ended March 31, 1995 and March 31, 1996. Included below is
supplemental pro forma financial information that management believes is
important to provide a more complete 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, as well as for the
six-month periods ended March 31, 1995 and March 31, 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 March 31, 1996 is also presented which gives effect to the
Distribution as if it had occurred on March 31, 1996. The pro forma adjustments
reflect the anticipated terms of the Distribution Agreement and the related
spinoff agreements, which are expected to have a continuing impact on the
Company. Neither the Condensed Consolidated Pro Forma Statements of Income nor
the Condensed Consolidated Pro Forma Balance Sheet reflects an estimate of the
direct costs incurred in connection with the Distribution. Such costs are
estimated to range from approximately $8.5 million to approximately $10.5
million. 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
are forward-looking and 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 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 March 31, 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
IN THOUSANDS
(UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS
SEPTEMBER 30, ENDED MARCH 31,
------------------------------- --------------------
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 $ 39,864 $ 54,080
Operator services.................................... 50,446 54,707 59,567 26,015 29,283
--------- --------- --------- --------- ---------
Total operating revenues........................... 80,119 117,541 144,050 65,879 83,363
Cost of services....................................... 47,403 72,944 94,038 42,930 55,260
--------- --------- --------- --------- ---------
Gross profit......................................... 32,716 44,597 50,012 22,949 28,103
Selling, general and administrative (B)................ 27,804 38,541 42,030 19,505 24,311
Depreciation and amortization.......................... 5,060 8,424 10,032 4,784 5,709
--------- --------- --------- --------- ---------
Loss from operations................................. (148) (2,368) (2,050) (1,340) (1,917)
Other income (expense), net............................ (1,561) (866) (549) (516) (402)
--------- --------- --------- --------- ---------
Loss before provision for income taxes................. (1,709) (3,234) (2,599) (1,856) (2,319)
Provision for income taxes (C)......................... 0 0 0 0 0
--------- --------- --------- --------- ---------
Net loss before extraordinary items.................... (1,709) (3,234) (2,599) (1,856) (2,319)
Extraordinary items.................................... (316) 0 0 0 0
--------- --------- --------- --------- ---------
Net loss............................................... ($ 2,025) $ (3,234) $ (2,599) $ (1,856) $ (2,319)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Gross profit margin.................................... 40.8% 37.9% 34.7% 34.8% 33.7%
Selling, general and administrative % of revenue....... 34.7% 32.8% 29.2% 29.6% 29.2%
Earnings before interest, taxes, depreciation and
amortization ("EBITDA") % of revenue.................. 6.1% 5.1% 5.5% 5.2% 4.5%
</TABLE>
16
<PAGE>
U.S. LONG DISTANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
AT MARCH 31, 1996
IN THOUSANDS
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
--------- ------------- ---------
<S> <C> <C> <C>
ASSETS
Total current assets....................................................... $ 29,474 $ 13,561(D) $ 43,035
Net property and equipment................................................. 28,633 28,633
Other assets, net.......................................................... 18,517 18,517
--------- ------------- ---------
Total assets............................................................. $ 76,624 $ 13,561 $ 90,185
--------- ------------- ---------
--------- ------------- ---------
LIABILITIES AND EQUITY
Total current liabilities.................................................. $ 21,529 $ 21,529
Long-term obligations...................................................... 12,868 12,868
Stockholders' equity....................................................... 42,227 13,561 55,788
--------- ------------- ---------
Total liabilities and stockholders' equity............................... $ 76,624 $ 13,561 $ 90,185
--------- ------------- ---------
--------- ------------- ---------
Working capital............................................................ $ 7,945 $ 13,561 $ 21,506
Current ratio.............................................................. 1.37:1 2.00:1
</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 will be established 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 that will be 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) -- 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
anticipated 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 balance
sheet following the transfer. The calculation of the cash amount to be
transferred by Billing to USLD will be based on current assets and
current liabilities as reported on the USLD balance sheet on the
month-end date immediately preceding the Distribution and is subject to
change at any time prior to execution of the Distribution Agreement in
light of changes in the financial position and results of operations of
Billing and USLD. Had the Distribution Date been March 31, 1996, the
amount of cash that would have been transferred from Billing to USLD to
meet this working capital requirement would have been $13,561,000.
17
<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, frame relay, paging and internet 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.
The Company recently joined the Associated Communication Companies of America
("ACCA"). The ACCA, 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 benefits from this arrangement are
expected to be phased in over the next nine months. 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 initially identified in
excess of $2 million of cost reductions and is in the process of identifying
additional cost savings. 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 $26.6 million at March 31, 1996 from
$22.9 million at September 30, 1995. As an additional source of cash
availability, the Company has 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 $23.7 million at March
31, 1996. The credit facility also allows the Company to borrow against its own
operator services and direct dial long distance services accounts receivable. At
March 31, 1996, the Company had approximately $21.3 million available for
borrowing and no amounts borrowed against its own eligible receivables under
this credit facility. Working capital was $37.7 million at March 31, 1996,
compared to $29.0 million at September 30, 1995. The Company's current ratio was
1.4:1 and 1.3:1 at March 31, 1996 and September 30, 1995, respectively.
Additionally, the Company's cash flow provided by operations was $17.4 million
for the six-month period ended March 31, 1996, compared to $8.3 million for the
same period of the prior year.
Capital expenditures amounted to approximately $4.7 million during the first
six months of 1996. These expenditures were primarily related to the purchase of
telecommunications equipment and computer equipment and software. During the
remaining six months of 1996, the Company anticipates investing between $5 to
$10 million of additional funds to service the Company's projected
18
<PAGE>
growth. Approximately $4 million to $6 million of these capital expenditures are
expected to be purchases of telecommunications equipment, approximately $1
million to $3 million are expected to be purchases of computer hardware and
software to develop systems to support the anticipated continued growth of the
Company's business and the remainder is expected to be for purchases of office
furniture and equipment and payments for leasehold improvements. 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. 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 may not be sold, assigned,
transferred, pledged or otherwise encumbered for a period of not less than one
year but not greater than two years. During the six months ended March 31, 1996,
115,000 shares of the Company's common stock were awarded pursuant to the
Restricted Stock Plan.
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.
19
<PAGE>
The SEC's Division of Enforcement 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 TRADING IN THE SECURITIES OF VALUE-ADDED
COMMUNICATIONS, INC. (HO-2765)) on August 25, 1993. The investigation relates to
the trading in the securities of both the Company and Value-Added
Communications, Inc. ("VAC"), an operator services provider based in Dallas,
Texas. A proposed merger between the Company and VAC was terminated in February
1993. Specifically, the SEC has alleged, among other things, that certain
individuals may have employed devices, schemes or artifices to defraud others in
connection with the purchase or sale of the securities of either the Company,
VAC or both. The SEC may impose a variety of civil, criminal and administrative
remedies and/or sanctions against any individual or entity found to have
violated the federal securities laws. The Company is not aware of any facts or
circumstances that would indicate that the Company or any of its management
violated the federal securities laws by trading on material, nonpublic
information.
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.
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.
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:
<TABLE>
<CAPTION>
EXHIBITS BY REFERENCE DESCRIPTION PAGE
- - ----------- ----------------- ------------------------------------------------------------- -----
<S> <C> <C> <C>
11.1 Filed herewith Computation of Earnings Per Share 22
27.1 Filed herewith Financial Data Schedule 23
</TABLE>
(b) Current Reports on Form 8-K:
None.
20
<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)
<TABLE>
<S> <C>
Date: May 14, 1996 By: /s/ MICHAEL E. HIGGINS
----------------------------------------
Michael E. Higgins
SENIOR VICE PRESIDENT
CHIEF FINANCIAL OFFICER
Date: May 14, 1996 By: /s/ PHILLIP J. STORIN
----------------------------------------
Phillip J. Storin
VICE PRESIDENT, CORPORATE CONTROLLER
</TABLE>
21
<PAGE>
EXHIBIT 11.1
U.S. LONG DISTANCE CORP. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- --------------------
1995 1996 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE CALCULATION:
Earnings (loss):
Continuing operations............................................ $ (663) $ (1,078) $ (1,304) $ (1,923)
Discontinued operations.......................................... 3,102 5,022 6,013 8,969
--------- --------- --------- ---------
Net income applicable to common stock............................ $ 2,439 $ 3,944 $ 4,709 $ 7,046
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares:
Weighted average number of shares of common stock outstanding.... 13,110 14,447 13,022 14,272
Weighted average common stock equivalents applicable to stock
options and warrants............................................ 1,387 742 1,330 749
--------- --------- --------- ---------
Weighted average shares used for computation..................... 14,497 15,189 14,352 15,021
--------- --------- --------- ---------
--------- --------- --------- ---------
Primary earnings (loss) per common share:
Continuing operations............................................ (0.04) (0.07) (0.09) (0.13)
Discontinued operations.......................................... 0.21 0.33 0.42 0.60
--------- --------- --------- ---------
Net income applicable to common stock............................ $ 0.17 $ 0.26 $ 0.33 $ 0.47
--------- --------- --------- ---------
--------- --------- --------- ---------
FULLY DILUTED EARNINGS PER SHARE CALCULATION:
Earnings (loss):
Continuing operations............................................ $ (663) $ (1,078) $ (1,304) $ (1,923)
Discontinued operations.......................................... 3,102 5,022 6,013 8,969
--------- --------- --------- ---------
Net income applicable to common stock............................ $ 2,439 $ 3,944 $ 4,709 $ 7,046
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares:
Weighted average number of shares of common stock outstanding.... 13,110 14,447 13,022 14,272
Weighted average common stock equivalents applicable to stock
options and warrants............................................ 1,408 893 1,609 1,018
--------- --------- --------- ---------
Weighted average shares used for computation..................... 14,518 15,340 14,631 15,290
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully diluted earnings per common share:
Continuing operations............................................ (0.04) (0.07) (0.09) (0.13)
Discontinued operations.......................................... 0.21 0.33 0.41 0.59
--------- --------- --------- ---------
Net income applicable to common stock............................ $ 0.17 $ 0.26 $ 0.32 $ 0.46
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR U.S. LONG DISTANCE CORP
AS OF AND FOR THE SIX-MONTH PERIOD ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 26,597
<SECURITIES> 0
<RECEIVABLES> 53,491
<ALLOWANCES> 2,399
<INVENTORY> 0
<CURRENT-ASSETS> 143,756
<PP&E> 63,204
<DEPRECIATION> 29,123
<TOTAL-ASSETS> 197,019
<CURRENT-LIABILITIES> 106,106
<BONDS> 11,227
0
0
<COMMON> 150
<OTHER-SE> 76,533
<TOTAL-LIABILITY-AND-EQUITY> 197,019
<SALES> 0
<TOTAL-REVENUES> 83,363
<CGS> 0
<TOTAL-COSTS> 55,260
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,664
<INTEREST-EXPENSE> 691
<INCOME-PRETAX> (2,319)
<INCOME-TAX> (396)
<INCOME-CONTINUING> (1,923)
<DISCONTINUED> 8,969
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,046
<EPS-PRIMARY> .47
<EPS-DILUTED> .46
</TABLE>
