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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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
___________
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, 1997:
NUMBER OF SHARES
TITLE OF CLASS OUTSTANDING
-------------- ----------------
Common Stock, $0.01 par value 16,557,023
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U.S. LONG DISTANCE CORP. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 1997 and
September 30, 1996.......................................... 3
Consolidated Statements of Income - For the Three and Nine
Months Ended June 30, 1997 and 1996......................... 4
Consolidated Statements of Cash Flows - For the Nine Months
Ended June 30, 1997 and 1996................................ 5
Notes to Interim Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................. 21
Item 5. Other Information............................................. 21
Item 6. Exhibits and Reports on Form 8-K.............................. 22
(a) Exhibits............................................. 22
(b) Current Reports on Form 8-K.......................... 22
SIGNATURES.............................................................. 23
2
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PART I - FINANCIAL INFORMATION
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
U.S. LONG DISTANCE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
(UNAUDITED)
ASSETS
JUNE 30, SEPTEMBER 30,
1997 1996
-------- ------------
Current assets:
Cash and cash equivalents............................. $ 8,211 $ 8,842
Accounts receivable, net.............................. 47,626 35,867
Prepaids and other.................................... 6,785 6,002
-------- -------
Total current assets............................ 62,622 50,711
Property and equipment, net........................... 33,372 29,577
Equipment held under capital leases, net.............. 81 282
Other assets:
Excess of cost over net assets acquired, net....... 13,377 13,804
Other assets, net.................................. 7,110 4,870
-------- -------
Total assets.................................... $116,562 $99,244
-------- -------
-------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable................................ $ 17,611 $10,909
Accrued liabilities................................... 7,942 13,581
Current portion of long-term debt..................... 5,993 5,854
Current portion of obligations under capital leases... 122 294
-------- -------
Total current liabilities....................... 31,668 30,638
Other liabilities..................................... 5,321 52
Long-term debt, less current portion.................. 11,085 10,146
Obligations under capital leases, less current
portion.............................................. 58 143
-------- -------
Total liabilities............................... 48,132 40,979
Commitments and contingencies (See Notes 7 and 9)
Stockholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares
authorized; no shares issued or outstanding at
June 30, 1997 or September 30, 1996.................. 0 0
Common stock, $0.01 par value, 50,000,000 shares
authorized; 16,368,096 and 15,255,977 shares issued
and 16,163,995 and 15,051,876 shares outstanding at
June 30, 1997 and September 30, 1996, respectively... 164 153
Additional paid-in capital............................ 61,494 54,554
Retained earnings..................................... 8,679 5,465
Treasury stock........................................ (1,907) (1,907)
-------- -------
Total stockholders' equity...................... 68,430 58,265
-------- -------
Total liabilities and stockholders' equity...... $116,562 $99,244
-------- -------
-------- -------
The accompanying notes are an integral part
of these consolidated financial statements.
3
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U.S. LONG DISTANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1997 1996 1997 1996
------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating revenues:
Direct dial long distance services................... $45,248 $ 31,306 $120,355 $ 85,386
Operator services.................................... 14,299 15,378 40,911 44,661
Local services....................................... 511 0 707 0
------- -------- -------- --------
Total operating revenues.......................... 60,058 46,684 161,973 130,047
Cost of services....................................... 40,015 30,498 107,512 85,759
------- -------- -------- --------
Gross profit......................................... 20,043 16,186 54,461 44,288
Selling, general and administrative expense............ 13,777 13,139 38,131 37,450
Non-recurring special charge (See Note 4).............. 1,233 0 1,233 0
Direct spin-off costs.................................. 0 6,628 0 6,628
Depreciation and amortization expense.................. 2,823 2,702 8,170 8,411
------- -------- -------- --------
Income (loss) from continuing operations............. 2,210 (6,283) 6,927 (8,201)
Other income (expense):
Interest income...................................... 91 228 417 650
Interest expense..................................... (439) (361) (1,122) (1,052)
Other, net........................................... (18) ( 26) (12) (158)
------- -------- -------- --------
Total other expense............................... (366) (159) (717) (560)
Income (loss) from continuing operations before
income tax benefit (provision)........................ 1,844 (6,442) 6,210 (8,761)
Income tax benefit (provision)......................... (747) 2,427 (2,515) 2,822
------- -------- -------- --------
Net income (loss) from continuing operations........... 1,097 (4,015) 3,695 (5,939)
Discontinued operations (See Notes 1 and 3):
Income from discontinued operations, net of
income taxes of $2,645 and $8,142, three and
nine months ended June 30, 1996, respectively....... 0 4,317 0 13,287
------- -------- -------- --------
Net income............................................. $ 1,097 $ 302 $ 3,695 $ 7,348
------- -------- -------- --------
------- -------- -------- --------
Net income (loss) per common share:
Continuing operations................................ $ 0.07 $ (0.25) $ 0.22 $ (0.39)
Discontinued operations.............................. 0.00 0.27 0.00 0.87
------- -------- -------- --------
Net income per common share.......................... $ 0.07 $ 0.02 $ 0.22 $ 0.48
------- -------- -------- --------
------- -------- -------- --------
Weighted average common shares and common share
equivalents outstanding............................... 16,847 15,715 16,473 15,252
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
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U.S. LONG DISTANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
JUNE 30,
---------------------
1997 1996
-------- --------
Cash flows from operating activities:
Net income (1997), net loss from continuing
operations (1996) $ 3,695 $ (5,939)
Adjustments to reconcile net income (1997), net
loss from continuing operations (1996) to net
cash provided by operating activities:
Depreciation and amortization 8,170 8,411
Loss on disposition of equipment 36 206
Provision for losses on accounts receivable 6,387 5,350
Deferred compensation 0 476
Changes in operating assets and liabilities:
Increase in accounts receivable (11,084) (17,008)
Decrease (increase) in prepaids and other (2,027) 410
Increase in accounts payable 6,139 3,498
Increase (decrease) in accrued liabilities (5,972) 9,797
Increase (decrease) in other liabilities 3,357 (1,677)
-------- --------
Net cash provided by operating activities 8,701 3,524
-------- --------
Net cash provided by discontinued operations 0 2,894
Cash flows from investing activities:
Purchases of property and equipment (9,756) (7,640)
Proceeds from sale of assets 0 46
Other investing activities (2,844) 2,061
-------- --------
Net cash used in investing activities (12,600) (5,533)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of debt 10,284 0
Payments on debt (9,259) (4,446)
Payments on capital leases (257) (385)
Proceeds from issuance of common stock 2,500 3,946
-------- --------
Net cash provided by (used in) financing activities 3,268 (885)
-------- --------
Net decrease in cash and cash equivalents (631) 0
Cash and cash equivalents, beginning of period 8,842 0
-------- --------
Cash and cash equivalents, end of period $ 8,211 $ 0
-------- --------
-------- --------
The accompanying notes are an integral
part of these consolidated financial statements.
5
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U.S. LONG DISTANCE CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The interim 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 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 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 fiscal year ended September 30, 1996. Certain prior period amounts have
been reclassified for comparative purposes and to reflect the spin-off
discussed in Note 3 below.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company recognizes revenue from its direct dial long distance,
operator and local services as such services are performed.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," which establishes standards for computing and presenting earnings per
share ("EPS") for entities with publicly held common stock or potential common
stock. SFAS No. 128 simplifies the standards for computing EPS previously found
in Accounting Principles Board Opinion No. 15, "Earnings Per Share", and makes
them comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS, which excludes dilution. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures. SFAS No. 128 is
effective for financial statements for periods ending after December 15, 1997
and early adoption is not permitted. Had SFAS No. 128 been applied, pro forma
basic EPS would have been $0.07 and $0.24 for the three and nine months ended
June 30, 1997, respectively, and $0.02 and $0.51 for the three and nine months
ended June 30, 1996, respectively. Pro forma diluted EPS would have been $0.07
and $0.22 for the three and nine months ended June 30, 1997, respectively, and
$0.02 and $0.48 for the three and nine months ended June 30, 1996,
respectively. Management of the Company does not anticipate the adoption of
SFAS No. 128 will have a material impact on the Company's financial position or
results of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which requires that certain items currently reported in stockholders'
equity, such as foreign currency translation adjustments and gains and losses
on certain securities, be shown in a financial statement, displayed as
prominently as other financial statements. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997 and requires reclassification of
earlier financial statements for comparative purposes. Management of the
Company does not anticipate the adoption of SFAS No. 130 will have a material
impact on the Company's financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which requires the disclosure of segment
data based on how management makes decisions about allocating resources to
segments and measuring their performance. It also requires entity-wide
disclosures about the products and services an entity provides, the material
countries in which it holds assets and reports revenues and about its major
customers. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," and is effective for fiscal years beginning
after December 15, 1997. Management of the Company does not anticipate the
adoption of SFAS No. 131 will have a material impact on the
6
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Company's financial position or results of operations.
NOTE 3. DISCONTINUED OPERATIONS
On August 2, 1996, the Company completed the spin-off of Billing
Information Concepts Corp. ("Billing"), its subsidiary engaged in the billing
clearinghouse and information management services business ("Billing Group
Business"). The spin-off has been accounted for as a discontinued operation
and, accordingly, the Company restated its consolidated financial statements
for all periods presented prior to that date in accordance with Accounting
Principles Board Opinion No. 30. The spin-off was a tax-free distribution of
100% of the common stock of Billing to the Company's stockholders.
Revenues of the discontinued operations of Billing were $25.7 million and
$76.0 million for the three and nine-month periods ended June 30, 1996,
respectively. Net income of the discontinued operations of Billing was $4.3
million and $13.3 million for the three and nine-month periods ended June 30,
1996, respectively.
NOTE 4. NON-RECURRING SPECIAL CHARGE
Effective June 2, 1997, Parris H. Holmes, Jr. resigned as Chairman of the
Board of the Company. This action completed the separation of the Company and
its former wholly owned subsidiary, Billing, that began with the distribution
of all of the common stock of Billing to the stockholders of the Company in
August 1996. The Company paid Mr. Holmes an $875,000 cash bonus and granted him
25,000 shares of restricted common stock, for a total $1.2 million one-time
charge during the three and nine-month periods ended June 30, 1997. Larry M.
James, Chief Executive Officer, was named by the Company's Board of Directors
to serve as Chairman.
NOTE 5. STOCKHOLDERS' EQUITY
During the nine months ended June 30, 1997, employees and former employees
of the Company exercised stock options to purchase an aggregate of 677,446
common shares at exercise prices ranging from $0.78 to $4.76 per share,
resulting in aggregate consideration to the Company of approximately $1.9
million in cash. In addition, the Company issued an aggregate of 59,040 common
shares during the nine months ended June 30, 1997 to participants in the U.S.
Long Distance Corp. Employee Stock Purchase Plan, resulting in aggregate
consideration to the Company of approximately $219,000 in cash. Additionally,
during the nine months ended June 30, 1997, the Company recognized a tax
benefit of $3.6 million associated with stock options exercised and the vesting
of certain stock grants. These tax benefits were recorded as an increase in
additional paid-in capital.
During the nine months ended June 30, 1997, customers of the Company
exercised stock purchase warrants to purchase an aggregate of 112,500 common
shares at an exercise price of $3.25, resulting in aggregate consideration to
the Company of approximately $366,000 in cash.
NOTE 6. STATEMENTS OF CASH FLOWS
Cash payments and non-cash activities during the periods indicated were as
follows:
NINE MONTHS ENDED
JUNE 30,
-----------------
1997 1996
------- ------
(IN THOUSANDS)
Cash payments for income taxes $ 1,270 $ 44
Cash payments for interest 1,123 1,088
Non-cash investing and financing activities:
Assets acquired in connection with pooling of interests 471 0
Liabilities assumed in connection with
pooling of interests 690 0
Common stock issued in connection with
pooling of interests 250 0
Tax benefit of options exercised 2,527 0
Tax benefit of stock grants 1,080 0
Issuance of restricted stock 358 0
Grant of warrants to purchase common stock 235 0
Return of escrowed treasury stock 0 118
7
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NOTE 7. INCOME TAXES
The Company has been notified by the Internal Revenue Service ("IRS") that
a fiscal 1992 transaction between a wholly owned foreign subsidiary (Mega Plus
Dialing, Inc.) and its U.S. subsidiary (Billing Information Concepts, Inc.,
formerly Zero Plus Dialing, Inc.) is proposed to be treated differently by the
IRS than originally characterized by the Company. The IRS district office has
issued a report that proposed an assessment of taxes, penalties and interest.
The assessment has been appealed to the appellate division of the IRS. The
Company and its tax counsel believe the possibility that the IRS will prevail
in this matter is remote. Consequently, no accrual for this potential liability
or any associated taxes, interest or penalties has been made. At the present
time, management of the Company does not anticipate this matter will have a
material impact on the Company's financial position or results of operations.
NOTE 8. RELATED PARTY TRANSACTIONS
Until June 2, 1997, the Company and Billing shared a common individual on
their respective boards of directors. Therefore, the companies were considered
related parties for financial disclosure purposes through June 2, 1997. At
September 30, 1996, the Company had accounts receivable from Billing of $1.3
million, as well as notes receivable of $1.0 million. In addition, the Company
had accounts payable to Billing of $1.1 million at September 30, 1996.
Operating revenues recognized from Billing were $364,000 and $1.1 million for
the quarter through June 2, 1997 and the three-month period ended June 30,
1996, respectively. Operating revenues recognized from Billing were $1.9
million and $2.7 million for the year-to-date period through June 2, 1997 and
the nine-month period ended June 30, 1996, respectively. In addition, the
Company incurred operating expenses related to billing and collection fee
charges from Billing of $901,000 and $1.3 million for quarter through June 2,
1997 and the three-month period ended June 30, 1996, respectively. Operating
expenses related to billing and collection fee charges from Billing of $3.4
million and $3.9 million were incurred for the year-to-date period through June
2, 1997 and the nine-month period ended June 30, 1996, respectively.
Historically, the Company has obtained financing for capital expenditures
through term debt and capital lease agreements that were guaranteed and cross-
collateralized by the Company and Billing. These debt agreements were
negotiated based on the strength of the consolidated financial statements,
earnings and cash flow of the consolidated group. Most of these debt agreements
were secured by the assets of all the subsidiaries within the consolidated
group. The Company has received from certain lenders loan agreement amendments
or separate loan agreements whereby the subject indebtedness will be secured by
only the Company's assets. In other cases, the existing guarantees and security
arrangements between the Company and Billing will remain in place for the
duration of the facility. In this regard, the Company has agreed to pay Billing
a credit support fee of 1% of the average annual outstanding balance.
NOTE 9. 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.
NOTE 10. REGULATORY MATTERS
BILLED PARTY PREFERENCE
In April 1992, the Federal Communications Commission ("FCC") tentatively
proposed adopting a "Billed Party Preference" ("BPP") system for automatically
routing operator assisted calls to each caller's pre-selected carrier,
fundamentally changing the nature of the operator services industry. Comments
were requested by the FCC during 1992 and again in 1994. In each case, industry
participants overwhelmingly opposed the idea as too costly, relative to the
perceived benefits of such a system.
On March 9, 1995, the FCC requested industry comment on two proposals it
had recently received relative to the BPP proceeding. In an ex-parte petition,
the National Association of Attorney's General ("NAAG") suggested that the FCC
modify its current branding requirement such that operator service providers
("OSPs") would be required to announce at the beginning
8
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of each call more specific information for obtaining access to alternate
carriers (the "NAAG Petition"). Another petition filed by a coalition of
industry members, including most of the Regional Bell Operating Companies
("RBOCs"), two competitive access providers, the American Public
Communications Counsel ("APCC") and the Competitive Telecommunications
Association ("CompTel"), recommended that the FCC impose certain rate
thresholds for interstate operator assisted services, which the FCC would
presume to be reasonable, and any OSP electing to charge rates higher than
such threshold would be required to first prove to the FCC that such rates
are justified based upon the underlying costs of the service (the "APCC Rate
Cap Proposal"). The NAAG Petition was proposed to remain in effect until such
time that BPP is adopted and fully implemented. The APCC Rate Cap Proposal
was proposed to obviate the need to consider any further action regarding BPP.
Subsequently, in June 1996, the FCC issued a Second Further Notice of
Proposed Rulemaking ("SFNPRM") in this proceeding. In it, the FCC proposed
adopting a rule which would require OSPs to announce the rates for certain
calls to the billed party prior to connecting the call, thereby allowing the
billed party to disconnect such call without incurring any unwanted charges.
In 1996, the FCC released its Second Request for Comment in the SFNPRM,
soliciting technical and other administrative details to support the proposed
announcement requirement. Most commentors objected to the discriminatory
nature of the proposal, which would have some carriers announcing rates while
others would not. If any of these proposals are adopted by the FCC, the
Company's operator service traffic could be materially adversely affected.
MFJ LEGISLATION
On February 8, 1996, President Clinton signed the Telecommunications Act
of 1996 (the "Telecommunications Act") into law. The new law allows the RBOCs
to seek authority from the FCC to allow the applicant RBOC to provide "in-
region" 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 antitrust standards 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 communications.
To date, no RBOC has been granted authority for in-region interLATA
services, because the provisions set forth above have not been satisfied by any
RBOC. However, many entities, including the Company, have reached
interconnection agreements with one or more of the RBOCs to date, and many
states have adopted rules governing local competition. It is reasonable to
expect that the conditions for RBOC entry will be met in the near future, and
carriers in the interLATA long distance business today, such as the Company,
will encounter new, formidable competition.
INTERCONNECTION ORDER
On August 8, 1996, the FCC released its Interconnection Order, designed to
implement federal regulations governing the opening of the local
telecommunications market to competition. After a Circuit Court Appeal and
temporary stay of certain aspects of this decision, the Circuit Court released
its opinion on July 18, 1997. In that opinion, the Court stated that state
regulatory agencies, and not the FCC, are authorized to establish pricing rules
for local unbundled network elements. Furthermore, the Court found that states
have jurisdiction over disputes regarding interconnection agreements between
carriers. Finally, the Court stated that Local Exchange Companies ("LECs") were
not required to offer any carrier requesting interconnection the best
components of different previously reached agreements, contrary to the FCC's
original Interconnection Order. Rather, the LECs are required to offer those
agreements in their entirety to requesting interconnectors.
The three aspects in this decision will lead to the implementation of
local competition to different degrees in each state. Furthermore, carriers
will be able to negotiate different and unique terms of interconnection with
each LEC, leading, therefore, to a disparity of opportunity to enter and
compete in the local market. To the extent that LECs offer better rates or
discounts in exchange for volume commitments or other contingencies which
cannot be met by non-first tier carriers, those carriers will be at a
competitive disadvantage. To the extent that such carriers are relying on
expeditious and non-discriminatory entry into the local telecommunications
market as an integral part of their overall growth strategy, such a development
could have a negative
9
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effect. The Company cannot determine if such developments will unfold, or, if
so, to what extent they affect the Company's efforts to enter the local
exchange market.
ACCESS CHARGE REFORM
On May 6, 1997, pursuant to their interpretation of the
Telecommunications Act, the FCC released its Access Reform Order (the "Access
Order"). The FCC sought through this decision to restructure the manner in
which interexchange carriers compensate facilities-based LECs for providing
access to their local end users. One requirement within the Access Order
would significantly shift the economic burden associated with providing
access from "direct-trunked" carriers, or long distance companies with
dedicated facilities to a particular local exchange central office, to
carriers who utilize toll tandem switching, i.e., those who used shared
access facilities to reach that same central office. The overwhelming
majority of long distance carriers today buy "tandem switched" transport,
including in many cases, the Company. However, if the price discrepancy
becomes too great between direct trunk transport and tandem switched
transport, with all other cost factors remaining constant, the Company may
be at a competitive disadvantage relative to larger, direct trunk transport
carriers. Access is an essential element to the origination and completion of
all long distance calls, and if certain entities are provided special pricing
for the same service relative to their competitors, they are thereby afforded
a formidable competitive cost advantage.
This Access Order also imposes the phase-in of replacing a usage based
carrier common line charge with a line-based flat fee to be assessed upon all
long distance companies beginning on January 1, 1998. In addition, the Access
Order requires LECs to reduce their access revenue requirements by reducing
interconnection access charges to long distance companies. Management of the
Company does not anticipate that the net effect of these modifications will
have a material impact on the Company's financial position or results of
operations.
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 such service is rendered by a 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. The
Company cannot predict whether or not any such requirement may be imposed in
any particular jurisdiction.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS - CAUTIONARY STATEMENTS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS CERTAIN "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SPECIFICALLY, ALL STATEMENTS OTHER
THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS REPORT, INCLUDING THE
OUTLOOK, REGARDING THE COMPANY'S FINANCIAL POSITION, BUSINESS STRATEGY AND
PLANS AND OBJECTIVES OF MANAGEMENT OF THE COMPANY FOR FUTURE OPERATIONS ARE
FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS 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," "COULD," "ESTIMATE," "EXPECT" AND
"INTEND" AND WORDS OR PHRASES OF SIMILAR IMPORT, AS THEY RELATE TO THE COMPANY
OR COMPANY'S MANAGEMENT, ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
SUCH STATEMENTS REFLECT THE CURRENT VIEW OF THE COMPANY WITH RESPECT TO FUTURE
EVENTS AND ARE SUBJECT TO CERTAIN 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, THE OPERATION OF THE COMPANY'S NETWORKS, TRANSMISSION COSTS,
PRODUCT INTRODUCTIONS AND ACCEPTANCE, TECHNOLOGICAL CHANGE, CHANGES IN INDUSTRY
PRACTICES, ONE-TIME EVENTS AND OTHER FACTORS DESCRIBED HEREIN ("CAUTIONARY
STATEMENTS"). ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS ARE
REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO BE
CORRECT. 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. ALL SUBSEQUENT WRITTEN
AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS
ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE
APPLICABLE CAUTIONARY STATEMENTS.
GENERAL
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, 1997 and 1996. It should be read in conjunction with the Interim
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 spin
off the Company's Billing Group Business as a separate public company. To
effect the spin-off, the Board approved the distribution of the outstanding
shares of common stock of its wholly owned subsidiary that owned and operated
the Billing Group Business, Billing, to the Company's stockholders. The
distribution was completed on August 2, 1996.
The spin-off has been accounted for as a discontinued operation, and
accordingly, the Company restated its consolidated financial statements for all
periods presented prior to that date in accordance with Accounting Principles
Board Opinion No. 30. The unaudited Consolidated Pro Forma Statements of Income
for the three and nine-month periods ended June 30, 1996 are also included and
discussed in a separate section below.
OVERVIEW
Revenues increased 29% in the third quarter of 1997 to $60.1 million from
$46.7 million in the third quarter of 1996. Revenues increased 25% in the nine-
month period ended June 30, 1997, compared to the corresponding period of 1996.
The Company's gross profit margin was 33.4% and 33.6% during the quarter and
nine months ended June 30, 1997, respectively, compared to 34.7% and 34.1%
during the same periods of 1996.
The Company's selling, general and administrative ("SG&A") expenses as a
percentage of revenues in the quarter ended June 30, 1997 decreased to 22.9%
from 28.1% in the quarter ended June 30, 1996. SG&A expenses as a percentage of
revenues were 23.5% in the first nine months of fiscal 1997 compared to 28.8%
in the corresponding period of 1996. This decrease was primarily the result of
tighter expense controls and increased efficiencies. Depreciation and
amortization expenses as a percentage of revenues decreased to 4.7% and 5.0%
during the quarter and nine months ended June 30, 1997, respectively, from 5.8%
and 6.5% during the same periods of 1996. Income from continuing operations of
$2.2 million was reported for the quarter ended June 30, 1997, compared to a
loss of $6.3 million during the same quarter of the prior year. For the first
nine months of fiscal 1997,
11
<PAGE>
income from continuing operations was $6.9 million compared to a loss of $8.2
million during the same period of the prior year.
RESULTS OF OPERATIONS
The following table presents certain items in the Consolidated Statements
of Income as a percentage of total revenues for the three and nine-month
periods ended June 30, 1997 and 1996:
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Operating revenues:
Direct dial long distance services 75.3% 67.1% 74.3% 65.7%
Operator services 23.8 32.9 25.3 34.3
Local services 0.9 0.0 0.4 0.0
----- ----- ----- -----
Total operating revenues 100.0 100.0 100.0 100.0
Operating expenses:
Cost of services 66.6 65.3 66.4 65.9
Selling, general and administrative 22.9 28.1 23.5 28.8
Non-recurring special charge 2.1 0.0 0.8 0.0
Direct spin-off costs 0.0 14.2 0.0 5.1
Depreciation and amortization 4.7 5.8 5.0 6.5
----- ----- ----- -----
Income (loss) from continuing operations 3.7% (13.5)% 4.3% (6.3)%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
OPERATING REVENUES
Revenues increased 29% in the third quarter of 1997 to $60.1 million from
$46.7 million in the third quarter of 1996. Growth in direct dial long distance
services revenue accounted for $13.9 million of the total increase in revenues
while operator services revenues decreased by $1.1 million.
DIRECT DIAL LONG DISTANCE SERVICES. Direct dial long distance services
revenue increased 45% to $45.2 million in the third quarter of 1997 compared to
$31.3 million in the third quarter of 1996. The increase in revenue is
primarily attributable to growth in the number of customers serviced.
OPERATOR SERVICES. Operator services revenue was $14.3 million in the
third quarter of 1997 compared to $15.4 million in the third quarter of 1996.
The Company processed 3.7 million operator services calls in the third quarter
of 1997 compared to 4.5 million in the third quarter of 1996. The Company
serviced an average of approximately 67,100 pay telephones and 141,000
hospitality rooms per month for the quarter ended June 30, 1997, compared to an
average of approximately 66,400 pay telephones and 127,400 hospitality rooms
per month for the quarter ended June 30, 1996. The decrease in revenue is
principally attributable to the decrease in volume of operator services calls.
The decrease in call volume is primarily attributable to 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 ("dial-around").
LOCAL SERVICES. Local service revenue was $511,000 in the third quarter
of 1997 compared to $0 in the third quarter of 1996. The Company entered the
local service market in Texas during the second quarter of 1997, and was
providing local resale service to approximately 7,100 privately owned pay
telephones in Texas at June 30, 1997.
OPERATING EXPENSES
COST OF SERVICES. The gross profit margin of 33.4% reported for the
quarter ended June 30, 1997 decreased from 34.7% achieved in the comparable
prior year quarter. This decrease is due primarily to 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 75.3% of the Company's total revenues for the third quarter of
1997 compared to 67.1% for the corresponding quarter of 1996. Also, the Company
has incurred additional fixed network costs associated with the Atlanta switch
that was installed during the second quarter of 1997. The revenue base
associated with the switch is still maturing, thus fixed costs as a percentage
of revenue are higher than normal levels. 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.
12
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses for the third quarter
of 1997 were $13.8 million, representing 22.9% of revenues, compared to
$13.1 million in the third quarter of 1996, or 28.1% of revenues. SG&A expenses
as a percentage of revenues have continued to decrease as a result of tighter
expense controls and efforts to streamline the Company's operations.
NON-RECURRING SPECIAL CHARGE. Effective June 2, 1997, Parris H. Holmes,
Jr. resigned as Chairman of the Board of the Company. The Company paid Mr.
Holmes an $875,000 cash bonus and granted him 25,000 shares of restricted
common stock, for a total $1.2 million one-time charge during the three months
ended June 30, 1997.
DIRECT SPIN-OFF COSTS. Direct spin-off costs represent only direct costs
incurred in connection with the spin-off of Billing. The $6.6 million of spin-
off costs in the third quarter of 1996 represents certain professional and
filing fees, payments relating to employment contracts and accruals for foreign
taxes payable.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
$2.8 million in the third quarter of 1997, compared to $2.7 million in the
third quarter of 1996. As a percent of revenues, depreciation and amortization
expense declined to 4.7% in the third quarter of 1997 from 5.8% in the prior
year quarter. This decrease is partially attributable to the increase in
revenues from the prior year quarter. In addition, this decrease is
attributable to the $1.8 million write-off of certain computer equipment as
part of a fourth quarter fiscal 1996 restructuring charge.
INCOME (LOSS) FROM CONTINUING OPERATIONS
Income from continuing operations in the third quarter of 1997 increased
to $2.2 million for the third quarter of 1997, compared to a loss of $6.3
million in the third quarter of 1996. The continued improvement in operations
is primarily attributable to the increase in revenues and the decrease in SG&A
expenses as a percentage of revenues discussed above.
OTHER EXPENSE, NET
Net other expense increased to $366,000 in the third quarter of 1997 from
$159,000 in the third quarter of 1996. This increase is primarily attributable
to an increased level of indebtedness over the prior year quarter.
INCOME TAXES
The Company's effective tax rate is higher than the federal statutory rate
due to the addition of state income taxes and certain deductions taken for
financial reporting purposes which are not deductible for federal income tax
purposes. The effective tax rate increased to 40.5% in the third quarter of
1997 from 37.7% in the third quarter of 1996 due to the graduated federal
income tax rate structure.
NET INCOME
The Company reported net income of $1.1 million in the third quarter of
1997 compared to net income of $302,000 in the third quarter of 1996. This
increase is primarily attributable to the increase in revenue and the decrease
in SG&A expenses as a percentage of revenues, as discussed above.
NINE MONTHS ENDED JUNE 30, 1997 COMPARED TO NINE MONTHS ENDED JUNE 30, 1996
OPERATING REVENUES
Revenues increased 25% in the first nine months of 1997 to $162.0 million
from $130.0 million in the first nine months of 1996. Growth in direct dial
long distance services revenue accounted for $35.0 million of the total
increase in revenues while operator services revenue decreased by $3.8 million.
DIRECT DIAL LONG DISTANCE SERVICES. Direct dial long distance services
revenue increased 41% to $120.4 million in the first nine months of 1997
compared to $85.4 million in the first nine months of 1996. The increase in
revenue is primarily attributable to growth in the number of customers
serviced.
OPERATOR SERVICES. Operator services revenue was $40.9 million in the
first nine months of 1997 compared to $44.7 million in the first nine months of
1996. The Company processed 10.9 million operator services calls in the first
nine months of 1997 compared to 13.0 million in the first nine months of 1996.
The Company serviced an average of approximately 64,700 pay telephones and
140,600 hospitality rooms per month for the nine months ended June 30, 1997,
compared to an average of approximately 67,100 pay telephones and 126,200
hospitality rooms per month for the nine months ended June 30, 1996. The
decrease in revenue is principally attributable to the decrease in volume of
operator services calls. The decrease in call volume is primarily attributable
to an increasing awareness on the part of the consumer of the ability to select
a carrier of choice by dialing
13
<PAGE>
access codes of other carriers ("dial-around").
LOCAL SERVICES. Local service revenue was $707,000 in the first nine
months of 1997 compared to $0 in the first nine months of 1996. The Company
entered the local service market in Texas during the second quarter of 1997,
and was providing local resale service to approximately 7,100 privately owned
pay telephones in Texas at June 30, 1997.
OPERATING EXPENSES
COST OF SERVICES. The gross profit margin of 33.6% reported for the nine
months ended June 30, 1997 decreased from 34.1% achieved in the comparable
prior year period. This decrease is due primarily to 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 74.3% of the Company's total revenues for the first nine months
of 1997 compared to 65.7% for the corresponding nine months of 1996. Also, the
Company has incurred additional fixed network costs associated with the Atlanta
switch that was installed during the second quarter of 1997. The revenue base
associated with the switch is still maturing, thus fixed costs as a percentage
of revenue are higher than normal levels. Although the total gross profit
margin has decreased, both direct dial and operator services margins have
increased as compared to the first nine months of 1996. The direct dial and
operator services margins have increased primarily as a result of continued
improvements in networking efficiencies and reductions in transmission 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 first nine
months of 1997 were $38.1 million, representing 23.5% of revenues, compared to
$37.5 million in the first nine months of 1996, or 28.8% of revenues. SG&A
expenses as a percentage of revenues have continued to decrease as a percentage
of revenues as a result of tighter expense controls and efforts to streamline
the Company's operations.
NON-RECURRING SPECIAL CHARGE. Effective June 2, 1997, Parris H. Holmes,
Jr. resigned as Chairman of the Board of the Company. The Company paid Mr.
Holmes an $875,000 cash bonus and granted him 25,000 shares of restricted
common stock, for a total $1.2 million one-time charge during the nine months
ended June 30, 1997.
DIRECT SPIN-OFF COSTS. Direct spin-off costs represent only direct costs
incurred in connection with the spin-off of Billing. The $6.6 million of spin-
off costs in the first nine months of 1996 represents certain professional and
filing fees, payments relating to employment contracts and accruals for foreign
taxes payable.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
$8.2 million in the first nine months of 1997, compared to $8.4 million in the
first nine months of 1996. As a percent of revenues, depreciation and
amortization expense declined to 5.0% in the first nine months of 1997 from
6.5% in the prior year period. This decrease is partially attributable to the
increase in revenues from the prior year period. In addition, this decrease is
attributable to the $1.8 million write-off of certain computer equipment as
part of a fourth quarter fiscal 1996 restructuring charge.
INCOME (LOSS) FROM CONTINUING OPERATIONS
Income from continuing operations in the first nine months of 1997
increased to $6.9 million for the first nine months of 1997, compared to a
loss of $8.2 million in the first nine months of 1996. The continued
improvement in operations is primarily attributable to the increase in revenues
and the decrease in SG&A expenses as a percentage of revenues discussed above.
OTHER EXPENSE, NET
Net other expense increased to $717,000 in the first nine months of 1997
from $560,000 in the first nine months of 1996. This increase is primarily
attributable to a higher level of indebtedness over the prior year period.
INCOME TAXES
The Company's effective tax rate is higher than the federal statutory rate
due to the addition of state income taxes and certain deductions taken for
financial reporting purposes which are not deductible for federal income tax
purposes. The effective tax rate increased to 40.5% in the first nine months of
1997 from 32.2% in the first nine months of 1996 due to the graduated federal
income tax rate structure.
14
<PAGE>
NET INCOME
The Company reported net income of $3.7 million in the first nine months
of 1997 compared to net income of $7.3 million in the first nine months of
1996. This decrease is attributable to the spin-off of Billing, which provided
$13.3 million of net income from discontinued operations in the first nine
months of 1996.
15
<PAGE>
EFFECTS OF SPIN-OFF OF BILLING GROUP BUSINESS
The Consolidated Statements of Income included in this report reflect the
continuing operations of the Company for the three and nine-month periods ended
June 30, 1997, and continuing operations and discontinued operations of the
Company for the three and nine-month periods ended June 30, 1996. Included
below is supplemental unaudited pro forma financial information that management
believes is important to provide an understanding of the results of the Company
on a stand-alone basis. Consolidated Pro Forma Statements of Income are
presented below for the three and nine-month periods ended June 30, 1996. These
unaudited Consolidated Pro Forma Statements of Income are based on the
historical statements of that period adjusted to reflect a pro forma benefit
for income taxes at a 42% tax rate reflective of the Company's three-year
historical tax rate. The unaudited Consolidated Pro Forma Statements of Income
give effect to the spin-off as if it had occurred on September 30, 1995. For
comparative purposes, the Company's historical Interim Consolidated Statements
of Income for the three and nine-month periods ended June 30, 1997, are also
included below.
The unaudited consolidated pro forma financial information is presented
for informational purposes only and should be read in conjunction with the
Company's historical Interim Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" set forth herein. The unaudited Consolidated Pro Forma
Statements of Income of the Company reflect, in management's opinion, all
adjustments necessary to fairly state the pro forma results of operations for
the periods presented and to make the unaudited pro forma statements not
misleading.
U.S. LONG DISTANCE CORP. AND SUBSIDIARIES
CONSOLIDATED PRO FORMA STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -----------------------
1996 1997 1996 1997
--------- --------- -------- --------
PRO FORMA ACTUAL PRO FORMA ACTUAL
<S> <C> <C> <C> <C>
Operating revenues:
Direct dial long distance services................. $31,306 $45,248 $85,386 $120,355
Operator services.................................. 15,378 14,299 44,661 40,911
Local services..................................... 0 511 0 707
------- ------- ------- --------
Total operating revenues........................ 46,684 60,058 130,047 161,973
Cost of services...................................... 30,498 40,015 85,759 107,512
------- ------- ------- --------
Gross profit....................................... 16,186 20,043 44,288 54,461
Selling, general and administrative expense........... 13,139 13,777 37,450 38,131
Non-recurring special charge.......................... 0 1,233 0 1,233
Depreciation and amortization expense................. 2,702 2,823 8,411 8,170
------- ------- ------- --------
Income (loss) from operations...................... 345 2,210 (1,573) 6,927
Other expense, net.................................... (159) (366) (560) (717)
------- ------- ------- --------
Income (loss) before income tax benefit (provision)... 186 1,844 (2,133) 6,210
Income tax benefit (provision)........................ (79) (747) 896 (2,515)
------- ------- ------- --------
Net income (loss)..................................... $ 107 $ 1,097 $(1,237) $ 3,695
------- ------- ------- --------
------- ------- ------- --------
Net income (loss) per common share.................... $ 0.01 $ 0.07 $ (0.08) $ 0.22
Weighted average common shares and common
share equivalents outstanding....................... 15,715 16,847 15,252 16,473
</TABLE>
16
<PAGE>
OUTLOOK
The statements contained in this Outlook are based on management's
current expectations. These statements are forward-looking, and actual
results may differ materially.
The industry in which the Company operates is very competitive and is
characterized by rapid change. In addition, the Company has faced, and
continues to face, regulatory issues that have affected or that may affect
operating revenues and operating profit. The continued success of the Company
is dependent on its ability to adapt to these competitive and regulatory
changes. In developing strategies to achieve continued growth in operating
revenues and operating profits, the Company anticipates continuing geographic
expansion, expanding its product offerings and controlling costs to improve
gross margins and reduce SG&A expense as a percentage of revenue.
The Company continues to evaluate and take actions to improve the
profitability of its existing products through, among other things, a
regionalized approach to pricing, to identify new products to fully utilize
the Company's existing sales distribution channels and to evaluate programs
that are expected to increase revenues through partnerships with independent
sales agents. In December 1996 and February 1997, management expanded product
offerings to include Internet access and local access services, respectively.
Furthermore, the Company is in the process of expanding product offerings
based on market opportunity that will likely include integrated services
digital network ("ISDN"), frame relay, paging and wireless services in
selected markets within the next 12 to 18 months. The Company is expanding
its direct dial long distance services residential customer base by offering
long distance services to employees of commercial customers. In addition, due
to the Telecommunications Act, the Company's opportunities in the operator
services market have expanded. The Telecommunications Act requires RBOCs
desiring to enter the long distance services market to, among other things,
open their networks to competition on a local basis as well as establish
separate subsidiaries through which they can offer in-region long distance
services. In addition to the 350,000 private pay telephones the Company has
traditionally marketed its services to, operator, long distance and local
services will now be marketed to an additional 1.7 million public pay
telephones, or to a total pay telephone market of approximately 2.0 million.
The Company is currently developing new products and redesigning existing
products to support the expanded market. In June 1997, the Company entered
into an agreement with GTE Telephone Operating Companies ("GTE") to provide
repair and refund services for GTE pay telephones nationwide. Other services
covered under the agreement include but are not limited to local, information
and technology services. In June 1997, the Company also extended its
agreement with G-Five Corp., a California aggregator of over 300 private pay
telephone affiliates, adding three years to the contract period. Under the
agreement, the Company will provide expanded communications services,
including operator, direct dial and local services to approximately 12,000
privately-owed pay telephones throughout California. The Company expects that
both the expanding operator services market opportunity and the expansion of
product offerings will increase revenues, as well as strengthen customer
relationships and increase customer retention. However, as the Company is in
the early stages of its marketing efforts, the revenue increase cannot be
accurately predicted and may not be material to the Company's financial
position or results of operations.
Management believes that there are opportunities for continued
geographic expansion through acquisition and continued development of the
Company's network. The Company believes that its base of operator services
business affords it the opportunity to expand its direct dial long distance
and local services on a more cost effective basis than many of its
competitors. The Company continues to evaluate acquisition candidates in
strategic geographic areas to expand its market. Acquisition activity is
focused primarily on companies that will grow the Company's direct dial long
distance business. To expand its footprint nationally over the next several
years, management is considering and will continue to consider new
investments in switching and related networking equipment. In January 1997,
the Company purchased a digital switch in Atlanta, Georgia, and completed the
acquisition of Omni Communications, Inc. ("Omni"), a regional direct dial
long distance service provider headquartered in Palm Beach Gardens, Florida.
In May 1997, the Company completed the acquisition of TransAmerica
Communications, Inc. ("TransAmerica"), a regional direct dial long distance
service provider headquartered in Boca Raton, Florida. The Omni and
TransAmerica acquisitions, although not material to the Company's financial
position or results of operations, were strategically planned to increase the
Company's presence in the Southeast region of the United States as they bring
to the Company a high quality customer base concentrated in Florida. The
existing customer bases of Omni and TransAmerica complement the Company's
network expansion strategy, as their customers are being serviced directly by
the switch in Atlanta, Georgia.
The Company believes that the introduction of the local service product
provides the Company a significant opportunity for revenue growth. The local
services industry in the United States is estimated to be a $95 billion
market. The Company is aggressively expanding into the local service business
and has signed resale agreements with three RBOCs covering 15 states and
17
<PAGE>
interconnection agreements with two RBOCs covering six states. The Company
believes that it has the potential to capitalize on its relationship with
existing customers to bundle the local product with its existing products and
services and that these factors will enable the Company to quickly and
efficiently enter the local services market in targeted areas. The Company's
strategy is to roll out three product offerings over a six-month period. The
first is a resale product targeted to the Company's private pay telephone
customers. The Company's existing relationship with private pay telephone
customers provides a unique opportunity for the Company. The Company has the
potential to provide local access to a large volume of phone lines, yet a
limited number of customers. This product was offered in the second quarter
of 1997 and has generated $707,000 of revenue in fiscal 1997. At the end of
the third quarter of 1997, a resale local product was offered to commercial
customers. This product is offered in targeted markets where the Company has
an existing high concentration of long distance customers. This strategy
should provide the Company a higher than average sales success rate and
increase customer retention. In addition, it should enable the Company to
more quickly attain the critical mass necessary to justify a capital
investment in local switching equipment. The third product, a switched local
product, will be offered to commercial and pay telephone customers in
selected markets in the fourth quarter of 1997. This product will be offered
through a switch which was installed in San Antonio, Texas, in July 1997.
This $1.0 million modular switch will initially be able to service 6,000
separate subscriber lines and, with an additional investment, the next
expansion will increase the capacity to 20,000 subscriber lines. The maximum
expansion possibility of the switch is 200,000 subscriber lines. This switch
is the first of several the Company plans to install in certain cities where
the Company has a high concentration of existing customers. The bundling of
these services with operator and long distance services will enhance the
Company's product offerings and provide new and existing customers with the
integrated communication services they desire. Initially, all three products
will be sold into the Company's existing customer base in an effort to
leverage existing relationships and minimize SG&A expenses. The Company
anticipates that it could have approximately 30,000 pay telephones and more
than 60,000 commercial lines on its local service products by the end of
fiscal 1998.
The Company has implemented a number of actions designed to improve
overall profitability and reduce the Company's cost structure. With regard to
improving the Company's gross margins, management is focused on maximizing
network efficiencies by implementing technological improvements and reducing
unit costs. As discussed above, the Company installed a digital switch in
Atlanta, Georgia, and a local switch in San Antonio, Texas. Both of these
investments were made in order to reduce unit costs in the long term. In
addition, the Company has purchased a multi-vendor switch network integration
platform which will allow Advanced Intelligent Network ("AIN") services and
enhanced call processing capabilities. This platform will allow the Company
to fully integrate the local and long distance switch networks and achieve
maximum utilization of the capabilities of each. It should also reduce unit
costs in the long term. In November 1995, the Company joined the Associated
Communication Companies of America ("ACCA"), a cooperative that provides
members with opportunities to pool purchasing power to acquire lower
transmission rates from interexchange carriers, volume discounts on switching
equipment purchases and to work in partnership with other members to
capitalize on resource sharing arrangements such as information services and
network sharing. The Company already has realized, from this arrangement,
lower network costs and expects continued benefits as the organization
broadens its member and vendor base.
In an effort to improve sales force productivity, streamline functional
processes and reduce future SG&A expenses, the Company has implemented and is
developing new, technologically advanced sales tools. An example of one such
implementation is the Company's deployment of notebook computers to the field
sales and support staff. These notebook computers have software that allows
the Company's sales force to quickly prepare sales proposals and make
enhanced marketing presentations on site at customer locations. In connection
with the advanced phase of this project, the Company is developing software
which will allow the sales force to use the notebook computer to
electronically transmit sales order information into the Company's
centralized order system automatically. This sales automation tool will not
only accelerate the Company's revenue flow as customer orders will be
received on an on-line, real-time basis, but should also streamline the sales
and order processing functions and thus reduce SG&A expenses. In addition,
management has streamlined and reorganized certain corporate, administrative
and overhead functions to align its infrastructure with the smaller operation
that resulted from the spin-off.
Over the past several years, the Company has undertaken a program of
developing new products and expanding its existing service offerings,
geographic focus and network. In connection with these new products and
services, the Company has made significant investments in circuitry, switches
and related equipment and software. These investments, generally, are timed
to coincide closely with anticipated revenue growth. In addition, the
Company continues to increase its sales and marketing, customer support,
network operations and field services commitments in anticipation of the
expansion of its customer base in targeted geographic markets. The Company
expects to continue to expand the breadth and scale of its network and
related sales and marketing, customer support and operations activities. The
Company attempts to carefully plan these expansion efforts to minimize the
effect on SG&A expenses; however, these expansion efforts could cause the
Company to incur significant increases in
18
<PAGE>
expenses, from time to time, in anticipation of potential future growth in
the Company's customer base and targeted geographic markets.
On February 8, 1996, President Clinton signed the Telecommunications Act
into law. The new law allows the RBOCs to seek authority from the FCC to
allow the applicant RBOC to provide "in-region" long distance services in
competition with the Company. 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, which would allow the Company to
offer local service in RBOC service areas. It is reasonable to expect that
the conditions for RBOC entry will be met in the near future. As a result,
carriers in the interLATA long distance business today, such as the Company,
will encounter new, formidable competition. The viability of competition in
the local market depends greatly upon the conditions under which such service
is made available by the RBOCs. On July 18, 1997, the Eighth Circuit Court of
Appeals vacated certain important provisions of the FCC's Interconnection
Order and, if let stand, will have the effect of allowing each state to
determine how to set prices for unbundled network elements, and allow RBOCs
greater flexibility when negotiating local interconnection agreements with
competitive local exchange carriers. These decisions will result in disparity
in opportunities among states and between carriers. Additionally, as a result
of the Telecommunications Act, the FCC has undertaken to restructure the
means by which long distance access services are priced, and the manner in
which universal service subsidies are collected and re-distributed. The
charges currently assessed in support of these subsidies are a significant
component of the Company's overall line costs. The charges currently assessed
are equitable and allow for competitive pricing within the industry. However,
the latest FCC decision is expected to create a price discrepancy among long
distance carriers. Refer to Note 10, Regulatory Matters, on page eight of
this Form 10-Q for a detailed discussion of this matter. The Company cannot
predict whether the ultimate dispensation of the FCC's rulemakings or further
adjudication of the aforementioned appeals will have a material impact upon
the Company's financial position or results of operations. The continued
success of the Company is dependent on its ability to adapt to these
competitive and regulatory changes.
The Company's future results of operations and the other forward-looking
statements contained in this Outlook, in particular the statements regarding
revenue growth and reducing cost structure, involve a number of risks and
uncertainties. In addition to the factors discussed above, other factors that
could cause actual results to differ materially are the following: business
conditions and the general economy, regulatory developments, competitive
factors, introduction and acceptance of new products, pricing pressures,
availability of leased network facilities, risk of collection of accounts
receivable, technological advancements, regulatory factors, litigation and
other factors as discussed in the cautionary statements and elsewhere herein.
The Company believes that it has the competitive product offerings,
personnel and financial resources for continued business success; however,
future revenues, costs and profits all are influenced by a number of factors
and are subject to certain risks and uncertainties, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance was $8.2 million at June 30, 1997, compared
to $8.8 million at September 30, 1996. Working capital was $31.0 million at
June 30, 1997, compared to $20.1 million at September 30, 1996. The Company's
current ratio was 2.0:1 at June 30, 1997 and 1.7:1 at September 30, 1996.
Additionally, the Company's cash flow provided by continuing operations was
$8.7 million for the nine months ended June 30, 1997, as compared to $3.5
million for the nine months ended June 30, 1996. Refer to the Consolidated
Statements of Cash Flows on page five of this Form 10-Q for a detailed
account of the Company's cash flow activity.
Capital expenditures amounted to approximately $9.8 million during the
nine months ended June 30, 1997. These expenditures were related primarily to
the purchase of telecommunications equipment, computer equipment and
software, and office furniture. During the remaining three months of fiscal
1997, the Company anticipates capital expenditures of $5.0 million to $7.0
million to service the Company's projected growth. Approximately $4.0 million
to $5.0 million of these capital expenditures are expected to be purchases of
telecommunications equipment, approximately $1.0 million to $2.0 million are
expected to be purchases of computer hardware and software to develop systems
to support the anticipated growth of the Company's business and the remainder
is expected to be for purchases of office furniture and equipment. The
Company anticipates financing these capital expenditures primarily through
term notes 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
19
<PAGE>
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. Although
line of credit commitments have been made by various lenders for equipment
purchases, there is no assurance that the Company will continue to be able to
obtain satisfactory financing for these capital expenditures and investments.
The Company has equipment financing facilities with several lenders for
a total of $16.0 million. At June 30, 1997, the Company had $4.2 million
borrowed under these facilities. The Company also has a $5.0 million
revolving credit receivable financing facility, which allows the Company to
borrow against its own operator services accounts receivable. At June 30,
1997, the Company did not have any amounts borrowed under this facility. In
addition, the Company has a $10.0 million credit receivable financing
facility which allows the Company to borrow against its own direct dial long
distance services accounts receivable. At June 30, 1997, the Company did not
have any amounts borrowed under this facility.
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
availability 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. The Company does not intend to seek
stockholder approval for any such acquisitions or security issuances unless
required by applicable laws or regulations.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 5. OTHER INFORMATION
Effective June 2, 1997, Parris H. Holmes, Jr. resigned as Chairman of the
Board of the Company. This action completed the separation of the Company and
its former wholly owned subsidiary, Billing, that began with the distribution
of all of the common stock of Billing to the stockholders of the Company in
August 1996. Larry M. James, Chief Executive Officer, was named by the
Company's Board of Directors to serve as Chairman. In addition, effective June
24, 1997, L. Lowry Mays, Chairman and Chief Executive Officer of Clear Channel
Communications, Inc., a diversified media company which owns and/or programs
radio and television stations, was appointed to the Company's Board of
Directors.
A Special Meeting of Stockholders of the Company will be held on Tuesday,
August 19, 1997 for the purpose of considering and voting upon a proposal to
amend the Company's Restated Certificate of Incorporation to change the name of
the Company to USLD Communications Corp. The new name will more accurately
represent the Company's role as a provider of a diverse line of communications
services, rather than just a provider of long distance services.
21
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The exhibits listed below are filed as part of or incorporated by
reference in this report. Where such filing is made by incorporation by
reference to a previously filed document, such document is identified
in parentheses.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Restated Certificate of Incorporation (Exhibit 3.1 to
Form 10-K for the Fiscal Year Ended September 30, 1996)
3.2 Bylaws, as amended (Exhibit 3.2 to Form 10-K for the Fiscal
Year Ended September 30, 1996)
4.1 Form of Certificate Evidencing Common Stock (Exhibit 4.1 to
Form 10-K for the Fiscal Year Ended September 30, 1996)
10.38 Office Lease Agreement entered into on March 14, 1997, and
effective April 1, 1997, by and between U.S. Long Distance,
Inc. and Nowlin Partners (Exhibit 10.38 to Form 10-Q for
the Quarterly Period Ended March 31, 1997)
11.1 Computation of Earnings Per Share (filed herewith)
27.1 Financial Data Schedule (filed herewith)
(b) Current Reports on Form 8-K:
None.
22
<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 11, 1997 By: /s/ PHILLIP J. STORIN
------------------------------------
Phillip J. Storin
SENIOR VICE PRESIDENT
CHIEF FINANCIAL OFFICER
(Duly authorized and Principal
Financial Officer)
Date: August 11, 1997 By: /s/ PATRICK M. AELVOET
------------------------------------
Patrick M. Aelvoet
VICE PRESIDENT
CORPORATE CONTROLLER
(Duly authorized and Principal
Accounting Officer)
23
<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,
----------------------- ---------------------
1997 1996 1997 1996
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Primary
Earnings:
Net income (loss) from continuing operations............ $ 1,097 $(4,015) $ 3,695 $(5,939)
Net income from discontinued operations................. 0 4,317 0 13,287
-------- ------- ------- -------
Net income applicable to common stock................... $ 1,097 $ 302 $ 3,695 $ 7,348
-------- ------- ------- -------
-------- ------- ------- -------
Shares:
Weighted average number of shares of common
stock outstanding..................................... 15,642 14,854 15,330 14,466
Weighted average common share equivalents
applicable to stock options and warrants.............. 1,205 861 1,143 786
-------- ------- ------- -------
Weighted average shares used for computation............ 16,847 15,715 16,473 15,252
-------- ------- ------- -------
-------- ------- ------- -------
Primary earnings per common share:
Net income (loss) from continuing operations............ $ 0.07 $ (0.25) $ 0.22 $ (0.39)
Net income from discontinued operations................. 0.00 0.27 0.00 0.87
-------- ------- ------- -------
Net income applicable to common stock................... $ 0.07 $ 0.02 $ 0.22 $ 0.48
-------- ------- ------- -------
-------- ------- ------- -------
Fully Diluted (a)
Earnings:
Net income (loss) from continuing operations............ $ 1,097 $(4,015) $ 3,695 $(5,939)
Net income from discontinued operations................. 0 4,317 0 13,287
-------- ------- ------- -------
Net income applicable to common stock................... $ 1,097 $ 302 $ 3,695 $ 7,348
-------- ------- ------- -------
-------- ------- ------- -------
Shares:
Weighted average number of shares of common
stock outstanding..................................... 15,642 14,854 15,330 14,466
Weighted average common share equivalents
applicable to stock options and warrants.............. 1,309 920 1,217 1,196
-------- ------- ------- -------
Weighted average shares used for computation............ 16,951 15,774 16,547 15,662
-------- ------- ------- -------
-------- ------- ------- -------
Fully diluted earnings per common share:
Net income (loss) from continuing operations............ $ 0.06 $ (0.25) $ 0.22 $ (0.38)
Net income from discontinued operations................. 0.00 0.27 0.00 0.85
-------- ------- ------- -------
Net income applicable to common stock................... $ 0.06 $ 0.02 $ 0.22 $ 0.47
-------- ------- ------- -------
-------- ------- ------- -------
</TABLE>
(a) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by APB Opinion No. 15 because it results
in dilution of less than 3%.
<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. AND
SUBSIDIARIES AS OF AND FOR THE NINE MONTHS ENDED JUNE 30, 1997 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-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 8,211
<SECURITIES> 0
<RECEIVABLES> 50,336
<ALLOWANCES> 2,710
<INVENTORY> 0
<CURRENT-ASSETS> 62,622
<PP&E> 68,832
<DEPRECIATION> 35,379
<TOTAL-ASSETS> 116,562
<CURRENT-LIABILITIES> 31,668
<BONDS> 11,143
0
0
<COMMON> 164
<OTHER-SE> 68,266
<TOTAL-LIABILITY-AND-EQUITY> 116,562
<SALES> 0
<TOTAL-REVENUES> 161,973
<CGS> 0
<TOTAL-COSTS> 107,512
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,387
<INTEREST-EXPENSE> 1,122
<INCOME-PRETAX> 6,210
<INCOME-TAX> 2,515
<INCOME-CONTINUING> 3,695
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,695
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
