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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number: 0-18195
USLD COMMUNICATIONS CORP.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 74-2522103
(State of Incorporation) (I.R.S. Employer
Identification No.)
9311 SAN PEDRO, SUITE 100, SAN ANTONIO, TEXAS 78216
(Address of Principal Executive Office) (Zip Code)
(210) 525-9009
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
SERIES A JUNIOR PARTICIPATING
PREFERRED STOCK PURCHASE RIGHTS
(Title of Class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements in Part III of this Form 10-K or any amendment to this
Form 10-K. /x/
The aggregate market value of the Registrant's voting and non-voting
outstanding Common Stock held by non-affiliates of the Registrant at November
28, 1997 was $330,008,540. There were 16,325,409 shares of the Registrant's
voting and non-voting Common Stock outstanding at November 28, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
None
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USLD COMMUNICATIONS CORP. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
ITEM PAGE
NUMBER NUMBER
- - Index 2
PART I
1. Business 3
2. Properties 12
3. Legal Proceedings 12
4. Submission of Matters to a Vote of Security Holders 12
PART II
5. Market for the Company's Common Equity and Related Stockholder
Matters 13
6. Selected Financial Data 14
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
7A. Quantitative and Qualitative Disclosures About Market Risk 23
8. Financial Statements and Supplementary Data 23
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 42
PART III
10. Directors and Executive Officers of the Company 43
11. Executive Compensation 46
12. Security Ownership of Certain Beneficial Owners and Management 59
13. Certain Relationships and Related Transactions 60
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 61
Signatures 68
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PART I
ITEM 1. BUSINESS
OTHER THAN HISTORICAL AND FACTUAL STATEMENTS, THE MATTERS AND ITEMS
DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K ARE FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS OF USLD COMMUNICATIONS
CORP. (INDIVIDUALLY, OR TOGETHER WITH ITS SUBSIDIARIES, THE "COMPANY") MAY
DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. CERTAIN FACTORS THAT COULD CONTRIBUTE TO SUCH DIFFERENCES ARE
DISCUSSED WITH THE FORWARD-LOOKING STATEMENTS THROUGHOUT THIS REPORT AND ARE
SUMMARIZED IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-FORWARD-LOOKING STATEMENTS-CAUTIONARY LANGUAGE."
GENERAL
The Company is a fully-integrated, switch-based communications company.
From fiscal 1992 through fiscal 1997, the Company's revenues increased at a
compounded annual rate of 36%, totaling $226.9 million for fiscal 1997. The
Company offers a full array of communication services including direct dial
long distance and local services, prepaid calling cards, travel cards,
Internet access, data transmission and calling center services.
On August 19, 1997, stockholders of the Company approved a proposal to
amend the Company's Restated Certificate of Incorporation to change the name
of the Company from U.S. Long Distance Corp. to USLD Communications Corp. The
new name more accurately represents the Company's role as a provider of a
diverse line of communications services, rather than just a provider of long
distance services.
The telecommunications industry has changed significantly since the
mandated divestiture by American Telephone and Telegraph Co. ("AT&T") of its
22 local telephone companies in 1984. Regulations mandating equal access to
the existing telecommunications network led to the creation of hundreds of
new long distance companies. Competition now pervades across all categories
of long distance telephone services, including both domestic and
international direct dial long distance telephone services, operator assisted
and calling card services and 800/888 specialized in-bound long distance
telephone services. While AT&T and, to a lesser extent, MCI
Telecommunications Corporation ("MCI") and Sprint Corporation ("Sprint"),
together dominate the estimated $85 billion long distance telecommunications
industry, management believes that a growing share of the market is serviced
by smaller long distance companies such as the Company. Industry sources
estimate that approximately 80% of the long distance market is shared among
AT&T, MCI and Sprint.
The Telecommunications Act of 1996 ( the "Telecommunications Act"),
which was signed into law on February 8, 1996, was the first major overhaul
of the telecommunications law since the divestiture of AT&T. This act allows
telecommunications providers such as the Company to provide local telephone
services. The local telephone services industry is estimated to be a $95
billion industry and is dominated by the Regional Bell Operating Companies
("RBOCs"). The Company is aggressively expanding into the local services
industry and began offering local services in February 1997. The Company is
currently certified to offer local services in 21 states and has
certification pending in six other states. The Company has signed
interconnection agreements with Southwestern Bell Telephone Company ("SWBT"),
U S WEST Communications Inc. ("U S WEST") and GTE Telephone Operating
Companies ("GTE"), enabling the Company to provide local telephone service to
business and residential customers in these respective companies' local
service areas. The Company also has entered into a local resale agreement
with BellSouth Telecommunications, Inc. ("BellSouth") for its nine-state
service territory. Additionally, the Telecommunications Act allows the RBOCs
to compete in the long distance industry. However, the applicant RBOC must
first satisfy a legislative "checklist" that outlines the steps required for
an RBOC to open its network to competition on a local basis. To date, no RBOC
has been granted authority for in-region interLATA services.
PROPOSED MERGER
On September 17, 1997, the Company signed a definitive agreement to
merge with a wholly-owned subsidiary of LCI International, Inc. ("LCI") (the
"Merger"). Under the terms of the agreement, for each of the Company's
outstanding shares of common stock, par value $0.01 per share (the "Common
Stock"), LCI will exchange a fraction of one share of LCI common stock having
a value of $20.00 based upon the average price of LCI common stock for the 20
trading days ending three days before the Merger, subject to certain
exceptions. The transaction is to be accounted for as a pooling-of-interests
business combination. The transaction is anticipated to be tax-free to both
the Company's and LCI's stockholders and is expected to be completed by
December 31, 1997. A Special Meeting of Stockholders of the Company is
scheduled for December 17, 1997, for the purpose of considering and voting
upon the Merger. There can be no assurances that such Merger will be approved
by the stockholders of the Company at the Special Meeting, or, if approved,
that the other conditions to closing will be met or waived in order to permit
consummation of the Merger. At this time, the effect of completion of the
Merger on forward-looking statements contained in this Form 10-K is not
determinable.
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DIRECT DIAL LONG DISTANCE SERVICES
The Company is a full-service long distance carrier currently providing
direct dial long distance services to small and medium-sized commercial
customers and, to a lesser extent, residential customer accounts. The Company
was authorized to complete international and interstate calls throughout the
United States as well as intrastate calls within 47 states at September 30,
1997. However, the Company focuses its direct sales efforts in the West
Coast, Pacific Northwest, Southwest and Southeast regions of the United
States to take advantage of network efficiencies. In addition to its basic
"one-plus" service, the Company provides inbound 800 service, travel and
prepaid calling card services, private line services, data transmission
services, wholesale carrier services and other customer-specific products.
The Company began offering direct dial long distance services following
its entry into the direct dial long distance business in August 1991 through
the acquisition of three related direct dial long distance companies in
Texas. At September 30, 1997, the Company serviced approximately 87,100
commercial and residential customer accounts. The Company billed an average
of 151.2 million minutes per month of long distance traffic during the fiscal
quarter ended September 30, 1997, as compared to 106.5 million and 62.6
million during the fiscal quarters ended September 30, 1996 and 1995,
respectively. In fiscal 1997, 1996 and 1995, the Company had $167.9, $119.4
million and $84.5 million, respectively, in direct dial long distance
revenues, comprising 74%, 66% and 59% of total operating revenues in each
period, respectively.
INDUSTRY OVERVIEW
Direct dial long distance revenues industry wide are estimated to be
approximately $85 billion in 1997, up from approximately $78 billion in 1996.
AT&T, MCI and Sprint dominate the long distance industry. Industry sources
estimate that these companies control a combined market share of
approximately 80%. These companies offer comprehensive communications
services in a wider array of products than other long distance companies and
typically target national, multi-state business customers and millions of
residential long distance users through national television and media
advertising. The Company believes that over 500 smaller long distance
companies account for the remaining 20% of the market. These companies
typically concentrate on smaller regional and local business customers.
Competition in the direct dial long distance industry has historically been
based upon price. More recently, the focus has been moving towards customer
service, product design and innovation, customized billing capabilities,
transmission quality and availability of service.
SALES AND MARKETING
The Company's direct dial long distance sales personnel are located
throughout the Company's service area and are responsible for marketing to
commercial accounts. The Company supervises sales and marketing efforts from
its corporate headquarters and utilizes various advertising media to enhance
its commercial marketing efforts and to attract and retain residential
customers. The Company examines the calling profiles of target markets and
designs long distance services that specifically address certain demands. For
example, the Company issues long distance calling cards customized to include
a customer's corporate logo and has also customized prepaid calling cards to
be used as promotional marketing tools. The Company also directly markets to
employees of commercial customers for their residential service. In addition
to its own sales force, the Company markets its direct dial long distance
services through authorized agents, other carriers and affinity organizations
(strategic partnerships).
The Company currently has an exclusive marketing agreement with Nolan
Ryan, formerly a player with the Texas Rangers-Registered Trademark-
professional baseball team and a potential hall of fame candidate, who acts
as the Company's spokesman for its direct dial long distance services and
whose picture appears in the Company's advertisements and product literature,
including prepaid calling cards.
OPERATIONS
The Company completes calls that are originated when a pre-subscribed
customer dials "1" plus the area code and number or when a customer selects
the Company's network through dial-up access to reach any domestic or
international destination. All long distance calls placed over the Company's
network are directed to call destination points by computerized digital
network switching equipment operating at one of the Company's switching
centers. The switching equipment receives a customer's direct dial call,
verifies the caller's billing status, routes the call to the dialed
destination, monitors the call's duration and collects other information for
billing purposes. The Company's switching equipment selects the most
cost-efficient transmission circuit or path available prior to switching and
completing each call. The Company employs state-of-the-art digital switching
equipment at the Company's switching centers in Houston, Texas; Waco, Texas;
Seattle, Washington; Los Angeles, California; and the newest facility in
Atlanta, Georgia. The Atlanta switch was purchased in January 1997 and is the
Company's launch pad into the Southeast and East Coast markets.
To satisfy increasing or anticipated usage of its long distance network
and to ensure that its network is optimally accessible when network demand is
heavy, the Company, from time to time, adds circuit capacity at each existing
switching center by increasing the number of telecommunications ports and
access lines. The Company utilizes state-of-the-art Common Channel Signaling
System 7, which
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is currently operational for virtually all originating and terminating
traffic within the Company's markets. This network protocol significantly
reduces connect time delays and provides additional technical capabilities
and efficiencies for the routing of calls.
COMPETITIVE ADVANTAGES
The Company competes with AT&T, MCI, Sprint and numerous local, regional
and national carriers on the basis of its products and services, competitive
pricing and local identity. The Company, generally, prices its services below
AT&T, MCI and Sprint comparable service offerings. In addition, by designing
long distance products and services that fill specific market needs, the
Company enhances its ability to compete with AT&T, MCI, Sprint and others.
The Company believes that its emphasis on customer service distinguishes
itself from many of its competitors. The Company has taken an integrated team
approach to sales and service by increasing the number of account development
specialists in its field offices to maintain responsive service after the
sale. In an effort to improve sales force productivity and streamline
functional processes, the Company deployed 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.
Additionally, the Company offers a computerized bulletin board service
called Advantage Direct, which is similar to the remote access service
offered to its operator services customers. This service allows customers to
monitor and evaluate calling patterns and volume by department or location.
Moreover, in competing with certain regional and local long distance
carriers, the Company believes it holds a competitive advantage within its
territory because the Company's regional concentration of traffic over its
network facilities allows for certain cost efficiencies of a national
carrier. In addition, the Company believes that its local identity in the
markets it serves provides an advantage in marketing its services and
competing with long distance carriers based outside of the target regions.
Management believes that the Company has developed the expertise in
information systems necessary to meet the needs of its direct dial long
distance customers. For instance, the Company provides an invoice indicating
call detail in a form that assists customers in controlling and monitoring
communications costs for various projects or departments.
The Company employs digital switching equipment utilizing a network
comprised largely of high quality fiber-optic circuitry to maximize
communications quality. The Company believes that its use of a digital
fiber-optic network is particularly advantageous in marketing both its voice
and data transmission services. The Company also designs redundant and
diverse routes to each major service area to ensure maximum service
availability.
The communications industry is dynamic, and the Telecommunications Act
is expected to continue to have a major impact on the industry's competitive
environment. In essence, the RBOCs will be competing with long distance
carriers for both domestic and international long distance customers. The
Company believes it is prepared to meet this challenge by capitalizing on its
experienced management team and sales force, personalized customer service,
quality products and services and competitive pricing structures.
STRATEGY AND GROWTH OPPORTUNITIES
The Company's strategic focus in the direct dial long distance industry
is to compete with AT&T, MCI and Sprint primarily on the basis of competitive
pricing, while offering a comparable or higher level of service. Moreover,
the Company intends to remain focused on small and medium-sized commercial
customers and will continue its efforts to develop innovative and
cost-efficient services that meet the needs of its customers. In December
1996 and February 1997, Company 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 frame relay, paging and wireless
services in selected markets within the next 12 to 18 months. The Company's
ability to offer this array of services will allow it to be the customer's
"one source" for communications.
The Company believes that there are opportunities for geographic
expansion through acquisitions, mergers and continued development of the
Company's network. The primary focus of the Company's acquisition activities
is on acquisitions that will grow the Company's direct dial long distance
business. 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. By
having a concentration of operator services call traffic in a particular
geographic region, the Company can utilize any long distance facilities it
installs or acquires to service a ready base of call traffic, thereby
lowering the marginal transmission costs for any direct dial long distance
traffic that the Company acquires or develops in that region. The Company
believes this cost advantage not only improves the potential profitability of
both the Company's operator services and direct dial long distance services
businesses in such region, but also expands the number of companies that
would be attractive acquisition candidates in that region.
In January 1997, the Company 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
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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 continually evaluates business opportunities, including
potential acquisitions. 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. While the Company has, from
time to time, had discussions with communications companies, it has no
agreements or pending negotiations, with the exception of the Merger noted
above.
OPERATOR SERVICES
The Company provides operator assisted services for private pay
telephones, hotels, motels, university dormitories and hospitals. The
Company's operator services are accessed when calls requiring operator
assistance and/or alternate billing options are placed from customer
locations or customer pay telephone equipment. Such services involve the use
of live and automated operator stations to receive, validate and complete the
calls. The Company processes collect, third-party, person-to-person and
calling card calls and, generally, shares a percentage of call revenues with
its customers.
At September 30, 1997, the Company provided operator services to
approximately 141,500 hotel, motel, hospital and dormitory rooms. In
addition, at September 30, 1997, the Company had service contracts with
private pay telephone owners covering approximately 71,600 pay telephones.
The Company carried 6.8 million average monthly minutes of operator services
traffic during the fourth quarter of fiscal 1997, as compared to 7.6 million
and 8.3 million average monthly minutes during the fourth quarters of fiscal
1996 and 1995, respectively. The Company's operator services revenues
amounted to $57.5 million, $60.9 million, $59.6 million in fiscal 1997, 1996
and 1995, respectively.
INDUSTRY OVERVIEW
Management believes that there are approximately 130 operator services
providers competing within the long distance communications industry. AT&T
continues to dominate the operator services market, supplying operator
services for traffic originating from both the hospitality and pay telephone
industries. Additionally, MCI and Sprint provide operator services and are
considered by management to be major competitors. Excluding AT&T, MCI,
Sprint, GTE and the RBOCs, management believes the Company is one of the five
largest providers of operator services.
Many operator services providers, including the Company, initially
focused on the hospitality industry. More recently, as the private pay
telephone industry has grown and taken market share from the public pay
telephone market traditionally served by AT&T, many operator services
providers gained increased market share by providing service to the owners of
private and public pay telephones. Competition between the Company and other
operator services providers is based upon commission programs, quality of
service, reporting and customer service.
SALES AND MARKETING
The Company markets its operator services nationally through the
combined effort of regional sales representatives based in Illinois, Texas,
Florida and California and a network of agents. The Company's corporate sales
force focuses on larger accounts, such as hotel management companies,
multi-unit franchises, hospital chains, large private pay telephone companies
and universities. The Company's agents market the Company's operator services
on a nationwide basis and typically receive a commission based upon the
volume of business generated. The Company also participates in various
industry trade shows and promotes its operator services through
advertisements in trade magazines. The Company customizes its communications
services to provide, among other things, individualized reports and
specialized call branding to customers.
OPERATIONS
The Company owns and operates its own operator center in San Antonio,
Texas, which employed 264 operators and support staff at September 30, 1997.
The Company provides live and automated operator services 24 hours per day,
365 days per year, and features multi-lingual operators versed in English,
Spanish and a variety of other languages. The Company maintains a
sophisticated emergency call handling system that enables its operators to
access police, fire and other emergency agencies within the jurisdiction of
the telephone from which the call is placed. The Company utilizes its own
transmission facilities when possible or contracts to use facilities of
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other long distance network providers as necessary.
The Company switches its operator assisted calls at its five main
switching centers. Many operator assisted calls are transmitted to the
Company's switching centers via call processing equipment installed at
customer locations or in customer pay telephone equipment. This call
processing equipment is programmed to recognize calls requiring operator
assistance and to access the Company's network by dialing the Company's
access number, then passing the call record information to one of the
switching centers. The Company validates the authorization code or telephone
number to be billed and then completes the call, while recording the date,
destination, duration and time of day for subsequent billing purposes. At
September 30, 1997, the Company was authorized to complete international and
interstate calls placed throughout the United States, as well as intrastate
calls within 47 states.
COMPETITIVE ADVANTAGES
Management believes that the Company enjoys several competitive
advantages over many others in the operator services industry. By virtue of
the Company's large call volumes relative to many other operator services
providers and the cost efficiencies it realizes by routing a large portion of
its operator services traffic over its own facilities and maintaining its own
operator center, the Company is able to provide high quality transmission on
an efficient and economical basis. Additionally, because it is the source of
commission payments to its operator services customers, the Company believes
that its financial stability and history of timely payments allow it to
compete effectively against many smaller, under-capitalized operator services
providers. Moreover, the Company's flexible rate options allow it to offer
customized commission programs to its customers as compared to larger
operator services providers.
In 1994, the Company implemented a computerized bulletin board service
called Stealth that allows its customers to access the system from remote
locations and obtain customized and sophisticated reporting of calling
patterns and volumes for each customer location or pay telephone. This
advanced reporting system allows the Company's operator services customers to
analyze their traffic on a daily basis and maximize telecommunications
revenues by, for example, relocating underutilized telephones. The Company's
detailed reporting also allows its customers to reconcile the accuracy or
integrity of their commissions. The Company employs a skilled, professional
staff of customer service employees and technicians, who provide service 24
hours per day, 365 days per year.
STRATEGY AND GROWTH OPPORTUNITIES
The Company has developed a strong presence in operator services
throughout the United States. Through its direct sales force and agents and
its participation in state, regional and national trade associations, the
Company intends to pursue geographic expansion on a nationwide basis. The
Company will continue to market its operator services business to both the
private pay telephone and hospitality industries and present new products and
services for these markets.
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 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 this marketing effort, the revenue increase cannot be
accurately predicted and may not be material to the Company's financial
position or results of operations.
The Company's existing relationships with operator service customers,
who typically own or manage numerous pay telephones or hotels, provide a
unique opportunity for the Company. The Company has the potential to provide
local access services to a large volume of telephone lines through its
existing customer base. These characteristics will allow the Company to
quickly and efficiently enter the local services market in targeted areas.
LOCAL SERVICES
The Telecommunications Act provides for certain significant changes to
the regulatory market structure of the domestic telecommunications industry.
For example, competitive telecommunications providers such as the Company now
are permitted to offer
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local telephone services in competition with the Incumbent Local Exchange
Companies ("ILECs") throughout most areas in each state. The Company,
therefore, can offer local services either by reselling services over the
network of an ILEC or over its own network and facilities, or any combination
of the two.
Management of the Company believes that the introduction of the local
service product provides the Company a significant opportunity for revenue
growth. The Company was one of the first long distance carriers to offer
local resale service and has provided Centrex resale for ten years in the
Northwest. The Company introduced two local service products in fiscal 1997.
In February 1997, the Company began offering a local resale product to its
pay telephone customers, primarily in SWBT exchanges within the State of
Texas. In June 1997, a local resale product was offered to the Company's
commercial customers. A third product, a switched local product, was offered
to commercial and pay telephone customers in select markets in the first
quarter of fiscal 1998. At September 30, 1997, the Company was providing
local service to approximately 12,900 subscriber lines. In fiscal 1997, the
Company had $1.6 million in local services revenue.
INDUSTRY OVERVIEW
The local telecommunications market is estimated to be a $95 billion
industry. Prior to the Telecommunications Act, regulations prohibited
competition in this industry, and, therefore, the geographic markets were
exclusively controlled by the ILECs. The introduction of competition in 1996
has yet to have any measurable effect on the overall market dominance of the
collective ILECs. These companies' marketing practices traditionally have
been driven by regulations rather than customer demand, and as a result the
local services offered currently are not as diverse or competitively priced
as direct dial long distance services today. Also, because prices for local
services sometimes contain intrinsic built-in subsidies for other local
exchange products, some services are priced well over their actual costs and,
therefore, are highly vulnerable to competition in a competitive market.
Entry into the local market by niche providers has been slow due to the
tremendous amount of coordination and investment necessary. For example, a
Competitive Local Exchange Company ("CLEC"), such as the Company, needs to
negotiate an interconnection agreement with an ILEC and submit such agreement
to the applicable state regulatory agency for approval. The CLEC also must
obtain the appropriate license and/or certification from that state before it
can offer local services. The CLEC and the ILEC then must coordinate their
order entry/service delivery process and address related issues such as 911
services, city franchise requirements, rights-of-way permits, intraLATA toll
transiting agreements and service and maintenance obligations. As these
issues are resolved, niche providers should have a unique opportunity to
design local services that meet actual customer needs.
SALES AND MARKETING
The Company is offering local services in the geographic areas in which
it can provide such services through its direct sales force, with emphasis on
the Company's existing customer base. The Company has relied upon its
traditional marketing channels, radio and television advertisements as well
as billboard and print ad campaigns in geographically concentrated markets.
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. The bundling of these services with local
services will enhance the Company's product offerings and provide new and
existing customers with the integrated communication services they desire. To
a lesser extent, the Company also continues to market to residential
customers.
As noted above, the Company currently has an exclusive marketing
agreement with Nolan Ryan. Mr. Ryan acts as the Company's spokesman for its
local services and appears in the Company's radio and television
advertisements and product literature, promoting 1-800-TRY-USLD.
COMPETITIVE ADVANTAGES
To the extent the Company can provide the necessary billing, customer
service and back-office support for local services for less cost per line
than the contractual wholesale discount, the Company can offer its customer a
lower rate for the same service than the ILEC. The Company also believes that
its optional billing methods (e.g., bulletin board service), its customer
service and its ability to combine an invoice for local and long distance
services on a single bill from a single source serve as competitive
advantages. These advantages are even greater in geographical areas where
similarly situated carriers have not yet entered the local market.
The Company is aggressively expanding into the local service business
and is currently certified to offer local services in 21 states and has
certification pending in six other states. The Company has signed
interconnection agreements with SWBT enabling the Company to provide local
telephone service to business and residential customers in SWBT's five-state
service area. The Company has also entered into a local resale agreement with
BellSouth for their nine-state service territory. In addition, the Company's
existing relationship with pay telephone customers provides a unique
opportunity for the Company. The Company has the potential to provide local
access to a large volume of telephone lines through its existing customer
base.
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<PAGE>
STRATEGY AND GROWTH OPPORTUNITIES
The Company will continue to pursue interconnection agreements,
regulatory authority and technical functionality to carry, sell and provide
local telephone services. The Company's strategy has been to roll out three
product offerings over a nine-month period. The first was a resale product
targeted to the Company's private pay telephone customers. This product was
offered in February 1997. In June 1997, a resale local product was offered to
commercial customers. This product is offered in targeted markets where the
Company has high concentration of existing long distance customers. This
strategy should provide the Company a higher than average sales success rate
and increase customer retention. The third product, a switched local product,
was offered to commercial and pay telephone customers in selected markets in
the first quarter of fiscal 1998. This product is offered through a switch
which was installed in San Antonio, Texas, in the fourth quarter of fiscal
1997. This $1.0 million, state-of-the-art, modular Lucent switch is initially
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.
CORPORATE SYNERGY
Management believes that the Company has certain operating advantages
and cost efficiencies through the integration of its long distance, operator
and local services businesses. The combined traffic volumes of the Company's
operator services and direct dial long distance businesses operate to lower
the Company's transmission costs for both of these businesses in geographic
regions where the Company operates long distance switching equipment. In
addition, the Company's sales force can provide integrated communications
solutions by offering operator services, direct dial long distance and local
telephone services. The opportunity to bundle products and services
strengthens customer relationships and, thus, improves customer retention.
GOVERNMENT REGULATION
GENERAL
The Company competes in an industry that, to a large degree, continues
to be regulated by government agencies. At approximately the same time as the
required divestiture of the Bell telephone companies by AT&T in 1984, the
Federal Communications Commission (the "FCC") announced rules that were
created to foster a self-regulating, interstate telecommunications industry,
relying upon competitive forces to keep rates and services in check.
Management believes that the current direct dial marketplace demonstrates
substantial progress toward the fulfillment of these objectives. For example,
the cost of a long distance call has significantly declined while the number
of long distance companies has multiplied. Competition has encouraged these
direct dial long distance companies to find ever more efficient methods of
carrying calls.
OPERATOR SERVICES
On October 15, 1990, President Bush signed into law the Telephone
Operator Consumer Service Improvement Act of 1990. Congress directed the FCC
to impose upon the interstate operator services market certain rules and
regulations designed to increase consumer awareness concerning the operator
services provider carrying the call, the information the caller can request
of the operator, and the alternatives available to the consumer for reaching
other long distance carriers. Operator services providers were required to
file with the FCC informational tariffs that describe the rules and
regulations governing the provision of interstate operator assisted
telecommunications and to include all rates that may apply to an interstate
call. Furthermore, operator services providers were required to submit, on a
Congressionally prescribed timetable, certain reports relating to rate
changes, complaints and costs. Based on these reports, on November 16, 1992,
the FCC submitted to Congress its "Final Report Pursuant to the Telephone
Operator Consumer Services Improvement Act of 1990." The purpose of this
report was to identify whether increased regulatory scrutiny by the FCC was
required to satisfy Congressional objectives. The FCC determined that
"...market forces are securing rates and charges that are just and
reasonable..." and therefore stated "...we conclude that no further action is
necessary...".
At September 30, 1997, the Company was authorized to carry intrastate
operator assisted traffic in 47 states. Authorization is pending approval in
two other states. State regulatory agencies have the authority to impose
their own rules and regulations governing the provision of intrastate
operator services, including regulation of rates. Many states have rules
similar if not identical to those imposed by the FCC on interstate operator
assisted calls. At the date of this report, the Company was in material
compliance with the requirements of each of the individual state regulatory
agencies and continues to pursue authorization to provide intrastate operator
services in other targeted states. Certain states are expected to introduce
or revise their rules governing operator services providers within the next
year. Currently, the Company does not anticipate significant difficulty in
complying with the new or revised rules.
9
<PAGE>
DIRECT DIAL LONG DISTANCE SERVICES
The FCC has regulatory jurisdiction over interstate and international
telecommunications common carriers, like the Company. Under Section 214 of
the Federal Communications Act, the FCC must certify a communications common
carrier before it may provide international services. The Company has
obtained Section 214 authorization to provide international switched services
by means of resale. The FCC has ruled that "non-dominant" common carriers,
like the Company, need not apply for Section 214 authorization for the
provision of domestic U.S. interstate services.
At September 30, 1997, the Company was authorized to provide intrastate
long distance service within 47 states with authorization pending approval in
one other state. Regulations within each of these states, as they pertain to
completing direct dial long distance calls for the Company's customers within
the state, are virtually static and pose no foreseeable concern. As the
Company expands the geographic scope of its direct dial long distance
business, it will seek state regulatory approvals as necessary to provide
intrastate long distance service.
BILLED PARTY PREFERENCE
In April 1992, the 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 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 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
into law. This act allows the RBOCs to seek authority from the FCC 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, non-discriminatory access to white pages listings and
telephone number assignments, 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
10
<PAGE>
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 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, including in many cases, the Company,
today buy "tandem switched" transport. 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.
11
<PAGE>
EMPLOYEES
At September 30, 1997, the Company had 658 full-time employees,
including 18 officers, 219 sales and marketing personnel, 148 network,
technical and operations personnel, 92 accounting, administrative and support
personnel and 181 telephone operators and customer service representatives
and related support personnel. At September 30, 1997, the Company also
employed 178 part-time telephone operators and customer service
representatives. None of the Company's employees are represented by a union.
The Company believes that its employee relations are good.
ITEM 2. PROPERTIES
At September 30, 1997, the Company occupied approximately 75,185 square
feet of space for its corporate offices at 9311 San Pedro, San Antonio,
Texas, pursuant to a lease agreement that expires in March 2004.
Additionally, at September 30, 1997, the Company leased approximately 17,000
square feet of space for its operator services center at 2200 Danbury, San
Antonio, Texas, and approximately 69,300 square feet in the aggregate for 30
sales and operations offices throughout Texas, Oklahoma, New Mexico,
Louisiana, California, Oregon, Florida, Washington, Georgia and North
Carolina. The Company believes that its facilities are adequate to meet its
current needs.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Stockholders of the Company was held on 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 from U.S. Long Distance Corp. to USLD Communications Corp. The new
name more accurately represents the Company's role as a provider of a diverse
line of communications services, rather than just a provider of long distance
services.
The results of the Special Meeting were as follows:
Number of Votes
Votes For 13,848,201
Votes Against 20,451
Votes Abstained 9,762
12
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is quoted on the Nasdaq National Market
System under the symbol "USLD." The table below sets forth the high and low
bid prices for the Common Stock from October 1, 1996, through November 28,
1997, as reported by the Nasdaq National Market System. These price
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
HIGH LOW
---- ---
Fiscal Year Ended September 30, 1996:
1st quarter $ 15 1/8 $ 10 7/8
2nd quarter $ 20 1/2 $ 13
3rd quarter (1) $ 41 1/8 (1) $ 19 5/8 (1)
4th quarter (Pre-Distribution) (1) $ 39 3/8 (1) $ 25 1/2 (1)
4th quarter (Post-Distribution) (1) $ 10 (1) $ 4 3/8 (1)
Fiscal Year Ended September 30, 1997:
1st quarter $ 10 1/8 $ 7 1/2
2nd quarter $ 12 7/8 $ 7 7/8
3rd quarter $ 17 1/4 $ 10 1/4
4th quarter $ 20 1/8 $ 13
Fiscal Year Ended September 30, 1998:
1st quarter (through November 28, 1997) $ 21 $ 18 3/8
- --------------------
(1) On May 14, 1996, the Company's Board of Directors announced the spin-off of
Billing Information Concepts Corp. ("Billing"). On August 2, 1996, the Company
completed the distribution of all of the capital stock of Billing. The average
stock price for the first ten business days after the distribution date was
$6.77 for the Company and $19.36 for Billing.
STOCKHOLDERS
At November 28, 1997, there were 16,325,409 shares of Common Stock
outstanding, held by 527 holders of record. The last reported sales price of
the Common Stock on November 28, 1997, was $20 3/4 per share.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on the Common
Stock. The Company presently intends to retain all earnings for the operation
and development of its business and does not anticipate paying any cash
dividends on the Common Stock in the foreseeable future. Furthermore, certain
covenants in various credit agreements of the Company together with the
definitive Merger agreement with LCI prohibit the payment of cash dividends
on the Common Stock.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below are derived from the audited
Consolidated Financial Statements of the Company. The data presented below
for the fiscal years ended September 30, 1997, 1996 and 1995 should be read
in conjunction with the Consolidated Financial Statements, the Notes thereto
and the other financial information included elsewhere in this report. All
periods presented reflect the spin-off of Billing as discontinued operations
as of September 30, 1992. The Company has never declared cash dividends on
its Common Stock, nor does it anticipate doing so in the foreseeable future.
<TABLE>
FISCAL YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT DATA:
Total operating revenues $226,893 $180,346 $144,050 $117,541 $80,119
Net income (loss) from continuing operations $ 5,251 $(13,754) $ (2,083) $ (2,475) $(1,265)
Net income (loss) from continuing operations
per common share $ 0.32 $ (0.89) $ (0.14) $ (0.18) $ (0.10)
SEPTEMBER 30,
-----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Total assets (1) $123,003 $ 99,244 $ 86,027 $ 79,413 $64,835
Long-term obligations, less current portion $ 16,022 $ 10,341 $ 16,168 $ 16,684 $13,266
SEPTEMBER 30,
-----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
OPERATING DATA (UNAUDITED):
Operator services minutes per month (2) 6,800 7,600 8,300 9,100 10,600
Pay telephones serviced (3) 71.6 61.3 60.9 52.0 44.8
Rooms serviced (3) 141.5 135.9 136.9 122.0 106.0
Direct dial long distance minutes per month (2) 151,200 105,400 62,600 44,700 17,200
</TABLE>
- ------------------
(1) Excludes net assets of discontinued operations.
(2) Calculated based upon a monthly average over the fiscal quarter ended on
the date indicated.
(3) At end of the period.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS - CAUTIONARY STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K 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 fiscal 1997, 1996 and 1995. It
should be read in conjunction with the Consolidated Financial Statements of
the Company, the Notes thereto and the other financial information included
elsewhere in this report. For purposes of the following discussion,
references to year periods refer to the Company's fiscal years ended
September 30 and references to quarterly periods refer to the Company's
fiscal quarters ended December 31, March 31, June 30 and September 30.
On July 10, 1996, the Company's Board of Directors approved a plan to
spin off the Company's commercial billing clearinghouse and information
management services business ("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 tax-free for federal income tax purposes
to the Company's stockholders, and the Company did not recognize income, gain
or loss as a result of the distribution except for direct spin-off costs. The
distribution was completed on August 2, 1996.
The accompanying 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 Consolidated Pro Forma
Statements of Operations are also included and discussed in a separate
section below.
OVERVIEW
Revenues grew to $226.9 million in 1997 from $180.3 million in 1996 and
$144.1 million in 1995. During the five-year period ended September 30, 1997,
revenues grew at a 36% annual compounded rate. The Company's gross profit
margin was 33.8% in 1997, 34.3% in 1996 and 34.7% in 1995. The decrease in
gross margin from 1995 to 1997 was largely due to the growth of lower gross
margin direct dial long distance revenues as a percentage of total revenues.
The Company's selling, general and administrative ("SG&A") expenses as a
percentage of revenues were 23.4%, 28.1% and 28.9% in 1997, 1996 and 1995,
respectively. The decrease from 1995 to 1997 was primarily the result of
tighter expense controls and increased efficiencies. Depreciation and
amortization expenses as a percentage of revenues were 5.0%, 6.5% and 7.0% in
1997, 1996 and 1995, respectively. Net income (loss) from continuing
operations of $5.3 million, ($13.8) million and ($2.1) million was reported
for 1997, 1996 and 1995, respectively.
15
<PAGE>
RESULTS OF OPERATIONS
The following table presents certain items in the Consolidated
Statements of Income as a percentage of total operating revenues for the
years ended September 30, 1997, 1996 and 1995:
1997 1996 1995
----- ----- -----
Operating revenues:
Direct dial long distance services 74.0% 66.2 % 58.6 %
Operator services 25.3 33.8 41.4
Local services 0.7 0.0 0.0
----- ----- -----
Total operating revenues 100.0% 100.0 % 100.0 %
Operating expenses:
Cost of services 66.2% 65.7 % 65.3 %
Selling, general and administrative 23.4 28.1 28.9
Non-recurring special charges 0.8 8.8 0.0
Depreciation and amortization 5.0 6.5 7.0
----- ----- -----
Income (loss) from operations 4.6% (9.1)% (1.2)%
----- ----- -----
----- ----- -----
OPERATING REVENUES
Revenues in 1997 increased by 26% to $226.9 million from $180.3 million
in 1996 and by 25% from $144.1 million in 1995. Growth in direct dial long
distance services revenues accounted for $48.5 million of the total increase
in revenues from 1996 to 1997.
DIRECT DIAL LONG DISTANCE SERVICES. Direct dial long distance services
revenue increased 41% to $167.9 million in 1997 compared to $119.4 million in
1996 and 41% compared to $84.5 million in 1995. The increase in revenue is
primarily 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 of its primary
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.
Accordingly, the Company continues to consider potential acquisitions. While
the Company has, from time to time, had discussions with such companies, it
has no agreements or pending negotiations, with the exception of the Merger.
OPERATOR SERVICES. Operator services revenue was $57.5 million in 1997
compared to $60.9 million in 1996 and $59.6 million in 1995. The Company
processed 15.3 million operator services calls in 1997 compared to 17.5
million in 1996 and 17.4 million in 1995. The Company serviced an average of
approximately 66,100 pay telephones and 140,500 hospitality rooms per month
for 1997, compared to an average of approximately 66,100 pay telephones and
128,300 hospitality rooms per month for 1996 and 55,200 pay telephones and
130,300 hospitality rooms per month for 1995. The decrease in revenue is
principally attributable to the decrease in volume of operator services
calls. The decrease in call volume is primarily attributed 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").
Additionally, changes in federal or state regulations could negatively impact
revenues of the Company (see "Item 1 - Business - Government Regulations").
LOCAL SERVICES. Local service revenue was $1.6 million in 1997. The
Company entered the local service market during the second quarter of 1997,
and was providing local resale service to approximately 12,900 subscriber
lines at September 30, 1997.
OPERATING EXPENSES
COST OF SERVICES. The gross profit margin was 33.8%, 34.3% and 34.7%
during 1997, 1996 and 1995, respectively. The decline in gross profit margins
from 1995 to 1997 is primarily due to the change in the Company's revenue
mix. The direct dial long distance services revenue as a percentage of total
revenues has increased. Such revenues have a lower gross margin than the
operator services revenue and accounted for 74%, 66% and 59% of total revenue
during 1997, 1996 and 1995, respectively.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses for 1997 were $53.2
million, representing 23.4% of revenues, compared to $50.7 million in 1996,
or 28.1% of revenues, and $41.6 million in 1995 or 28.9% of revenues. SG&A
expenses as a percentage of revenues have continued to decrease as a result
of tighter expense controls and successful efforts to streamline the
Company's operations.
NON-RECURRING SPECIAL CHARGES. The Company incurred $1.9 million and
$15.8 million in non-recurring special charges in 1997 and 1996,
respectively. The 1997 charges consisted of $1.2 million in charges
associated with the resignation of Parris H. Holmes, Jr. 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
16
<PAGE>
restricted Common Stock. In addition, the Company incurred $669,000 in
professional fees during 1997 in association with the Merger. Non-recurring
special charges in 1996 represent costs incurred in connection with the
spin-off of Billing and restructuring charges. The Company incurred $13.0
million in certain professional and filing fees, payments required for
terminating or restructuring employment contracts, tax payments triggered by
the spin-off and non-cash expenses associated with the vesting of stock
grants. The Company also incurred $2.8 million in restructuring charges. The
charges include costs associated with consolidating customer service, credit
and collection and other support functions; vacating certain office
facilities; terminating certain marketing contracts; writing down excess
assets and providing severance payments.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
was $11.3 million, $11.8 million and $10.0 million in 1997, 1996 and 1995,
respectively. Depreciation and amortization expense as a percentage of
revenues decreased to 5.0% in 1997 from 6.5% in 1996 and 7.0% in 1995. This
decrease as a percentage of revenues is primarily attributable to the
increase in revenues.
INCOME (LOSS) FROM CONTINUING OPERATIONS
Income from continuing operations in 1997 increased to $10.3 million
from losses of $16.5 million in 1996 and $1.6 million in 1995. Excluding
non-recurring special charges, the Company would have reported income from
continuing operations of $12.2 million in 1997, and a loss from continuing
operations of $667,000 in 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, as discussed above.
OTHER EXPENSE, NET
Net other expense was $982,000, $628,000 and $999,000 in 1997, 1996 and
1995, respectively. The increase in 1997 from 1996 is primarily attributable
to a higher average level of indebtedness during the past year as well as a
decrease in other income. The decrease in 1996 from 1995 is due to a lower
level of indebtedness in 1996.
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.
NET INCOME
The Company reported net income of $5.3 million, $1.4 million and $12.0
million in 1997, 1996 and 1995, respectively. The increase in 1997 from 1996
is attributable to the increase in revenues and the decrease in SG&A expenses
as a percentage of revenues, as discussed above. The decrease in 1996 from
1995 is due to the non-recurring special charges incurred in 1996. In
addition, 1996 and 1995 include $15.2 million and $14.1 million,
respectively, in income from discontinued operations due to the spin-off of
Billing.
EFFECTS OF SPIN-OFF OF BILLING GROUP BUSINESS
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 its stockholders. The
distribution was tax-free for federal income tax purposes to the stockholders
of the Company, and the Company did not recognize income, gain or loss as a
result of the distribution, except for direct spin-off costs. The spin-off
was completed on August 2, 1996.
The Consolidated Statements of Income included in this report reflect
the continuing operations of the Company for the year ended September 30,
1997, and the continuing and discontinued operations for the years ended
September 30, 1996 and 1995. 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 Operations are presented below for the
years ended September 30, 1996, 1995, 1994 and 1993. These unaudited
Consolidated Pro Forma Statements of Operations are based on the historical
statements of the periods presented adjusted to reflect the items discussed
in the accompanying Notes to the unaudited Consolidated Pro Forma Financial
Statements. The unaudited Consolidated Pro Forma Statements of Operations
give effect to the spin-off of Billing as if it had occurred on September 30,
1992. The pro forma adjustments reflect the terms of the spin-off agreements,
which are expected to have a continuing impact on the Company.
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 the Company's historical Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" set forth herein. The pro
forma financial statements should not be considered indicative of the
operating results which the Company 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 upon certain assumptions which are subject to change.
The unaudited Consolidated Pro Forma Statements of Operations of the
Company reflect, in management's opinion, all
17
<PAGE>
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.
USLD COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED PRO FORMA STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
FISCAL YEAR ENDED
SEPTEMBER 30,
-----------------------------------------
1996 1995 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PRO FORMA
Operating revenues:
Direct dial long distance services (A) $119,401 $ 84,484 $ 62,834 $ 29,673
Operator services 60,945 59,566 54,707 50,446
-------- -------- -------- --------
Total operating revenues 180,346 144,050 117,541 80,119
Cost of services 118,493 94,038 72,944 47,403
-------- -------- -------- --------
Gross profit 61,853 50,012 44,597 32,716
Selling, general and administrative expense (B) 50,722 41,580 38,541 27,804
Depreciation and amortization expense 11,798 10,032 8,424 5,060
-------- -------- -------- --------
Loss from operations (C) (667) (1,600) (2,368) (148)
Other expense, net (628) (999) (865) (1,561)
-------- -------- -------- --------
Loss before income tax benefit (1,295) (2,599) (3,233) (1,709)
Income tax benefit (D) 544 1,092 1,358 718
-------- -------- -------- --------
Net loss before extraordinary items (751) (1,507) (1,875) (991)
Extraordinary loss 0 0 0 (316)
-------- -------- -------- --------
Net loss $ (751) $ (1,507) $ (1,875) $ (1,307)
-------- -------- -------- --------
-------- -------- -------- --------
Net loss per common share $ (0.05) $ (0.10) $ (0.13) $ (0.11)
Weighted average common shares and common
share equivalents outstanding 15,398 14,587 14,069 12,117
</TABLE>
NOTES TO UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(A) The long distance and 800 services provided by the Company to Billing
were, historically, eliminated in consolidation. The pro forma statements
of operations reflect an adjustment for these long distance and 800
services revenues to achieve arm's length pricing consistent with the
Telecommunications Agreement executed between the Company and Billing.
(B) The billing clearinghouse and information management services provided by
Billing to the Company were, historically, eliminated in consolidation.
The pro forma statements of operations reflect an adjustment for these
billing clearinghouse and information management costs to achieve arm's
length pricing consistent with the Zero Plus-Zero Minus Billing and
Information Management Services Agreement and the One-Plus Billing and
Information Management Services Agreement executed between Billing and
the Company.
(C) In order to reflect the operating results of the Company on normalized
basis, these unaudited Consolidated Pro Forma Statements of Operations
exclude direct spin-off costs and restructuring charges. Direct spin-off
costs were $13.0 million for the year ended September 30, 1996,
respectively. Restructuring charges were $2.8 million for the year ended
September 30, 1996.
(D) On the unaudited Consolidated Pro Forma Statements of Operations, the
Company reflects a pro forma benefit for income taxes at a 42% tax rate
for all periods presented for purposes of comparability. Actual tax amounts
were higher in the third and fourth quarters of fiscal 1996 due to
nondeductibility of certain non-recurring expenses associated with the
spin-off and restructuring.
18
<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.
On September 17, 1997, the Company signed a definitive agreement to
merge with a wholly-owned subsidiary of LCI. The transaction is to be
accounted for as a pooling-of-interests business combination. The transaction
is anticipated to be tax-free to both the Company's and LCI's stockholders
and is expected to be completed by December 31, 1997. A Special Meeting of
Stockholders of the Company is scheduled for December 17, 1997, for the
purpose of considering and voting upon the Merger. There can be no assurances
that such Merger will be approved by the stockholders of the Company at the
Special Meeting, or, if approved, that the other conditions to closing will
be met or waived in order to permit consummation of the Merger. At this time,
the effect of completion of the Merger on the Company's "Outlook" and other
forward-looking statements contained in this Form 10-K is not determinable.
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 expenses as a percentage of revenues.
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 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.
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. Management is considering and will continue to consider
new investments in switching and related networking equipment.
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 two RBOCs and one LEC covering 16
states and interconnection agreements with two RBOCs and one LEC covering
seven states. The Company has signed interconnection agreements with SWBT,
U S WEST and GTE, enabling the Company to provide local service to business and
residential customers in these respective companies' local service areas. The
Company believes that it has the potential to capitalize on its relationships
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 has been to roll out three product offerings over a
nine-month period. The first was a resale product targeted to the Company's
pay telephone customers. The Company's existing relationships with pay
telephone customers provides a unique opportunity for the Company. The
Company has the potential to provide local access to a large volume of
telephone lines, yet a limited number of customers. This product was offered
in February 1997. In June 1997, a resale local product was offered to
commercial customers. This product is offered in targeted markets where the
Company has high concentration of existing 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, was offered to commercial and pay
19
<PAGE>
telephone customers in selected markets in the first quarter of fiscal 1998.
This product is provided through a switch which was installed in San Antonio,
Texas, during the fourth quarter of fiscal 1997. This $1.0 million,
state-of-the-art, Lucent modular switch is initially 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
are being sold into the Company's existing customer base in an effort to
leverage existing relationships and minimize SG&A expenses.
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. This investment is expected
to result in lower 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 $2.0 billion in
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 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. This act allows the RBOCs to seek authority from the FCC 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 "Item 1 - Business - Government Regulations"
within this Form 10-K for a detailed discussion of this matter. The Company
cannot predict
20
<PAGE>
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 decreased to $4.8 million at September 30,
1997, from $8.8 million at September 30, 1996. This decrease is attributable
to the purchase of certain computer and network equipment in the fourth
quarter of 1997. Working capital was $26.2 million at September 30, 1997,
compared to $20.1 million at September 30, 1996. The Company's current ratio
was 1.7:1 at September 30, 1997 and September 30, 1996. The Company's cash
flow provided by operations was $16.0 million for fiscal 1997 and $1.6
million for 1996. Improved cash flow provided by operations was primarily due
to increased profitability of the Company.
Accounts receivable increased to $43.1 million at September 30, 1997
from $35.9 million at September 30, 1996. This increase is attributable
primarily to a higher level of direct dial long distance services revenues in
1997 compared to 1996. Federal income tax receivable increased to $7.3
million at September 30, 1997 from $0 at September 30, 1996. This increase is
attributable to a refund of federal income taxes due to the Company. Trade
accounts payable and accrued liabilities increased to $30.5 at September 30,
1997 from $24.5 million at September 30, 1996 due to the overall expansion of
the Company's business. Prepaids and other current assets increased to $7.2
million at September 30, 1997 from $6.0 million at September 30, 1996. This
increase is due to an increase in prepaid line costs and notes receivable.
The increase in other assets to $8.8 million at September 30, 1997 from $4.9
million at September 30, 1996 is due to an increase in purchased customer
lists.
Capital expenditures amounted to approximately $17.1 million during
1997. These expenditures were related primarily to the purchase of
telecommunications equipment, computer equipment and software and office
furniture. During 1997, the Company financed approximately $4.1 million of
equipment through long-term borrowings. During fiscal 1998, the Company
anticipates capital expenditures of $21.0 million to $25.0 million to service
the Company's projected growth. Approximately $14.0 million to $16.0 million
of these capital expenditures are expected to be purchases of
telecommunications equipment, approximately $5.5 million to $7.5 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. Although line of credit
commitments have been made to the Company by various lenders for equipment
purchases, there is no assurance that the Company will be able to obtain
satisfactory financing for these capital expenditures.
In fiscal 1997, the Company entered into two revolving credit receivable
financing facilities and one equipment financing facility. One revolving
facility allows the Company to borrow against its own operator services
accounts receivable. Any borrowings under this facility will bear interest at
the prime rate plus 4.0%. The second revolving facility is a one-year,
annually renewable facility and allows the Company to borrow against its own
direct dial long distance services accounts receivable. Any borrowings under
this facility will bear interest at the prime rate plus .5%. This financing
facility terminates on January 31, 1998. The equipment financing facility
will bear interest at the five-year treasury bond rate, as defined in the
agreement, plus approximately 3.0%. This financing facility terminates on
December 31, 1997. At September 30, 1997, the Company had $21.0 million
available for borrowing and did not have any amounts borrowed under these
facilities.
In addition, the Company has a $10.0 million equipment financing
facility with an interest rate at the 30-day commercial paper rate, as
defined in the agreement, plus 2.70%. The agreement provided for a one-year
period during which the Company could finance up to $10.0 million in
equipment on an interest payment only basis. During fiscal 1997, this
interest-only period was extended through December 31, 1997. Upon completion
of this period, the outstanding borrowings will convert to a series of term
notes with 20% of the total amount borrowed due in each of the next five
years. Any amounts not due in a given year may be prepaid and reborrowed at
the Company's discretion. At September 30, 1997, the Company had $4.1 million
borrowed and $5.9 million available for borrowing under this facility. No
amounts were outstanding under this facility at September 30, 1996.
21
<PAGE>
The Company has various fixed rate notes with interest rates ranging
from 6.75% to 11.0%, due in varying amounts through August 2001. The proceeds
from the issuance of these notes were used to acquire certain computer and
telecommunications equipment and office furniture. The loans are secured by
the assets acquired with the proceeds of such notes. Certain of these notes
are also guaranteed by Billing.
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 prior to the spin-off. In connection with the
spin-off, the Company received from certain lenders loan agreement amendments
or separate loan agreements whereby the subject indebtedness is secured by
only the Company's assets. In other cases, the existing guarantees and
security arrangements between the Company and Billing remained 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.
The credit facilities discussed above contain various restrictions and
financial ratio maintenance requirements. Under one of its credit facilities,
the Company is required to maintain a quarterly ratio of consolidated
operating income, as defined in the agreement, to consolidated fixed charges
of 1.5 to 1.0. Further, the Company is required to maintain a ratio of funded
debt, as defined in the agreement, to total capitalization of not greater
than 60% and total debt to total capitalization of not greater than 85%.
Other agreements require the Company to maintain cash flow coverage ratios,
as defined in the agreements, ranging between 1.25 and 1.40, a minimum
tangible net worth ranging between $30.0 million and $35.0 million, minimum
total liabilities to net worth ratio of 1.20, a current ratio of greater than
1.50 and working capital in excess of $18.0 million. Under one agreement, the
Company is prohibited from paying a cash dividend on its Common Stock.
Cross-default provisions of the Company's most significant credit facilities
may place the Company in default of such facilities should it fail to satisfy
provisions of certain other loan agreements. Under the Company's most
significant credit facilities, USLD has guaranteed the obligations of its
subsidiaries. The Company was in compliance with all required covenants at
September 30, 1997 and 1996. In order to remain in compliance with certain
debt covenants, the Company is required to obtain written consent from
certain lenders regarding any proposed merger activity. The Company expects
that these consents will be obtained in connection with the Merger.
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. While the Company has, from time
to time, had discussions with communications companies, it has no agreements
or pending negotiations, with the exception of the Merger noted above.
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.
SEASONALITY
Approximately 95% of the Company's direct dial long distance revenues is
generated by commercial customers and, accordingly, the Company experiences
general decreases in long distance revenues around national holidays when
commercial traffic is reduced. The Company typically experiences decreases in
operator services revenues in the fall and winter months as pay telephone
usage declines due to cold and inclement weather in many parts of the United
States. As a result of the seasonal variations discussed above, revenue
reported in the Company's first fiscal quarter ending December 31 (which
includes the Thanksgiving, Christmas and New Year's Eve holidays), historically,
has been the lowest level of any quarter of the year. Conversely, due to
increased traffic from pay telephones during the spring and summer months and
a lower concentration of national holidays, the Company has historically
experienced its highest revenue levels in the third and fourth quarters of
the fiscal year. Because the Company's fixed operating expenses do not decrease
during the first fiscal quarter, the Company's profitability is also, generally,
at its lowest level for any quarter of the year.
22
<PAGE>
EFFECT OF INFLATION
Inflation is not a material factor affecting the Company's business.
Prices charged to the Company for switching equipment and transmission costs
have not materially changed during the year. General operating expenses such
as salaries, employee benefits and occupancy costs are, however, subject to
normal inflationary pressures.
NEW ACCOUNTING STANDARDS
The Company is not currently, nor does it expect to be, materially
affected by any new standards recently issued by the Financial Accounting
Standards Board.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and the related
report of the Company's independent public accountants thereon are included
in this report at the page indicated.
ITEM PAGE
- ---- ----
Report of Independent Public Accountants 24
Consolidated Balance Sheets at September 30, 1997 and 1996 25
Consolidated Statements of Income for the Years Ended
September 30, 1997, 1996 and 1995 26
Consolidated Statements of Stockholders' Equity for the
Years Ended September 30, 1997, 1996 and 1995 27
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1997, 1996 and 1995 28
Notes to Consolidated Financial Statements 29
23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
USLD Communications Corp.:
We have audited the accompanying consolidated balance sheets of USLD
Communications Corp. (a Delaware corporation) and subsidiaries as of
September 30, 1997 and 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in
the period ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of USLD
Communications Corp. and subsidiaries as of September 30, 1997 and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended September 30, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
San Antonio, Texas
November 14, 1997
24
<PAGE>
USLD COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
ASSETS
SEPTEMBER 30,
------------------------
1997 1996
Current assets: --------- ---------
Cash and cash equivalents $ 4,816 $ 8,842
Accounts receivable, net of allowances for
doubtful accounts of $2,827 (1997) and
$2,519 (1996) 43,124 35,867
Federal income tax receivable 7,302 0
Prepaids and other 7,239 6,002
--------- ---------
Total current assets 62,481 50,711
--------- ---------
Property and equipment 76,161 60,110
Less accumulated depreciation and amortization (37,637) (30,251)
--------- ---------
Net property and equipment 38,524 29,859
--------- ---------
Other assets:
Excess of cost over net assets acquired, net of
accumulated amortization of $2,634 (1997)
and $2,065 (1996) 13,234 13,804
Other assets, net of accumulated amortization
of $6,901 (1997) and $4,892 (1996) 8,764 4,870
--------- ---------
Total assets $ 123,003 $ 99,244
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 21,524 $ 10,909
Accrued liabilities 9,039 13,581
Current portion of long-term debt 5,572 5,854
Current portion of obligations under capital leases 109 294
--------- ---------
Total current liabilities 36,244 30,638
--------- ---------
Long-term debt, less current portion 5,852 10,146
Line of credit 4,158 0
Other liabilities 614 143
Deferred tax liability 5,398 52
Commitments and contingencies (See Notes 7 and 15)
Stockholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares
authorized, no shares issued or outstanding at
September 30, 1997 or 1996 0 0
Common stock, $0.01 par value, 50,000,000 shares
authorized; 16,493,524 and 15,255,977 shares
issued and 16,289,423 and 15,051,876 shares outstanding
at September 30, 1997 and 1996, respectively 165 153
Additional paid-in capital 62,147 54,554
Retained earnings 10,332 5,465
Treasury stock (1,907) (1,907)
--------- ---------
Total stockholders' equity 70,737 58,265
--------- ---------
Total liabilities and stockholders' equity $ 123,003 $ 99,244
--------- ---------
--------- ---------
The accompanying notes are an integral part of
these consolidated financial statements.
25
<PAGE>
USLD COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
FOR THE YEAR
ENDED SEPTEMBER 30,
-------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Operating revenues:
Direct dial long distance services $ 167,866 $ 119,401 $ 84,484
Operator services 57,468 60,945 59,566
Local services 1,559 0 0
--------- --------- ---------
Total operating revenues 226,893 180,346 144,050
Cost of services 150,214 118,493 94,038
--------- --------- ---------
Gross profit 76,679 61,853 50,012
Selling, general and administrative expense 53,181 50,722 41,580
Non-recurring special charges (See Note 4) 1,902 15,809 0
Depreciation and amortization expense 11,333 11,798 10,032
--------- --------- ---------
Income (loss) from continuing operations 10,263 (16,476) (1,600)
Other income (expense):
Interest income 490 894 682
Interest expense (1,456) (1,356) (1,643)
Other, net (16) (166) (38)
--------- --------- ---------
Total other expense (982) (628) (999)
--------- --------- ---------
Income (loss) from continuing operations before
income tax benefit (provision) 9,281 (17,104) (2,599)
Income tax benefit (provision) (4,030) 3,350 516
--------- --------- ---------
Net income (loss) from continuing operations 5,251 (13,754) (2,083)
Discontinued operations (See Note 3):
Income from discontinued operations, net of
income taxes of $9,292 (1996) and $8,661
(1995) 0 15,161 14,118
--------- --------- ---------
Net income $ 5,251 $ 1,407 $ 12,035
--------- --------- ---------
--------- --------- ---------
Net income (loss) per common share, primary:
Continuing operations $ 0.32 $ (0.89) $ (0.14)
Discontinued operations 0.00 0.98 0.97
--------- --------- ---------
Net income per common share $ 0.32 $ 0.09 $ 0.83
--------- --------- ---------
--------- --------- ---------
Weighted average common shares and common share
equivalents outstanding 16,662 15,398 14,587
--------- --------- ---------
--------- --------- ---------
Net income (loss) per common share, fully diluted:
Continuing operations $ 0.31 $ (0.89) $ (0.14)
Discontinued operations 0.00 0.98 0.96
--------- --------- ---------
Net income per common share $ 0.31 $ 0.09 $ 0.82
--------- --------- ---------
--------- --------- ---------
Weighted average common shares and common share
equivalents outstanding 16,756 15,473 14,617
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
26
<PAGE>
USLD COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
COMMON STOCK PREFERRED STOCK ADDITIONAL
--------------- ---------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK
------ ------ ------ ------ ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at September 30, 1994 12,932 $129 0 $0 $42,540 $ 8,211 $(1,664)
Business combinations 175 2 0 0 1 227 0
Exercise of stock options and
warrants 1,080 11 0 0 4,805 0 0
Issuance of common stock 195 2 0 0 2,422 0 0
Issuance of treasury stock (100) (1) 0 0 (949) 0 950
Purchase of treasury stock 0 0 0 0 0 0 (1,075)
Other capital contribution 0 0 0 0 485 0 0
Net income 0 0 0 0 0 12,035 0
------ ------ ------ ------ ------- -------- --------
Balances at September 30, 1995 14,282 143 0 0 49,304 20,473 (1,789)
Issuance of common stock 223 2 0 0 1,210 0 0
Return of escrowed shares 0 0 0 0 0 0 (118)
Exercise of stock options and warrants 751 8 0 0 3,913 0 0
Other capital contribution 0 0 0 0 127 0 0
Spin-off of Billing Information Concepts
Corp. 0 0 0 0 0 (16,415) 0
Net income 0 0 0 0 0 1,407 0
------ ------ ------ ------ ------- -------- --------
Balances at September 30, 1996 15,256 153 0 0 54,554 5,465 (1,907)
Issuance of common stock 116 1 0 0 846 0 0
Exercise of stock options and warrants 884 9 0 0 6,499 0 0
Business combinations 238 2 0 0 248 (384) 0
Net income 0 0 0 0 0 5,251 0
------ ------ ------ ------ ------- -------- --------
Balances at September 30, 1997 16,494 $165 0 $0 $62,147 $ 10,332 $(1,907)
------ ------ ------ ------ ------- -------- --------
------ ------ ------ ------ ------- -------- --------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
27
<PAGE>
USLD COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
FOR THE YEAR
ENDED SEPTEMBER 30,
---------------------------------------
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) from continuing operations $ 5,251 $(13,754) $ (2,083)
Adjustments to reconcile net income (loss) from
continuing operations to net cash
provided by operating activities:
Depreciation and amortization 11,333 11,798 10,032
Provision for losses on accounts receivable 9,156 8,388 6,231
Deferred compensation 0 4,078 255
Loss on write-down of property and equipment 35 1,084 171
Changes in current assets and liabilities, net of
effects from acquisitions of direct
dial long distance companies:
Increase in accounts receivable (17,115) (13,001) (12,882)
Decrease (increase) in prepaids and other (2,391) (766) 600
Increase (decrease) in accounts payable 10,052 161 (4,222)
Increase (decrease) in accrued liabilities (4,419) 6,897 1,869
Increase (decrease) in other liabilities 4,122 (3,266) 1,843
-------- -------- --------
Net cash provided by operating activities 16,024 1,619 1,814
-------- -------- --------
Net cash provided by discontinued operations 0 16,661 6,549
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment (17,111) (11,007) (9,761)
Purchases of customer lists (5,016) 0 0
Acquisition of direct dial long distance companies,
net of cash acquired 0 0 (175)
Proceeds from sale of assets 0 45 632
Other investing activities (216) (335) (54)
-------- -------- --------
Net cash used in investing activities (22,343) (11,297) (9,358)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of debt 1,741 3,500 4,784
Payments on debt (6,231) (5,742) (5,512)
Payments on capital leases (304) (458) (1,267)
Proceeds from line of credit, net 4,018 0 0
Proceeds from issuance of common stock, net of
issuance costs 3,069 4,559 4,065
Purchase of treasury stock 0 0 (1,075)
-------- -------- --------
Net cash provided by financing activities 2,293 1,859 995
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (4,026) 8,842 0
Cash and cash equivalents, beginning of year 8,842 0 0
-------- -------- --------
Cash and cash equivalents, end of year $ 4,816 $ 8,842 $ 0
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
28
<PAGE>
USLD COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
NOTE 1. BUSINESS ACTIVITY
USLD Communications Corp. ("USLD") was redomesticated from Canada and
reincorporated under the Delaware Corporation Law Act in the State of
Delaware, United States of America, in 1987. USLD (individually, or together
with its subsidiaries, the "Company") offers an integrated group of
communications services including direct dial long distance and local
services, prepaid calling cards, travel cards, Internet access, data
transmission and calling center services. The Company's network consists of a
digital switching system which provides nationwide, largely fiber-optic,
access throughout the United States.
The Company is a fully-integrated, switch-based communications company
currently providing direct dial long distance services to small and
medium-sized commercial customers and, to a lesser extent, residential
customers. In addition, the Company provides operator assisted services for
pay telephones, hotels, motels, university dormitories and hospitals. In
February 1997, the Company began offering local services to pay telephone and
commercial customers. In fiscal 1997, direct dial long distance services
represented approximately three-fourths of the Company's revenues, while
operator services represented approximately one-fourth of revenues. Local
services revenues were not significant in fiscal 1997.
On August 19, 1997, stockholders of the Company approved a proposal to
amend the Company's Restated Certificate of Incorporation to change the name
of the Company from U.S. Long Distance Corp. to USLD Communications Corp.
On September 17, 1997, the Company signed a definitive agreement to
merge with a wholly-owned subsidiary of LCI International, Inc. ("LCI") (the
"Merger"). Under the terms of the agreement, for each of the Company's
outstanding shares of Common Stock, LCI will exchange a fraction of one share
of LCI common stock having a value of $20.00 based upon the average price of
LCI common stock for the 20 trading days ending three days before the Merger,
subject to certain exceptions. The transaction is to be accounted for as a
pooling-of-interests business combination. The transaction is anticipated to
be tax-free to both the Company's and LCI's stockholders and is expected to
be completed by December 31, 1997. A Special Meeting of Stockholders of the
Company is scheduled for December 17, 1997, for the purpose of considering
and voting upon the Merger. There can be no assurances that such Merger will
be approved by the stockholders of the Company at the Special Meeting, or, if
approved, that the other conditions to closing will be met or waived in order
to permit consummation of the Merger.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of USLD and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain
current period and prior period amounts have been reclassified for
comparative purposes.
On August 2, 1996, the Company completed the spin-off of its commercial
billing clearinghouse and information management services business, Billing
Information Concepts Corp. ("Billing"). 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 ("APB") Opinion No. 30.
Financial disclosures for all periods presented which are prior to the
spin-off reflect that restatement.
Cash was historically managed by a centralized cash management
department in Billing. Consequently, cash was not allocated among the
Company's subsidiaries and was recorded on the balance sheet of Billing.
Total consolidated cash was $22.9 million at September 30, 1995, none of
which is reflected on the Company's statement of cash flows for financial
reporting purposes.
ESTIMATES IN THE FINANCIAL STATEMENTS
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.
29
<PAGE>
REVENUE RECOGNITION POLICIES
The Company recognizes revenue from its direct dial long distance,
operator and local services as such services are performed.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are computed on a straight-line basis over the estimated useful lives of the
related assets, which range from three to ten years. Upon disposition, the
cost and related accumulated depreciation and amortization are removed from
the accounts and the resulting gain or loss is reflected in other income for
that period. Expenditures for maintenance and repairs are charged to expense
as incurred. Direct installation costs and major improvements are capitalized.
EXCESS OF COST OVER NET ASSETS ACQUIRED
Excess of cost over net assets acquired represents the excess of the
consideration paid over the fair value of the net assets acquired. The
initial acquisition of the direct dial long distance business is being
amortized using the straight-line method over 40 years. All subsequent
acquisitions of direct dial long distance businesses are being amortized over
20 years. The Company annually assesses the appropriateness of the asset
valuations and the amortization periods.
OTHER ASSETS
Other assets include financing costs related to the issuance of
long-term debt, which have been deferred and are amortized over the life of
each respective agreement, acquisition costs of direct dial long distance
customer bases, which are amortized over the expected useful life of the
customer bases, and costs incurred to acquire operator services agreements,
which are amortized over the life of each respective contract. In addition,
the cash surrender value of executive and director deferred compensation life
insurance, long-term deposits and the long-term portion of notes receivable
have been included in other assets.
OTHER LIABILITIES
Other liabilities include deferred compensation costs associated with
the executive and director deferred compensation plans.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of the Company's financial instruments
have been determined by the Company using appropriate valuation methodologies
and approximate their recorded book values at September 30, 1997 and 1996.
The carrying values of the Company's cash, debt and all other financial
instruments approximate their fair market values.
ADVERTISING EXPENSE
The Company charges advertising costs to expense as the costs are
incurred. Total advertising expense was $1.5 million, $1.1 million and
$543,000 for the years ended September 30, 1997, 1996 and 1995, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (the "SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." SFAS No. 121 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In fiscal 1997, the
Company determined that there was no impairment of long-lived assets. In
fiscal 1996, the Company determined that certain computer equipment, customer
lists and goodwill were impaired and, accordingly, wrote down these assets by
$1.8 million.
INCOME TAXES
Deferred tax liabilities and assets are recorded based on enacted income
tax rates that are expected to be in effect in the period in which the
deferred tax liability or asset is expected to be settled or realized. A
change in the tax laws or rates results in adjustments to the deferred tax
liabilities or assets. The effects of such adjustments are required to be
included in income in the period in which the tax laws or rates are changed.
30
<PAGE>
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share was computed by dividing net income
(loss) applicable to the Company's common stock, par value $0.01 per share
(the "Common Stock"), by the weighted average number of common shares and
common share equivalents outstanding during the applicable period. The
weighted average number of shares outstanding during each fiscal year differs
from the number of shares outstanding at each year end due to assumed
conversions of options and warrants that were outstanding during the
respective periods.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
125 provides accounting and reporting standards for, among other things, the
transfer and servicing of financial assets, such as factoring receivables
with recourse. SFAS No. 125 is effective for transfers and servicing of
financial assets occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted. In
December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date
of Certain Provisions of SFAS No. 125." SFAS No. 127 amends the effective
date for certain provisions of SFAS No. 125 to December 31, 1997. Management
of the Company does not anticipate that the adoption of SFAS No. 125 will
have a material impact on the Company's financial position or results of
operations.
In February 1997, the FASB issued 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 APB 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 from continuing operations would have been $0.34, $(0.94) and
$(0.16) for the years ended September 30, 1997, 1996 and 1995, respectively.
Pro forma diluted EPS from continuing operations would have been $0.32,
$(0.89) and $(0.14) for the years ended September 30, 1997, 1996 and 1995,
respectively. Management of the Company does not anticipate that the adoption
of SFAS No. 128 will have a material impact on the Company's earnings per
share.
NOTE 3. DISCONTINUED OPERATIONS
On August 2, 1996, the Company completed the spin-off of Billing, its
billing clearinghouse and information management services 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. The spin-off was a tax-free distribution of
100% of the common stock of Billing to the Company's stockholders. Revenue of
the discontinued operations of Billing was $85.8 million and $80.8 million in
fiscal 1996 and 1995, respectively. Net income of the discontinued operations
of Billing was $15.2 million and $14.1 million in fiscal 1996 and 1995,
respectively. In connection with the spin-off, the Company entered into an
agreement with Billing under which the intercompany payable/receivable
balances were forgiven. Additionally, Billing agreed to reimburse the
Company for direct out-of-pocket expenses associated with the spin-off and to
transfer cash to the Company to provide the Company a working capital balance
of $21.5 million at the spin-off date. The net effect of this agreement
resulted in the Company recording the distribution as a dividend in the
amount of $16.4 million for financial statement purposes.
NOTE 4. NON-RECURRING SPECIAL CHARGES
Effective June 2, 1997, the Chairman of the Board of the Company
resigned. 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 the former Chairman an $875,000 cash bonus and granted
him 25,000 shares of restricted Common Stock, for a total $1.2 million
one-time charge for the year ended September 30, 1997.
Additionally, $669,000 of professional fees incurred in association with
the Merger are included in non-recurring special charges for the year ended
September 30, 1997.
Direct spin-off costs recorded as operating expenses and included in
non-recurring special charges in the year ended September 30, 1996 were
approximately $13.0 million and include professional fees, tax payments
triggered by the spin-off, payments called for under employment agreements
and costs associated with accelerated vesting of stock grants.
In fiscal 1996, the Company recorded restructuring charges of $2.8
million. These restructuring charges are included in non-recurring special
charges and include costs associated with consolidating customer service,
credit and collection and other support functions, vacating certain office
facilities, terminating certain marketing contracts, writing down excess
assets and providing severance payments.
31
<PAGE>
NOTE 5. STATEMENTS OF CASH FLOWS
Cash payments and non-cash activities during the periods indicated were
as follows:
YEAR ENDED SEPTEMBER 30,
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
Cash payments for interest $1,456 $ 1,393 $1,685
Cash payments for income taxes 1,316 187 414
Noncash investing and financing activities:
Assets acquired in connection with business
combinations 471 0 939
Liabilities assumed in connection with business
combinations 593 0 351
Common stock issued in connection with business
combinations 250 0 896
Capital lease and debt obligations incurred 53 1,159 470
Tax benefit recognized in connection with stock
option exercises 3,602 1,421 1,236
Issuance of restricted stock 358 0 0
Exercise of warrants to purchase common stock 235 0 0
Return of escrowed treasury stock 0 118 0
Reimbursable spin-off costs due from Billing 0 704 0
Dividend pursuant to spin-off of Billing 0 34,345 0
For purposes of determining cash flows, the Company considers all
temporary cash investments purchased with an original maturity of three
months or less to be cash equivalents.
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
SEPTEMBER 30,
-----------------------
1997 1996
-------- --------
(IN THOUSANDS)
Communications equipment $ 48,003 $ 40,573
Furniture, fixtures and equipment 23,693 15,018
Leasehold improvements 2,830 2,779
Equipment held under capital leases 1,635 1,740
-------- --------
Less accumulated depreciation (37,637) (30,251)
-------- --------
Net property and equipment $ 38,524 $ 29,859
-------- --------
-------- --------
NOTE 7. DEBT
Long-term debt is comprised of the following:
SEPTEMBER 30,
-----------------------
1997 1996
-------- --------
(IN THOUSANDS)
Fixed interest rate term notes $11,424 $16,000
Less - current portion 5,572 5,854
------- -------
Long-term debt, less current portion $ 5,852 $10,146
------- -------
------- -------
In fiscal 1997, the Company entered into two revolving credit receivable
financing facilities and one equipment financing facility. One revolving
facility allows the Company to borrow against it own operator services
accounts receivable. Any borrowings under this facility will bear interest at
the prime rate plus 4.0%. At September 30, 1997, the Company had $5.0 million
available for borrowing and did not have any amounts borrowed under this
facility. The second revolving facility is a one-year, annually renewable
facility and
32
<PAGE>
allows the Company to borrow against its own direct dial long distance
services accounts receivable. Any borrowings under this facility will bear
interest at the prime rate plus .5%. At September 30, 1997, the Company had
$10.0 million available for borrowing and did not have any amounts borrowed
under this facility. This financing facility terminates on January 31, 1998
and is collateralized by the related accounts receivable and the Company's
cash accounts. The equipment financing facility will bear interest at the
five-year treasury bond rate, as defined in the agreement, plus approximately
3.0%. At September 30, 1997, the Company had $6.0 million available for
borrowing and did not have any amounts borrowed under this facility. This
financing facility terminates on December 31, 1997.
In addition, the Company has a $10.0 million equipment financing
facility with an interest rate at the 30-day commercial paper rate, as
defined in the agreement, plus 2.70%. The agreement provided for a one-year
period during which the Company could finance up to $10.0 million in
equipment on an interest payment only basis. During fiscal 1997, this
interest-only period was extended through December 31, 1997. Upon completion
of this period, the outstanding borrowings will convert to a series of term
notes with 20% of the total amount borrowed due in each of the next five
years. Any amounts not due in a given year may be prepaid and reborrowed at
the Company's discretion. At September 30, 1997, the Company had $4.2 million
borrowed and $5.9 million available for borrowing under this facility. No
amounts were outstanding under this facility at September 30, 1996.
The Company has various fixed rate notes with interest rates ranging
from 6.75% to 11.0%, due in varying amounts through August 2001. The proceeds
from the issuance of these notes were used to acquire certain computer and
telecommunications equipment and office furniture. The loans are secured by
the assets acquired with the proceeds of such notes. Certain of these notes
are also guaranteed by Billing.
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 prior to the spin-off. In connection with the
spin-off, the Company received from certain lenders loan agreement amendments
or separate loan agreements whereby the subject indebtedness is secured by
only the Company's assets. In other cases, the existing guarantees and
security arrangements between the Company and Billing remained 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.
The credit facilities discussed above contain various restrictions and
financial ratio maintenance requirements. Under one of its credit facilities,
the Company is required to maintain a quarterly ratio of consolidated
operating income, as defined in the agreement, to consolidated fixed charges
of 1.5 to 1.0. Further, the Company is required to maintain a ratio of funded
debt, as defined in the agreement, to total capitalization of not greater
than 60% and total debt to total capitalization of not greater than 85%.
Other agreements require the Company to maintain cash flow coverage ratios,
as defined in the agreements, ranging between 1.25 and 1.40, a minimum
tangible net worth ranging between $30.0 million and $35.0 million, minimum
total liabilities to net worth ratio of 1.20, a current ratio of greater than
1.50 and working capital in excess of $18.0 million. Under one agreement, the
Company is prohibited from paying a cash dividend on its Common Stock.
Cross-default provisions of the Company's most significant credit facilities
may place the Company in default of such facilities should it fail to satisfy
provisions of certain other loan agreements. Under the Company's most
significant credit facilities, USLD has guaranteed the obligations of its
subsidiaries. The Company was in compliance with all required covenants at
September 30, 1997 and 1996. In order to remain in compliance with certain
debt covenants, the Company is required to obtain written consent from
certain lenders regarding any proposed merger activity. The Company expects
that these consents will be obtained in connection with the Merger.
Scheduled maturities for long-term debt and the line of credit for the
years ending September 30, 1998 through 2002 are as follows (in thousands):
Year Ending September 30,
1998 $ 5,572
1999 3,949
2000 2,463
2001 1,516
2002 878
Thereafter 1,204
-------
Total debt $15,582
-------
-------
NOTE 8. LEASES
The Company leases certain equipment and office space under operating
leases. Rental expense for fiscal 1997, 1996 and 1995, was $2.2, $2.5 and
$2.6 million, respectively. Future minimum lease payments under
non-cancelable operating leases at September 30, 1997, are as follows (in
thousands):
33
<PAGE>
Year Ending September 30,
1998 $ 2,444
1999 1,874
2000 1,658
2001 1,373
2002 1,305
Thereafter 1,908
-------
Total minimum lease payments $10,562
-------
-------
The Company also leases various computer and telecommunications
equipment under capital lease arrangements. Future minimum lease payments
under these capital leases, together with the present value of the net
minimum lease payments at September 30, 1997, are $133,000 and are due in
varying amounts through 1999.
NOTE 9. SHARE CAPITAL
At September 30, 1997, 1996 and 1995, the Company had 204,101, 204,101
and 187,232 shares of treasury stock, respectively, carried at cost.
Other capital contributions in fiscal 1996 and 1995 are from a former
director and officer of the Company and represent a settlement of certain
securities matters. No cash dividends were paid on the Company's Common Stock
during fiscal 1997, 1996 or 1995.
On December 12, 1995, the Board of Directors adopted the USLD
Communications 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 1,000,000 shares of
Common Stock are reserved for awards under the Restricted Stock Plan, as
amended. The number of shares of Common Stock to be awarded to an employee
and other terms of the award are determined by a committee of disinterested
persons who will administer the Restricted Stock Plan. The Restricted Stock
Plan provides for certain restrictions upon the sale of the stock.
Subsequently, the Restricted Stock Plan was amended to allow for immediate
vesting at the discretion of the committee. No shares were granted under this
plan in fiscal 1997. In fiscal 1996, 188,000 shares of stock were granted
under this plan. Compensation expense of $0 and $553,000 was recognized upon
the amortization of deferred compensation for the years ended September 30,
1997 and 1996, respectively. An additional $3.4 million of compensation
expense was recognized in fiscal 1996 due to the acceleration of vesting of
stock grants pursuant to the spin-off of Billing and is included in
non-recurring special charges. At September 30, 1997, 487,000 shares were
available for granting under this plan.
Additionally, during 1997, the Company granted 25,000 shares of
restricted stock to a former officer and director in connection with his
resignation as Chairman of the Board of the Company. This stock was granted
outside of any plan and expense of $358,000 was charged to non-recurring
special charges during the year ended September 30,1997.
On April 12, 1996, the Company, upon authorization by its Board of
Directors, adopted a Shareholder Rights Plan ("Rights Plan") and declared a
dividend of one preferred share purchase right on each share of its
outstanding Common Stock. The rights will become exercisable if a person or
group acquires 15% or more of the Company's Common Stock or announces a
tender offer, the consummation of which would result in ownership by a person
or group of 15% or more of the Common Stock. These rights, which expire on
April 12, 2006, entitle stockholders to buy one ten-thousandth of a share of
a new series of participating preferred shares at a purchase price of $90.00
per one ten-thousandth of a preferred share. The Rights Plan was designed to
assure that stockholders receive fair and equal treatment in the event of any
proposed takeover of the Company. Subsequently, on September 17, 1997, the
Rights Plan was amended to exclude the Merger as an event that would cause
the shareholder rights to become exercisable.
NOTE 10. STOCK OPTIONS AND STOCK PURCHASE WARRANTS
The Company has granted stock options to directors, employees and other
affiliated parties as follows:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
---------- --------------
Outstanding, September 30, 1996 2,404,130 $ 3.33
Canceled (148,855) $ 5.51
Granted 1,111,500 $13.48
Exercised (771,187) $ 2.88
---------
Outstanding, September 30, 1997 2,595,588 $ 7.70
---------
---------
34
<PAGE>
The following table summarizes information about stock options
outstanding at September 30, 1997:
<TABLE>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -----------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 9/30/97 CONTRACTUAL LIFE EXERCISE PRICE AT 9/30/97 EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.39 - $ 2.91 744,445 2.1 years $ 2.55 564,471 $2.43
$4.38 - $ 8.75 886,643 4.9 years $ 4.97 265,337 $4.72
$9.75 - $15.38 964,500 5.5 years $14.18 0 $0.00
</TABLE>
The Company has a Director Plan and an Employee Option Plan. Outstanding
options under both plans call for an exercise price equal to the fair market
value of the stock on the date of the grant, three-year vesting periods and
expiration dates of up to four years from the date of the grant. The Employee
Option Plan provides for the granting of incentive stock options and
nonqualified stock options to full-time employees and officers of the
Company. The Director Plan provides for the granting of incentive stock
options to directors of the Company. Stock options to purchase an aggregate
of 317,500 shares were outstanding at September 30, 1997 under the provisions
of the Director Plan and expire at varying dates through June 2, 2003. There
were 405,000 shares remaining to be issued under the Director Plan at
September 30, 1997. Stock options to purchase an aggregate of 2,278,088
shares were outstanding at September 30, 1997 under the provisions of the
Employee Option Plan and expire at varying dates through August 20, 2003. At
September 30, 1997, there were 56,870 shares remaining to be issued under the
Employee Option Plan.
The excess of the market value of the Common Stock on the date granted
over the exercise price of such options results in compensation expense to
the Company over the vesting period. No compensation expense was recognized
by the Company during fiscal 1997. Approximately $145,000 and $255,000 of
compensation expense was recognized by the Company during fiscal 1996 and
1995, respectively. There were no deferred compensation costs associated with
stock options netted against additional paid-in capital at September 30, 1997
or 1996.
Stock warrants to purchase 469,741 shares of Common Stock were
outstanding at September 30, 1995. These warrants were issued in connection
with the sale of senior subordinated notes during the fiscal year ended
September 30, 1991 and were exercisable at $0.01 per share. Warrants to
purchase 469,741 and 608,459 shares of Common Stock were exercised in fiscal
1996 and 1995, respectively. There were no such stock purchase warrants
associated with this transaction outstanding at September 30, 1997 or 1996.
During the fiscal years ended September 30, 1995 and 1992, the Company
granted warrants to purchase 100,000 and 125,000 shares of Common Stock,
respectively, pursuant to two telecommunications service agreements. The
exercise price of the warrants was equal to the market value of the Company's
Common Stock on the date of grant. Pursuant to the spin-off of Billing, the
exercise price associated with these warrants was adjusted to $3.24 per
share. The warrants vest ratably over the contract periods. Warrants to
purchase 112,500 shares of Common Stock were exercised in fiscal 1997. At
September 30, 1997, 1996 and 1995, there were 112,500, 225,000 and 225,000,
respectively, of these stock purchase warrants outstanding.
In addition, during fiscal 1997, the Company granted warrants to
purchase 100,000 shares of Common Stock, pursuant to a telecommunications
service agreement. The exercise price of the warrants was equal to the market
value of the Company's Common Stock on the date of the grant, or $8.25 per
share. The warrants vest ratably over the contract period. At September 30,
1997, 100,000 of these stock purchase warrants were outstanding. The
estimated fair value of these warrants was $2.22 per share. The fair value
was estimated on the grant date using the Black-Scholes option-pricing model,
with an expected dividend yield of 0.0%, expected stock price volatility of
46.9%, risk-free interest rate of 6.1% and expected life of 1.6 years.
In connection with the August 2, 1996 spin-off of Billing, further
discussed in Note 3, the Company effected a tax-free distribution of 100% of
the common stock of Billing to the Company's stockholders. Immediately prior
to that distribution, Billing, under its employee stock plans, granted
options to purchase Billing common stock to each holder of an outstanding
option to purchase shares of the Company's Common Stock under the USLD
Communications Corp. 1990 Employee Stock Option Plan, as amended (the
"Employee Option Plan") and the USLD Communications Corp. 1993 Non-Employee
Director Plan, as amended (the "Director Plan"), respectively. In connection
with the grant of the Billing options, the exercise price of the Company's
options was adjusted via a formula adjustment designed to preserve the
economic value of the Company's options existing immediately prior to the
distribution. Except for the formula adjustment, the terms of each of the
Company's adjusted option are substantially the same as those in effect prior
to the distribution. The per share exercise price of the Company's options
was adjusted based on the relative fair market values of the underlying
common stock of each of the two companies, or by a factor of 25.9%. The fair
market value per share of common stock of each company was defined as the
average of the last sales price per share of that common stock on the Nasdaq
National Market System for each of the ten consecutive trading days
immediately subsequent to the date of distribution.
35
<PAGE>
The Merger agreement provides that, at the effective date of the Merger,
each stock option and warrant granted by the Company ("USLD Stock Option") to
purchase shares of Common Stock which is outstanding and unexercised shall be
assumed by LCI and converted into an option or warrant to purchase common
stock of LCI ("LCI Common Stock") in such amount and at such exercise price
as is provided below and otherwise having the same terms and conditions as
are in effect immediately prior to the effective date of the Merger. The
number of shares of LCI Common Stock to be subject to the new option or
warrant will be equal to the number of shares that the holder of such USLD
Stock Option would be entitled to receive pursuant to the Merger had such
holder exercised such option or warrant in full immediately prior to the
effective date of the Merger (whether or not such option or warrant was in
fact exercisable). The exercise price per share of LCI Common Stock under the
new option or warrant will be equal to the aggregate exercise price for the
Company's Common Stock purchasable pursuant to such USLD Stock Option divided
by the number of shares of LCI Common Stock deemed purchasable pursuant to
such USLD Stock Option.
Pursuant to the Company's Employee Option Plan, Director Plan and
certain contract stock option grants (the "USLD Stock Option Plans"), the
Merger will result in each USLD Stock Option, whether or not fully vested,
becoming fully vested and exercisable. Any USLD Stock Option not exercised
will be assumed and converted into an immediately exercisable option to
purchase LCI Common Stock on the terms described above. The vesting period of
outstanding stock purchase warrants will be unaffected by the Merger. In
addition, pursuant to the terms of the spin-off with Billing, Billing
granted, under its 1996 Employee Comprehensive Stock Plan and 1996
Non-Employee Director Plan, options to purchase Billing common stock to each
holder of an outstanding option to purchase shares of the Company's Common
Stock under the USLD Stock Option Plans. The Billing options were granted on
the basis of an option exercisable for one share of Billing common stock for
every one share of the Company's Common Stock subject to the outstanding USLD
Stock Options. Each Billing option agreement provides that the Merger will
result in each Billing option held by the Company's employees, whether or not
fully vested, becoming fully vested and exercisable. Billing options held by
Billing employees will be unaffected by the Merger.
NOTE 11. PRO FORMA STOCK-BASED COMPENSATION EXPENSE
The Company has adopted SFAS No. 123, "Accounting For Stock-Based
Compensation" but will continue to account for employee stock-based
compensation under the provisions of APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, no compensation expense has been
recognized for options granted to employees where the exercise price is equal
to the market price of the underlying stock at the date of the grant. It is
the policy of the Company that the exercise price of all options granted be
equal to the market price of the underlying stock at the date of the grant.
In the event that options were issued with an exercise price less than the
market price of the underlying stock on the date of grant, the Company is
aware that it would be required to recognize compensation expense for those
options under provisions of APB Opinion No. 25. In addition, in accordance
with the adoption of SFAS No. 123 and the provisions of APB Opinion No. 25,
no compensation expense has been recognized for employee stock purchases
under the USLD Communications Corp. Employee Stock Purchase Plan (the "ESPP").
Had compensation expense for the Company's employee stock option grants
and ESPP purchases been determined based on the fair value at the grant date
for awards and purchases in 1997 and 1996, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below (in thousands, except per share amounts):
FISCAL YEAR ENDED
SEPTEMBER 30,
-----------------
1997 1996
------ ------
Net income, as reported $5,251 $1,407
Net income, pro forma 4,337 1,287
Primary earnings per share, as reported $ 0.32 $ 0.09
Primary earnings per share, pro forma 0.26 0.08
Fully diluted earnings per share, as reported $ 0.31 $ 0.09
Fully diluted earnings per share, pro forma 0.26 0.08
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997 and 1996:
FISCAL YEAR ENDED
SEPTEMBER 30,
---------------------
1997 1996
--------- ---------
Expected dividend yield 0.0% 0.0%
Expected stock price volatility 45.6% 45.6%
Risk-free interest rate 5.6%-5.9% 5.5%-6.0%
Expected life of options 1-3 Years 1-3 Years
The weighted-average estimated fair value of market price options
granted during fiscal 1997 and 1996 was $3.73 and $1.27 per share,
respectively.
36
<PAGE>
The 1997 volatility percentage was also used in the fiscal 1996
option-pricing calculation because the August 2, 1996 spin-off of Billing
created an anomaly in the Company's stock price. The stock price in the
months prior to the spin-off fluctuated at a rate greater than is typical for
the Company's stock and thus created an unusually high volatility rate. Use
of this rate in the estimated fair value calculation would have caused a
distorted fair value.
Because the SFAS No. 123 method of accounting has been applied only to
grants after October 1, 1995, the resulting pro forma compensation expense
may not be representative of that to be expected in future periods.
NOTE 12. BENEFIT PLANS
The Company adopted the USLD Communications Corp. 401(k) Retirement Plan
(the "Retirement Plan") effective January 1, 1992. Participation in the
Retirement Plan is offered to eligible employees of the Company or its
subsidiaries. Generally, all employees of the Company or its subsidiaries who
are 21 years of age and who have completed one year of service during which
they worked at least 1,000 hours are eligible for participation in the
Retirement Plan.
The Retirement Plan is a defined contribution plan which allows
participants to make voluntary salary deferral contributions, on a pretax
basis, of between 1% and 15% of their compensation in the form of voluntary
payroll deductions up to a maximum amount as statutorily determined. In
fiscal 1997 and 1996, the Company made matching contributions of 50% of the
first 3% of the participant's contribution. In fiscal 1995, the Company made
matching contributions at a percentage determined annually of 25% of the
first 6% of the participant's contribution. The Company may, from time to
time, make additional discretionary contributions. No discretionary
contributions were made in fiscal 1997, 1996 or 1995. During fiscal 1997,
1996 and 1995, the Company's contributions totaled approximately $122,000,
$162,000, and $150,000, respectively.
The Company adopted the USLD Communications Corp. Executive Compensation
Deferral Plan (the "Executive Deferral Plan") and the USLD Communications
Corp. Director Compensation Deferral Plan (the "Director Deferral Plan"),
effective January 1, 1994. Participation in the Executive Deferral Plan is
offered to selected employees occupying management positions who are
determined by the Company's Board of Directors, from time to time, to be
eligible to participate in the Executive Deferral Plan. Participation in the
Director Deferral Plan is offered to individuals occupying a position as an
outside director. The Executive and Director Deferral Plans are defined
contribution plans which provide that participants may make voluntary
contributions, on a pretax basis, of between 1% and 100% of their eligible
compensation. During fiscal 1997, the Company did not make any matching
contributions under the Executive Deferral Plan or the Director Deferral
Plan. During fiscal 1996 and 1995, under the Executive Deferral Plan, the
Company made matching contributions equal to the lesser of 100% of a
participant's contributions or an amount determined by a formula established
by the plan. Matching contributions under the Director Deferral Plan were 33%
of the participant's contributions during fiscal 1996 and 1995. The Company
has the right to make matching contributions of a different amount or no
contributions under both plans. During fiscal 1997, 1996 and 1995, the
Company contributed $16,000, $189,000 and $102,000, respectively, to the
Executive Deferral Plan and the Director Deferral Plan.
Additionally, the Company adopted the USLD Communications Corp.
Executive Qualified Disability Plan (the "Disability Plan"), effective
January 1, 1994. The Disability Plan provides long-term disability benefits
for certain employees occupying management positions through disability
insurance coverage purchased by the Company and through Company funded
payments. Benefits under the Disability Plan are provided directly by the
Company based on definitions contained in the insurance policies.
In addition, the Company created an Employee Stock Purchase Plan (the
"ESPP") effective July 1, 1995 which was established under the requirements
of Section 423 of the Internal Revenue Code of 1986, as amended. The ESPP
enables employees who have completed at least six months of continuous
service with the Company to purchase shares of the Company's Common Stock at
a 15% discount through voluntary payroll deductions.
NOTE 13. INCOME TAXES
The income tax benefit (provision) is comprised of the following:
YEAR ENDED SEPTEMBER 30,
--------------------------------
1997 1996 1995
------- ------ -------
(IN THOUSANDS)
Current $ 1,457 $ 119 $ 2,574
Deferred (5,487) 3,231 (2,058)
------- ------ -------
Income tax benefit (provision) $(4,030) $3,350 $ 516
------- ------ -------
------- ------ -------
37
<PAGE>
The income tax benefit for fiscal 1997, 1996 and 1995 differs from the
amount computed by applying the statutory federal income tax rate of 35% for
fiscal 1997, 1996 and 1995 to income (loss) from continuing operations before
taxes. The reasons for these differences were as follows:
<TABLE>
YEAR ENDED SEPTEMBER 30,
-------------------------
1997 1996 1995
------- ------ -----
(IN THOUSANDS)
<C> <C> <C> <C>
Computed income tax benefit (provision)
at statutory rate $(3,249) $ 5,986 $ 910
Reductions (increases) in taxes resulting from:
State income taxes (510) (311) (146)
Amortization of asset valuations in excess of tax (154) (98) (165)
Non-deductible expenses related to spin-off 0 (2,455) 0
Non-deductible costs related to the Merger (245) 0 0
Other, net 128 228 (83)
------- ------- -----
Income tax benefit (provision) $(4,030) $ 3,350 $ 516
------- ------- -----
------- ------- -----
</TABLE>
The tax effect of significant temporary differences, which comprise the
deferred tax assets and liabilities, are as follows:
<TABLE>
SEPTEMBER 30,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<C> <C> <C>
Deferred tax assets:
Deferred compensation $ 0 $ 1,713
Expense provisions 373 1,460
------- -------
Total gross deferred tax assets 373 3,173
Deferred tax liabilities:
Tax depreciation and amortization in excess of book (5,323) (2,556)
Prepaid expenses (226) (262)
Other (319) (407)
------- -------
Total gross deferred tax liabilities (5,868) (3,225)
Deferred tax assets not related to assets or liabilities:
Tax benefit of operating loss carryforward 97 0
------- -------
Net deferred tax liability $(5,398) $ (52)
------- -------
------- -------
</TABLE>
During fiscal 1996, the Company incurred expenses related to the
spin-off of Billing. Under federal income tax law, expenses incurred for
effecting a corporate reorganization are non-deductible capital expenditures.
Approximately $7.0 million of the spin-off expenses were determined to be
non-deductible, resulting in a reduction of the income tax benefit of
approximately $2.5 million.
During fiscal 1996, the Company recognized a tax gain related to the
liquidation of its wholly owned foreign subsidiary, Mega Plus Dialing, Inc.
("MPDI"). The gain arose in conjunction with the redemption of common and
preferred shares of Billing held by MPDI. The Company paid Canadian federal
taxes totaling US $3.3 million on the gain. This tax payment generated a
foreign tax credit for U.S. federal income tax purposes equal to this amount.
In fiscal 1996, the Company was notified by the Internal Revenue Service
(the "IRS") that a fiscal 1992 transaction between a wholly owned foreign
subsidiary (Mega Plus Dialing, Inc.) and its U.S. subsidiary (Billing,
formerly Zero Plus Dialing, Inc.) was proposed to be treated differently by
the IRS than originally characterized by the Company. The IRS district office
issued a report that proposed an assessment of taxes, penalties and interest.
The assessment was appealed to the appellate division of the IRS. The
appellate division of the IRS agreed with the Company's original treatment of
the transaction. In addition, the appellate division also agreed to
depreciation adjustments to the Company's tax returns for fiscal years 1992
through 1994 that will result in a refund of taxes for those years. In fiscal
1997, the Company and the IRS each signed a closing letter stating that a
refund of $1.2 million is to received by the Company. The Company is
currently waiting on final approval of the refund by the Joint Committee of
Taxation of the U. S. Congress, which is required for refunds over certain
materiality thresholds. Consequently, the income tax refund of $1.2 million
has been recorded in federal income tax receivable at September 30, 1997.
NOTE 14. 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
38
<PAGE>
had accounts payable to Billing of $1.1 million at September 30, 1996.
Operating revenues recognized from Billing were $1.9 million, $3.6 million
and $1.7 million for the years ended September 30, 1997, 1996 and 1995,
respectively. In addition, the Company incurred operating expenses related to
billing and collection fee charges from Billing of $3.4 million, $5.3 million
and $5.3 million for the years ended September 30, 1997, 1996 and 1995,
respectively.
For purposes of governing certain ongoing relationships between the
Company and Billing after the spin-off and to provide for an orderly
transition, the Company and Billing entered into certain agreements. Such
agreements include: (i) the Distribution Agreement, providing for, among
other things, the spin-off and the division between the Company and Billing
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 the Company and Billing agreed 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 the Company provides certain services on a temporary basis
and subleases certain office space to Billing and Billing provides certain
services to the Company on a temporary basis; (v) the Zero Plus-Zero Minus
Billing and Information Management Services Agreement and the One-Plus
Billing and Information Management Services Agreement pursuant to which
Billing is to provide billing clearinghouse and information management
services to the Company for an initial period of three years; and (vi) the
Telecommunications Agreement pursuant to which the Company is to provide long
distance telecommunications services to Billing for an initial period of
three years; and (vii) the Leasing Agreement, whereby the Company and Billing
agree to pay certain usage charges. It is the intention of the Company and
Billing that the Transitional Services and Sublease Agreement, the Zero
Plus-Zero Minus Billing and Information Management Services Agreement, the
One-Plus Billing and Information Management Services Agreement, the
Telecommunications Agreement, and the Leasing Agreement reflect terms and
conditions similar to those that would have been arrived at by independent
parties bargaining at arm's length; however, there can be no assurances that
such agreements are on terms at least as favorable as could have been
obtained from unaffiliated third parties.
From time to time, the Company has loaned to or was otherwise owed
amounts from certain officers and directors of the Company. The highest
amount outstanding of advances to officers and directors during fiscal 1997
and 1996 was $75,000 and $212,000, respectively. The amount outstanding at
September 30, 1997 and 1996 was $75,000.
During fiscal 1997, the Company contracted for certain policies of
insurance from a company partially owned by a director of the Company. The
amount paid for these insurance policies was not material to the Company's
financial position or results of operations.
A director of the Company is Chairman and Chief Executive Officer of a
diversified media company. Pursuant to on-going agreements, the Company
purchases advertising from this company and this company purchases long
distance services from the Company. The amount associated with these
agreements is not material to the Company's financial position or results of
operations.
NOTE 15. 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 occurs.
The Company is obligated to pay a minimum of approximately $8.0 million
during fiscal 1998 for usage charges under service agreements with certain
long distance carriers. The Company anticipates exceeding the minimum usage
volumes with these vendors.
In the event the Merger is consummated, the Company is obligated to pay
approximately $1.8 million in lump-sum severance payments to certain officers
of the Company.
NOTE 16. REGULATORY MATTERS
BILLED PARTY PREFERENCE
In April 1992, the Federal Communications Commission (the "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
39
<PAGE>
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 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, which remain under
consideration, 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. This act allows the RBOCs to
seek authority from the FCC 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, non-discriminatory access to white pages
listings and telephone number assignments, 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 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.
40
<PAGE>
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, including in many cases, the Company,
today buy "tandem switched" transport. 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.
AUTHORIZATION
At September 30, 1997, the Company was authorized to carry intrastate
operator assisted traffic in 47 states. Authorization is pending approval in
two other states. State regulatory agencies have the authority to impose
their own rules and regulations governing the provision of intrastate
operator services, including regulation of rates. Many states have rules
similar if not identical to those imposed by the FCC on interstate operator
assisted calls. At the date of this report, the Company was in material
compliance with the requirements of each of the individual state regulatory
agencies and continues to pursue authorization to provide intrastate operator
services in other targeted states. Certain states are expected to introduce
or revise their rules governing operator services providers within the next
year. Currently, the Company does not anticipate significant difficulty in
complying with the new or revised rules.
At September 30, 1997, the Company was authorized to provide intrastate
long distance service within 47 states with authorization pending approval in
one other state. Regulations within each of these states, as they pertain to
completing direct dial long distance calls for the Company's customers within
the state, are virtually static and pose no foreseeable concern. As the
Company expands the geographic scope of its direct dial long distance
business, it will seek state regulatory approvals as necessary to provide
intrastate long distance service.
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.
41
<PAGE>
NOTE 17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
In thousands, except per share amounts
<TABLE>
THREE MONTHS ENDED
-------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1997 1997 1997
----------- -------- -------- -------------
<C> <C> <C> <C> <C>
Operating revenues $48,747 $53,168 $60,058 $64,920
Income from operations 2,192 2,525 2,210 3,336
Net income 1,153 1,445 1,097 1,556
Net income per common share $ 0.07 $ 0.09 $ 0.07 $ 0.09
THREE MONTHS ENDED
-------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996 1996
----------- -------- -------- -------------
<C> <C> <C> <C> <C>
Operating revenues $39,708 $43,655 $46,684 $50,299
Loss from operations (831) (1,087) (6,283) (8,273)
Loss from continuing operations (846) (1,078) (4,015) (7,812)
Income from discontinued operations, net 3,948 5,022 4,317 1,875
Net income (loss) 3,102 3,944 302 (5,937)
Net income (loss) per common share:
Continuing operations $ (0.06) $ (0.07) $ (0.25) $ (0.50)
Discontinued operations 0.27 0.33 0.27 0.11
Net income (loss) per common share 0.21 0.26 0.02 (0.39)
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
42
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
DIRECTORS
The Bylaws of the Company, as amended, provide that the Board of
Directors shall consist of not fewer than three nor more than 15 members and
that the number of directors, within such limits, shall be determined by
resolution of the Board of Directors at any meeting or by the stockholders at
the Annual Meeting of Stockholders. The Board of Directors of the Company has
set the number of directors comprising the Board of Directors at five, with
such directors being divided into three classes with current terms expiring
at the 1998, 1999 and 2000 Annual Meetings of Stockholders, or sooner upon
consummation of the Merger.
The following table sets forth the name, age and current term of office
of the directors of the Company as of November 28, 1997, as well as the year
each first became a director of the Company:
YEAR YEAR FIRST
CURRENT BECAME
NAME AGE TERM EXPIRES(4) A DIRECTOR
------------------------ --- --------------- ----------
LARRY M. JAMES (1)(2) 50 1998 1991
CHARLES E. AMATO (3) 50 1999 1992
GARY D. BECKER (1)(3) 38 1999 1986
L. LOWRY MAYS (1) 62 2000 1997
F. GARDNER PARKER (1)(2) 55 2000 1996
- --------------------
(1) Member of the Compensation Committee
(2) Member of the Executive Committee
(3) Member of the Audit Committee
(4) Or such term will expire sooner upon consummation of the Merger
All directors hold office for their elected term or until their
successors are duly elected and qualified. If a director should be
disqualified or unable to serve as a director, the vacancy so arising may be
filled by the Board of Directors for the unexpired portion of his term.
The following is a description of the biographies of the Company's
directors for the past five years.
LARRY M. JAMES has served as Chief Executive Officer and President of
the Company since August 1996 and has been a director of the Company since
February 1991. Mr. James served as Chief Operating Officer of the Company
from February 1991 to August 1996 and was named President of the Company in
March 1993. From February 1991 to August 1996, Mr. James served as President
of USLD Communications, Inc., a wholly owned subsidiary of the Company. From
August 1994 to August 1996, Mr. James served as Chief Executive Officer of
Zero Plus Dialing, Inc., now Billing Information Concepts, Inc., a separate
subsidiary of the Company which conducted the Company's billing and
information management services business prior to the spin-off of Billing. He
joined the Company as Vice President - Sales and Marketing in April 1988.
CHARLES E. AMATO has served as a director of the Company since October
1992. Since 1976, he has been Chairman of Southwest Business Corporation
("SWBC"), a financial services company in the insurance brokerage and
mortgage banking business.
GARY D. BECKER has served as a director of the Company since 1986. Since
February 1980, he has been a senior officer at Pace Entertainment Corp., a
diversified live entertainment production and promotion organization. Mr.
Becker was promoted to Chief Executive Officer of Pace Motor Sports, Inc., a
wholly owned subsidiary of Pace Entertainment Corp., in January 1996.
L. LOWRY MAYS was appointed to the Company's Board of Directors in June
1997. Mr. Mays has served as President and Chief Executive Officer of Clear
Channel Communications, Inc. ("Clear Channel") since its incorporation in
April 1974 and in February 1997 was named Chairman of the Board and Chief
Executive Officer and has been a director of Clear Channel since 1974. Clear
Channel is a diversified broadcasting company with radio and television
stations in the United States, and broadcasting
43
<PAGE>
operations in Australia, New Zealand and the Czech Republic. Clear Channel
also has outdoor advertising display faces and is part owner of Heftel
Broadcasting Corporation, the largest Spanish-language radio broadcaster in
the United States.
F. GARDNER PARKER was appointed to the Company's Board of Directors in
December 1996. Mr. Parker has owned and operated Parker Investments, a
private investment firm, since June 1984. Mr. Parker also serves as Managing
Trustee of Camden Property Trust, a New York Stock Exchange real estate
investment trust, and Chairman of the Board of Computer Control Systems,
Inc., as well as serving on the boards of directors of several privately
owned companies.
COMMITTEES, MEETINGS AND BOARD COMPENSATION
The Board of Directors conducts its business through meetings of the
Board of Directors and through its committees. In accordance with the Bylaws
of the Company, the Board of Directors has established a Compensation
Committee, an Audit Committee and an Executive Committee. The Executive
Committee acts as a nominating committee.
COMPENSATION COMMITTEE
The Compensation Committee reviews and makes recommendations to the
Board of Directors concerning major compensation policies and compensation of
officers and executive employees. This committee currently is comprised of
directors Becker, Mays, Parker and James. See "Executive Compensation -
Report of the Compensation Committee."
AUDIT COMMITTEE
The Audit Committee acts on behalf of the Board of Directors with
respect to the Company's financial statements, record-keeping, auditing
practices and matters relating to the Company's independent public
accountants, including recommending to the Board of Directors the firm to be
engaged as independent public accountants for the next fiscal year; reviewing
with the Company's independent public accountants the scope and results of
the audit and any related management letter; consulting with the independent
public accountants and management with regard to the Company's accounting
methods and the adequacy of its internal accounting controls; approving
professional services by the independent public accountants; and reviewing
the independence of the independent public accountants. The Audit Committee
currently is comprised of directors Amato and Becker.
EXECUTIVE COMMITTEE
In June 1997, the Board of Directors established an Executive Committee,
to be comprised of the chief executive officer of the Company and up to four
other members. The Executive Committee's responsibilities include review of
contracts which are over $2.5 million in value, initial review of offers for
major acquisitions by the Company or for the possible sale of the Company,
review of investment banking opportunities and interviewing and recommending
to the Board of Directors nominees to fill vacancies on the Board of
Directors. The Executive Committee currently is comprised of directors Parker
and James.
BOARD OF DIRECTOR AND COMMITTEE MEETINGS
During the fiscal year ended September 30, 1997, the Board of Directors
met seven times and took actions on 26 other occasions by unanimous written
consents. During the year, the Compensation Committee of the Board of
Directors took action on four separate occasions by unanimous written
consents and the Audit Committee met on three occasions. During fiscal 1997,
each director attended at least 75% of the total of all meetings of the Board
of Directors and any committee on which he served.
EXECUTIVE OFFICERS
At November 28, 1997, the executive officers of the Company were as
follows:
NAME AGE POSITION
--------------- --- -----------------------------------------------
LARRY M. JAMES 50 Chairman of the Board, Chief Executive
Officer and President
W. AUDIE LONG 53 General Counsel, Senior Vice President - Legal
and Regulatory Affairs and Corporate Secretary
JAMES S. SPEIRS 46 Senior Vice President - Network Operations and
Chief Technology Officer
44
<PAGE>
PHILLIP J. STORIN 46 Senior Vice President, Chief Financial Officer
and Corporate Treasurer
STAN G. MASTERS 47 Senior Vice President - Sales
PATRICK M. AELVOET 35 Vice President and Corporate Controller
RICHARD E. BURK 51 Vice President - Strategic Planning
DAVID S. HORNE 43 Vice President - Human Resources
MARION K. JENKINS 44 Vice President - Management Information Systems
STEPHEN M. WAGNER 41 Vice President - Marketing, Sales and Business
Development
The following is a description of the biographies of the Company's
executive officers for the past five years. Mr. James' biography is listed
above under "Directors."
W. AUDIE LONG has been General Counsel and Senior Vice President - Legal
and Regulatory Affairs of the Company since February 1991 and Corporate
Secretary of the Company since August 1993. Mr. Long joined the Company as
General Counsel and Vice President - Legal and Regulatory Affairs in April
1990. Previously, Mr. Long was an attorney in private practice. He has been
General Counsel to the Company since 1986.
JAMES S. SPEIRS joined the Company in October 1995 as Vice President -
Network Operations and Chief Technical Officer. He was elected Senior Vice
President - Network Operations and Chief Technology Officer in July 1996. Mr.
Speirs has been Senior Vice President - Network Operations of USLD
Communications, Inc. since October 1995. Prior to joining the Company, Mr.
Speirs was Vice President of Network Engineering for Frontier Communications
Corp. from May 1994 to September 1995. From January 1992 to December 1994, he
was a partner in Carlin Club Lodge. He served as Senior Vice President of
Network Operations for COM Systems, Inc. from July 1986 to October 1991.
PHILLIP J. STORIN joined the Company in July 1992 as Vice President
- - Accounting, was named Corporate Controller effective October 1994 and
promoted to Senior Vice President, Chief Financial Officer and Corporate
Treasurer in August 1996. From April 1987 to July 1992, Mr. Storin was
Director of Accounting for Dell Computer Corporation in Austin, Texas. Mr.
Storin was charged with primary responsibility of all accounting matters
while employed with Dell Computer Corporation.
STAN G. MASTERS joined the Company in June 1991 as Director of Operator
Services and Direct Dial Sales Agents of USLD Communications, Inc. Mr.
Masters was elected Vice President - Direct Dial Sales of USLD
Communications, Inc. in April 1993 and Senior Vice President - Sales in
October 1994. He was elected Vice President - Sales of the Company in October
1994 and Senior Vice President - Sales in July 1996.
PATRICK M. AELVOET has served as Vice President and Corporate Controller
of the Company since October 1996. Mr. Aelvoet joined the Company in March
1993 as Director of Financial Reporting. He was promoted to Director of
Accounting in September 1993 and to Financial Controller in December 1994.
Mr. Aelvoet worked for KPMG Peat Marwick as Senior Audit Manager from August
1985 to March 1993.
RICHARD E. BURK joined the Company in June 1996 as Vice President -
Strategic Planning, with the primary responsibility of implementing the
Company's proposed local exchange business. From January 1996 through June
1996, Mr. Burk was President of Network Intelligence, Inc., a
telecommunications consulting firm, and from October 1990 to January 1996, he
was Vice President of Operations for American Telco, Inc., where he was
responsible for management information systems and software development,
network operations and regulatory affairs. Mr. Burk has served as President
of the Texas Association of Long Distance Carriers ("Texaltel") for the last
four years.
DAVID S. HORNE has served as Vice President - Human Resources of the
Company since November 1990. Mr. Horne has over 18 years of experience in
human resources management and previously was Director of Human Resources for
Scott's Food Services, Inc. in Austin, Texas.
MARION K. JENKINS joined the Company in October 1996 as Vice President -
Management Information Systems after having been a consultant to the Company
since July 1996. Mr. Jenkins was employed by American Telco, Inc. from
January 1986 to July
45
<PAGE>
1996, where he was Vice President of Sales and Customer Service from September
1991 to July 1996.
STEPHEN M. WAGNER has been Vice President - Marketing, Sales and
Business Development of the Company since January 1997. He joined USLD
Communications, Inc. in June 1992 as Vice President - Sales. In October 1994,
Mr. Wagner was promoted to Vice President - Sales and Business Development of
USLD Communications, Inc., and in March 1996, he also became Vice President -
Marketing. Mr. Wagner was Executive Vice President of Fone America, Inc. from
May 1991 to June 1992.
All officers serve at the discretion of the Board of Directors. There
are no family relationships between members of the Board of Directors or any
executive officers of the Company.
SECTION 16 (a) REPORTING
Paragraph Section 16(a) of the Securities Exchange Act of 1934 (the
"Exchange Act") requires the Company's directors and executive officers, and
persons who own more than 10% of the Company's Common Stock, to file with the
United States Securities and Exchange Commission (the "SEC") initial reports
of ownership and reports of changes in ownership of Common Stock and other
equity securities of the Company. Officers, directors and greater than 10%
stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) reports they file. To the Company's knowledge,
based solely on review of the copies of such reports furnished to the Company
and written representations, during the fiscal year ended September 30, 1997,
all Section 16(a) filing requirements applicable to its officers, directors
and greater than 10% beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTORS' COMPENSATION
MEETING AND ANNUAL RETAINER FEES
Each outside member of the Board of Directors received a meeting fee of
$2,000 for each meeting of the Board attended during fiscal 1997.
Additionally, each outside member of the Compensation Committee or Audit
Committee received $500 for each committee meeting attended during the year
except that the chairperson of each such committee received $1,000 for
attendance. Mr. Parker receives $3,000 per month for services rendered as
chairman of the Executive Committee. In each case, the members of the Board
are reimbursed for their travel expenses to and from the meetings, and Mr.
Parker is reimbursed for travel expenses incurred in connection with his
duties on the Executive Committee. The Board members do not receive a fee for
telephonic meetings.
In addition, commencing December 1994, the Company instituted an annual
retainer fee (the "Annual Director Fee") for all outside directors. The
Director Plan provides for receipt by each outside director of an Annual
Director Fee on the business day on or immediately after December 15 of each
year. Each non-employee director of the Company must make an election, no
later than December 31 of each year, to receive his Annual Director Fee for
the following year in cash ($15,000) or in whole or in part through the grant
of an option ("Director Fee Option") exercisable for up to 7,500 shares of
Common Stock at an exercise price per share equal to the fair market value of
the Common Stock on the date of grant (i.e., the business day on or
immediately after December 15). Each non-employee director previously has
elected to receive the Annual Director Fee for calendar 1997 in the form of a
Director Fee Option for 7,500 shares of Common Stock to be granted on
December 15, 1997. A non-employee director must still be a director on
December 15 to be eligible to receive an Annual Director Fee. The Director
Fee Option vests immediately, but at least six months must elapse from the
date of the acquisition of the Director Fee Option to the date of disposition
of the Director Fee Option (other than upon exercise or conversion) or its
underlying Common Stock. Each Director Fee Option will expire five years from
the date of grant.
DIRECTOR BONUSES
In the first quarter of fiscal 1998, Messrs. Amato, Becker and Parker
each received a cash bonus of $50,000 for services rendered in fiscal 1997.
STOCK OPTIONS
As amended, the Director Plan provides that each non-employee director
of the Company who is elected or appointed to the Board of Directors will be
granted a nonqualified stock option ("Director Option") exercisable for
30,000 shares of Common Stock on the date such non-employee director is so
elected or appointed as a director, whether at the Annual Meeting of
Stockholders or otherwise, at an exercise price equal to the fair market
value of the Common Stock on the date such non-employee director is elected
or appointed. In addition, upon their re-election, each non-employee director
currently receives, on the first business day after the date of each Annual
Meeting of Stockholders of the Company, commencing with the Annual Meeting of
Stockholders immediately
46
<PAGE>
following the full vesting of any previously granted Director Option, a
Director Option to purchase an additional 30,000 shares of Common Stock at an
exercise price per share equal to the fair market value of the Common Stock
on the date of grant. Prior to amendment of the Director Plan as approved by
the stockholders of the Company in February 1997, such automatic, periodic
grants of Director Options were for 15,000 shares of Common Stock. In each
case, the Director Option currently vests one third of the shares of Common
Stock on each of the first three anniversaries of the date of grant or sooner
upon a change of control such as the Merger, and each Director Option expires
five years after the date of grant unless sooner terminated as provided in
the Director Plan.
In addition, the Director Plan, as amended, authorizes discretionary
grants of stock options ("Discretionary Options") from time to time by the
Board of Directors to any non-employee director of the Company. The
Discretionary Options will vest according to the vesting schedule determined
by the Board of Directors (immediately upon a change of control such as the
Merger) and will expire five years from the date of grant. At least six
months must elapse from the date of the acquisition of the Discretionary
Option to the date of disposition of the Director Fee Option (other than upon
exercise or conversion) or its underlying Common Stock.
Each outside director has been granted a Director Option or Director
Options to purchase certain shares of Common Stock. In fiscal 1997, Messrs.
Amato and Becker each were granted a Director Fee Option for the purchase of
7,500 shares at $8.75 per share. In addition, in fiscal 1997, Mr. Becker was
granted a Discretionary Option for the purchase of 20,000 shares at $8.625
per share and Mr. Parker was granted a Discretionary Option for the purchase
of 100,000 shares at $14.3125 per share, each of which vests one-third on
each of the first three anniversaries of the date of grant, or sooner upon a
change of control such as the Merger, and is exercisable for five years. At
September 30, 1997, the outside directors of the Company held the following
number and value of options granted under the Director Plan and outside the
Director Plan:
<TABLE>
SECURITIES UNDERLYING UNREALIZED VALUE OF OPTIONS
OPTIONS (1) AT SEPTEMBER 30, 1997($)(2)
-------------------------- EXERCISE PRICE ---------------------------
DIRECTOR EXERCISABLE UNEXERCISABLE PER SHARE EXERCISABLE UNEXERCISABLE
---------------- ----------- ------------- --------------- ----------- -------------
<C> <C> <C> <C> <C> <C>
CHARLES E. AMATO 10,834 16,666 $4.375 - $ 8.75 $ 137,146 $ 257,598
GARY D. BECKER 12,500 30,000 $4.76 - $ 8.75 $ 161,356 $ 381,775
L. LOWRY MAYS 0 30,000 $15.375 $ 0 $ 140,625
F. GARDNER PARKER 0 145,000 $8.25 - $14.3125 $ 0 $ 1,051,563
</TABLE>
- --------------------
(1) Does not include Billing stock options received by the listed individuals
in August 1996, if any, pursuant to the terms of the spin-off.
(2) Reflects the aggregate market value of the underlying securities as
determined by reference to the closing price of the Common Stock on the
Nasdaq National Market System on September 30, 1997 ($20.0625 per share)
minus the aggregate exercise price for each option.
DIRECTOR COMPENSATION DEFERRAL PLAN
The Company adopted the Director Deferral Plan effective January 1,
1994. Participation in the Director Deferral Plan is offered to outside
directors of the Company who elect to participate as provided in the plan
(the "Director Deferral Participants"). At November 28, 1997, there were four
Director Deferral Participants in the Director Deferral Plan. The Director
Deferral Plan is a deferred compensation plan that generally allows Director
Deferral Participants to make voluntary deferral contributions (the
"Voluntary Director Contribution"), on a pre-tax basis, in increments of 1%,
of up to 100% of the fees paid by the Company for services rendered as a
director. The Company contributed, on behalf of each Director Deferral
Participant, an amount equal to 33% of that director's Voluntary Director
Contribution (the "Company Director Contribution") each plan year through
December 31, 1996. However, the Company reserved the right at any time to
provide a Company Director Contribution of a different amount. The Company
made approximately $1,800 in Company Director Contributions to the Director
Deferral Plan during the first quarter of fiscal 1997 on behalf of directors
Amato and Becker. Effective January 1, 1997, matching contributions by the
Company were eliminated.
Director Deferral Participants are annually vested in 33% of any Company
Director Contribution beginning with the Director Deferral Participant's
first anniversary of service and becoming 100% vested after the third
anniversary of service or upon a change in control of the Company such as the
Merger. At September 30, 1997, Messrs. Amato and Becker were 100% vested in
Company Director Contributions. No Company Director Contributions have been
made on behalf of Messrs. Mays and Parker. Benefits generally are payable to
a Director Deferral Participant (or his beneficiary) upon retirement,
disability, termination of service or death, in each case as provided in the
Director Deferral Plan.
47
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors of the Company (the
"Committee") has furnished the following report on the Company's executive
compensation policies. The report describes the Committee's compensation
policies applicable to the Company's executive officers and provides specific
information regarding the compensation of the Company's Chief Executive
Officers in 1997. (The information contained in the report shall not be deemed
to be "soliciting material" or to be "filed" with the SEC, nor shall such
information be incorporated by reference into any future filings under the
Securities Act of 1933, as amended (the "Securities Act"), or the Exchange
Act, except to the extent that the Company specifically incorporates it by
reference into such filing).
In fiscal 1997, the Committee was comprised of directors Amato and Becker
until January 1997, when Mr. Amato resigned and Mr. Parker was appointed to
the Committee. In June 1997, Mr. James was appointed as a third member of the
Committee, and in July 1997 Mr. Mays was appointed as a fourth member. The
Committee administers and oversees all aspects of the Company's executive
compensation policy and reports its determinations to the Board of Directors.
See "Management - Committees, Meetings and Board Compensation - Compensation
Committee." The Committee's overall goal is to develop executive compensation
policies that are consistent with, and linked to, strategic business
objectives and Company values. The Committee approves the design of, assesses
the effectiveness of, and administers executive compensation programs in
support of, the Company's compensation policies. The Committee also reviews
and approves all salary arrangements and other remuneration for executives,
evaluates executive performance and considers related matters.
COMPENSATION PHILOSOPHY
The Company's executive compensation policies have four primary
objectives: to attract and retain highly competent executives to manage the
Company's business, to offer executives appropriate incentives for
accomplishment of the Company's business objectives and strategy, to encourage
stock ownership by executives to enhance mutuality of interest with
stockholders and to maximize long-term stockholder value. The Committee
believes that the compensation policies should operate in support of these
objectives and should emphasize the following: a long-term and at-risk focus,
a pay-for-performance culture, an equity orientation and management
development.
ELEMENTS OF COMPENSATION
Each element of compensation considers median compensation levels paid
within the competitive market. Competitive market data compares the Company's
compensation practices to a group of comparator companies that tend to have
similar sales volumes, market capitalizations, employment levels and lines of
business. The Committee reviews and approves the selection of companies used
for compensation comparison purposes.
The key elements of the Company's executive compensation are base salary,
annual incentive and long-term incentive. These key elements are addressed
separately below. In determining compensation for fiscal 1997, the Committee
considered all elements of an executive's total compensation package.
BASE SALARIES. Base salaries for executives are initially determined by
evaluating executives' levels of responsibility, prior experience, breadth of
knowledge, internal equity issues and external pay practices.
Mr. James's annual, calendar year base salary did not increase in fiscal
1997.
INCENTIVE BONUS. Annually, each executive is considered for an incentive
bonus. Factors considered in determining the amount of the award include
revenue growth, cost control, net profitability and achievement of individual
goals and objectives. Typically, minimum revenue and earnings thresholds have
been established, below which no awards are made. Bonus awards for all
executives are approved by the Chief Executive Officer. Bonus awards for the
Company's Chief Executive Officer are subject to approval by the Compensation
Committee. Beginning with fiscal year 1997, the timing of these bonus payments
changed from an annual to a quarterly basis for all executives except Mr.
James, who received his bonus in installments paid in April, August and
November 1997 and Messrs. Long and Storin, who received their bonuses in
installments paid in August and November 1997. Mr. James earned a cash bonus
of $1,281,000 in fiscal 1997. Because of the Company's record performance,
sizable bonuses also were earned by other executive officers in fiscal 1997.
LONG-TERM INCENTIVE. The Company's long-term compensation philosophy
provides that long-term incentives should relate to improvement in stockholder
value, thereby creating a mutuality of interests between executives and
stockholders. Long-term
48
<PAGE>
incentives are provided to executives through restricted stock awards, the
Company's Employee Option Plan and the Company's Executive Deferral Plan.
In keeping with the Company's commitment to provide a total compensation
package that favors at-risk components of pay, long-term incentives comprise
an appreciable portion of an executive's total compensation package. When
awarding long-term incentives, the Committee considers executives' respective
levels of responsibility, prior experience, historical award data, various
performance criteria and compensation practices at comparator companies.
Again, the Committee does not utilize formal mathematical formulae when
determining the number of options/shares granted to executives.
RESTRICTED STOCK AWARDS
On December 12, 1995, the Board of Directors adopted the Restricted Stock
Plan for the purpose of enabling the Company to provide incentives to its key
employees to maximize stockholder value by giving them a proprietary interest
in the Company through the ownership of stock. The Board of Directors approved
an amendment to the Restricted Stock Plan on July 2, 1996, to allow for
immediate vesting of restricted stock grants at the discretion of the
committee administering the Restricted Stock Plan. On July 14, 1997, the Board
of Directors approved an amendment to the Restricted Stock Plan to increase
the number of shares reserved for awards under the plan from 500,000 to
1,000,000. Officers and certain key employees of the Company, including
directors who are also full-time employees, are eligible 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 administer the Restricted Stock Plan. Each award is
evidenced by an agreement that sets forth the terms and conditions of the
restricted stock granted, including the vesting schedule. The Restricted Stock
Plan provides for certain vesting upon death, permanent disability,
retirement, termination for good reason by the employee and upon a change of
control such as the Merger. The employee, as owner of the restricted stock,
has all rights of a stockholder including voting rights and the right to
receive cash dividends, if any. No grants were made under the Restricted Stock
Plan in fiscal 1997. At September 30, 1997, 812,000 shares were available for
granting under the plan.
The Committee believes that restricted stock provides the Company's
executives with an immediate link to stockholder interests. Upon becoming a
stockholder, the executive receives the right to vote Company shares and
receive dividends, further aligning the executive's interests to those of the
Company's stockholders. During fiscal 1996, Messrs. James and Long were
granted a total of 38,000 and 22,000 shares, respectively, under the
Restricted Stock Plan. No unvested restricted stock grants exist for 1997. See
"Summary Compensation Table" below.
STOCK OPTIONS
Stock options are granted at an option price not less than the fair
market value of the Common Stock on the date of grant. Accordingly, stock
options have value only if the price of the Common Stock appreciates after the
date the options are granted. This design focuses executives on the creation
of stockholder value over the long term and encourages equity ownership in the
Company.
As detailed in the table entitled "Stock Option Grants in Fiscal 1997"
under the caption "Executive Compensation" below, in fiscal 1997 Mr. James
received an option to purchase 130,000 shares of the Common Stock with an
exercise price of $14.3125 per share, exercisable for six years and vesting
one-third on each of the first three anniversaries of the grant or in its
entirety upon a change in control such as the Merger.
In determining the number of shares subject to the options granted to Mr.
James, the Committee considered the number of options previously granted to
him, the level of total stockholder return and numerous subjective factors
indicative of his dedication to the success of the Company. At November 28,
1997, Mr. James owned 105,818 shares of the Company's Common Stock and,
including his fiscal 1997 grant, held options to purchase an additional
403,000 shares. The Committee believes that this equity interest provides an
appropriate link to the interests of stockholders.
EXECUTIVE COMPENSATION DEFERRAL PLAN
During fiscal 1997, the Company continued offering to certain key
employees the ability to defer a portion of their respective salaries, on a
pre-tax basis, up to 100% of base compensation, with benefits generally
payable upon retirement, disability, termination of employment (other than for
cause) or death. The Company may make certain matching contributions to each
participant's account under such plan with vesting to occur over time or upon
change of control such as the Merger; however, the Company has retained the
ability to limit its contributions thereunder at any time. The Committee
believes that this type of plan provides additional long-term incentive for
overall corporate success. The Company made an aggregate of approximately
$13,730 in matching contributions during the first quarter of fiscal 1997,
$2,102 of which was made on behalf of Mr. James. Effective January 1, 1997,
matching contributions by the Company were eliminated.
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<PAGE>
CONCLUSION
The Committee believes that these executive compensation policies serve
the interests of the stockholders and the Company effectively. The Committee
believes that the various pay vehicles offered are appropriately balanced to
provide increased motivation for executives to contribute to the Company's
overall future successes, thereby enhancing the value of the Company for the
stockholders' benefit.
Gary D. Becker L. Lowry Mays F. Gardner Parker Larry M. James
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid during each of the Company's last three fiscal years to the Company's
Chief Executive Officer and each of the Company's four other most highly
compensated executive officers whose base salary and bonus exceeded $100,000
for fiscal 1997.
<TABLE>
LONG-TERM
COMPENSATION AWARDS
---------------------------
ANNUAL COMPENSATION OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER
NAME AND PRINCIPAL FISCAL ---------------------- COMPENSATION STOCK UNDERLYING COMPENSATION
POSITION YEAR SALARY($) BONUS ($) ($)(1) AWARDS($)(2) OPTIONS(#)(3) ($)
- ------------------------- ------ --------- --------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
LARRY M. JAMES 1997 240,000 1,281,000(4) 7,730 0 130,000 12,100(5)
CHIEF EXECUTIVE OFFICER, 1996 229,231 300,000 8,467 176,900(6) 180,000 17,241(7)
PRESIDENT AND DIRECTOR 1995 200,000 140,000 7,280 0 50,000 9,492(8)
W. AUDIE LONG 1997 156,231 120,000(9) 9,189 0 50,000 13,776(10)
GENERAL COUNSEL, SENIOR 1996 174,616 55,000 11,152 103,380(11) 75,000 380,634(12)
VICE PRESIDENT-LEGAL 1995 160,427 100,000 9,327 0 25,000 10,583(13)
AND REGULATORY AFFAIRS
& CORPORATE SECRETARY
JAMES S. SPEIRS 1997 120,000 37,993 3,482 0 40,000 2,106(14)
SENIOR VICE PRESIDENT- 1996 117,692 40,000 1,582 0 70,000 2,373(15)
NETWORK OPERATIONS AND 1995 N/A N/A N/A N/A N/A N/A
CHIEF TECHNOLOGY OFFICER
PHILLIP J. STORIN 1997 139,215 120,000(9) 4,287 0 40,000 2,245(16)
SENIOR VICE PRESIDENT, 1996 102,230 60,000 3,148 0 50,000 4,319(17)
CHIEF FINANCIAL OFFICER 1995 92,000 36,000 0 0 0 3,567(18)
AND CORPORATE TREASURER
STAN G. MASTERS 1997 114,539 44,497 0 0 40,000 2,510(19)
SENIOR VICE PRESIDENT- 1996 93,654 40,000 0 0 50,000 4,472(20)
SALES 1995 89,712 22,000 0 0 0 4,304(21)
</TABLE>
- -------------
(1) Represents amounts reimbursed during fiscal 1997, 1996 and 1995 for the
payment of certain taxes.
(2) At September 30, 1997, the number and value of aggregate restricted stock
award holdings were as follows: Mr. James, 38,000 shares ($762,375); Mr.
Long, 22,000 shares ($441,375); Messrs. Speirs, Storin and Masters did
not hold any restricted stock at September 30, 1997. The value of the
restricted stock awards was determined by multiplying the market value of
the Common Stock on September 30, 1997 as determined by reference to the
closing price of the Common Stock on the Nasdaq National Market System
($20.0625 per share) by the number of shares of restricted stock held.
The value of the restricted stock awards does not include the value of
Billing stock awards received by the foregoing individuals pursuant to
the terms of the spin-off. If any dividends are paid with respect to the
Company's Common Stock, such dividends will be paid on the restricted
stock.
(3) Certain of the options granted during fiscal 1996 were the result of the
voluntary surrender and exchange of previously granted options under the
Company's Employee Option Plan.
(4) Represents bonus earned in fiscal 1997, $1,066,000 of which was paid in
the first quarter of fiscal 1998.
(5) Represents $3,600 in Company 401(k) Retirement Plan contributions, $2,102
in Company deferred compensation contributions and $6,398 in life
insurance premiums made or paid on behalf of Mr. James during fiscal 1997.
(6) Mr. James was granted 28,000 shares on December 14, 1995 which, as
amended, vested 100% on July 2, 1996, and was granted 10,000 shares on
July 16, 1996 which vested 100% on the date of grant.
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<PAGE>
(7) Represents $3,202 in Company 401(k) Retirement Plan contributions, $8,121
in Company deferred Compensation contributions and $5,918 in life
insurance premiums made or paid on behalf of Mr. James during fiscal 1996.
(8) Represents $2,236 in Company 401(k) Retirement Plan contributions and
$7,256 in Company deferred compensation contributions made on behalf of
Mr. James during fiscal 1995.
(9) Represents bonus earned in fiscal 1997, $50,000 of which was paid in the
first quarter of fiscal 1998.
(10) Represents $2,344 in Company 401(k) Retirement Plan contributions, $2,664
in Company deferred compensation contributions and $8,768 in life
insurance premiums made or paid on behalf of Mr. Long during fiscal 1997.
(11) Mr. Long was granted 16,000 shares on December 14, 1995 which, as
amended, vested 100% on July 2, 1996, and was granted 6,000 shares on
July 16, 1996 which vested 100% on the date of grant.
(12) Represents $2,536 in Company 401(k) Retirement Plan contributions,
$10,015 in Company deferred Compensation contributions and $8,083 in life
insurance premiums made or paid on behalf of Mr. Long during fiscal 1996
and $360,000 paid under contractual agreement in connection with the
spin-off of Billing.
(13) Represents $2,494 in Company 401(k) Retirement Plan contributions and
$8,089 in Company deferred compensation contributions made on behalf of
Mr. Long during fiscal 1995.
(14) Represents $1,315 in Company 401(k) Retirement Plan contributions and
$791 in Company deferred compensation contributions made on behalf of
Mr. Speirs during fiscal 1997.
(15) Represents $2,373 in Company deferred compensation contributions made on
behalf of Mr. Speirs during fiscal 1996.
(16) Represents $1,465 in Company 401(k) Retirement Plan contributions and
$780 in Company deferred compensation contributions made on behalf of
Mr. Storin during fiscal 1997.
(17) Represents $1,427 in Company 401(k) Retirement Plan contributions and
$2,892 in Company deferred compensation contributions made on behalf of
Mr. Storin during fiscal 1996.
(18) Represents $1,359 in Company 401(k) Retirement Plan contributions and
$2,208 in Company deferred compensation contributions made on behalf of
Mr. Storin during fiscal 1995.
(19) Represents $1,718 in Company 401(k) Retirement Plan contributions and
$792 in Company deferred compensation contributions made on behalf of
Mr. Masters during fiscal 1997.
(20) Represents $1,353 in Company 401(k) Retirement Plan contributions and
$3,119 in Company deferred compensation contributions made on behalf of
Mr. Masters during fiscal 1996.
(21) Represents $1,466 in Company 401(k) Retirement Plan contributions and
$2,838 in Company deferred compensation contributions made on behalf of
Mr. Masters during fiscal 1995.
51
<PAGE>
STOCK OPTION GRANTS IN FISCAL 1997
The following table provides information related to options granted to
the named executive officers during fiscal 1997. The Company has never
granted stock appreciation rights.
<TABLE>
INDIVIDUAL GRANTS
----------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE OPTION TERM(1)
OPTIONS IN FISCAL PRICE EXPIRATION ------------------------
NAME GRANTED(#) 1997 ($/SH) DATE 5%($) 10%($)
- ------------------ ------------ ------------ --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
LARRY M. JAMES 130,000 15.4 14.3125 6/03/03 514,056 1,135,930
W. AUDIE LONG 50,000 5.9 14.3125 6/03/03 197,714 436,896
JAMES S. SPEIRS 40,000 4.7 14.3125 6/03/03 158,171 349,517
PHILLIP J. STORIN 40,000 4.7 14.3125 6/03/03 158,171 349,517
STAN G. MASTERS 46,000(2) 5.4 14.3125 6/03/03 181,897 401,945
</TABLE>
- ---------
(1) Calculation based on stock option exercise price over the exercise period
of the option assuming annual compounding. The columns present estimates of
potential values based on certain mathematical assumptions. The actual
value, if any, that an executive officer may realize is dependent upon the
market price on the date of option exercise.
(2) Includes the grant of an option for 6,000 shares to Mr. Masters' wife, who
serves as the Company's Director of Product Management.
AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND FISCAL YEAR-END OPTION VALUES
The following table provides information related to options exercised by
the named executive officers during the 1997 fiscal year and the number and
value of options held at fiscal year ("FY") end. The Company does not have
any outstanding stock appreciation rights.
<TABLE>
NUMBER OF SECURITIES VALUE(3) OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES ACQUIRED OPTIONS AT FY-END(#)(2) OPTIONS AT FY-END($)
UPON OPTION VALUE -------------------------- --------------------------
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------- --------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
LARRY M. JAMES 0 N/A 186,334 216,666 3,175,300 2,107,073
W. AUDIE LONG 0 N/A 158,667 83,333 2,837,729 810,411
JAMES S. SPEIRS 0 N/A 23,334 86,666 380,702 991,373
PHILLIP J. STORIN 5,000 $32,125 34,668 73,332 581,679 762,661
STAN G. MASTERS 0 N/A 40,919(4) 83,331(5) 672,139 860,871
</TABLE>
- ---------
(1) Market value of the underlying securities at exercise date, minus the
exercise price.
(2) Does not include Billing stock options received by the listed individuals
in August 1996 pursuant to the terms of the spin-off.
(3) Market value of the underlying securities at September 30, 1997 ($20.0625),
minus the exercise price.
(4) Includes options for 5,751 shares held by Mr. Masters' wife.
(5) Includes options for 9,999 shares held by Mr. Masters' wife.
52
<PAGE>
EMPLOYEE BENEFIT PLANS
USLD COMMUNICATIONS CORP. 401(K) RETIREMENT PLAN
The Company adopted the Retirement Plan effective January 1, 1992.
Participation in the Retirement Plan is offered to eligible employees of the
Company (collectively, the "Participants"). Generally, all employees of the
Company who are 21 years of age and who have completed one year of service
during which they worked at least 1,000 hours are eligible for participation
in the Retirement Plan.
The Retirement Plan is a 401(k) plan, a form of defined contribution
plan which provides that Participants generally may make voluntary salary
deferral contributions, on a pre-tax basis, of between 1% and 15% of their
base compensation in the form of voluntary payroll deductions up to a maximum
amount as indexed for cost-of-living adjustments ("Voluntary Contributions").
From January 1993 through December 1994, the Company made matching
contributions equal to 33% of the first 6% of a Participant's compensation
contributed as salary deferral. Effective January 1, 1995, the Company made
matching contributions equal to 25% of the first 6% of a Participant's
compensation contributed as salary deferral. Effective January 1, 1996, the
Company made matching contributions equal to 50% of the first 3% of a
Participant's compensation contributed as salary deferral. The Company may
from time to time make additional discretionary contributions at the sole
discretion of the Board. The discretionary contributions, if any, are
allocated to Participants' accounts based on a discretionary percentage of
the Participants' respective salary deferrals.
Participants are gradually vested in all contributions made by the
Company over a period of five years of credited service, vesting 25% a year
for each full year of service beginning with the Participant's second
anniversary, and becoming 100% vested after five years of service or upon
death, total and permanent disability, retirement under the Retirement Plan,
Retirement Plan termination, or upon a change in control such as the Merger.
Participants are always 100% vested in their Voluntary Contributions.
STOCK OPTION PLANS
On February 6, 1990, the stockholders of the Company approved the
Employee Option Plan. The Employee Option Plan provides for the grant of
incentive stock options ("ISOs") under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code") and stock options that do not qualify
under Section 422 of the Code ("NQSOs"). Under the terms of the Employee
Option Plan, as amended by the stockholders at the Company's 1992, 1994 and
1996 Annual Meetings of Stockholders, 3,966,666 shares of Common Stock have
been reserved for the granting of options. At November 28, 1997, options to
purchase 3,905,797 shares had been granted. If any option granted under the
Employee Option Plan terminates, expires or is surrendered, new options may
thereafter be granted covering such shares.
The Employee Option Plan is administered by a committee (the "Option
Plan Committee") of three "disinterested persons" appointed by the Board. The
Option Plan Committee currently consists of non-employee members of the
Compensation Committee of the Board: Gary D. Becker, L. Lowry Mays and F.
Gardner Parker. The Employee Option Plan grants broad authority to the Option
Plan Committee to grant options to full-time employees and officers of the
Company and its subsidiaries (totaling 672 eligible individuals at November
28, 1997), selected by the Option Plan Committee, to determine the number of
shares subject to options and to provide for the appropriate periods and
methods of exercise and requirements regarding the vesting of options. The
option price for ISOs may not be less than 100% of the fair market value of
the Common Stock on the date of grant, or 110% of the fair market value with
respect to any ISO issued to a holder of 10% or more of the Company's shares.
There is no price requirement for NQSOs, other than that the option price
must exceed the par value of the Common Stock. The Employee Option Plan
further directs the Option Plan Committee to set forth provisions in option
agreements regarding the exercise and expiration of options according to
stated criteria. The Option Plan Committee oversees the methods of exercise
of options, with attention being given to compliance with appropriate
securities laws and regulations. The Employee Option Plan permits the use of
already owned Common Stock as payment for the exercise price of options.
Options for no more than 150,000 shares may be granted to any individual
employee under the Employee Option Plan during any single fiscal year.
On March 9, 1993, the, Board of Directors adopted, subject to
stockholder approval, the Director Plan. The Director Plan incorporated and
expanded a previous director option plan and authorizes the granting of
nonqualified options ("Director Options") to purchase Common Stock to
non-employee directors (totaling four eligible individuals at November 28,
1997). The Director Plan was approved by the Company's stockholders at the
Company's 1994 Annual Meeting of Stockholders, and the Company's stockholders
approved certain amendments to the Director Plan at the Company's 1996 Annual
Meeting of Stockholders, which amendments included the Annual Director Fee
for non-employee directors of the Company. Under the terms of the Director
Plan, each non-employee director must make an election, no later than
December 31 of each year, to receive his Annual Director Fee for the
following year in cash ($15,000) or in whole or in part through the grant of
a Director Fee Option exercisable for up to 7,500 shares of Common Stock at
an exercise price per share equal to the fair market value of the Common
Stock on the date of grant (i.e., the business day on or immediately after
December 15). At the Company's 1997 Annual Meeting of Stockholders, the
stockholders
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<PAGE>
approved certain additional amendments to the Director Plan, which amendments
included an increase in the aggregate number of shares of Common Stock
subject to issuance under this plan from 250,000 to 750,000, an increase in
the number of shares subject to Director Options from 15,000 to 30,000, a
provision for the granting of Discretionary Options and deletion of the
limitation that the plan not be amended more frequently than once every six
months.
During the fiscal year ended September 30, 1997, director F. Gardner
Parker was granted Director Options, directors Amato and Becker were granted
Director Fee Options and directors Becker and Parker were granted
Discretionary Options. A total of 750,000 shares of Common Stock (subject to
certain adjustments) has been reserved for issuance upon exercise of Director
Options. At November 28, 1997, options to purchase 345,000 shares of Common
Stock had been granted under the Director Plan. Each such option had a per
share option exercise price equal to the market price per share of the Common
Stock on the date of grant. All Director Options vest in three equal portions
over three years from the first date of the individual's service to the
Company as a director or date of grant, as the case may be, or sooner upon a
change of control such as the Merger, and are exercisable for a period of
five years from the date of grant. All Director Fee Options vest on the date
of grant and are exercisable for a period of five years from the date of
grant. Discretionary Options vest according to the vesting schedule
determined by the Board of Directors (immediately upon a change of control
such as the Merger) and are exercisable for a period of five years from the
date of grant. Each of the Discretionary Options granted in fiscal 1997 vest
one-third on each of the first three anniversaries of the date of grant.
Director Options, Director Fee Options and Discretionary Options, once
granted and to the extent vested and exercisable, will remain exercisable
throughout their term, except that the unexercised portion of a Director
Option will terminate 30 days after the date an optionee ceases to be a
Director for any reason other than death, in which case the Director Option
will terminate one year after the optionee's death or six months after the
optionee's death if the death occurs during the 30-day period referenced
above.
The Merger agreement provides that, at the effective date of the Merger,
each stock option and warrant granted by the Company ("USLD Stock Option") to
purchase shares of Common Stock which is outstanding and unexercised shall be
assumed by LCI and converted into an option or warrant to purchase common
stock of LCI ("LCI Common Stock") in such amount and at such exercise price
as is provided below and otherwise having the same terms and conditions as
are in effect immediately prior to the effective date of the Merger. The
number of shares of LCI Common Stock to be subject to the new option or
warrant will be equal to the number of shares that the holder of such USLD
Stock Option would be entitled to receive pursuant to the Merger had such
holder exercised such option or warrant in full immediately prior to the
effective date of the Merger (whether or not such option or warrant was in
fact exercisable). The exercise price per share of LCI Common Stock under the
new option or warrant will be equal to the aggregate exercise price for the
Company's Common Stock purchasable pursuant to such USLD Stock Option divided
by the number of shares of LCI Common Stock deemed purchasable pursuant to
such USLD Stock Option.
Pursuant to the Company's Employee Option Plan, Director Plan and
certain contract stock option grants (the "USLD Stock Option Plans"), the
Merger will result in each USLD Stock Option, whether or not fully vested,
becoming fully vested and exercisable. Any USLD Stock Option not exercised
will be assumed and converted into an immediately exercisable option to
purchase LCI Common Stock on the terms described above. The vesting period of
outstanding stock purchase warrants will be unaffected by the Merger. In
addition, pursuant to the terms of the spin-off with Billing, Billing
granted, under its 1996 Employee Comprehensive Stock Plan and 1996
Non-Employee Director Plan, options to purchase Billing common stock to each
holder of an outstanding option to purchase shares of the Company's Common
Stock under the USLD Stock Option Plans. The Billing options were granted on
the basis of an option exercisable for one share of Billing common stock for
every one share of the Company's Common Stock subject to the outstanding USLD
Stock Options. Each Billing option agreement provides that the Merger will
result in each Billing option held by the Company's employees, whether or not
fully vested, becoming fully vested and exercisable. Billing options held by
Billing employees will be unaffected by the Merger.
EMPLOYEE STOCK PURCHASE PLAN
The Company adopted the ESPP effective July 1, 1995, and the
stockholders of the Company approved the ESPP on February 29, 1996. The ESPP
allows participating employees to purchase shares of the Common Stock at a
discount with funds from payroll deductions. Every employee of the Company
and its subsidiaries is eligible to participate in the ESPP on a voluntary
basis with the exception of (i) employees who have not completed at least six
months of continuous service with the Company as of the applicable enrollment
date and (ii) employees who would, immediately upon enrollment, own directly
or indirectly, or hold purchase rights, options or rights to acquire, an
aggregate of 5% or more of the total combined voting power or value of all
outstanding shares of all classes of the Company. At November 28, 1997, there
were 255 participants in the ESPP.
Enrollment in the ESPP constitutes a grant by the Company to the
participant of the right to purchase shares of the Company's Common Stock.
Under the terms of the ESPP, 1,000,000 shares of Common Stock have been
reserved for purchase under the plan, subject to adjustment as provided in
the ESPP. At November 28, 1997, 125,821 shares had been purchased under the
ESPP. Each offering of Common Stock under the ESPP (except for the initial
offering period, which was seven months, and the second
54
<PAGE>
offering period, which was shortened to four months due to the spin-off of
Billing) covers a period of approximately six months. To participate in the
ESPP, eligible employees must enroll in the ESPP and authorize payroll
deductions pursuant to the ESPP. These payroll deductions may not exceed
$10,600 in any six-month participation period. The purchase price per share
is the lesser of (i) 85% of the fair market value of the Common Stock on the
first day of the applicable participation period or (ii) 85% of the fair
market value of the Common Stock on the last day of such participation
period. The ESPP is administered, at the Company's expense, by the Employee
Stock Purchase Plan Committee, which was appointed by the Board of Directors.
The Committee consists of at least three persons who need not be members of
the Board of Directors.
EXECUTIVE COMPENSATION DEFERRAL PLAN
On December 15, 1993, the Board of Directors adopted the Executive
Deferral Plan to be effective January 1, 1994. Participation in the Executive
Deferral Plan is offered to certain key employees occupying management
positions and/or certain other highly compensated employees of the Company
who are determined by the Board, from time to time, to be eligible to
participate in the Executive Deferral Plan ("Executive Deferral
Participants"). At November 28, 1997, there were 15 Executive Deferral
Participants in the Executive Deferral Plan.
The Executive Deferral Plan is a deferred compensation plan that
provides that Executive Deferral Participants generally may make voluntary
salary deferral contributions, on a pre-tax basis, in equal monthly amounts
of up to 100% of his or her base compensation ("Voluntary Deferral
Contribution"). In addition, through December 31, 1996, the Company made
certain matching contributions with respect to each Voluntary Deferral
Contribution (the "Company Deferral Contribution") equal to the lesser of (i)
the Voluntary Deferral Contribution or (ii) that amount together with the
Voluntary Deferral Contribution which actuarially determined would yield a
10-year annuity equal to 50% of the Executive Deferral Participant's
compensation payable at age 65, with a minimum contribution of $3,000.
However, the Company reserved the right, at any time, to decrease the Company
Deferral Contribution or provide no Company contribution whatsoever for any
plan year. The Company Deferral Contributions were eliminated beginning
January 1, 1997. The Company made approximately $13,700 in Company Deferral
Contributions to this plan during the first quarter of fiscal 1997.
Unless terminated for cause, Executive Deferral Participants are vested
annually in 33% of any Company Deferral Contribution beginning with the
Executive Deferral Participant's first anniversary of service and becoming
100% vested after the third anniversary of service or upon a change in
control of the Company such as the Merger. Benefits generally are payable to
an Executive Deferral Participant (or his or her beneficiaries) upon
retirement, disability, termination of employment (other than for cause) or
death, in each case as provided in the Executive Deferral Plan. Messrs.
James, Long, Storin and Masters were 100% vested in their respective Company
Deferral Contributions. At November 28, 1997, Mr. Speirs was 66% vested in
Company Deferral Contributions but will be 100% vested if the Merger is
consummated.
DISABILITY PLAN
Effective January 1, 1994, the Board of Directors of the Company adopted
the Disability Plan. The Disability Plan provides long-term disability
benefits for certain employees occupying management positions with the
Company or its subsidiaries. Benefits under the Disability Plan are provided
directly by the Company based on definitions, terms and conditions contained
in the Disability Plan documents. At November 28, 1997, there were 18
participants in the Disability Plan. No benefits were paid to any participant
under the Disability Plan during fiscal 1997.
EMPLOYMENT AGREEMENTS AND CHANGE-OF-CONTROL ARRANGEMENTS
Effective February 14, 1997, the Company entered into an employment
agreement with Mr. James. This agreement expires on February 13, 2000,
subject to automatic one-year extensions on each anniversary of the
agreement. Mr. James's employment agreement provided for an annual, calendar
year base salary of $240,000 in fiscal 1997 and an incentive bonus at the
discretion of the Compensation Committee of the Board of Directors. Effective
August 1, 1997, the Company entered into a new employment agreement with Mr.
James which expires on the same terms as the February 14, 1997 agreement and
provides for an annual base salary of $325,000 beginning October 1, 1997 and
an incentive bonus at the discretion of the Compensation Committee of the
Board of Directors.
Effective as of August 2, 1996, the Company and Billing entered into an
employment agreement with Mr. Long. This agreement expired on August 1, 1997,
subject to extension for successive one-year terms unless the Company elected
not to extend the agreement. The employment agreement provided for an annual
base salary of $150,000 and an incentive bonus at the discretion of the
Compensation Committee of the Board of Directors. Effective August 1, 1997,
the Company entered into a new employment agreement with Mr. Long. The
agreement expires on July 31, 1999, subject to automatic two-year extensions
on each two-year anniversary of the agreement unless the Company elects not
to extend the agreement. The agreement provides for an annual base salary of
$190,000 and an incentive bonus at the discretion of the Compensation
Committee of the Board of Directors.
55
<PAGE>
The employment agreement with Mr. James provides that if the Company
terminates his employment without cause (including the Company's election to
not extend the employment agreement at any renewal date) or if he resigns his
employment for "good reason" (as "good reason" is defined in the employment
agreement), Mr. James will be entitled to a lump-sum payment in the amount
his then effective annual base salary through the expiration of the
three-year term then in effect (up to $975,000 depending on the actual date
of the termination and between $650,000 and $975,000 upon consummation of the
Merger, depending on the actual effective date). In addition, under the terms
of the Agreement Regarding Vesting of Stock Options entered into between the
Company and Mr. James on August 2, 1996, if Mr. James' employment is
terminated under any of the circumstances listing in the preceding sentence,
all outstanding stock options held by Mr. James shall become fully vested and
exercisable for the latter of the remainder of the exercise period under the
Employee Option Plan or two years following the date of termination.
The employment agreement with Mr. Long provides that if the Company
terminates his employment without cause (including the Company's election to
not extend the employment agreement at any renewal date) or if he resigns his
employment for "good reason" (as "good reason" is defined in the employment
agreement), Mr. Long will be entitled to a lump-sum payment in the amount
equal to two times his annual base salary ($380,000). In addition, under the
terms of the Agreement Regarding Vesting of Stock Options entered into
between the Company and Mr. Long on August 2, 1996, if Mr. Long's employment
is terminated under any of the circumstances listing in the preceding
sentence, all outstanding stock options held by Mr. Long shall become fully
vested and exercisable for the latter of the remainder of the exercise period
under the Employee Option Plan or two years following the date of termination.
A change of control is deemed to have occurred if (i) more than 30% of
the combined voting power of the Company's then outstanding securities is
acquired, directly or indirectly, or (ii) at any time during the 24-month
period after a tender offer, merger, consolidation, sale of assets or
contested election, or any combination of such transactions, at least a
majority of the Company's Board of Directors shall cease to consist of
"continuing directors" (meaning directors of the Company who either were
directors prior to such transaction or who subsequently became directors and
whose election, or nomination for election by the Company's stockholders, was
approved by a vote of at least two-thirds of the directors then still in
office who were directors prior to such transaction), or (iii) the
stockholders of the Company approve a merger or consolidation of the Company
with any other corporation such as the Merger, other than a merger or
consolidation that would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least 60% of the total voting power represented by the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or (iv) the stockholders of
the Company approve a plan of complete liquidation of the Company or an
agreement of sale or disposition by the Company of all or substantially all
of the Company's assets.
The employment agreements with Messrs. James and Long are subject to
early termination as provided therein, including termination by the Company
for "cause" (as defined in the employment agreements) or termination by the
employee for "good reason" (as defined in the employment agreements). The
employment agreements also provide that if, at any time within 12 months of a
change of control, the employee ceases to be an employee of the Company by
reason of (i) termination by the Company (or its successor) without "cause"
(as defined in the employment agreement) or (ii) voluntary termination by the
employee for "good reason upon change of control" (as defined in the
employment agreements), in addition to the severance stated above, all
outstanding stock options held by them shall become fully vested and
exercisable, and they shall receive an additional payment that, when added to
all other payments received in connection with a change of control, will
result in the maximum amount allowed to be paid to an employee without
triggering an excess parachute payment (as defined by the Internal Revenue
Code), and Mr. Long's employment agreement provides that all benefits (as
defined by the employment agreement) shall continue throughout the remainder
of the two-year term of the agreement then in effect, and continuation of
medical benefits for two years from the date of termination.
Effective January 1, 1997, the Company entered into employment
agreements with Messrs. Speirs and Storin, each of which continues thereafter
until terminated by the Company or the employee upon 120 days' notice as
provided therein. These employment agreements provide for annual, base
salaries of $120,000 and $140,000 for Mr. Speirs and Mr. Storin,
respectively. Messrs. Speirs and Storin also are eligible to receive
incentive bonuses at the discretion of the Compensation Committee of the
Board. These employment agreements were amended on July 16, 1997 to increase
the annual base salaries for Messrs. Speirs and Storin to $160,000 effective
October 1, 1997.
The employment agreements with Messrs. Speirs and Storin provide that if
the Company terminates their employment without cause (including the
Company's election to not extend the employment agreements at any renewal
date) or if they resign their employment for "good reason" (as "good reason"
is defined in the employment agreement), Mr. Speirs will be entitled to a
lump-sum payment equal to one times his annual base salary ($160,000) and Mr.
Storin will be entitled to a lump-sum payment equal to two times his annual
base salary ($320,000).
56
<PAGE>
In anticipation of the Merger and as part of LCI's efforts to insure an
efficient integration of the Company's operations with its existing
operations, LCI has caused its wholly owned subsidiary, LCI Acquisition Corp.
("Merger Sub"), to enter into or to anticipate entering into employment
agreements with approximately 30 of the Company's employees, including
Messrs. James, Long, Speirs, Storin and Masters and other members of the
Company's management, to be effective as of the effective date of the Merger.
These employment agreements will provide for (i) annual salaries consistent
with such individual's responsibilities in accordance with LCI's knowledge of
industry standards; (ii) grants of options to purchase shares of LCI Common
Stock pursuant to the 1997/1998 LCI International, Inc. Stock Option Plan
that vest over five years; (iii) stay bonuses to induce such individuals to
remain in the employ of the surviving corporation for specified periods of
time equal to 100% of such individual's annual salary for the Messrs. James,
Long, Speirs, Storin and Masters and certain other senior members of the
Company's management and 50% of such individual's annual salary for certain
other employees entering into such agreements; and (iv) certain
non-competition and non-solicitation restrictions on the activities of these
individuals. In addition, such employees will be eligible for standard bonus
compensation in accordance with LCI's corporate incentive plan for non-sales
employees and sales incentive plan for sales employees, as the case may be.
The employment agreements entered into by Merger Sub with current senior
officers of the Company will provide for annual salaries and option grants as
follows: The annual salary of Mr. James will remain at $325,000 and he will
receive options to purchase 50,000 shares of LCI Common Stock; the annual
salary of Mr. Long will increase to $192,000 from $190,000 and he will
receive options to purchase 25,000 shares of LCI Common Stock; the annual
salary of Mr. Speirs will increase to $184,000 from $160,000 and he will
receive options to purchase 25,000 of LCI Common Stock; the annual salary of
Mr. Storin will increase to $188,000 from $160,000 and he will receive
options to purchase 25,000 of LCI Common Stock; the annual salary of Mr.
Masters will increase to $160,000 from $140,000 and he will receive options
to purchase 40,000 of LCI Common Stock.
Pursuant to the terms of the employment agreements with Merger Sub
described above, Messrs. James, Long, Speirs, Storin and Masters will be
entitled to receive their respective severance payments.
In addition, effective as of the effective date of the Merger, Merger
Sub has entered into or anticipates entering into non-competition agreements
with certain of the Company's employees, including Messrs. James, Long,
Speirs, Storin and Masters. Such non-competition agreements place broader and
longer non-competition and broader non-solicitation restrictions on such
individuals than those contained in the employment agreements described in
the preceding three paragraphs. In consideration for entering into such
non-competition agreements, Merger Sub has agreed to pay $1,000,000 to Mr.
James, $500,000 to Mr. Long and $200,000 for each other employee who enters
into such agreements, which amounts were determined after consultation with
LCI's independent consultants.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Upon resignation of Parris H. Holmes, Jr. as Chairman of the Board in July
1997, Mr. James was named Chairman of the Board and appointed to the
Compensation Committee. Mr. James also serves as Chief Executive Officer and
President of the Company.
57
<PAGE>
PERFORMANCE GRAPH
The following performance graph compares the performance of the
Company's Common Stock to the Standard and Poors 500 Index (the "S&P 500
Index") and to the Standard and Poors Telecommunications Index (the "S&P Tel
Index") for the period since September 30, 1992. The S&P Tel Index is
comprised of AT&T, MCI, Sprint and Worldcom, Inc. The graph assumes that the
value of the investment in the Company's Common Stock and each index was $100
at September 30, 1992 and that all dividends were reinvested. Performance
data for the Company is provided as of the last trading day of each of the
Company's last five fiscal years. Performance data for the S&P 500 Index and
for the S&P Tel Index is provided for the last trading day closest to
September 30 of each year.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL STOCKHOLDER RETURN
USLD COMMUNICATIONS CORP., S&P 500 INDEX AND S&P TEL INDEX
[GRAPH]
FISCAL YEAR ENDING
------------------------------------------------
COMPANY 1992 1993 1994 1995 1996 1997
- ------------------------ ---- ------ ------ ------ ------ ------
USLD COMMUNICATIONS CP 100 164.89 85.11 128.19 76.06 170.74
INDUSTRY INDEX 100 142.49 135.57 160.20 142.17 188.59
BROAD MARKET 100 113.01 117.18 152.04 182.96 256.97
Notes:
(1) Assumes that the value of the investment in the Company's Common Stock,
and each index, was $100 on September 30, 1992, and that all dividends were
reinvested.
(2) The peer group index is comprised of the following companies: AT&T, MCI,
Sprint and Worldcom, Inc. The index is weighted to reflect the relative
market capitalization of the peer group companies.
(3) The cumulative total return for fiscal 1996 includes the value of Billing
common stock distributed to the Company's stockholders in the spin-off.
There can be no assurance that performance of an investment in the
Company will continue in the future with the same or similar trends depicted
above. The Company does not and will not make or endorse any predictions as
to future stock performance.
58
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information with respect to
persons who are known to the Company to be the beneficial owners of 5% or
more of the outstanding Common Stock at November 28, 1997:
AMOUNT AND NATURE OF PERCENT OF CLASS
NAME AND ADDRESS BENEFICIAL OWNERSHIP(1) OWNED BENEFICIALLY
---------------- ----------------------- ------------------
AIM MANAGEMENT GROUP INC. 1,023,800 6.3%
11 Greenway Plaza, Suite 1919
Houston, Texas 77046
- ----------
(1) Unless otherwise noted, each of the persons named has sole voting and
investment power with respect to the shares reported.
SECURITY OWNERSHIP OF MANAGEMENT
The following table and notes thereto set forth certain information with
respect to the shares of Common Stock beneficially owned at November 28, 1997
by (i) each director of the Company, (ii) each executive officer of the
Company included in the Summary Compensation Table set forth under the
caption "Executive Compensation" in Item 11 of this report and (iii) all
executive officers and directors of the Company as a group.
<TABLE>
COMMON STOCK
------------------------------------------------
AMOUNT AND NATURE OF PERCENT OF CLASS
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) OWNED BENEFICIALLY (2)
------------------------ ------------------------ ----------------------
<S> <C> <C>
LARRY M. JAMES 292,152(3) 1.8%
W. AUDIE LONG 181,667(4) 1.1%
JAMES S. SPEIRS 38,622(5) *
PHILLIP J. STORIN 63,980(6) *
STAN G. MASTERS 40,481(7) *
CHARLES E. AMATO 56,134(8) *
GARY D. BECKER 17,500(9) *
L. LOWRY MAYS 5,000 *
F. GARDNER PARKER 12,000(10) *
ALL EXECUTIVE OFFICERS AND DIRECTORS
AS A GROUP (14 persons, including the
executive officers and directors
listed above) 834,009(11) 4.9%
</TABLE>
- ----------
* Represents less than 1% of the issued and outstanding shares of Common
Stock.
(1) Unless otherwise noted, each of the persons named has sole voting and
investment power with respect to the shares reported.
(2) The percentages indicated are based on outstanding stock options
exercisable within 60 days for each individual and 16,325,409 shares of
Common Stock issued and outstanding on November 28, 1997.
(3) Includes 186,334 shares that Mr. James has the right to acquire upon the
exercise of stock options, exercisable within 60 days, and 3,000 shares
owned by Mr. James's wife.
(4) Includes 158,667 shares that Mr. Long has the right to acquire upon the
exercise of stock options, exercisable within 60 days.
(5) Includes 33,334 shares that Mr. Speirs has the right to acquire upon the
exercise of stock options, exercisable within 60 days.
(6) Includes 38,001 shares that Mr. Storin has the right to acquire upon the
exercise of stock options, exercisable within 60 days.
(7) Includes 4,672 shares owned by Mr. Master's wife and 26,500 and 6,084
shares that Mr. Masters and his wife, respectively, have the right to
acquire upon the exercise of stock options, exercisable within 60 days.
59
<PAGE>
(8) Includes 10,834 shares that Mr. Amato has the right to acquire upon the
exercise of stock options, exercisable within 60 days.
(9) Includes 12,500 shares that Mr. Becker has the right to acquire upon the
exercise of stock options, exercisable within 60 days.
(10) Includes 5,000 shares that Mr. Parker has the right to acquire upon the
exercise of stock options, exercisable within 60 days.
(11) Includes 561,340 shares that 14 directors and executive officers
(including those held by Mr. Masters' wife) have the right to acquire upon
the exercise of stock options, exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Parris H. Holmes, Jr. served as Chairman of the Board and as a member of
the Compensation Committee of the Board of Directors until his resignation on
June 2, 1997. In connection with his resignation from the Board of Directors
of the Company in June 1997, the Company paid Mr. Holmes an $875,000 cash
bonus and granted him 25,000 shares of restricted Common Stock having a value
of $358,000 based on the closing price of the Common Stock on the Nasdaq
National Market System on June 4, 1997 ($14.3125 per share).
During fiscal 1997, the Company contracted for director and officer
liability, employee dishonesty, general liability, commercial auto, workers'
compensation, umbrella liability, employee benefits liability, property,
earthquake, fiduciary responsibility, employment practices and aircraft
policies of insurance. SWBC Insurance Services, Inc., a full service
insurance agency owned 25% by Mr. Amato, a director of the Company, served as
the agent for the placement of these policies. The aggregate amount of these
insurance policy premiums was not material to the Company's financial
position or results of operations. Mr. Amato also serves as a director and
Vice President of SWBC Insurance Services, Inc.
On April 18, 1997, Richard E. Burk, Vice President - Strategic Planning
of the Company, borrowed $75,000 from the Company. This loan accrued interest
at the rate of 10% per annum and matures on April 15, 1998. This loan is
secured by a first lien collateral interest in and to (i) any bonus realized
by Mr. Burk from the Company for fiscal year 1997 and (ii) the proceeds from
the exercise of stock options that vest prior to the repayment of such loan.
The largest aggregate amount of this indebtedness outstanding from Mr. Burk
to the Company for this loan during the period October 1, 1996 through
September 30, 1997 was $75,000.
L. Lowry Mays, a director of the Company is Chairman and Chief Executive
Officer of Clear Channel. Pursuant to on-going agreements, the Company
purchases advertising from Clear Channel and Clear Channel purchases long
distance services from the Company. The amount associated with these
agreements is not material to the Company's financial position or results of
operations.
60
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF REPORT
1. Financial Statements:
The consolidated financial statements of the Company and the
related report of the Company's independent public accountants thereon
have been filed under Item 8 hereof.
2. Financial Statement Schedules:
The following financial statement schedule and the report of
independent public accountants thereon are included in this report at
the page indicated. All other schedules for which provision is made in
the applicable accounting regulations of the SEC have been omitted
because such schedules are not required under the related instructions
or are inapplicable or because the information required is included in
the Consolidated Financial Statements or notes thereto.
ITEM PAGE
- ---- ----
Report of Independent Public Accountants 62
Schedule II - Valuation and Qualifying Accounts 63
61
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
USLD Communications Corp.:
We have audited, in accordance with generally accepted auditing
standards, the consolidated financial statements of USLD Communications Corp.
and subsidiaries and have issued our report thereon dated November 14, 1997.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken
as a whole.
ARTHUR ANDERSEN LLP
San Antonio, Texas
November 14, 1997
62
<PAGE>
SCHEDULE II
USLD COMMUNICATIONS CORP. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
ADDITIONS
----------------------
BALANCE AT CHARGED TO CHARGED TO WRITE-OFFS
FISCAL BEGINNING OF COSTS AND OTHER CHARGED TO BALANCE AT
YEAR DESCRIPTION PERIOD EXPENSES ACCOUNTS ALLOWANCE END OF PERIOD
- ------ ----------- ------------ ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
1995 Allowance for doubtful accounts $2,298 $6,231 $0 $(6,591) $1,938
1996 Allowance for doubtful accounts $1,938 $8,388 $0 $(7,807) $2,519
1997 Allowance for doubtful accounts $2,519 $9,156 $0 $(8,848) $2,827
</TABLE>
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<PAGE>
3. 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 September 30,
1996, Form 10-K)
3.2 Certificate of Designation, Preference and Rights of Series A Junior
Participating Preferred Stock, filed with the Delaware Secretary of
State on April 27, 1996 (Filed herewith)
3.3 Certificate of Amendment of Restated Certificate of Incorporation,
amending Article 1 to change the name of the corporation to USLD
Communications Corp., filed with the Delaware Secretary of State on
August 19, 1997 (Filed herewith)
3.4 Bylaws, as amended (Exhibit 3.2 to September 30, 1996, Form 10-K)
4.1 Form of Certificate Evidencing Common Stock (Filed herewith)
4.2 Amended Letter Agreement dated October 6, 1992, by and between
Communications Central, Inc., U.S. Long Distance Corp. and U.S. Long
Distance, Inc. (Exhibit 4.7 to Amendment No. 1 to Registration
Statement on Form S-3, SEC File No. 33-71228, dated November 23,
1993) as amended by Letter Agreement dated January 11, 1995 (Exhibit
4.7 to September 30, 1995, Form 10-K) and as amended by Letter
Agreement dated August 21, 1996 (Exhibit 4.2 to September 30, 1996,
Form 10-K)
4.3 Agreement dated March 23, 1993 by and between Paytel Northwest, Inc.,
U.S. Long Distance Corp. and U.S. Long Distance, Inc., as amended by
Agreement dated August 23, 1995 (Exhibit 4.8 to September 30, 1995,
Form 10-K) and as amended by Addendum No. 3 to Telecommunications
Services Agreement dated February 22, 1996 (Exhibit 4.3 to September
30, 1996, Form 10-K)
4.4 Rights Agreement by and between the Company and U.S. Trust Company of
Texas, N.A. dated April 12, 1996 (Exhibit 4.1 to Form 8-K filed
April 17, 1996), as amended by Amendment No. 1 to Rights Agreement
dated as of September 17, 1997 (Exhibit 4.1 to Form 8-K filed
September 23, 1997)
10.1 Amended and Restated Employment Agreement, dated August 1, 1997, by
and between the Company and Larry M. James (Filed herewith)
10.2 Amended and Restated Employment Agreement, dated August 1, 1997, by
and between the Company and W. Audie Long (Filed herewith)
10.3 Employment Agreement and Agreement Regarding Vesting of Stock Options,
both dated January 1, 1997, by and between the Company and Phillip J.
Storin (Filed herewith)
10.4 Form of letter agreement and Agreement Regarding Vesting of Stock
Options, both dated January 1, 1997, by and between the Company and
David S. Horne, Stan G. Masters and James S. Speirs, amending
employment agreements by and between the Company and each of such
individuals on January 1, 1997 (Filed herewith)
10.5 Form of Employment Agreement by and between the Company and its Vice
Presidents (Exhibit 10.4 to September 30, 1993, Form 10-K)
10.6 1990 Employee Stock Option Plan, as amended (Exhibit 10.5 to
September 30, 1996, Form 10-K)
10.7 Form of Option Agreement by and between the Company and its Employees,
Under the Employee Stock Option Plan (Exhibit 10.8 to September 30,
1992, Form 10-K)
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<PAGE>
10.8 Form of Stock Option Agreement by and between the Company and
Directors, Key Employees and Advisors (Filed herewith)
10.9 Form of Discretionary Option Agreement by and between the Company and
Non-Employee Directors (Filed herewith)
10.10 Amended and Restated Loan and Security Agreement dated May 22, 1991,
by and between Zero Plus Dialing, Inc. (currently Billing Information
Concepts, Inc.), U.S. Long Distance Corp. and U.S. Long Distance,
Inc. and Bell Atlantic TriCon Leasing Corporation ("Bell Atlantic")
(currently FINOVA Capital Corporation) (Exhibit 10.10 to September 30,
1991, Form 10-K) and related Revolving Credit Note dated May 24, 1991,
Term Note dated June 1992, Corporate Guaranties dated May 24, 1991,
and First Amendment and Joinder to Amended and Restated Loan and
Security Agreement dated December 17, 1992 (Exhibit 10.9 to
September 30, 1992, Form 10-K)
10.11 Second Amendment to Amended and Restated Loan and Security Agreement
dated April 2, 1993 by and between Zero Plus Dialing, Inc. (currently
Billing Information Concepts, Inc.), U.S. Long Distance Corp., U.S.
Long Distance, Inc., U.S. Billing, Inc. and Bell Atlantic (currently
FINOVA Capital Corporation) (Exhibit 10.11 to September 30, 1993,
Form 10-K)
10.12 Third Amendment to Amended and Restated Loan and Security Agreement
dated October 1, 1993 by and between Zero Plus Dialing, Inc.
(currently Billing Information Concepts, Inc.), U.S. Long Distance
Corp., U.S. Long Distance, Inc., U.S. Billing, Inc. and Bell Atlantic
(currently FINOVA Capital Corporation) (Exhibit 10.12 to September 30,
1993, Form 10-K)
10.13 Fourth Amendment to Amended and Restated Loan and Security Agreement
dated October 1, 1993 by and between Zero Plus Dialing, Inc.
(currently Billing Information Concepts, Inc.), U.S. Long Distance
Corp., U.S. Long Distance, Inc., U.S. Billing, Inc. and Bell Atlantic
(currently FINOVA Capital Corporation) (Exhibit 10.13 to September 30,
1993, Form 10-K)
10.14 Fifth Amendment to Amended and Restated Loan and Security Agreement
dated November 16, 1993 by and between Zero Plus Dialing, Inc.
(currently Billing Information Concepts, Inc.), U.S. Long Distance
Corp., U.S. Long Distance, Inc., U.S. Billing, Inc., USLD Acquisition
Corp. d/b/a Telecom West, Inc., STS Telecommunications, Inc. and Bell
Atlantic (currently FINOVA Capital Corporation) (Exhibit 10.14 to
September 30, 1993, Form 10-K)
10.15 Sixth Amendment to Amended and Restated Loan and Security Agreement
dated December 7, 1993 by and between Zero Plus Dialing, Inc.
(currently Billing Information Concepts, Inc.), U.S. Long Distance
Corp., U.S. Long Distance, Inc., U.S. Billing, Inc., USLD Acquisition
Corp., STS Telecommunications, Inc. and Bell Atlantic (currently
FINOVA Capital Corporation) (Exhibit 10.36 to September 30, 1994,
Form 10-K)
10.16 Seventh Amendment to Amended and Restated Loan and Security Agreement
dated March 17, 1994 by and between Zero Plus Dialing, Inc. (currently
Billing Information Concepts, Inc.), U.S. Long Distance Corp., U.S.
Long Distance, Inc., U.S. Billing, Inc., USLD Acquisition Corp.,
California Acquisition Corp., Telecom Acquisition Corp., STS
Telecommunications, Inc., Enhanced Services Billing, Inc. and Bell
Atlantic (currently FINOVA Capital Corporation) (Exhibit 10.37 to
September 30, 1994, Form 10-K)
10.17 Letter Agreement dated December 2, 1993 by and between Bell Atlantic
(currently FINOVA Capital Corporation) and U.S. Long Distance Corp.
(Exhibit 10.15 to September 30, 1993, Form 10-K)
10.18 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)
10.19 Agreement of Lease dated September 1, 1992, by and between U.S. Long
Distance, Inc. and Multi-Employer Property Trust (Exhibit 10.13 to
September 30, 1992, Form 10-K), as amended by Modification and
Ratification of Lease dated as of September 1, 1997 (Filed herewith)
10.20 Loan and Security Agreement dated July 25, 1991, by and between Buyer
Acquisition Corporation (NTX) and Bell Atlantic (currently FINOVA
Capital Corporation) (Exhibit 10.13 to September 30, 1991, Form 10-K)
and related Revolving Credit Note, Term Note, Subordination Agreement
and Corporation Guaranties dated July 25, 1991 (Exhibit 10.14 to
September 30, 1992, Form 10-K)
65
<PAGE>
10.21 Loan and Security Agreement Nos. 2882, 2883, 2884 and 2885 by and
between U.S. Long Distance Corp. and Charter Financial, Inc. dated
August 29, 1996 (Exhibit 10.20 to September 30, 1996, Form 10-K)
10.22 WCMA and Term WCMA Loan and Security Agreement No. 9608340801 by and
between U.S. Long Distance, Inc. and Merrill Lynch Business Financial
Services Inc. ("Merrill Lynch"), dated as of August 23, 1996, as
amended by letter agreement dated November 5, 1996, and Term WCMA
Note, dated August 23, 1996, made by U.S. Long Distance, Inc. and
payable to Merrill Lynch (Exhibit 10.21 to September 30, 1996,
Form 10-K), as amended by letter agreement dated October 13, 1997
(Filed herewith)
10.23 Operator Services Agreement by and between the Company and G-Five
Corp., dated September 16, 1993 (Exhibit 10.33 to September 30, 1993,
Form 10-K), as amended by Amendment to Operator Services Agreement
dated August 31, 1995 (Exhibit 10.22 to September 30, 1996,
Form 10-K)
10.24 1993 Non-Employee Director Plan of U.S. Long Distance Corp., as
amended (Filed herewith)
10.25 Form of Director Option Agreement by and between the Company and Non-
Employee Directors (Exhibit 10.24 to September 30, 1996, Form 10-K)
10.26 Form of Director Fee Option Agreement by and between the Company and
Non-Employee Directors (Exhibit 10.25 to September 30, 1996,
Form 10-K)
10.27 U.S. Long Distance Corp. Executive Qualified Disability Plan
(Exhibit 10.42 to September 30, 1994, Form 10-K)
10.28 U.S. Long Distance Corp. Executive Compensation Deferral Plan,
Restated Effective December 12, 1995 (Exhibit 10.27 to September 30,
1996, Form 10-K)
10.29 U.S. Long Distance Corp. Director Compensation Deferral Plan,
Restated Effective December 19, 1995 (Exhibit 10.28 to September 30,
1997, Form 10-K)
10.30 U.S. Long Distance Corp. Employee Stock Purchase Plan (Exhibit 10.44
to September 30, 1995, Form 10-K)
10.31 U.S. Long Distance Corp. Restricted Stock Plan (Exhibit 10.45 to
September 30, 1995, Form 10-K), as amended by First Amendment dated
July 2, 1996 and Second Amendment dated July 14, 1997 (Filed herewith)
10.32 Merrill Lynch Special Prototype Defined Contribution Plan and
Adoption Agreement for Merrill Lynch Special Prototype Defined
Contribution Plan (401(k) Plan) (Exhibit 10.31 to September 30,
1996, Form 10-K)
10.33 Distribution Agreement dated as of July 10, 1996 between the Company
and Billing Information Concepts Corp. (Exhibit 10.1 to Form 8-K
filed August 2, 1996)
10.34 Benefit Plans and Employment Matters Allocation Agreement dated as of
July 10, 1996 between the Company and Billing Information Concepts
Corp. (Exhibit 10.2 to Form 8-K filed August 2, 1996)
10.35 Tax Sharing Agreement dated as of July 10, 1996 between the Company
and Billing Information Concepts Corp. (Exhibit 10.3 to Form 8-K filed
August 2, 1996)
10.36 Transitional Services and Sublease Agreement dated as of July 10,
1996 between the Company and Billing Information Concepts Corp.
(Exhibit 10.4 to Form 8-K filed August 2, 1996)
10.37 Zero Plus-Zero Minus Billing and Information Management Services
Agreement dated as of July 10, 1996 between the Company and Billing
Information Concepts Corp. (Exhibit 10.5 to Form 8-K filed August 2,
1996)
10.38 Telecommunications Agreement dated as of July 10, 1996 between the
Company and Billing Information Concepts Corp. (Exhibit 10.6 to
Form 8-K filed August 2, 1996)
10.39 Agreement and Plan of Merger dated September 17, 1997 between the
Company and LCI International, Inc. (Exhibit 2.1 to Form 8-K filed
September 23, 1997)
11.1 Statement regarding computation of per share earnings (Filed herewith)
66
<PAGE>
21.1 Subsidiaries of the Company (Filed herewith)
23.1 Consent of Arthur Andersen LLP (Filed herewith)
27.1 Financial Data Schedule (Filed herewith)
(b) REPORTS ON FORM 8-K
The Company filed a Report on Form 8-K on September 23, 1997, relating
to (i) an amendment to the Company's Restated Certificate of Incorporation to
change its name to USLD Communications Corp. and (ii) execution of the
September 17, 1997 Agreement and Plan of Merger with LCI International, Inc.
and a wholly-owned subsidiary of LCI International, Inc.
67
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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:
USLD COMMUNICATIONS CORP.
By: /s/ LARRY M. JAMES
----------------------------------------
Larry M. James
CHAIRMAN OF THE BOARD,
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Date: December 15, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities indicated on the 15th day of
December, 1997.
SIGNATURE TITLE
--------- -----
/s/ LARRY M. JAMES Chairman of the Board,
- --------------------------- President and Chief Executive Officer
Larry M. James (Principal Executive Officer)
/s/ PHILLIP J. STORIN Senior Vice President and Chief Financial Officer
- --------------------------- (Principal Financial Officer)
Phillip J. Storin
/s/ PATRICK M. AELVOET Vice President and Chief Accounting Officer
- --------------------------- (Principal Accounting Officer)
Patrick M. Aelvoet
/s/ CHARLES E. AMATO Director
- ---------------------------
Charles E. Amato
/s/ GARY D. BECKER Director
- ---------------------------
Gary D. Becker
/s/ L. LOWRY MAYS Director
- ---------------------------
L. Lowry Mays
/s/ F. GARDNER PARKER Director
- ---------------------------
F. Gardner Parker
68
<PAGE>
EXHIBIT 3.2
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 10:00 AM 04/17/1996
960110075 - 2138401
CERTIFICATE OF DESIGNATION,
PREFERENCE AND RIGHTS
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
U.S. LONG DISTANCE CORP.
(Pursuant to Section 151 of the
General Corporation Law of the State of Delaware)
--------------------------
U.S. Long Distance Corp., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "corporation"), hereby
certifies that the following resolution was adopted by the Board of Directors of
the corporation as required by Section 151 of the General Corporation Law at a
meeting on April 12, 1996:
RESOLVED, that pursuant to the authority granted to and vested in the Board
of Directors of the corporation (the "Board of Directors") in accordance with
the provisions of the Restated Certificate of Incorporation of the corporation,
the Board of Directors hereby creates the following series of preferred stock,
par value $.0l per share, of the corporation:
The designation and number of shares, and the relative rights, preferences,
and limitations of the corporation's Series A Junior Participating Preferred
Stock is as follows:
SECTION 1. DESIGNATION AND AMOUNT.
The shares of such series shall be designated as "Series A Junior
Participating Preferred Stock" (the "Series A Preferred Stock") and the number
of shares constituting the Series A Preferred Stock shall be 5,000. Such number
of shares may be increased or decreased by resolution of the Board of Directors;
provided that no decrease shall reduce the number of shares
1
<PAGE>
of Series A Preferred Stock to a number less than the number of shares then
outstanding plus the number of shares reserved for issuance upon the exercise of
outstanding options, rights or warrants or upon the conversion of any
outstanding securities issued by the corporation convertible into Series A
Preferred Stock.
SECTION 2. DIVIDENDS AND DISTRIBUTIONS.
(A) Subject to the rights of the holders of any shares of any other
series of preferred stock (or any similar stock) of the corporation, the
holders of shares of Series A Preferred Stock, in preference to the holders
of Common Stock, par value $.01 per share (the "Common Stock"), of the
corporation, and of any other junior stock, shall be entitled to receive,
when, as and if declared by the Board of Directors out of funds legally
available for the purpose, cumulative preferential dividends, payable in
cash on the first day of January, April, July and October in each year
(each such date being referred to herein as "Quarterly Dividend Payment
Date"), commencing on the first Quarterly Dividend Payment Date after the
first issuance of a share or fraction of a share of Series A Preferred
Stock, at a rate per annum (rounded to the nearest cent) equal to the
greater of (a) $1.00 per share, or (b) subject to the provision for
adjustment hereinafter set forth, 10,000 times the aggregate per share
amount of all cash dividends, and 10,000 times the aggregate per share
amount (payable in kind) of all noncash dividends or other distributions
(other than a dividend payable in shares of Common Stock or a subdivision
of the outstanding shares of Common Stock (by reclassification or
otherwise)), declared on the Common Stock during the immediately preceding
fiscal year. In the event the corporation shall at any time after April
22, 1996 declare or pay any dividend on the Common Stock payable in shares
of Common Stock, or effect a subdivision (by reclassification or otherwise
than by payment of a dividend in shares of Common Stock) or combination or
consolidation of the outstanding shares of Common Stock into a greater or
lesser number of shares of Common Stock, then in each such case the amount
to which holders of shares of Series A Preferred Stock were entitled
immediately prior to such event under clause (b) of the preceding sentence
shall be adjusted by multiplying such amount by a fraction, the numerator
of which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares of
Common Stock that were outstanding immediately prior to such event.
(B) The corporation shall declare a dividend or distribution on the
Series A Junior Participating Preferred Stock as provided in paragraph (A)
above immediately after it declares a dividend or distribution on the
Common Stock (other than a dividend payable in shares of Common Stock).
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preferred Stock from the Quarterly Dividend Payment Date
next preceding the date of issuance of such shares, unless the date of
issue of such shares is prior to the record date for the first Quarterly
Dividend Payment Date, in which case dividends on such shares shall begin
to accrue from the date of issue of such shares, or unless the date
2
<PAGE>
of issue is a Quarterly Dividend Payment Date or is a date after the record
date for determination of holders of shares of Series A Preferred Stock
entitled to receive a quarterly dividend and before such Quarterly Dividend
Payment Date, in either of which events such dividends shall begin to
accrue and be cumulative from such Quarterly Dividend Payment Date.
Accrued but unpaid dividends shall not bear interest. Dividends paid on
the shares of Series A Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares
shall be allocated pro rata on a share-by-share basis among all such shares
at the time outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of Series A Preferred Stock entitled
to receive payment of a dividend or distribution declared thereon, which
record date shall be not more than 60 days prior to the date fixed for the
payment thereof.
SECTION 3. VOTING RIGHTS.
The holders of shares of Series A Preferred Stock shall have the following
voting rights:
(A) Each share of Series A Preferred Stock shall entitle the holder
thereof to 10,000 votes on all matters submitted to a vote of the
stockholders of the corporation. In the event the corporation shall at
any time after April 22, 1996, declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision (by
reclassification or otherwise than by payment of a dividend in shares of
Common Stock) or combination or consolidation of the outstanding shares of
Common Stock into a greater or lesser number of shares of Common Stock,
then in each such case the number of votes to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event
shall be adjusted by multiplying such number by a fraction, the numerator
of which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares of
Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein, in any other Certificate of
Designation, Preferences and Rights in respect of a series of preferred
stock (or any similar stock) of the corporation, in the Restated
Certificate of Incorporation of the corporation, or by law, the holders of
shares of Series A Preferred Stock and the holders of shares of Common
Stock and any other capital stock of the corporation having general voting
rights shall vote together as one class on all matters submitted to a vote
of stockholders of the corporation.
(C) Except as set forth herein, in the Restated Certificate of
Incorporation of the corporation or as otherwise provided by law, holders
of Series A Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any
corporate action.
3
<PAGE>
SECTION 4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Preferred
Stock outstanding shall have been paid in full, the corporation shall not:
(i) declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock;
(ii) declare or pay dividends, or make any other distributions,
on any shares of stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except dividends paid ratably on the Series A
Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
Series A Preferred Stock, provided that the corporation may at any
time redeem, purchase or otherwise acquire shares of any such junior
stock in exchange for shares of any stock of the corporation ranking
junior (both as to dividends and upon liquidation, dissolution or
winding up) to the Series A Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares
of Series A Preferred Stock, or any shares of stock ranking on a
parity with the Series A Preferred Stock, except in accordance with a
purchase offer made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such terms as
the Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective series or
classes.
(B) The corporation shall not permit any subsidiary of the
corporation to purchase or otherwise acquire for consideration any shares
of stock of the corporation unless the corporation could, under paragraph
(A) of this Section 4, purchase or otherwise acquire such shares at such
time and in such manner.
SECTION 5. REACQUIRED SHARES.
Any shares of Series A Preferred Stock redeemed, purchased or otherwise
acquired by the corporation in any manner whatsoever shall be retired and
cancelled promptly after the
4
<PAGE>
acquisition thereof. All such shares shall upon their cancellation become
authorized but unissued shares of preferred stock without designation as to
series and may be reissued as part of a new series of preferred stock subject to
the conditions and restrictions on issuance set forth herein, in the Restated
Certificate of Incorporation, or in any other Certificate of Designation,
Preferences and Rights in respect of a series of preferred stock (or any similar
stock) of the corporation, or as otherwise required by law.
SECTION 6. LIQUIDATION, DISSOLUTION OR WINDING UP.
Upon any liquidation, dissolution or winding up of the corporation, no
distribution shall be made (1) to the holders of shares of Common Stock or any
other stock ranking junior to the Series A Preferred Stock upon liquidation,
distribution or winding, up, unless, prior thereto, the holders of shares of
Series A Preferred Stock shall have received $1.00 per share, plus an amount
equal to accrued and unpaid dividends and distributions thereon, whether or not
declared, to the date of such payment; provided that the holders of shares of
Series A Preferred Stock shall be entitled to receive an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
10,000 times the aggregate amount to be distributed per share to holders of
shares of Common Stock, or (2) the holders of shares of stock ranking on a
parity with the Series A Preferred Stock upon liquidation, dissolution or
winding up, except distributions made ratably on the Series A Preferred Stock
and all such parity stock in proportion to the total amounts to which the
holders of all such shares are entitled upon such liquidation, dissolution or
winding up. In the event the corporation shall at any time after April 22, 1996
declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision (by reclassification or otherwise than by payment
of a dividend in shares of Common Stork) or combination or consolidation of the
outstanding shares of Common Stock into a greater or lesser number of shares of
Common Stock, then in each such case the aggregate amount to which holders of
shares of Series A Preferred Stock were entitled immediately prior to such event
under the proviso in clause (1) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
SECTION 7. CONSOLIDATION, MERGER, ETC.
In case the corporation shall enter into any consolidation, merger,
combination or other transaction in which the shares of Common Stock are
exchanged for or converted or changed into other stock or securities, cash
and/or any other property, then in any such case proper provision shall be made
so that each share of Series A Preferred Stock shall at the same time be
similarly exchanged for or converted or changed into an amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 10,000
times the aggregate amount of stock, securities, cash and/or any other property
(payable in kind), as the case may be, for which or into which each share of
Common Stock is exchanged for or converted or changed. In the event the
corporation shall at any time after April 22, 1996 declare or pay any dividend
on the Common Stock payable in shares of Common Stock, or effect a subdivision
(by reclassification or otherwise than by payment of a dividend in shares of
Common Stock) or combination or
5
<PAGE>
consolidation of the outstanding shares of Common Stock into a greater or lesser
number of shares of Common Stock, then in each such case the amount set forth in
the preceding sentence with respect to the exchange or conversion or change of
shares of Series A Preferred Stock shall be adjusted by multiplying such amount
by a fraction, the numerator of which is the number of shares of Common Stork
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event,
SECTION 8. NO REDEMPTION.
Shares of the Series A Preferred Stock shall not be redeemable.
SECTION 9. AMENDMENT.
This Certificate of Designation shall not be amended in any manner that
would materially alter or change the powers, preferences or special rights of
the Series A Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of at least two-thirds of the outstanding shares
of Series A Preferred Stock, voting together as a single class.
IN WITNESS WHEREOF, this Certificate of Designation, Preferences and Rights
is executed on behalf of the corporation by its President and attested by its
Secretary this 12th day of April, 1996.
U.S. LONG DISTANCE CORP.
By: /S/ LARRY M. JAMES
--------------------------------
Larry M. James, President
Attest:
/S/ AUDIE LONG
- --------------------------
Audie Long
Corporate Secretary
6
<PAGE>
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
U. S. LONG DISTANCE CORP.
U. S. Long Distance Corp., a corporation duly organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify that:
I. The amendment to the Corporation's Restated Certificate of
Incorporation set forth below was duly adopted in accordance with the provisions
of Sections 242 and 211 of the General Corporation Law of the State of Delaware.
II. Article 1 of the Corporation's Restated Certificate of Incorporation
is amended to read in its entirety as follows:
"The name of the corporation is USLD COMMUNICATIONS CORP. The
date of filing of its original Certificate of Incorporation with
the Secretary of State was September 21, 1987."
IN WITNESS WHEREOF, U. S. Long Distance Corp. has caused this Certificate
to be executed by its authorized officer on this 19th day of August, 1997.
/s/ LARRY M. JAMES
--------------------------------------------
Name: Larry M. James
Title: Chairman of the Board
and Chief Executive Officer
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 10:30 AM 08/19/1997
971277268 - 2138401
<PAGE>
SEE REVERSE FOR LEGEND
COMMON STOCK PAR VALUE $.01 PER SHARE
NUMBER USLD COMMUNICATIONS CORP. SHARES
B CONTINUED UNDER THE LAWS OF THE STATE OF DELAWARE
-----------------
CUSIP 902982 1D 7
-----------------
SEE REVERSE SIDE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE COMMON SHARES, WITH A
PAR VALUE OF $0.01 PER SHARE OF
USLD COMMUNICATIONS CORP.
(HEREINAFTER CALLED THE "CORPORATION"), TRANSFERABLE ON THE BOOKS OF THE
CORPORATION BY THE HOLDER HEREOF IN PERSON OR BY DULY AUTHORIZED ATTORNEY
UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED. THIS CERTIFICATE AND
THE SHARES REPRESENTED HEREBY ARE ISSUED AND SHALL BE HELD SUBJECT TO ALL OF
THE TERMS, CONDITIONS AND LIMITATIONS OF THE CERTIFICATE OF INCORPORATION AND
THE BYLAWS OF THE CORPORATION, AS RESTATED OR AMENDED, OR AS SAME MAY BE
RESTATED OR AMENDED HEREAFTER, TO ALL OF WHICH THE HOLDER HEREOF BY
ACCEPTANCE HEREOF AGREES AND ASSENTS. THIS CERTIFICATE IS NOT VALID UNTIL
COUNTERSIGNED BY THE TRANSFER AGENT AND REGISTERED BY THE REGISTRAR.
WITNESS THE FACSIMILE SEAL OF THE CORPORATION AND THE FACSIMILE SIGNATURES
OF ITS DULY AUTHORIZED OFFICERS.
DATED:
/s/ [ILLEGIBLE]
COUNTERSIGNED AND REGISTERED CHAIRMAN
MONTREAL TRUST COMPANY OF CANADA VANCOUVER [SEAL]
TRANSFER AGENT AND REGISTRAR /s/ AUDIE LONG
SECRETARY
BY SPECIMEN
---------------------------------
AUTHORIZED OFFICER
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE TRANSFERABLE
AT THE MAIN OFFICES OF MONTREAL TRUST COMPANY OF CANADA, VANCOUVER, BC
<PAGE> USLD COMMUNICATIONS CORP.
USLD COMMUNICATIONS CORP. WILL FURNISH TO THE RECORD HOLDER OF THIS
CERTIFICATE WITHOUT CHARGE ON WRITTEN REQUEST TO SUCH CORPORATION AT ITS
PRINCIPAL PLACE OF BUSINESS A FULL STATEMENT OF THE POWERS, DESIGNATIONS,
PREFERENCES, [] RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF
EACH CLASS OF STOCK OR SERIES THEREOF WHICH SUCH CORPORATION IS AUTHORIZED TO
ISSUE AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES
AND/OR RIGHTS.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT--.....Custodian.....
TEN ENT -- as tenants by the (Cust) (Minor)
entireties under Uniform Gift to
JT TEN -- as joint tenants with Minors Act..........
right of survivorship (State)
and not as tenants
in common
Additional abbreviations may also be used though not in the above list.
For value received, _____________________________________hereby sell,
assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
________________________
________________________________________________________________________________
________________________________________________________________________________
Please print or typewrite name and address including postal zip code of
assignee.
________________________________________________________________________________
_________________________________________________________________________Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________________
________________________________________________________________________Attorney
to transfer the said shares on the books of the within-named Corporation with
full power of substitution in the premises.
Dated: _____________________________
____________________________________________
NOTICE: THE SIGNATURE(S) TO THE ASSIGNMENT MUST CORRESPOND WITH THE NAME(S)
AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
_____________________________________________
_________________________________________________________
Signature(s) must be guaranteed by a commercial bank or
trust company or a member firm of a major stock exchange.
_________________________________________________________
THIS CERTIFICATE ALSO EVIDENCES AND ENTITLES THE HOLDER HEREOF TO CERTAIN
RIGHTS AS SET FORTH IN AN AGREEMENT BETWEEN USLD COMMUNICATIONS CORP.,
FORMERLY KNOWN AS U.S. LONG DISTANCE CORP., AND U.S. TRUST COMPANY OF TEXAS,
N.A., AS RIGHTS AGENTS, DATED AS OF APRIL 12, 1996, AND AS AMENDED FROM TIME
TO TIME (THE "AGREEMENT") THE TERMS OF WHICH ARE INCORPORATED HEREIN BY
REFERENCE AND A COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICE OF
U.S. TRUST COMPANY OF TEXAS, N.A. UNDER CERTAIN CIRCUMSTANCES, AS SET FORTH
IN THE AGREEMENT, SUCH RIGHTS WILL BE EVIDENCED BY SEPARATE CERTIFICATES AND
WILL NO LONGER BE EVIDENCED BY THIS CERTIFICATE. U.S. TRUST COMPANY OF TEXAS,
N.A. WILL MAIL TO THE HOLDER OF THIS CERTIFICATE A COPY OF THE AGREEMENT
WITHOUT CHARGE PROMPTLY AFTER RECEIPT BY IT OF A WRITTEN REQUEST THEREFOR.
RIGHTS ISSUED TO OR BENEFICIALLY OWNED BY A PERSON WHO IS OR BECOMES AN
ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF SUCH ACQUIRING PERSON (AS
SUCH TERMS ARE DEFINED IN THE AGREEMENT) OR, UNDER CERTAIN CIRCUMSTANCES,
TRANSFEREE THEREOF, WILL BECOME VOID AS PROVIDED IN SECTION 11(a)(II) OF THE
AGREEMENT AND THEREAFTER MAY NOT BE TRANSFERRED TO ANY PERSON.
<PAGE>
EXHIBIT 10.1
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement (this "Agreement") is
entered into this 1st day of August, 1997 ("Effective Date"), by and between
Larry M. James ("Employee") and U.S. Long Distance Corp., a Delaware corporation
(the "Company").
WITNESSETH:
WHEREAS, the Company and Employee are parties to an Amended and Restated
Employment Agreement dated effective February 14, 1997 (the "Prior Agreement");
WHEREAS, the Company and Employee desire to amend and restate the terms of
such employment;
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Prior Agreement is
hereby amended and restated in its entirety to read as follows:
ARTICLE I
DUTIES
1.1 DUTIES. During the term of this Agreement, the Company agrees to
employ Employee as Chairman of the Board, President and Chief Executive Officer
of the Company, and Employee agrees to serve the Company in such capacities or
in such other capacities (subject to Employee's termination rights under Section
4.2) as the Board of Directors of the Company may direct, all upon the terms and
subject to the conditions set forth in this Agreement.
1.2 EXTENT OF DUTIES. Employee shall devote substantially all of his
business time, energy and skill to the affairs of the Company as the Company,
acting through its Board of Directors, shall reasonably deem necessary to
discharge Employee's duties in such capacities. Employee may participate in
social, civic, charitable, religious, business, education or professional
associations, so long as such participation would not materially detract from
Employee's ability to perform his duties under this Agreement. Employee shall
not engage in any other business activity during the term of this Agreement
without the prior written consent of the Company, other than the passive
management of employee's personal investments or activities which would not
materially detract from Employee's ability to perform his duties under this
Agreement.
<PAGE>
ARTICLE II
TERM OF EMPLOYMENT
The term of this Agreement shall commence on the Effective Date and
continue for a period of three years, provided that, on each one-year
anniversary of this Agreement, the term of this Agreement shall automatically be
extended for an additional one year. This Agreement is subject to earlier
termination as hereinafter provided.
ARTICLE III
COMPENSATION
3.1 ANNUAL BASE COMPENSATION. As compensation for services rendered under
this Agreement, Employee shall be entitled to receive from Company an annual
base salary of $240,000 (before standard deductions) during the first five
months of the first year of this Agreement. Effective October 1, 1997,
Employee's annual base salary shall increase to $325,000 (before standard
deductions). Employee's annual base salary shall be subject to review and
adjustment by the Compensation Committee of the Company (the "Compensation
Committee") on an annual basis, provided that any such adjustment shall not
result in a reduction in Employee's annual base salary below $240,000 (through
September 30, 1997, or $325,000 thereafter) without Employee's consent.
Employee's annual base salary shall be payable at regular intervals in
accordance with the prevailing practice and policy of the Company.
3.2 INCENTIVE BONUS. As additional compensation for services rendered
under this Agreement, the Compensation Committee may, in its sole discretion and
without any obligation to do so, declare that Employee shall be entitled to an
annual incentive bonus (whether payable in cash, stock, stock rights or other
property) as the Compensation Committee shall determine. If any such bonus is
declared, the bonus shall be payable in accordance with the terms prescribed by
the Compensation Committee.
3.3 OTHER BENEFITS. Employee shall, in addition to the compensation
provided for in Sections 3.1 and 3.2 above, be entitled to the following
additional benefits:
(a) MEDICAL, HEALTH AND DISABILITY BENEFITS. Employee shall be
entitled to receive all of the medical, health and disability benefits that may,
from time to time, be provided by the Company to its executive officers.
(b) OTHER BENEFITS. Employee shall also be entitled to receive any
other benefits provided by the Company to all employees of Company as a group,
or all executive officers of the Company as a group, including any profit
sharing, 401(k) or retirement benefits.
(c) VACATION PAY. Employee shall be entitled to an annual vacation
as determined in accordance with the prevailing practice and policy of the
Company.
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(d) HOLIDAYS. Employee shall be entitled to holidays in accordance
with the prevailing practice and policy of the Company.
(e) REIMBURSEMENT OF EXPENSES. The Company shall reimburse Employee
for all expenses reasonably incurred by Employee on behalf of the Company in
accordance with the prevailing practice and policy of the Company.
ARTICLE IV
TERMINATION
4.1 TERMINATION BY THE COMPANY WITHOUT CAUSE. Subject to the provisions
of this Section 4.1, this Agreement may be terminated by the Company without
cause upon 30 days prior written notice thereof given to Employee. In the event
of termination pursuant to this Section 4.1, (a) the Company shall pay Employee,
within 15 days of the effective date of such termination, a lump-sum payment
equal to (without discounting to present value) his then effective base salary
under Section 3.1 hereof through the expiration of the three year term then in
effect (without giving effect to any further extension thereof under Article II
hereof), and (b) all outstanding stock options held by Employee shall become
fully vested and exercisable. Payment of such sum by the Company shall
constitute Employee's full severance pay and the Company shall have no further
obligation to Employee arising out of such termination.
4.2 VOLUNTARY TERMINATION BY EMPLOYEE FOR GOOD REASON. Employee may at
any time voluntarily terminate his employment for "good reason" (as defined
below). In the event of such voluntary termination for "good reason," (a) the
Company shall pay Employee, within 15 days of the effective date of such
termination, a lump-sum payment equal to (without discounting to present value)
his then effective base salary under Section 3.1 hereof through the expiration
of the three year term then in effect (without giving effect to any further
extension thereof under Article II hereof), and (b) all outstanding stock
options held by Employee shall become fully vested and exercisable.
For purposes of this Agreement, "good reason" shall mean the
occurrence of any of the following events:
(a) Removal from the offices Employee holds on the date of this
Agreement or a material reduction in Employee's authority or
responsibility, including, without limitation, involuntary
removal from the Board of Directors, but not including
termination of Employee for "cause," as defined below; or
(b) The Company otherwise commits a material breach of this
Agreement.
4.3. TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate this
Agreement at any time if such termination is for "cause" (as defined below), by
delivering to Employee written notice describing the cause of termination 30
days before the effective date of such termination and by granting Employee at
least 30 days to cure the cause. In the event the
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employment of Employee is terminated for "cause," Employee shall be entitled
only to the base salary earned PRO RATA to the date of such termination with no
entitlement to any base salary continuation payments or benefits continuation
(except as specifically provided by the terms of an employee benefit plan of the
Company). Except as otherwise provided in this Agreement, the determination of
whether Employee shall be terminated for "cause" shall be made by the Board of
Directors of the Company, in the reasonable exercise of its business judgment,
and shall be limited to the occurrence of the following events:
(a) Conviction of or a plea of NOLO CONTENDERE to the charge of a
felony (which, through lapse of time or otherwise, is not subject
to appeal);
(b) Willful refusal without proper legal cause to perform, or gross
negligence in performing, Employee's duties and responsibilities;
(c) Material breach of fiduciary duty to the Company through the
misappropriation of Company funds or property; or
(d) The unauthorized absence of Employee from work (other than
for sick leave or disability) for a period of 30 working
days or more during any period of 45 working days during
the term of this Agreement.
4.4 TERMINATION UPON DEATH OR PERMANENT DISABILITY. In the event that
Employee dies, this Agreement shall terminate upon the Employee's death.
Likewise, if the Employee becomes unable to perform the essential functions of
the position, with or without reasonable accommodation, on account of illness,
disability, or other reason whatsoever for a period of more than six consecutive
or nonconsecutive months in any twelve-month period, this Agreement shall
terminate effective upon such incapacity, and Employee (or his legal
representatives) shall be entitled only to the base salary earned PRO RATA to
the date of such termination with no entitlement to any base salary continuation
payments or benefits continuation (except as specifically provided by the terms
of an employee benefit plan of the Company).
4.5 VOLUNTARY TERMINATION BY EMPLOYEE. Employee may terminate this
Agreement at any time upon delivering 30 days' written notice of resignation to
the Company. In the event of such voluntary termination other than for "good
reason" (as defined above), Employee shall be entitled to his base salary earned
PRO RATA to the date of his resignation, but no base salary continuation
payments or benefits continuation (except as specifically provided by the terms
of an employee benefit plan of the Company). On or after the date the Company
receives notice of Employee's resignation, the Company may, at its option, pay
Employee his base salary through the effective date of his resignation and
terminate his employment immediately.
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4.6 TERMINATION FOLLOWING CHANGE OF CONTROL.
(a) Notwithstanding anything to the contrary contained herein, should
Employee at any time within 12 months of the occurrence of a "change of control"
(as defined below) cease to be an employee of the Company (or its successor), by
reason of (i) termination by the Company (or its successor) other than for
"cause" (following a change of control, "cause" shall be limited to the
conviction of or a plea of NOLO CONTENDERE to the charge of a felony which,
through lapse of time or otherwise, is not subject to appeal), or a material
breach of fiduciary duty to the Company through the misappropriation of Company
funds or property) or (ii) voluntary termination by Employee for "good reason
upon change of control" (as defined below), then in any such event, (1) the
Company shall pay Employee, within 45 days of the severance of employment
described in this Section 4.6, a lump-sum payment equal to (without discounting
to present value) his then effective base salary under Section 3.1 hereof
through the expiration of the three year term then in effect (without giving
effect to any further extensions thereof under Article II hereof), and (2) all
outstanding stock options held by Employee shall become fully vested and
exercisable.
(b) Employee shall also be entitled to an additional payment, to the
extent all payments to Employee (whether pursuant to this Agreement or any other
agreement whatsoever) in connection with a change of control as defined in this
Section 4.6 do not exceed in aggregate, the maximum amount that could be paid to
Employee, without triggering an excess parachute payment under Section 280G(b)
of the Internal Revenue Code of 1986, as amended (the "Code"), and the resulting
excise tax under Section 4999 of the Code, (referred to herein as the "maximum
payment amount") equal to an amount, which when added to the amounts payable to
the Employee under paragraph (a) equals the maximum payment amount; it being the
express intention of the parties that Employee in all cases (whether through
this Agreement or any other agreement whatsoever) receive the maximum payment
amount in connection with a change of control without creating an excess
parachute payment. If such a payment is required under this paragraph (b) in
addition to the amounts set forth in paragraph (a) above, it shall be paid at
the time and in the manner set forth under paragraph (a) above.
(c) In determining the limitation determined under Section 280G of
the Code, (i) no portion of the total payments which Employee has waived in
writing prior to the date of the payment of benefits under this Agreement will
be taken into account, (ii) no portion of the total payments which nationally
recognized tax counsel (whether through consultation or retention of any
actuary, consultant or other expert), selected by the Company's independent
auditors and acceptable to Employee, (referred to herein as "Tax Counsel")
determines not to constitute a "parachute payment" within the meaning of
Section 280G(b)(2) of the Code will be taken into account, (iii) no portion of
the total payments which Tax Counsel determines to be reasonable compensation
for services rendered within the meaning of Section 280G(b)(4) of the Code will
be taken into account, and (iv) the value of any non-cash benefit or any
deferred payment or benefit included in the total payments will be determined by
the Company's independent auditors in accordance with Sections 280G(d)(3) and
(iv) of the Code.
(d) As used in this Section, voluntary termination by Employee for
"good reason upon change of control" shall mean (i) removal of Employee from the
offices Employee
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holds on the date of this Agreement, (ii) a material reduction in Employee's
authority or responsibility, including, without limitation, involuntary removal
from the Board of Directors, (iii) relocation of the Company's headquarters from
its then current location, (iv) a reduction in Employee's compensation, or (v)
the Company otherwise commits a breach of this Agreement.
(e) As used in this Agreement, a "change of control" shall be deemed
to have occurred if (i) any "Person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing more
than 30% of the combined voting power of the Company's then outstanding
securities, or (ii) at any time during the 24-month period after a tender offer,
merger, consolidation, sale of assets or contested election, or any combination
of such transactions, at least a majority of the Company's Board of Directors
shall cease to consist of "continuing directors" (meaning directors of the
Company who either were directors prior to such transaction or who subsequently
became directors and whose election, or nomination for election by the Company's
stockholders, was approved by a vote of at least two-thirds of the directors
then still in office who were directors prior to such transaction), or (iii) the
stockholders of the Company approve a merger or consolidation of the Company
with any other corporation, other than a merger or consolidation that would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least 60% of the
total voting power represented by the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation, or
(iv) the stockholders of the Company approve a plan of complete liquidation of
the Company or an agreement of sale or disposition by the Company of all or
substantially all of the Company's assets.
(f) Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any payment or distribution by the Company
or any of its affiliates to or for the benefit of Employee, whether paid or
payable or distributed or distributable pursuant to the terms of this Agreement
or otherwise (any such payments or distributions being individually referred to
herein as a "Payment," and any two or more of such payments or distributions
being referred to herein as "Payments"), would be subject to the excise tax
imposed by Section 4999 of the Code (such excise tax, together with any interest
thereon, any penalties, additions to tax, or additional amounts with respect to
such excise tax, and any interest in respect of such penalties, additions to tax
or additional amounts, being collectively referred herein to as the "Excise
Tax"), then Employee shall be entitled to receive an additional payment or
payments (individually referred to herein as a "Gross-Up Payment" and any two or
more of such additional payments being referred to herein as "Gross-Up
Payments") in an amount such that after payment by Employee of all taxes (as
defined in paragraph (p) below) imposed upon the Gross-Up Payment, Employee
retains an amount of such Gross-Up Payment equal to the Excise Tax imposed upon
the Payments.
(g) Subject to the provisions of paragraph (h) through (n) below, any
determination (individually, a "Determination") required to be made under this
Section 4.6, including whether a Gross-Up Payment is required and the amount of
such Gross-Up Payment, shall initially be made, at the Company's expense, by Tax
Counsel. Tax Counsel shall provide
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detailed supporting legal authorities, calculations, and documentation both to
the Company and Employee within 15 business days of the termination of
Employee's employment, if applicable, or such other time or times as is
reasonably requested by the Company or Employee. If Tax Counsel makes the
initial Determination that no Excise Tax is payable by Employee with respect to
a Payment or Payments, it shall furnish Employee with an opinion reasonably
acceptable to Employee that no Excise Tax will be imposed with respect to any
such Payment or Payments. Employee shall have the right to dispute any
Determination (a "Dispute") within 15 business days after delivery of Tax
Counsel's opinion with respect to such Determination. The Gross-Up Payment, if
any, as determined pursuant to such Determination shall, at the Company's
expense, be paid by the Company to Employee within five business days of
Employee's receipt of such Determination. The existence of a Dispute shall not
in any way affect Employee's right to receive the Gross-Up Payment in accordance
with such Determination. If there is no Dispute, such Determination shall be
binding, final and conclusive upon the Company and Employee, subject in all
respects, however, to the provisions of paragraph (h) through (n) below. As a
result of the uncertainty in the application of Sections 4999 and 280G of the
Code, it is possible that Gross-Up Payments (or portions thereof) which will not
have been made by the Company should have been made ("Underpayment"), and if
upon any reasonable written request from Employee or the Company to Tax Counsel,
or upon Tax Counsel's own initiative, Tax Counsel, at the Company's expense,
thereafter determines that Employee is required to make a payment of any Excise
Tax or any additional Excise Tax, as the case may be, Tax Counsel shall, at the
Company's expense, determine the amount of the Underpayment that has occurred
and any such Underpayment shall be promptly paid by the Company to Employee.
(h) The Company shall defend, hold harmless, and indemnify Employee
on a fully grossed-up after tax basis from and against any and all claims,
losses, liabilities, obligations, damages, impositions, assessments, demands,
judgments, settlements, costs and expenses (including reasonable attorneys',
accountants', and experts' fees and expenses) with respect to any tax liability
of Employee resulting from any Final Determination (as defined in paragraph (o)
below) that any Payment is subject to the Excise Tax.
(i) If a party hereto receives any written or oral communication with
respect to any question, adjustment, assessment or pending or threatened audit,
examination, investigation or administrative, court or other proceeding which,
if pursued successfully, could result in or give rise to a claim by Employee
against the Company under this paragraph (i) ("Claim"), including, but not
limited to, a claim for indemnification of Employee by the Company under
paragraph (h) above, then such party shall promptly notify the other party
hereto in writing of such Claim ("Tax Claim Notice").
(j) If a Claim is asserted against Employee ("Employee Claim"),
Employee shall take or cause to be taken such action in connection with
contesting such Employee Claim as the Company shall reasonably request in
writing from time to time, including the retention of counsel and experts as are
reasonably designated by the Company (it being understood and agreed by the
parties hereto that the terms of any such retention shall expressly provide that
the Company shall be solely responsible for the payment of any and all fees and
disbursements of such counsel and any experts) and the execution of powers of
attorney, provided that:
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(i) within 30 calendar days after the Company receives or
delivers, as the case may be, the Tax Claim Notice relating to such
Employee Claim (or such earlier date that any payment of the taxes claimed
is due from Employee, but in no event sooner than five calendar days after
the Company receives or delivers such Tax Claim Notice), the Company shall
have notified Employee in writing ("Election Notice") that the Company does
not dispute its obligations (including, but not limited to, its indemnity
obligations) under this Agreement and that the Company elects to contest,
and to control the defense or prosecution of, such Employee Claim at the
Company's sole risk and sole cost and expense; and
(ii) the Company shall have advanced to Employee on an interest-
free basis, the total amount of the tax claimed in order for Employee, at
the Company's request, to pay or cause to be paid the tax claimed, file a
claim for refund of such tax and, subject to the provisions of the last
sentence of paragraph (l) below, sue for a refund of such tax if such claim
for refund is disallowed by the appropriate taxing authority (it being
understood and agreed by the parties hereto that the Company shall only be
entitled to sue for a refund and the Company shall not be entitled to
initiate any proceeding in, for example, United States Tax Court) and shall
indemnify and hold Employee harmless, on a fully grossed-up after tax
basis, from any tax imposed with respect to such advance or with respect to
any imputed income with respect to such advance; and
(iii) the Company shall reimburse Employee for any and all costs
and expenses resulting from any such request by the Company and shall
indemnify and hold Employee harmless, on fully grossed-up after-tax basis,
from any tax imposed as a result of such reimbursement.
(k) Subject to the provisions of paragraph (j) above, the Company
shall have the right to defend or prosecute, at the sole cost, expense and risk
of the Company, such Employee Claim by all appropriate proceedings, which
proceedings shall be defended or prosecuted diligently by the Company to a Final
Determination; PROVIDED, HOWEVER, that (i) the Company shall not, without
Employee's prior written consent, enter into any compromise or settlement of
such Employee Claim that would adversely affect Employee, (ii) any request from
the Company to Employee regarding any extension of the statute of limitations
relating to assessment, payment, or collection of taxes for the taxable year of
Employee with respect to which the contested issues involved in, and amount of,
the Employee Claim relate is limited solely to such contested issues and amount,
and (iii) the Company's control of any contest or proceeding shall be limited to
issues with respect to the Employee Claim and Employee shall be entitled to
settle or contest, in his sole and absolute discretion, any other issue raised
by the Internal Revenue Service or any other taxing authority. So long as the
Company is diligently defending or prosecuting such Employee Claim, Employee
shall provide or cause to be provided to the Company any information reasonably
requested by the Company that relates to such Employee Claim, and shall
otherwise cooperate with the Company and its representatives in good faith in
order to contest effectively such Employee Claim. The Company shall keep
Employee informed of all developments and events relating to any such Employee
Claim (including, without limitation, providing to Employee copies of all
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written materials pertaining to any such Employee Claim), and Employee or his
authorized representatives shall be entitled, at Employee's expense, to
participate in all conferences, meetings and proceedings relating to any such
Employee Claim.
(l) If, after actual receipt by Employee of an amount of a tax
claimed (pursuant to an Employee Claim) that has been advanced by the Company
pursuant to paragraph (j)(ii) above, the extent of the liability of the Company
hereunder with respect to such tax claimed has been established by a Final
Determination, Employee shall promptly pay or cause to be paid to the Company
any refund actually received by, or actually credited to, Employee with respect
to such tax (together with any interest paid or credited thereon by the taxing
authority and any recovery of legal fees from such taxing authority related
thereto), except to the extent that any amounts are then due and payable by the
Company to Employee, whether under the provisions of this Agreement or
otherwise. If, after the receipt by Employee of an amount advanced by the
Company pursuant to paragraph (j)(ii) above, a determination is made by the
Internal Revenue Service or other appropriate taxing authority that Employee
shall not be entitled to any refund with respect to such tax claimed and the
Company does not notify Employee in writing of its intent to contest such denial
of refund prior to the expiration of thirty days after such determination, then
such advance shall be forgiven and shall not be required to be repaid and the
amount of such advance shall offset, to the extent thereof, the amount of any
Gross-Up Payments and other payments required to be paid hereunder.
(m) With respect to any Employee Claim, if the Company fails to
deliver an Election Notice to Employee within the period provided in paragraph
(j)(i) above or, after delivery of such Election Notice, the Company fails to
comply with the provisions of paragraph (j)(ii) above and (iii) and (k) above,
then Employee shall at any time thereafter have the right (but not the
obligation), at his election and in his sole and absolute discretion, to defend
or prosecute, at the sole cost, expense and risk of the Company, such Employee
Claim. Employee shall have full control of such defense or prosecution and such
proceedings, including any settlement or compromise thereof. If requested by
Employee, the Company shall cooperate, and shall cause its affiliates to
cooperate, in good faith with Employee and his authorized representatives in
order to contest effectively such Employee Claim. The Company may attend, but
not participate in or control, any defense, prosecution, settlement or
compromise of any Employee Claim controlled by Employee pursuant to this
paragraph (m) and shall bear its own costs and expenses with respect thereto.
In the case of any Employee Claim that is defended or prosecuted by Employee,
Employee shall, from time to time, be entitled to current payment, on a fully
grossed-up after tax basis, from the Company with respect to costs and expenses
incurred by Employee in connection with such defense or prosecution.
(n) In the case of any Employee Claim that is defended or prosecuted
to a Final Determination pursuant to the terms of this paragraph (n), the
Company shall pay, on a fully grossed-up after tax basis, to Employee in
immediately available funds the full amount of any taxes arising or resulting
from or incurred in connection with such Employee Claim that have not
theretofore been paid by the Company to Employee, together with the costs and
expenses, on a fully grossed-up after tax basis, incurred in connection
therewith that have not theretofore been paid by the Company to Employee, within
ten calendar days after such Final Determination. In the case of any Employee
Claim not covered by the preceding sentence, the Company shall pay, on a fully
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grossed-up after tax basis, to Employee in immediately available funds the full
amount of any taxes arising or resulting from or incurred in connection with
such Employee Claim at least ten calendar days before the date payment of such
taxes is due from Employee, except where payment of such taxes is sooner
required under the provisions of this paragraph (n), in which case payment of
such taxes (and payment, on a fully grossed-up after tax basis, of any costs and
expenses required to be paid under this paragraph (n) shall be made within the
time and in the manner otherwise provided in this paragraph (n).
(o) For purposes of this Agreement, the term "Final Determination"
shall mean (i) a decision, judgment, decree or other order by a court or other
tribunal with appropriate jurisdiction, which has become final and non-
appealable; (ii) a final and binding settlement or compromise with an
administrative agency with appropriate jurisdiction, including, but not limited
to, a closing agreement under Section 7121 of the Code; (iii) any disallowance
of a claim for refund or credit in respect to an overpayment of tax unless a
suit is filed on a timely basis; or (iv) any final disposition by reason of the
expiration of all applicable statutes of limitations.
(p) For purposes of this Agreement, the terms "tax" and "taxes" mean
any and all taxes of any kind whatsoever (including, but not limited to, any and
all Excise Taxes, income taxes, and employment taxes), together with any
interest thereon, any penalties, additions to tax, or additional amounts with
respect to such taxes and any interest in respect of such penalties, additions
to tax, or additional amounts.
(q) For purposes of this Agreement, the terms "affiliate" and
"affiliates" mean, when used with respect to any entity, individual, or other
person, any other entity, individual, or other person which, directly or
indirectly, through one or more intermediaries controls, or is controlled by, or
is under common control with such entity, individual or person. The term
"control" and derivations thereof when used in the immediately preceding
sentence means the ownership, directly or indirectly, of 50% or more of the
voting securities of an entity or other person or possessing the power to direct
or cause the direction of the management and policies of such entity or other
person, whether through the ownership of voting securities, by contract or
otherwise.
(r) The Company shall defend, hold harmless, and indemnify Employee
on a fully grossed-up after tax basis from and against any and all costs and
expenses (including reasonable attorneys', accountants' and experts' fees and
expenses) incurred by Employee from time to time as a result of any contest
(regardless of the outcome) by the Company or others contesting the validity or
enforcement of, or liability under, any term or provision of this Agreement,
plus in each case interest at the applicable federal rate provided for in
Section 7872(f)(2)(B) of the Code.
4.7 EXCLUSIVITY OF TERMINATION PROVISIONS. The termination provisions of
this Agreement regarding the parties' respective obligations in the event
Employee's employment is terminated, are intended to be exclusive and in lieu of
any other rights or remedies to which Employee or the Company may otherwise be
entitled at law, in equity or otherwise. It is also agreed that, although the
personnel policies and fringe benefit programs of the Company may be
unilaterally modified from time to time, the termination provisions of this
Agreement are not
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subject to modification, whether orally, impliedly or in writing, unless any
such modification is mutually agreed upon and signed by the parties.
ARTICLE V
CONFIDENTIAL INFORMATION AND NONCOMPETITION
5.1 NONDISCLOSURE. During the term of this Agreement and thereafter,
Employee shall not, without the prior written consent of the Board of Directors,
disclose or use for any purpose (except in the course of his employment under
this Agreement and in furtherance of the business of the Company) confidential
information or proprietary data of the Company (or any of its subsidiaries),
except as required by applicable law or legal process; provided, however, that
confidential information shall not include any information known generally to
the public or ascertainable from public or published information (other than as
a result of unauthorized disclosure by Employee) or any information of a type
not otherwise considered confidential by persons engaged in the same business or
a business similar to that conducted by the Company (or any of its
subsidiaries).
5.2 NONCOMPETITION. The Company and Employee agree that the services
rendered by Employee hereunder are unique and irreplaceable. Employee hereby
agrees that, during the term of this Agreement and for a period of eighteen
months thereafter, he shall not (except in the course of his employment under
this Agreement and in furtherance of the business of the Company (or any of its
subsidiaries)) (i) engage in as principal, consultant or employee in any segment
of a business of a company, partnership or firm ("Business Segment") that is
directly competitive with any significant business of the Company in one of its
major commercial or geographic markets or (ii) hold an interest (except as a
holder of less than 5% interest in a publicly traded firm or mutual funds, or as
a minority stockholder or unitholder in a form not publicly traded) in a
company, partnership or firm with a Business Segment that is directly
competitive, without the prior written consent of the Company.
5.3 VALIDITY OF NONCOMPETITION. The foregoing provisions of Section 5.2
shall not be held invalid because of the scope of the territory covered, the
actions restricted thereby, or the period of time such covenant is operative.
Any judgment of a court of competent jurisdiction may define the maximum
territory, the actions subject to and restricted by Section 5.2 and the period
of time during which such agreement is enforceable.
5.4 NONCOMPETITION COVENANTS INDEPENDENT. The covenants of the Employee
contained in Section 5.2 will be construed as independent of any other provision
in this Agreement; and the existence of any claim or cause of action by the
Employee against the Company will not constitute a defense to the enforcement by
the Company of said covenants. The Employee understands that the covenants
contained in Section 5.2 are essential elements of the transaction contemplated
by this Agreement and, but for the agreement of the Employee to Section 5.2, the
Company would not have agreed to enter into such transaction. The Employee has
been advised to consult with counsel in order to be informed in all respects
concerning the reasonableness and propriety of Section 5.2 and its provisions
with specific regard to the nature of the business
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conducted by the Company and the Employee acknowledges that Section 5.2 and its
provisions are reasonable in all respects.
5.5 REMEDIES. In the event of a breach or threatened breach by the
Employee of Section 5.2 or its provisions, the Company shall be entitled to a
temporary restraining order and an injunction restraining the Employee from the
commission of such breach. Nothing herein shall be construed as prohibiting the
Company from pursuing any other remedies available to it for such breach or
threatened breach, including the recovery of money damages.
ARTICLE VI
ARBITRATION
Any controversy of any nature whatsoever, including but not limited to tort
claims or contract disputes, between the parties to this Agreement or between
the Employee, his heirs, executors, administrators, legal representatives,
successors, and assigns and the Company and its affiliates, arising out of or
related to the Employee's employment with the Company, any resignation from or
termination of such employment and/or the terms and conditions of this
Agreement, including the implementation, applicability and interpretation
thereof, shall, upon the written request of one party served upon the other, be
submitted to and settled by arbitration in accordance with the provisions of the
Federal Arbitration Act, 9 U.S.C. Sections 1-15, as amended. Each of the
parties to this Agreement shall appoint one person as an arbitrator to hear and
determine such disputes, and if they should be unable to agree, then the two
arbitrators shall chose a third arbitrator from a panel made up of experienced
arbitrators selected pursuant to the procedures of the American Arbitration
Association (the "AAA") and, once chosen, the third arbitrator's decision shall
be final, binding and conclusive upon the parties to this Agreement. Each party
shall be responsible for the fees and expenses of its arbitrator and the fees
and expenses of the third arbitrator shall be shared equally by the parties.
The terms of the commercial arbitration rules of AAA shall apply except to the
extent they conflict with the provisions of this paragraph. It is further
agreed that any of the parties hereto may petition the United States District
Court for the Western District of Texas, San Antonio Division, for a judgment to
be entered upon any award entered through such arbitration proceedings.
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ARTICLE VII
MISCELLANEOUS
7.1 COMPLETE AGREEMENT. This Agreement constitutes the entire agreement
between the parties and cancels and supersedes all other agreements between the
parties which may have related to the subject matter contained in this
Agreement.
7.2 MODIFICATION; AMENDMENT; WAIVER. No modification, amendment or waiver
of any provisions of this Agreement shall be effective unless approved in
writing by both parties. The failure at any time to enforce any of the
provisions of this Agreement shall in no way be construed as a waiver of such
provisions and shall not affect the right of either party thereafter to enforce
each and every provision hereof in accordance with its terms.
7.3 GOVERNING LAW; JURISDICTION. This Agreement and performance under it,
and all proceedings that may ensue from its breach, shall be construed in
accordance with and under the laws of the State of Texas.
7.4 EMPLOYEE'S REPRESENTATIONS. Employee represents and warrants that he
is free to enter in to this Agreement and to perform each of the terms and
covenants of it. Employee represents and warrants that he is not restricted or
prohibited, contractually or otherwise, from entering into and performing this
Agreement, and that his execution and performance of this Agreement is not a
violation or breach of any other agreement between Employee and any other person
or entity.
7.5 COMPANY'S REPRESENTATIONS. Company represents and warrants that it is
free to enter into this Agreement and to perform each of the terms and covenants
of it. Company represents and warrants that it is not restricted or prohibited,
contractually or otherwise, from entering into and performing this Agreement and
that its execution and performance of this Agreement is not a violation or
breach of any other agreements between Company and any other person or entity.
The Company represents and warrants that this Agreement is a legal, valid and
binding agreement of the Company, enforceable in accordance with its terms.
7.6 SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement.
7.7 ASSIGNMENT. The rights and obligations of the parties under this
Agreement shall be binding upon and inure to the benefit of their respective
successors, assigns, executors, administrators and heirs, provided, however,
that neither the Company nor Employee any assign any duties under this Agreement
without the prior written consent of the other.
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7.8 LIMITATION. This Agreement shall not confer any right or impose any
obligation on the Company to continue the employment of Employee in any
capacity, or limit the right of the Company or Employee to terminate Employee's
employment.
7.9 ATTORNEYS' FEES AND COSTS. If any action at law or in equity is
brought to enforce or interpret the terms of this Agreement or any obligation
owing thereunder, venue will be in Bexar County, Texas and the prevailing party
shall be entitled to reasonable attorney's fees and all costs and expenses of
suit, including, without limitation, expert and accountant fees, and such other
relief which a court of competent jurisdiction may deem appropriate.
7.10 NOTICES. All notices and other communications under this Agreement
shall be in writing and shall be given in person or by either personal delivery,
overnight delivery, or first class mail, certified or registered with return
receipt requested, with postage or delivery charges prepaid, and shall be deemed
to have been duly given when delivered personally, upon actual receipt, and on
the next business day when sent via overnight delivery, or three days after
mailing first class, certified or registered with return receipt requested, to
the respective persons named below:
If to the Company: Corporate Secretary
U. S. Long Distance Corp.
9311 San Pedro
San Antonio, Texas 78216
If to the Employee: Larry M. James
9311 San Pedro
San Antonio, Texas 78216
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the day and year indicated above.
COMPANY: U. S. LONG DISTANCE CORP.
By: /s/ GARY D. BECKER By /s/ AUDIE LONG
--------------------------------- -------------------------------------
Gary D. Becker, Chairman of the
Compensation Committee of Title Senior Vice President & General
the Board of Directors Counsel
EMPLOYEE: /s/ LARRY M. JAMES
---------------------------------------
Larry M. James
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EXHIBIT 10.2
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement (this "Agreement") is
entered into this 1st day of August, 1997, by and between W. Audie Long
("Employee"), U. S. Long Distance Corp., a Delaware corporation (the "Company"),
Billing Information Concepts Corp., a Delaware corporation ("BIC") to be
effective as August 1, 1997 (the "Effective Date").
WITNESSETH:
WHEREAS, the Company, BIC and Employee are parties to an Amended and
Restated Employment Agreement dated effective June 25, 1996 (the "Prior
Agreement"); and
WHEREAS, in the Prior Agreement it was anticipated that Employee at his
election could transfer his employment to BIC under certain terms and
conditions; and
WHEREAS, the parties have decided to eliminate the ability of the Employee
to transfer his employment to BIC and desire to extend his Employment Agreement
with the Company; and
WHEREAS, the Company and Employee desire to amend and restate the terms of
such employment so as to clarify the ongoing terms of Employee's employment with
the Company, eliminate the Employee's contractual right to potential future
employment with BIC, and to set forth each party's duties and obligations to the
other;
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Prior Agreement is
hereby amended and restated in its entirety to read as follows:
ARTICLE I
DUTIES
1.1 DUTIES. During the term of this Agreement, the Company agrees to
employ Employee as General Counsel, Senior Vice President and Secretary of the
Company, and Employee agrees to serve the Company in such capacities or in such
other capacities (subject to Employee's termination rights under Section 4.2) as
the Board of Directors of the Company may direct, all upon the terms and subject
to the conditions set forth in this Agreement.
1.2 EXTENT OF DUTIES. Employee shall devote substantially all of his
business time, energy and skill to the affairs of the Company as the Company,
acting through its Board of
<PAGE>
Directors, shall reasonably deem necessary to discharge Employee's duties in
such capacities. Employee may participate in social, civic, charitable,
religious, business, education or professional associations, so long as such
participation would not materially detract from Employee's ability to perform
his duties under this Agreement. Employee shall not engage in any other
business activity during the term of this Agreement without the prior written
consent of the Company, other than the passive management of employee's
personal investments or activities which would not materially detract from
Employee's ability to perform his duties under this Agreement.
ARTICLE II
TERM OF EMPLOYMENT
2.1 GENERAL TERM OF EMPLOYMENT. The term of this Agreement shall commence
on the Effective Date and continue for a period of two years. The term of this
Agreement shall be automatically extended on each two year anniversary of this
Agreement for an additional two-year term unless, at least 30 days prior to the
end of the then effective two-year term, the Company shall give Employee written
notice of its election to terminate this Agreement as of the end of the then
effective two-year term. In the event the Company elects to so terminate this
Agreement, the Company shall pay Employee, within 15 days of the effective date
of such termination, a lump-sum payment equal to (without discounting to present
value) two times' his then effective annual base salary under Section 3.1 hereof
and shall continue Employee's medical, health and disability benefits for two
years from such termination. Payment of such sums and continuation of such
medical benefits by the Company shall constitute Employee's full severance pay
and the Company shall have no further obligation to Employee arising out of such
termination. This Agreement is also subject to earlier termination as
hereinafter provided.
ARTICLE III
COMPENSATION
3.1 ANNUAL BASE COMPENSATION. As compensation for services rendered
under this Agreement, Employee shall be entitled to receive from Company an
annual base salary of $190,000 (before standard deductions) during the first
year of this Agreement. Employee's annual base salary shall be subject to
review and adjustment by the Compensation Committee of the Company (the
"Compensation Committee") on an annual basis, provided that any such
adjustment shall not result in a reduction in Employee's annual base salary
below $190,000 without Employee's consent. Employee's annual base salary
shall be payable at regular intervals in accordance with the prevailing
practice and policy of the Company.
3.2 INCENTIVE BONUS. As additional compensation for services rendered
under this Agreement, the Compensation Committee may, in its sole discretion and
without any obligation to do so, declare that Employee shall be entitled to an
annual incentive bonus (whether payable in cash, stock, stock rights or other
property) as the Compensation Committee shall determine. If any such bonus is
declared, the bonus shall be payable in accordance with the terms prescribed by
the Compensation Committee.
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3.3 OTHER BENEFITS. Employee shall, in addition to the compensation
provided for in Sections 3.1 and 3.2 above, be entitled to the following
additional benefits:
(a) MEDICAL, HEALTH AND DISABILITY BENEFITS. Employee shall be
entitled to receive all of the medical, health and disability benefits that may,
from time to time, be provided by the Company to its executive officers.
(b) OTHER BENEFITS. Employee shall also be entitled to receive any
other benefits provided by the Company to all employees of Company as a group,
or all executive officers of the Company as a group, including any profit
sharing, 401(k) or retirement benefits.
(c) VACATION PAY. Employee shall be entitled to an annual vacation
as determined in accordance with the prevailing practice and policy of the
Company.
(d) HOLIDAYS. Employee shall be entitled to holidays in accordance
with the prevailing practice and policy of the Company.
(e) REIMBURSEMENT OF EXPENSES. The Company shall reimburse Employee
for all expenses reasonably incurred by Employee on behalf of the Company in
accordance with the prevailing practice and policy of the Company.
(f) AUTOMOBILE. Employee shall have the right to continue to use the
Mitsubishi and shall have an option, exercisable within 90 days of termination,
to purchase such automobile at its net book value as shown on the Company's
records as of the date of termination.
(g) APARTMENT. Employer agrees to continue, at its expense, to
provide to Employee the apartment at The Meridian Apartments.
ARTICLE IV
TERMINATION
4.1 TERMINATION BY THE COMPANY WITHOUT CAUSE. Subject to the provisions
of this Section 4.1, this Agreement may be terminated by the Company without
cause upon 30 days prior written notice thereof given to Employee. In the event
of termination pursuant to this Section 4.1, (a) the Company shall pay Employee,
within 15 days of the effective date of such termination, a lump-sum payment
equal to (without discounting to present value) two times' his then effective
annual base salary under Section 3.1 hereof, (b) Employee shall be entitled to
all benefits under Section 3.3 hereof, through the expiration of the two year
term then in effect (with the exception of medical benefits which shall continue
for two years from the date of termination), to the extent continuation of such
benefits is not prohibited by application state and/or federal law, and (c) any
outstanding stock options to acquire shares of the Company's common stock held
by Employee not already fully vested and exercisable shall become fully vested
and exercisable. Payment of such sum by the Company and two years continuation
of benefits provided under Section 3.3 shall
3
<PAGE>
constitute Employee's full severance pay and the Company shall have no
further obligation to Employee arising out of such termination.
4.2 VOLUNTARY TERMINATION BY EMPLOYEE FOR GOOD REASON. Employee may at
any time voluntarily terminate his employment for "good reason" (as defined
below). In the event of such voluntary termination for "good reason," (a) the
Company shall pay Employee, within 15 days of the effective date of such
termination, a lump-sum payment equal to (without discounting to present value)
two times' his then effective annual base salary under Section 3.1 hereof, (b)
the Company shall provide the continued benefit coverage described in Section
4.1, and (c) any outstanding stock options to acquire shares of the Company's
common stock held by Employee not already fully vested and exercisable shall
become fully vested and exercisable.
For purposes of this Agreement, "good reason" shall mean the
occurrence of any of the following events:
(a) Removal from the offices Employee holds on the date of this
Agreement or a material reduction in Employee's authority or
responsibility, including, without limitation, involuntary
removal from the Board of Directors, but not including
termination of Employee for "cause," as defined below;
(b) Relocation of the Company's headquarters from Bexar County,
Texas;
(c) A reduction in the Employee's then effective base salary under
Section 3.1; or
(b) The Company otherwise commits a material breach of this
Agreement.
4.3. TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate this
Agreement at any time if such termination is for "cause" (as defined below), by
delivering to Employee written notice describing the cause of termination 30
days before the effective date of such termination and by granting Employee at
least 30 days to cure the cause. In the event the employment of Employee is
terminated for "cause," Employee shall be entitled only to the base salary
earned PRO RATA to the date of such termination with no entitlement to any base
salary continuation payments or benefits continuation (except as specifically
provided by the terms of an employee benefit plan of the Company). Except as
otherwise provided in this Agreement, the determination of whether Employee
shall be terminated for "cause" shall be made by the Board of Directors of the
Company, in the reasonable exercise of its business judgment, and shall be
limited to the occurrence of the following events:
(a) Conviction of or a plea of NOLO CONTENDERE to the charge of a
felony (which, through lapse of time or otherwise, is not subject
to appeal);
(b) Willful refusal without proper legal cause to perform, or gross
negligence in performing, Employee's duties and responsibilities;
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<PAGE>
(c) Material breach of fiduciary duty to the Company through the
misappropriation of Company funds or property; or
(d) The unauthorized absence of Employee from work (other than for
sick leave or disability) for a period of 30 working days or more
during any period of 45 working days during the term of this
Agreement.
4.4 TERMINATION UPON DEATH OR PERMANENT DISABILITY. In the event that
Employee dies, this Agreement shall terminate upon the Employee's death.
Likewise, if the Employee becomes unable to perform the essential functions of
the position, with or without reasonable accommodation, on account of illness,
disability, or other reason whatsoever for a period of more than six consecutive
or nonconsecutive months in any twelve-month period, this Agreement shall
terminate effective upon such incapacity, and Employee (or his legal
representatives) shall be entitled only to the base salary earned PRO RATA to
the date of such termination with no entitlement to any base salary continuation
payments or benefits continuation (except as specifically provided by the terms
of an employee benefit plan of the Company).
4.5 VOLUNTARY TERMINATION BY EMPLOYEE. Employee may terminate this
Agreement at any time upon delivering 30 days' written notice of resignation to
the Company. In the event of such voluntary termination other than for "good
reason" (as defined above), Employee shall be entitled to his base salary earned
PRO RATA to the date of his resignation, but no base salary continuation
payments or benefits continuation (except as specifically provided by the terms
of an employee benefit plan of the Company). On or after the date the Company
receives notice of Employee's resignation, the Company may, at its option, pay
Employee his base salary through the effective date of his resignation and
terminate his employment immediately.
4.6 TERMINATION FOLLOWING CHANGE OF CONTROL.
(a) Notwithstanding anything to the contrary contained herein, should
Employee at any time within 12 months of the occurrence of a "change of control"
(as defined below) cease to be an employee of the Company (or its successor), by
reason of (i) termination by the Company (or its successor) other than for
"cause" (following a change of control, "cause" shall be limited to the
conviction of or a plea of NOLO CONTENDERE to the charge of a felony which,
through lapse of time or otherwise, is not subject to appeal), or a material
breach of fiduciary duty to the Company through the misappropriation of Company
funds or property) or (ii) voluntary termination by Employee for "good reason
upon change of control" (as defined below), then in any such event, (1) the
Company shall pay Employee, within 45 days of the severance of employment
described in this Section 4.6, a lump-sum payment equal to (without discounting
to present value) two times' his then effective base salary under Section 3.1
hereof, and (2) certain outstanding stock options held by Employee shall become
fully vested and exercisable. In addition, Company shall continue all benefits
under Section 3.3 hereof, through the expiration of the two year term then in
effect (with the exception of medical benefits which shall continue for two
years from the date of termination), to the extent continuation of such benefits
is not prohibited by applicable state and/or federal law.
5
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(b) Employee shall also be entitled to an additional payment, to the
extent all payments to Employee (whether pursuant to this Agreement or any other
agreement whatsoever) in connection with a change of control as defined in this
Section 4.6 do not exceed in aggregate, the maximum amount that could be paid to
Employee, without triggering an excess parachute payment under Section 280G(b)
of the Internal Revenue Code of 1986, as amended (the "Code"), and the resulting
excise tax under Section 4999 of the Code, (referred to herein as the "maximum
payment amount") equal to an amount, which when added to the amounts payable to
the Employee under paragraph (a) equals the maximum payment amount; it being the
express intention of the parties that Employee in all cases (whether through
this Agreement or any other agreement whatsoever) receive the maximum payment
amount in connection with a change of control without creating an excess
parachute payment. If such a payment is required under this paragraph (b) in
addition to the amounts set forth in paragraph (a) above, it shall be paid at
the time and in the manner set forth under paragraph (a) above.
(c) In determining the amount to be paid to Employee under this
Section 4.6, as well as the limitation determined under Section 280G of the
Code, (i) no portion of the total payments which Employee has waived in writing
prior to the date of the payment of benefits under this Agreement will be taken
into account, (ii) no portion of the total payments which nationally recognized
tax counsel (whether through consultation or retention of any actuary,
consultant or other expert), selected by the Company's independent auditors and
acceptable to Employee, (referred to herein as "Tax Counsel") determines not to
constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the
Code will be taken into account, (iii) no portion of the total payments which
Tax Counsel determines to be reasonable compensation for services rendered
within the meaning of Section 280G(b)(4) of the Code will be taken into account,
and (iv) the value of any non-cash benefit or any deferred payment or benefit
included in the total payments will be determined by the Company's independent
auditors in accordance with Sections 280G(d)(3) and (iv) of the Code.
(d) As used in this Section, voluntary termination by Employee for
"good reason upon change of control" shall mean (i) removal of Employee from the
offices Employee holds on the date of this Agreement, (ii) a material reduction
in Employee's authority or responsibility, including, without limitation,
involuntary removal from the Board of Directors, (iii) relocation of the
Company's headquarters from Bexar County, Texas, (iv) a reduction in Employee's
then effective base salary under Section 3.1, or (v) the Company otherwise
commits a breach of this Agreement.
(e) As used in this Agreement, a "change of control" shall be deemed
to have occurred if (i) any "Person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing more
than 30% of the combined voting power of the Company's then outstanding
securities, or (ii) at any time during the 24-month period after a tender offer,
merger, consolidation, sale of assets or contested election, or any combination
of such transactions, at least a majority of the Company's Board of Directors
shall cease to consist of "continuing directors" (meaning directors of the
Company who either were directors prior to such transaction or who subsequently
6
<PAGE>
became directors and whose election, or nomination for election by the Company's
stockholders, was approved by a vote of at least two-thirds of the directors
then still in office who were directors prior to such transaction), or (iii) the
stockholders of the Company approve a merger or consolidation of the Company
with any other corporation, other than a merger or consolidation that would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least 60% of the
total voting power represented by the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation, or
(iv) the stockholders of the Company approve a plan of complete liquidation of
the Company or an agreement of sale or disposition by the Company of all or
substantially all of the Company's assets.
(f) Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any payment or distribution by the
Company or any of its affiliates to or for the benefit of Employee, whether
paid or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise (any such payments or distributions being individually
referred to herein as a "Payment," and any two or more of such payments or
distributions being referred to herein as "Payments"), would be subject to
the excise tax imposed by Section 4999 of the Code (such excise tax, together
with any interest thereon, any penalties, additions to tax, or additional
amounts with respect to such excise tax, and any interest in respect of such
penalties, additions to tax or additional amounts, being collectively
referred herein to as the "Excise Tax"), then Employee shall be entitled to
receive an additional payment or payments (individually referred to herein as
a "Gross-Up Payment" and any two or more of such additional payments being
referred to herein as "Gross-Up Payments") in an amount such that after
payment by Employee of all taxes (as defined in paragraph (p) below) imposed
upon the Gross-Up Payment, Employee retains an amount of such Gross-Up
Payment equal to the Excise Tax imposed upon the Payments.
(g) Subject to the provisions of paragraph (h) through (n) below, any
determination (individually, a "Determination") required to be made under this
Section 4.6, including whether a Gross-Up Payment is required and the amount of
such Gross-Up Payment, shall initially be made, at the Company's expense, by Tax
Counsel. Tax Counsel shall provide detailed supporting legal authorities,
calculations, and documentation both to the Company and Employee within 15
business days of the termination of Employee's employment, if applicable, or
such other time or times as is reasonably requested by the Company or Employee.
If Tax Counsel makes the initial Determination that no Excise Tax is payable by
Employee with respect to a Payment or Payments, it shall furnish Employee with
an opinion reasonably acceptable to Employee that no Excise Tax will be imposed
with respect to any such Payment or Payments. Employee shall have the right to
dispute any Determination (a "Dispute") within 15 business days after delivery
of Tax Counsel's opinion with respect to such Determination. The Gross-Up
Payment, if any, as determined pursuant to such Determination shall, at the
Company's expense, be paid by the Company to Employee within five business days
of Employee's receipt of such Determination. The existence of a Dispute shall
not in any way affect Employee's right to receive the Gross-Up Payment in
accordance with such Determination. If there is no Dispute, such Determination
shall be binding, final and conclusive upon the Company and Employee, subject in
all respects, however, to the provisions of paragraph (h) through (n) below. As
a result of the
7
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uncertainty in the application of Sections 4999 and 280G of the Code, it is
possible that Gross-Up Payments (or portions thereof) which will not have
been made by the Company should have been made ("Underpayment"), and if upon
any reasonable written request from Employee or the Company to Tax Counsel,
or upon Tax Counsel's own initiative, Tax Counsel, at the Company's expense,
thereafter determines that Employee is required to make a payment of any
Excise Tax or any additional Excise Tax, as the case may be, Tax Counsel
shall, at the Company's expense, determine the amount of the Underpayment
that has occurred and any such Underpayment shall be promptly paid by the
Company to Employee.
(h) The Company shall defend, hold harmless, and indemnify Employee
on a fully grossed-up after tax basis from and against any and all claims,
losses, liabilities, obligations, damages, impositions, assessments, demands,
judgements, settlements, costs and expenses (including reasonable attorneys',
accountants', and experts' fees and expenses) with respect to any tax liability
of Employee resulting from any Final Determination (as defined in paragraph (o)
below) that any Payment is subject to the Excise Tax.
(i) If a party hereto receives any written or oral communication with
respect to any question, adjustment, assessment or pending or threatened audit,
examination, investigation or administrative, court or other proceeding which,
if pursued successfully, could result in or give rise to a claim by Employee
against the Company under this paragraph (i) ("Claim"), including, but not
limited to, a claim for indemnification of Employee by the Company under
paragraph (h) above, then such party shall promptly notify the other party
hereto in writing of such Claim ("Tax Claim Notice").
(j) If a Claim is asserted against Employee ("Employee Claim"),
Employee shall take or cause to be taken such action in connection with
contesting such Employee Claim as the Company shall reasonably request in
writing from time to time, including the retention of counsel and experts as are
reasonably designated by the Company (it being understood and agreed by the
parties hereto that the terms of any such retention shall expressly provide that
the Company shall be solely responsible for the payment of any and all fees and
disbursements of such counsel and any experts) and the execution of powers of
attorney, provided that:
(i) within 30 calendar days after the Company receives or
delivers, as the case may be, the Tax Claim Notice relating to such
Employee Claim (or such earlier date that any payment of the taxes claimed
is due from Employee, but in no event sooner than five calendar days after
the Company receives or delivers such Tax Claim Notice), the Company shall
have notified Employee in writing ("Election Notice") that the Company does
not dispute its obligations (including, but not limited to, its indemnity
obligations) under this Agreement and that the Company elects to contest,
and to control the defense or prosecution of, such Employee Claim at the
Company's sole risk and sole cost and expense; and
(ii) the Company shall have advanced to Employee on an
interest-free basis, the total amount of the tax claimed in order for
Employee, at the Company's request, to pay or cause to be paid the tax
claimed, file a claim for refund of such tax and, subject to
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the provisions of the last sentence of paragraph (l) below, sue for a
refund of such tax if such claim for refund is disallowed by the
appropriate taxing authority (it being understood and agreed by the parties
hereto that the Company shall only be entitled to sue for a refund and
the Company shall not be entitled to initiate any proceeding in, for
example, United States Tax Court) and shall indemnify and hold Employee
harmless, on a fully grossed-up after tax basis, from any tax imposed with
respect to such advance or with respect to any imputed income with respect
to such advance; and
(iii) the Company shall reimburse Employee for any and all costs
and expenses resulting from any such request by the Company and shall
indemnify and hold Employee harmless, on fully grossed-up after-tax basis,
from any tax imposed as a result of such reimbursement.
(k) Subject to the provisions of paragraph (j) above, the Company
shall have the right to defend or prosecute, at the sole cost, expense and risk
of the Company, such Employee Claim by all appropriate proceedings, which
proceedings shall be defended or prosecuted diligently by the Company to a Final
Determination; PROVIDED, HOWEVER, that (i) the Company shall not, without
Employee's prior written consent, enter into any compromise or settlement of
such Employee Claim that would adversely affect Employee, (ii) any request from
the Company to Employee regarding any extension of the statute of limitations
relating to assessment, payment, or collection of taxes for the taxable year of
Employee with respect to which the contested issues involved in, and amount of,
the Employee Claim relate is limited solely to such contested issues and amount,
and (iii) the Company's control of any contest or proceeding shall be limited to
issues with respect to the Employee Claim and Employee shall be entitled to
settle or contest, in his sole and absolute discretion, any other issue raised
by the Internal Revenue Service or any other taxing authority. So long as the
Company is diligently defending or prosecuting such Employee Claim, Employee
shall provide or cause to be provided to the Company any information reasonably
requested by the Company that relates to such Employee Claim, and shall
otherwise cooperate with the Company and its representatives in good faith in
order to contest effectively such Employee Claim. The Company shall keep
Employee informed of all developments and events relating to any such Employee
Claim (including, without limitation, providing to Employee copies of all
written materials pertaining to any such Employee Claim), and Employee or his
authorized representatives shall be entitled, at Employee's expense, to
participate in all conferences, meetings and proceedings relating to any such
Employee Claim.
(l) If, after actual receipt by Employee of an amount of a tax
claimed (pursuant to an Employee Claim) that has been advanced by the Company
pursuant to paragraph (j)(ii) above, the extent of the liability of the Company
hereunder with respect to such tax claimed has been established by a Final
Determination, Employee shall promptly pay or cause to be paid to the Company
any refund actually received by, or actually credited to, Employee with respect
to such tax (together with any interest paid or credited thereon by the taxing
authority and any recovery of legal fees from such taxing authority related
thereto), except to the extent that any amounts are then due and payable by the
Company to Employee, whether under the provisions of this Agreement or
otherwise. If, after the receipt by Employee of an amount advanced by the
Company pursuant to paragraph (j)(ii) above, a determination is made by the
Internal Revenue Service or other
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appropriate taxing authority that Employee shall not be entitled to any
refund with respect to such tax claimed and the Company does not notify
Employee in writing of its intent to contest such denial of refund prior to
the expiration of thirty days after such determination, then such advance
shall be forgiven and shall not be required to be repaid and the amount of
such advance shall offset, to the extent thereof, the amount of any Gross-Up
Payments and other payments required to be paid hereunder.
(m) With respect to any Employee Claim, if the Company fails to
deliver an Election Notice to Employee within the period provided in paragraph
(j)(i) above or, after delivery of such Election Notice, the Company fails to
comply with the provisions of paragraph (j)(ii) above and (iii) and (k) above,
then Employee shall at any time thereafter have the right (but not the
obligation), at his election and in his sole and absolute discretion, to defend
or prosecute, at the sole cost, expense and risk of the Company, such Employee
Claim. Employee shall have full control of such defense or prosecution and such
proceedings, including any settlement or compromise thereof. If requested by
Employee, the Company shall cooperate, and shall cause its affiliates to
cooperate, in good faith with Employee and his authorized representatives in
order to contest effectively such Employee Claim. The Company may attend, but
not participate in or control, any defense, prosecution, settlement or
compromise of any Employee Claim controlled by Employee pursuant to this
paragraph (m) and shall bear its own costs and expenses with respect thereto.
In the case of any Employee Claim that is defended or prosecuted by Employee,
Employee shall, from time to time, be entitled to current payment, on a fully
grossed-up after tax basis, from the Company with respect to costs and expenses
incurred by Employee in connection with such defense or prosecution.
(n) In the case of any Employee Claim that is defended or prosecuted
to a Final Determination pursuant to the terms of this paragraph (n), the
Company shall pay, on a fully grossed-up after tax basis, to Employee in
immediately available funds the full amount of any taxes arising or resulting
from or incurred in connection with such Employee Claim that have not
theretofore been paid by the Company to Employee, together with the costs and
expenses, on a fully grossed-up after tax basis, incurred in connection
therewith that have not theretofore been paid by the Company to Employee, within
ten calendar days after such Final Determination. In the case of any Employee
Claim not covered by the preceding sentence, the Company shall pay, on a fully
grossed-up after tax basis, to Employee in immediately available funds the full
amount of any taxes arising or resulting from or incurred in connection with
such Employee Claim at least ten calendar days before the date payment of such
taxes is due from Employee, except where payment of such taxes is sooner
required under the provisions of this paragraph (n), in which case payment of
such taxes (and payment, on a fully grossed-up after tax basis, of any costs and
expenses required to be paid under this paragraph (n) shall be made within the
time and in the manner otherwise provided in this paragraph (n).
(o) For purposes of this Agreement, the term "Final Determination"
shall mean (i) a decision, judgment, decree or other order by a court or other
tribunal with appropriate jurisdiction, which has become final and
non-appealable; (ii) a final and binding settlement or compromise with an
administrative agency with appropriate jurisdiction, including, but not limited
to, a closing agreement under Section 7121 of the Code; (iii) any disallowance
of a claim for refund
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or credit in respect to an overpayment of tax unless a suit is filed on a
timely basis; or (iv) any final disposition by reason of the expiration of
all applicable statutes of limitations.
(p) For purposes of this Agreement, the terms "tax" and "taxes" mean
any and all taxes of any kind whatsoever (including, but not limited to, any and
all Excise Taxes, income taxes, and employment taxes), together with any
interest thereon, any penalties, additions to tax, or additional amounts with
respect to such taxes and any interest in respect of such penalties, additions
to tax, or additional amounts.
(q) For purposes of this Agreement, the terms "affiliate" and
"affiliates" mean, when used with respect to any entity, individual, or other
person, any other entity, individual, or other person which, directly or
indirectly, through one or more intermediaries controls, or is controlled by, or
is under common control with such entity, individual or person. The term
"control" and derivations thereof when used in the immediately preceding
sentence means the ownership, directly or indirectly, of 50% or more of the
voting securities of an entity or other person or possessing the power to direct
or cause the direction of the management and policies of such entity or other
person, whether through the ownership of voting securities, by contract or
otherwise.
(r) The Company shall defend, hold harmless, and indemnify Employee
on a fully grossed-up after tax basis from and against any and all costs and
expenses (including reasonable attorneys', accountants' and experts' fees and
expenses) incurred by Employee from time to time as a result of any contest
(regardless of the outcome) by the Company or others contesting the validity
or enforcement of, or liability under, any term or provision of this Agreement,
plus in each case interest at the applicable federal rate provided for in
Section 7872(f)(2)(B) of the Code.
4.7 EXCLUSIVITY OF TERMINATION PROVISIONS. The termination provisions of
this Agreement regarding the parties' respective obligations in the event
Employee's employment is terminated, are intended to be exclusive and in lieu of
any other rights or remedies to which Employee or the Company may otherwise be
entitled at law, in equity or otherwise. It is also agreed that, although the
personnel policies and fringe benefit programs of the Company may be
unilaterally modified from time to time, the termination provisions of this
Agreement are not subject to modification, whether orally, impliedly or in
writing, unless any such modification is mutually agreed upon and signed by the
parties.
ARTICLE V
CONFIDENTIAL INFORMATION AND NONCOMPETITION
5.1 NONDISCLOSURE. During the term of this Agreement and thereafter,
Employee shall not, without the prior written consent of the Board of Directors,
disclose or use for any purpose (except in the course of his employment under
this Agreement and in furtherance of the business of the Company) confidential
information, proprietary data or trade secrets of the Company (or any of its
subsidiaries), including but not limited to customer, business planning or
business strategy information, except as required by applicable law or legal
process; provided, however, that
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confidential information shall not include any information known generally to
the public or ascertainable from public or published information (other than
as a result of unauthorized disclosure by Employee) or any information of a
type not otherwise considered confidential by persons engaged in the same
business or a business similar to that conducted by the Company (or any of
its subsidiaries). All documents which Employee prepared or which may have
been provided or made available to Employee in the course of work for the
Company shall be deemed the exclusive property of the Company and shall
remain in the Company's possession. Upon the termination of Employee's
employment with the Company, regardless of the reason for such termination,
Employee shall promptly deliver to the Company all materials of a
confidential nature relating to the business of the Company (or any of its
subsidiaries) which are within Employee's possession or control.
5.2 NONCOMPETITION. The Company and Employee agree that the services
rendered by Employee hereunder are unique and irreplaceable. For this reason
and in consideration of the benefits of this Agreement, specifically including
but not limited to applicable termination pay provisions, as well as
confidential/proprietary/trade secret information provided to Employee, Employee
hereby agrees that, during the term of this Agreement and for a period of
eighteen months thereafter, he shall not (except in the course of his employment
under this Agreement and in furtherance of the business of the Company (or any
of its subsidiaries)) (i) engage in as principal, consultant or employee in any
segment of a business of a company, partnership or firm ("Business Segment")
that is directly competitive with any significant business of the Company in one
of its major commercial or geographic markets or (ii) hold an interest (except
as a holder of less than 5% interest in a publicly traded firm or mutual funds,
or as a minority stockholder or unitholder in a form not publicly traded) in a
company, partnership or firm with a Business Segment that is directly
competitive, without the prior written consent of the Company.
5.3 VALIDITY OF NONCOMPETITION. The foregoing provisions of Section 5.2
shall not be held invalid because of the scope of the territory covered, the
actions restricted thereby, or the period of time such covenant is operative.
Any judgment of a court of competent jurisdiction may define the maximum
territory, the actions subject to and restricted by Section 5.2 and the period
of time during which such agreement is enforceable.
5.4 NONCOMPETITION COVENANTS INDEPENDENT. The covenants of the Employee
contained in Section 5.2 will be construed as independent of any other provision
in this Agreement; and the existence of any claim or cause of action by the
Employee against the Company will not constitute a defense to the enforcement by
the Company of said covenants. The Employee understands that the covenants
contained in Section 5.2 are essential elements of the transaction contemplated
by this Agreement and, but for the agreement of the Employee to Section 5.2, the
Company would not have agreed to enter into such transaction. The Employee has
been advised to consult with counsel in order to be informed in all respects
concerning the reasonableness and propriety of Section 5.2 and its provisions
with specific regard to the nature of the business conducted by the Company and
the Employee acknowledges that Section 5.2 and its provisions are reasonable in
all respects.
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5.5 COOPERATION. In the event of termination, and regardless of the
reason for such termination, Employee agrees to cooperate with the Company and
its representatives by responding to questions, attending meetings, depositions,
administrative proceedings and court hearings, executing documents and
cooperating with the Company and its legal counsel with respect to issues,
claims, litigation or administrative proceedings of which Employee has personal
or corporate knowledge. Employee further agrees to maintain in strict
confidence any information or knowledge Employee has regarding current or future
claims, litigation or administrative proceedings involving the Company (or any
of its subsidiaries). Employee agrees that any communication with a party
adverse to the Company, or with a representative, agent or counsel for such
adverse party, relating to any claim, litigation or administrative proceeding,
shall be solely and exclusively through counsel for the Company.
5.6 REMEDIES. In the event of a breach or threatened breach by the
Employee of any of the provisions of Sections 5.1, 5.2 or 5.5, the Company shall
be entitled to a temporary restraining order and an injunctive restraining the
Employee from the commission of such breach. Nothing herein shall be construed
as prohibiting the Company from pursuing any other remedies available to it for
such breach or threatened breach, including the recovery of money damages.
ARTICLE VI
ARBITRATION
Except for the provisions of Sections 5.1, 5.2 and 5.5 dealing with issues
of nondisclosure, noncompetition and cooperation, with respect to which the
Company reserves the right to petition a court directly for injunction or other
relief, any controversy of any nature whatsoever, including but not limited to
tort claims or contract disputes, between the parties to this Agreement or
between the Employee, his heirs, executors, administrators, legal
representatives, successors, and assigns and the Company and its affiliates,
arising out of or related to the Employee's employment with the Company, any
resignation from or termination of such employment and/or the terms and
conditions of this Agreement, including the implementation, applicability and
interpretation thereof, shall, upon the written request of one party served upon
the other, be submitted to and settled by arbitration in accordance with the
provisions of the Federal Arbitration Act, 9 U.S.C. Sections 1-15, as amended.
Each of the parties to this Agreement shall appoint one person as an arbitrator
to hear and determine such disputes, and if they should be unable to agree, then
the two arbitrators shall chose a third arbitrator from a panel made up of
experienced arbitrators selected pursuant to the procedures of the American
Arbitration Association (the "AAA") and, once chosen, the third arbitrator's
decision shall be final, binding and conclusive upon the parties to this
Agreement. Each party shall be responsible for the fees and expenses of its
arbitrator and the fees and expenses of the third arbitrator shall be shared
equally by the parties. The terms of the commercial arbitration rules of AAA
shall apply except to the extent they conflict with the provisions of this
paragraph. It is further agreed that any of the parties hereto may petition the
United States District Court for the Western District of Texas, San Antonio
Division, for a judgment to be entered upon any award entered through such
arbitration proceedings.
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ARTICLE VII
MISCELLANEOUS
7.1 COMPLETE AGREEMENT. This Agreement constitutes the entire agreement
between the parties and cancels and supersedes all other agreements between the
parties which may have related to the subject matter contained in this
Agreement.
7.2 MODIFICATION; AMENDMENT; WAIVER. No modification, amendment or waiver
of any provisions of this Agreement shall be effective unless approved in
writing by both parties. The failure at any time to enforce any of the
provisions of this Agreement shall in no way be construed as a waiver of such
provisions and shall not affect the right of either party thereafter to enforce
each and every provision hereof in accordance with its terms.
7.3 GOVERNING LAW; JURISDICTION. This Agreement and performance under it,
and all proceedings that may ensue from its breach, shall be construed in
accordance with and under the laws of the State of Texas.
7.4 EMPLOYEE'S REPRESENTATIONS. Employee represents and warrants that he
is free to enter in to this Agreement and to perform each of the terms and
covenants of it. Employee represents and warrants that he is not restricted or
prohibited, contractually or otherwise, from entering into and performing this
Agreement, and that his execution and performance of this Agreement is not a
violation or breach of any other agreement between Employee and any other person
or entity.
7.5 COMPANY'S REPRESENTATIONS. Company represents and warrants that it is
free to enter into this Agreement and to perform each of the terms and covenants
of it. Company represents and warrants that it is not restricted or prohibited,
contractually or otherwise, from entering into and performing this Agreement and
that its execution and performance of this Agreement is not a violation or
breach of any other agreements between Company and any other person or entity.
The Company represents and warrants that this Agreement is a legal, valid and
binding agreement of the Company, enforceable in accordance with its terms.
7.6 SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement.
7.7 ASSIGNMENT. The rights and obligations of the parties under this
Agreement shall be binding upon and inure to the benefit of their respective
successors, assigns, executors, administrators and heirs, provided, however,
that neither the Company nor Employee any assign any duties under this Agreement
without the prior written consent of the other.
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7.8 LIMITATION. This Agreement shall not confer any right or impose any
obligation on the Company to continue the employment of Employee in any
capacity, or limit the right of the Company or Employee to terminate Employee's
employment.
7.9 ATTORNEYS' FEES AND COSTS. If any action at law or in equity is
brought to enforce or interpret the terms of this Agreement or any obligation
owing thereunder, venue will be in Bexar County, Texas and the prevailing party
shall be entitled to reasonable attorney's fees and all costs and expenses of
suit, including, without limitation, expert and accountant fees, and such other
relief which a court of competent jurisdiction may deem appropriate.
7.10 NOTICES. All notices and other communications under this Agreement
shall be in writing and shall be given in person or by either personal delivery,
overnight delivery, or first class mail, certified or registered with return
receipt requested, with postage or delivery charges prepaid, and shall be deemed
to have been duly given when delivered personally, upon actual receipt, and on
the next business day when sent via overnight delivery, or three days after
mailing first class, certified or registered with return receipt requested, to
the respective persons named below:
If to the Company: Corporate Secretary
U. S. Long Distance Corp.
9311 San Pedro
San Antonio, Texas 78216
If to BIC: Corporate Secretary
Billing Information Concepts Corp.
9311 San Pedro
San Antonio, Texas 78216
If to the Employee: W. Audie Long
9311 San Pedro
San Antonio, Texas 78216
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the day and year indicated above.
COMPANY: U. S. LONG DISTANCE CORP.
By /s/ LARRY M. JAMES
-------------------------------
Title Chairman, CEO & President
----------------------------
BIC: BILLING INFORMATION CONCEPTS CORP.
By
-----------------------------
Title
----------------------------
EMPLOYEE: /s/ AUDIE LONG
-----------------------------
W. Audie Long
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EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made effective the first day of January, 1997,
by and between U.S. LONG DISTANCE CORP., a Delaware corporation, with principal
offices located at 9311 San Pedro, Suite 100, San Antonio, Texas 78216
(hereinafter referred to as the "Company"), and PHILLIP J. STORIN, a resident of
Austin, Travis County, Texas (hereinafter referred to as the "Employee").
W I T N E S S E T H:
WHEREAS, the Employee is now employed by the Company, and the Employee and
Company desire to enter into an agreement relating to such employment, outlining
the duties and obligations of each:
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein set forth, it is agreed as follows:
1. EMPLOYMENT. The Company agrees to continue to employ the Employee,
and the Employee agrees to continue to be employed by the Company, subject to
the terms and conditions set forth herein.
2. TERM. Subject to the provisions hereof, the term of the Employee's
employment by the Company under this Agreement shall be for a period of one (1)
year commencing on the date hereof; provided that such term of employment shall
continue thereafter unless and until terminated by either the Company or the
Employee upon no less than one hundred twenty (120) days' prior written notice
to the other of the desire to terminate such employment. The term of the
Employee's employment hereunder, including any continuation of the original
term, is hereinafter referred to as the "Employment Period."
3. POSITION AND DUTIES. During the Employment Period, the Employee shall
serve as Senior Vice President, Chief Financial Officer and Corporate Treasurer
of the Company, with such assignments, powers and duties as are assigned or
delegated to him by the Chief Executive Officer and President of the Company
(which is presently Mr. Larry M. James) or his authorized representative. Such
assignments, powers and duties may, from time to time, be modified by the
Company, as the Company's needs may require. The Employee shall also, at the
request of the Company, perform similar services for any Affiliate (as
hereinafter defined) of the Company without additional compensation. The
Employee agrees to devote all of his business time, skill, attention and best
efforts to the business of the Company and its Affiliates in the advancement of
the best interests of the Company and its Affiliates. As used in this
Agreement, the term "Affiliate" of the Company means any person or corporation
that, directly or indirectly through one or more intermediaries, controls or is
controlled by or is under the control of the Company.
<PAGE>
4. COMPENSATION.
4.1 For all services rendered by the Employee to the Company during
the Employment Period, the Company shall pay the Employee a salary at the rate
of One Hundred Forty Thousand and No/100 Dollars ($140,000.00) annually. The
compensation is to be payable, subject to such withholdings as are required by
law, in installments in accordance with the Company's customary payroll
practices.
4.2. The Employee will be eligible for bonuses from a bonus pool, the
make-up, terms, conditions and awards therefrom to be determined by the
Compensation Committee of the Company.
5. OFFICE FACILITIES. During the Employment Period, the Company will
furnish the Employee, without charge, suitable office facilities for the purpose
of performing his duties hereunder, which facilities shall include secretarial,
telephone, clerical and support personnel and services and shall be similar to
those furnished to employees of the Company having comparable positions.
6. FRINGE BENEFITS; VACATIONS. During the Employment Period, the
Employee shall be entitled to participate in or receive benefits under such
pension, medical and life insurance and other employee benefit plans of the
Company which may be in effect from time to time, to the extent he is eligible
under the terms of those plans, on the same basis as other employees of the
Company having comparable positions. The Employee shall be entitled to
vacations with pay in accordance with the policies of the Company in effect from
time to time.
7. EXPENSES. Subject to such policies regarding expenses and expense
reimbursement as may be adopted from time to time by the Company and compliance
therewith by the Employee, the Employee is authorized to incur reasonable
expenses in the performance of his duties hereunder, and the Company will
reimburse Employee for such reasonable out-of-pocket expenses upon the
presentation by the Employee of an itemized account and receipts satisfactory to
the Company.
8. TERMINATION.
8.1 TERMINATION BY THE COMPANY WITHOUT CAUSE. Subject to the
provisions of this Section 8.1, this Agreement may be terminated by the Company
without cause upon 30 days' prior written notice thereof given to Employee. In
the event of termination pursuant to this Section 8.1 the Company shall pay
Employee, within 15 days of the effective date of such termination, a lump-sum
payment equal to (without discounting to present value) one times his then
effective annual base salary under Section 4.1 hereof and (b) all outstanding
stock options to acquire shares of the Company's common stock held by Employee
shall become fully vested and exercisable pursuant to the Agreement Regarding
Vesting of Stock Options attached hereto as EXHIBIT A. Payment of such sum by
the Company shall constitute Employee's full severance pay, and the Company
shall have no further obligation to Employee arising out of such termination.
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8.2 VOLUNTARY TERMINATION BY EMPLOYEE FOR GOOD REASON. Employee
may at any time voluntarily terminate his employment for "good reason" (as
defined below). In the event of such voluntary termination for "good reason,"
(a) the Company shall pay Employee, within 15 days of the effective date of such
termination, a lump-sum payment equal to (without discounting to present value)
one times his then effective annual base salary under Section 4.1 hereof and (c)
all outstanding stock options to acquire shares of the Company's common stock
held by Employee shall become fully vested and exercisable pursuant to the
Agreement Regarding Vesting of Stock Options attached hereto as EXHIBIT A.
For purposes of this Agreement, "good reason" shall mean the
occurrence of any of the following events:
(a) Removal from the offices Employee holds on the date of this
Agreement or a material reduction in Employee's authority or
responsibility, including, without limitation, involuntary
removal from the Board of Directors, but not including
termination of Employee for "cause," as defined below;
(b) Relocation of the Company's headquarters from Bexar County,
Texas;
(c) A reduction in the Employee's then effective base salary under
Section 4.1; or
(d) The Company otherwise commits a material breach of this
Agreement.
8.3. TERMINATION BY THE COMPANY FOR CAUSE. The Company may
terminate this Agreement at any time if such termination is for "cause" (as
defined below), by delivering to Employee written notice describing the cause of
termination 30 days before the effective date of such termination and by
granting Employee at least 30 days to cure the cause. In the event the
employment of Employee is terminated for "cause," Employee shall be entitled
only to the base salary earned PRO RATA to the date of such termination with no
entitlement to any base salary continuation payments or benefits continuation
(except as specifically provided by the terms of an employee benefit plan of the
Company). Except as otherwise provided in this Agreement, the determination of
whether Employee shall be terminated for "cause" shall be made by the Board of
Directors of the Company, in the reasonable exercise of its business judgment,
and shall be limited to the occurrence of the following events:
(a) Conviction of or a plea of NOLO CONTENDERE to the charge of a
felony (which, through lapse of time or otherwise, is not
subject to appeal);
(b) Willful refusal without proper legal cause to perform, or gross
negligence in performing, Employee's duties and
responsibilities;
(c) Material breach of fiduciary duty to the Company through the
misappropriation of Company funds or property; or
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(d) The unauthorized absence of Employee from work (other than for
sick leave or disability) for a period of 30 working days or
more during any period of 45 working days during the term of
this Agreement.
8.4 TERMINATION UPON DEATH OR PERMANENT DISABILITY. In the event
that Employee dies, this Agreement shall terminate upon the Employee's death.
Likewise, if the Employee becomes unable to perform the essential functions of
the position, with or without reasonable accommodation, on account of illness,
disability, or other reason whatsoever for a period of more than six consecutive
or nonconsecutive months in any twelve-month period, this Agreement shall
terminate effective upon such incapacity, and Employee (or his legal
representatives) shall be entitled only to the base salary earned PRO RATA to
the date of such termination with no entitlement to any base salary continuation
payments or benefits continuation (except as specifically provided by the terms
of an employee benefit plan of the Company).
8.5 VOLUNTARY TERMINATION BY EMPLOYEE. Employee may terminate this
Agreement at any time upon delivering 30 days' written notice of resignation to
the Company. In the event of such voluntary termination other than for "good
reason" (as defined above), Employee shall be entitled to his base salary earned
PRO RATA to the date of his resignation, but no base salary continuation
payments or benefits continuation (except as specifically provided by the terms
of an employee benefit plan of the Company). On or after the date the Company
receives notice of Employee's resignation, the Company may, at its option, pay
Employee his base salary through the effective date of his resignation and
terminate his employment immediately.
8.6 TERMINATION FOLLOWING CHANGE OF CONTROL.
(a) Notwithstanding anything to the contrary contained herein,
should Employee at any time within 12 months of the occurrence of a "change of
control" (as defined below) cease to be an employee of the Company (or its
successor), by reason of (i) termination by the Company (or its successor) other
than for "cause" (following a change of control, "cause" shall be limited to the
conviction of or a plea of NOLO CONTENDERE to the charge of a felony which,
through lapse of time or otherwise, is not subject to appeal), or a material
breach of fiduciary duty to the Company through the misappropriation of Company
funds or property) or (ii) voluntary termination by Employee for "good reason
upon change of control" (as defined below), then in any such event, (1) the
Company shall pay Employee, within 45 days of the severance of employment
described in this Section 8.6, a lump-sum payment equal to (without discounting
to present value) two times his then effective base salary under Section 4.1
hereof, and (2) all outstanding stock options held by Employee shall become
fully vested and exercisable pursuant to the Agreement Regarding Vesting of
Stock Options attached hereto as EXHIBIT A.
(b) As used in this Section, voluntary termination by Employee for
"good reason upon change of control" shall mean (i) removal of Employee from the
offices Employee holds on the date of this Agreement, (ii) a material reduction
in Employee's authority or responsibility, including, without limitation,
involuntary removal from the Board of Directors, (iii) relocation of the
Company's headquarters from Bexar County, Texas, (iv) a reduction in
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Employee's then effective base salary under Section 4.1, or (v) the Company
otherwise commits a breach of this Agreement.
(c) As used in this Agreement, a "change of control" shall be
deemed to have occurred if (i) any "Person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), is or becomes a "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the Company
representing more than 30% of the combined voting power of the Company's then
outstanding securities, or (ii) at any time during the 24-month period after a
tender offer, merger, consolidation, sale of assets or contested election, or
any combination of such transactions, at least a majority of the Company's Board
of Directors shall cease to consist of "continuing directors" (meaning directors
of the Company who either were directors prior to such transaction or who
subsequently became directors and whose election, or nomination for election by
the Company's stockholders, was approved by a vote of at least two thirds of the
directors then still in office who were directors prior to such transaction), or
(iii) the stockholders of the Company approve a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation that
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at least 60% of
the total voting power represented by the voting securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation, or (iv) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement of sale or disposition by
the Company of all or substantially all of the Company's assets.
8.7 EXCLUSIVITY OF TERMINATION PROVISIONS. The termination
provisions of this Agreement regarding the parties' respective obligations in
the event Employee's employment is terminated, are intended to be exclusive and
in lieu of any other rights or remedies to which Employee or the Company may
otherwise be entitled at law, in equity or otherwise. It is also agreed that,
although the personnel policies and fringe benefit programs of the Company may
be unilaterally modified from time to time, the termination provisions of this
Agreement are not subject to modification, whether orally, impliedly or in
writing, unless any such modification is mutually agreed upon and signed by the
parties.
9. COVENANTS NOT TO DISCLOSE. The Employee covenants and agrees that he
will not, at any time during or after the termination of his employment by the
Company, communicate or disclose to any person, or use for his own account, or
advise, discuss with, or in any way assist any other person or firm in obtaining
or learning about, without the prior written consent of the Company, information
concerning any inventions, processes, programs, systems, flow charts or
equipment used in, or any secret or confidential information (including, without
limitation, any customer lists, trade secrets or information concerning any work
done by the Company for its customers or done in any effort to solicit or obtain
customers) concerning, the business and affairs of the Company or any of its
Affiliates acquired by the Employee during the term of his employment by the
Company. The Employee further covenants and agrees that he shall retain all
such knowledge and information concerning the foregoing in trust for the sole
benefit of the Company and its Affiliates and their respective successors and
assigns.
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10. COVENANT NOT TO COMPETE. The Employee covenants and agrees that,
during the Employment Period and for a period of one (1) year after the
voluntary resignation of the Employee as outlined in Section 8.5 herein, other
than for "good reason" (as defined in Section 8.2), or termination for cause as
outlined in Section 8.3 herein, he will not, directly or indirectly, own, render
services or advice to, or be engaged in a business which is similar to or in
competition with the business of marketing or selling of operator assisted or
long distance telecommunication services, such as one-plus, WATS, 800 and travel
services or any other products or services which have been, are then, or will in
the future be, marketed through the Company in the State of Texas except in the
course of his employment hereunder or except upon the written consent of the
Company.
11. ESSENTIAL NATURE OF COVENANTS. The covenants of the Employee
contained in Sections 9 and 10 shall be construed as independent of any other
provision of this Agreement; and the existence of any claim or cause of action
of the Employee against the Company or any of its Affiliates, whether predicated
on this Agreement or otherwise, shall not constitute a defense to the
enforcement by the Company of said covenants. The Employee understands that the
covenants contained in Sections 9 and 10 are essential elements of the
transactions contemplated by this Agreement and, but for the agreement of the
Employee to Sections 9 and 10, the Company would not have agreed to enter into
such transactions. The Employee has been advised to consult with his counsel in
order to be informed in all respects concerning the reasonableness and propriety
of Sections 9 and 10, with specific regard to the nature of the business
conducted by the Company, and the Employee acknowledges that Sections 9 and 10
are reasonable in all respects.
12. REMEDIES. In the event of a breach or threatened breach by the
Employee of Section 9 or 10, the Company shall be entitled to a temporary
restraining order and an injunction restraining the Employee from the commission
of such breach. Nothing herein contained shall be construed as prohibiting the
Company from pursuing any other remedies available to it for such breach or
threatened breach, including the recovery of money damages.
13. WAIVER OF BREACH. The waiver by the Company of a breach of any
provision of this Agreement by the Employee shall not operate or be construed as
a waiver of any subsequent breach by the Employee.
14. BINDING EFFECT. This Agreement shall inure to the benefit of and
shall be binding upon the parties hereto and their respective successors,
assigns, heirs and legal representatives. Insofar as the Employee is concerned,
this Agreement, being personal, cannot be assigned.
15. SEVERABILITY. The invalidity of all or any part of any section of
this Agreement shall not render invalid the remainder of this Agreement or the
remainder of such section. If any provision of this Agreement is so broad as to
be unenforceable, such provision shall be interpreted to be only so broad as is
enforceable.
-6-
<PAGE>
16. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall, when executed, be deemed to be an original,
but all of which together shall constitute one and the same instrument.
17. GOVERNING LAW. This Agreement shall be construed (both as to validity
and performance) and enforced in accordance with and governed by the laws of the
State of Texas.
18. NOTICE. All Notices which are required or may be given under this
Agreement shall be in writing and shall be deemed to have been duly given when
delivered in person or three (3) days after being mailed by registered or
certified first-class mail, postage prepaid, return receipt requested, if to the
Employee at 3104 Riva Ridge, Austin, Texas 78746, or if to the Company, at the
address listed above, or to such other address as such party shall have
specified by notice to the other party hereto as provided in this section.
19. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto and supersedes all prior agreements, understandings
and arrangements, oral or written, between the parties hereto with respect to
the subject matter hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and date first above written.
U.S. LONG DISTANCE CORP.
By: /s/ LARRY M. JAMES /s/ PHILLIP J. STORIN
------------------------- -------------------------
LARRY M. JAMES PHILLIP J. STORIN
Chief Executive Officer and President
-7-
<PAGE>
AGREEMENT REGARDING VESTING OF STOCK OPTIONS
This Agreement is entered into effective January 1, 1997, between Phillip
J. Storin ("Employee") and U.S. Long Distance Corp., a Delaware corporation (the
"Company").
WHEREAS, Employee has been granted and may hereafter be granted options
under the Company's 1990 Employee Stock Option Plan (as amended from time to
time, the "Option Plan") to acquire shares of common stock, $.01 par value, of
the Company; and
WHEREAS, Employee and the Company have entered into an Employment Agreement
on January 1, 1997 (the "Employment Agreement"); and
WHEREAS, as contemplated in the Employment Agreement, the parties desire
that options granted to Employee under the Option Plan become fully exercisable
by Employee upon termination of the Employment Agreement under certain
circumstances;
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, notwithstanding any provisions to the contrary
contained in resolutions granting or agreements governing Options heretofore or
hereafter granted to Employee under the Option Plan ("Options"), in the event of
termination of the Employment Agreement (a) at the election of the Company under
Article II thereof, (b) by the Company under Section 8.1 thereof without cause
(c) by Employee under Section 8.2 thereof with "good reason" (as defined
therein) or (d) under Section 8.6 thereof following a "change in control" (as
defined therein), then, in any such event, immediately prior to the effective
date of such termination, all Options which have not lapsed shall become fully
vested and exercisable (if not already vested and exercisable) by Employee for a
period of three months thereafter (as contemplated in Section 14 of the Option
Plan). Further, for the purposes of applying the provisions of Section 14 of
the Plan respecting the termination of Options, the Company hereby consents to
any termination by Employee under Section 8.2 of the Employment Agreement with
"good reason" (as defined therein).
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date indicated above.
COMPANY: U.S. LONG DISTANCE CORP.
By: /s/ LARRY M. JAMES
-------------------------
Name: Larry M. James
Title: President and CEO
EMPLOYEE: /s/ PHILLIP J. STORIN
------------------------------
PHILLIP J. STORIN
-8-
<PAGE>
EXHIBIT 10.4
January 1, 1997
[NAME]
[ADDRESS1]
[ADDRESS2]
RE: AMENDMENT TO EMPLOYMENT AGREEMENT DATED JANUARY 1, 1997
Dear Mr. [LASTNAME]:
This letter will set forth the terms of an amendment to your Employment
Agreement with U. S. Long Distance Corp. (the "Employer") dated January 1, 1997
(the "Agreement"). Effective January 1, 1997, the Agreement will be amended by
adding the following SECTION 20:
20. A. TERMINATION FOLLOWING CHANGE OF CONTROL. Notwithstanding anything to
the contrary contained herein, should Employee at any time within 12
months of the occurrence of a "change of control" (as defined below)
cease to be an employee of the Company (or its successor), by reason
of (i) termination by the Company (or its successor) other than for
"cause" (following a change of control, "cause" shall be limited to
the conviction of or a plea of NOLO CONTENDERE to the charge of a
felony (which, through lapse of time or otherwise, is not subject to
appeal), or a material breach of fiduciary duty to the Company through
the misappropriation of Company funds or property or (ii) voluntary
termination by Employee for "good reason upon change of control" (as
defined below), then in any such event, (a) the Company shall pay
Employee, within 15 days of the effective date of such termination, a
lump-sum payment equal to (without discounting to present value) one
times his then effective annual base salary, and (b) certain
outstanding stock options held by Employee shall become fully vested
and exercisable pursuant to the Agreement Regarding Vesting of Stock
Options attached hereto as EXHIBIT "A."
<PAGE>
As used in this Section, voluntary termination by Employee for "good
reason upon change of control" shall mean (i) removal of Employee from
the office Employee holds on the date of this Agreement, (ii) a
material reduction in Employee's authority or responsibility, (iii)
relocation of the Company's headquarters from its then current
location, (iv) a reduction in Employee's compensation, or (v) the
Company otherwise commits a breach of this Agreement.
As used in this Agreement, a "change of control" shall be deemed to
have occurred if (i)(a) any "Person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), is or becomes a "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing more than 30% of the combined
voting power of the Company's then outstanding securities, or (ii) at
any time during the 24-month period after a tender offer, merger,
consolidation, sale of assets or contested election, or any
combination of such transactions, at least a majority of the Board of
Directors of U. S. Long Distance Corp. ("USLD"), the Company's parent
corporation, shall cease to consist of "continuing directors" (meaning
directors of USLD who either were directors at or prior to such
transaction or who subsequently became directors and whose election,
or nomination for election by USLD's stockholders, was approved by a
vote of at least two-thirds of the directors then still in office who
were directors prior to such transaction), or (iii) the stockholders
of USLD approve a merger or consolidation that would result in the
voting securities of USLD outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least 60%
of the total voting power represented by the voting securities of USLD
or such surviving entity outstanding immediately after such merger or
consolidation, or (iv) the stockholders of USLD approve a plan of
complete liquidation of USLD or an agreement of sale or disposition by
USLD of all or substantially all of USLD's assets.
The Company shall pay any attorney's fees incurred by Employee in
reasonably seeking to enforce the terms of this Section.
<PAGE>
B. EXCLUSIVITY OF TERMINATION PROVISIONS. The termination provisions of
this Agreement regarding the parties' respective obligations in the
event Employee's employment is terminated are intended to be exclusive
and in lieu of any other rights or remedies to which Employee or the
Company may otherwise be entitled at law, in equity or otherwise. It
is also agreed that, although the personnel policies and fringe
benefit programs of the Company may be unilaterally modified from time
to time, the termination provisions of this Agreement are not subject
to modification, whether orally, impliedly or in writing, unless any
such modification is mutually agreed upon and signed by the parties.
All other terms and conditions of the Agreement are hereby ratified and
confirmed in their entirety.
If the foregoing sets forth your agreement and understanding of this Amendment,
please execute in the space provided below.
Very truly yours,
/s/ LARRY M. JAMES
Larry M. James
President and
Chief Executive Officer
AGREED TO AND ACCEPTED on
this _____ day of January, 1997:
/s/ EMPLOYEE
- ---------------------------------------
[NAME]
<PAGE>
EXHIBIT "A"
AGREEMENT REGARDING VESTING OF STOCK OPTIONS
This Agreement is entered into on January 1, 1997, between [NAME]
("Employee") and U. S. Long Distance Corp., a Delaware corporation (the
"Employer").
WHEREAS, Employee has been granted and may hereafter be granted options
under the U. S. Long Distance Corp. ("USLD") 1990 Employee Stock Option Plan (as
amended from time to time, the "Option Plan") to acquire shares of common stock,
$.01 par value, of USLD;
WHEREAS, the Employer and Employee have executed an amendment to the
existing Employment Agreement dated effective January 1, 1997 (the "Employment
Agreement");
WHEREAS, as contemplated in the Employment Agreement, the parties desire
that options granted to Employee under the Option Plan become fully exercisable
by Employee upon termination of the Employment Agreement under certain
circumstances;
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, notwithstanding any provisions to the contrary
contained in resolutions granting or agreements governing options heretofore or
hereafter granted to Employee under the Option Plan ("Options"), in the event
of termination of the Employment Agreement at the election of the Employer under
Section 20 thereof following a "change of control" (as defined therein), then,
in any such event, immediately prior to the effective date of such termination,
all Options which have not lapsed shall become fully vested and exercisable (if
not already vested and exercisable) by Employee for a period of three months
thereafter (as contemplated in Section 14 of the Option Plan).
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date indicated above.
EMPLOYER: U. S. LONG DISTANCE CORP.
By: /s/ LARRY M. JAMES
------------------------------
Larry M. James
President and
Chief Executive Officer
EMPLOYEE: /s/ EMPLOYEE
-----------------------------------
[NAME]
<PAGE>
EXHIBIT 10.8
[DATE]
[NAME]
[ADDRESS]
[ADDRESS]
Dear [Mr./Ms.] [OPTIONEE'S LAST NAME]:
On behalf of USLD Communications Corp. ("USLD"), I am pleased to
announce that you (the "Participant") have been awarded a non-qualified stock
option to purchase [NO. OF SHARES] shares of common stock of USLD (the
"Shares"). The option to acquire the Shares is awarded and granted upon the
following terms and conditions:
1. The exercise price for each share of common stock is $[OPTION PRICE].
2. For so long as you are an employee of the Company, the right to
exercise such option shall vest as follows:
(a) 33-1/3% ([ONE THIRD OF SHARES] shares) on [DATE OF FIRST
VESTING];
(b) 33-1/3% ([ONE THIRD OF SHARES] shares) on [DATE OF SECOND
VESTING];
(c) 33-1/3% ([ONE THIRD OF SHARES] shares) on [DATE OF THIRD
VESTING].
3. Subject to paragraph 5 herein, the options may be exercised at any
time on or before [EXPIRATION DATE]. No partial exercise of such option may
be for less than 100 full shares. In no event shall USLD be required to
transfer fractional shares to the Participant.
4. The option granted under this Agreement shall be exercisable from
time to time, as provided above, by the payment in cash or check to USLD of
the purchase price of the shares which the Participant elects to purchase.
USLD shall not be required to transfer or deliver any certificate or
certificates for shares of USLD's common shares purchased upon exercise of
the option granted under this Agreement until all then applicable
requirements of law have been met.
5. The option and all rights granted by this Agreement, to the extent
those rights have not been exercised, will terminate and become null and void
on [EXPIRATION DATE]. If the Participant dies while a consultant to USLD,
the person or persons to whom his vested
<PAGE>
[OPTIONEE'S NAME]
[DATE]
Page Two
rights under the option shall pass, whether by will or by the applicable laws
of descent and distribution, may exercise such vested option to the extent
the Participant was entitled to exercise the option on the date of death, at
any time within a period of one year after his death, but not after
[EXPIRATION DATE].
6. During the lifetime of the Participant, the option and all rights
granted in this Agreement shall be exercisable only by the Participant, and
except as Paragraph 5 otherwise provides, the option and all rights granted
under this contract shall not be transferred, assigned, pledged or
hypothecated in any way (whether by operation of law or otherwise), and shall
not be subject to execution, attachment or similar process. Upon any attempt
to transfer, assign, pledge, hypothecate or otherwise dispose of such option
or of such rights contrary to the provisions in this Agreement, or upon the
levy of any attachment or similar process upon such option or such rights,
such option and such rights shall immediately become null and void.
7. Notwithstanding the foregoing, upon the sale of substantially all
of the assets of USLD or change in control of forty percent (40%) of the
outstanding voting shares of USLD, all non-vested options shall immediately
vest.
8. In the event of any change in the common shares of USLD subject to
the option granted hereunder, through merger, consolidation, reorganization,
recapitalization, stock split, stock dividend, combination or exchange of
shares, issuance of rights, spin-off or other change in the capital
structure, without consideration, appropriate adjustment shall be made by
USLD in the number of shares subject to such option and the price per share.
Upon the dissolution or liquidation of USLD, the option granted under this
Agreement shall terminate and become null and void, but the Participant shall
have the right immediately prior to such dissolution or liquidation to
exercise the option granted hereunder to the full extent not before exercised.
9. Neither the Participant nor his executor, administrator, heirs or
legatees shall be or have any rights or privileges of a shareholder of USLD
in respect of the shares transferable upon exercise of the option granted
under this Agreement, unless and until certificates representing such shares
shall have been endorsed, transferred and delivered and the transferee has
caused his/her name to be entered as the shareholder of record on the books
of USLD.
10. Although it is the intention of USLD to register the Shares
underlying the Participant's option with the Securities and Exchange
Commission, these Shares have not been registered and, until such
registration becomes effective, the Shares issued upon the exercise of the
Participant's options will not be freely tradable. USLD cannot guarantee
such registration will be filed and approved in the near future. Once
registered, the Shares issued
<PAGE>
[OPTIONEE'S NAME]
[DATE]
Page Three
upon the exercise of your options will be freely tradable, subject, with
respect to Shares held by "affiliates" of USLD, to compliance with Rule 144
of the Securities and Exchange Commission.
11. USLD does not attempt to advise you on any tax or other
consequences arising from your acquisition of the Shares through the exercise
of the option.
12. The Participant hereby agrees to take whatever additional actions
and execute whatever additional documents USLD may in its reasonable judgment
deem necessary or advisable in order to carry out or effect one or more of
the obligations or restrictions imposed on the Participant pursuant to the
express provisions of this Agreement.
13. The rights of the Participant are subject to modification and
termination in certain events as provided in this Agreement.
14. This Agreement shall be governed by, and construed in accordance
with, the substantive laws of the State of Delaware applicable to contracts
made and to be wholly performed therein.
15. This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
16. This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof, and supersedes all previously
written or oral negotiations, commitments, representations and agreements
with respect thereto.
If the foregoing represents your understanding of the terms and
conditions upon which your options have been granted, please execute in the
space provided below, returning an executed copy to the undersigned.
Sincerely, AGREED:
Larry M. James
Chairman of the Board, Chief ----------------------------------
Executive Officer and President [OPTIONEE'S NAME]
<PAGE>
EXHIBIT 10.9
[DATE]
[NAME]
[ADDRESS]
[ADDRESS]
Dear [Mr./Ms.] [OPTIONEE'S LAST NAME]:
On behalf of USLD Communications Corp. (the "Company"), I am pleased to
announce that you (the "Participant") have been awarded, under the terms of
the 1993 Non-Employee Director Plan of USLD Communications Corp., as amended
(the "Plan"), a nonqualified stock option to purchase [NO. OF SHARES] shares
of common stock of the Company (the "Shares"). The option to acquire the
Shares is awarded and granted upon the following terms and conditions as well
as those terms, conditions, and limitations as set forth in the Plan, which
is attached hereto and incorporated herein for all purposes:
1. The exercise price for each share of common stock is $[OPTION PRICE].
2. For so long as you are a director of the Company, the right to
exercise such option shall vest as follows:
(a) 33-1/3% ([ONE THIRD OF SHARES] shares) on [DATE OF FIRST
VESTING];
(b) 33-1/3% ([ONE THIRD OF SHARES] shares) on [DATE OF SECOND
VESTING];
(c) 33-1/3% ([ONE THIRD OF SHARES] shares) on [DATE OF THIRD
VESTING].
3. Subject to Paragraph 5 herein, the options which have vested in
accordance with the schedule set forth in Paragraph 2 above may be exercised
at any time on or before [EXPIRATION DATE]. No partial exercise of such
option may be for less than 100 full shares. In no event shall the Company
be required to transfer fractional shares to the Participant.
4. The option granted under this Agreement shall be exercisable from
time to time, as provided above, by the payment in cash to the Company of the
purchase price of the shares which the Participant elects to purchase. The
Company shall not be required to transfer or deliver any certificate or
certificates for shares of the Company's common shares purchased
<PAGE>
[OPTIONEE'S NAME]
[DATE]
Page Two
upon exercise of the option granted under this Agreement until all then
applicable requirements of law have been met.
5. Subject to the limitations imposed pursuant to Section 9 of the
Plan, the option and all rights granted by this Agreement, to the extent
those rights have not been exercised, will terminate and become null and void
on [EXPIRATION DATE]. If the Participant dies, the person or persons to whom
his vested rights under the option shall pass, whether by will or by the
applicable laws of descent and distribution, may exercise such vested option
to the extent the Participant was entitled to exercise the option on the date
of death, at any time within a period of one year after his death, but not
after [EXPIRATION DATE].
6. During the lifetime of the Participant, the option and all rights
granted in this Agreement shall be exercisable only by the Participant, and
except as Paragraph 5 otherwise provides, the option and all rights granted
under this contract shall not be transferred, assigned, pledged or
hypothecated in any way (whether by operation of law or otherwise), and shall
not be subject to execution, attachment or similar process. Upon any attempt
to transfer, assign, pledge, hypothecate or otherwise dispose of such option
or of such rights contrary to the provisions in this Agreement, or upon the
levy of any attachment or similar process upon such option or such rights,
such option and such rights shall immediately become null and void.
7. Notwithstanding the foregoing, upon the sale of substantially all
of the assets of the Company or change in control of forty percent (40%) of
the outstanding voting shares of the Company, all non-vested options shall
immediately vest.
8. In the event of any change in the common shares of the Company
subject to the option granted hereunder, through merger, consolidation,
reorganization, recapitalization, stock split, stock dividend or other change
in the corporate structure, without consideration, appropriate adjustment
shall be made by the Company in the number of shares subject to such option
and the price per share. Upon the dissolution or liquidation of the Company
other than in connection with a transaction to which such Section is
applicable, the option granted under this Agreement shall terminate and
become null and void, but the Participant shall have the right immediately
prior to such dissolution or liquidation to exercise the option granted
hereunder to the full extent not before exercised.
9. Neither the Participant nor his executor, administrator, heirs or
legatees shall be or have any rights or privileges of a shareholder of the
Company in respect of the shares transferable upon exercise of the option
granted under this Agreement, unless and until
<PAGE>
[OPTIONEE'S NAME]
[DATE]
Page Three
certificates representing such shares shall have been endorsed, transferred
and delivered and the transferee has caused his/her name to be entered as the
shareholder of record on the books of the Company.
10. The Shares underlying your options have been registered with the
Securities and Exchange Commission, and the Shares issued upon the exercise
of your options will be freely tradable, subject, with respect to Shares held
by "affiliates" of the Company, to compliance with Rule 144 of the Securities
and Exchange Commission.
11. The Company does not attempt to advise you on any consequences
arising from your acquisition of the Shares through the exercise of the
option.
12. The terms and conditions of the Plan, unless expressly supplemented
by this Agreement, shall continue unchanged and in full force and effect. To
the extent that any terms or provisions of this Agreement are or may be
deemed expressly inconsistent with any terms or conditions of the Plan, the
terms of this Agreement shall control.
13. The Participant hereby agrees to take whatever additional actions
and execute whatever additional documents the Company may in its reasonable
judgment deem necessary or advisable in order to carry out or effect one or
more of the obligations or restrictions imposed on the Participant pursuant
to the express provisions of this Agreement.
14. The rights of the Participant are subject to modification and
termination in certain events as provided in this Agreement and the Plan.
15. This Agreement shall be governed by, and construed in accordance
with, the substantive laws of the State of Delaware applicable to contracts
made and to be wholly performed therein.
16. This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
17. This Agreement and the Plan constitute the entire agreement between
the parties with respect to the subject matter hereof, and supersede all
previously written or oral negotiations, commitments, representations and
agreements with respect thereto.
<PAGE>
[OPTIONEE'S NAME]
[DATE]
Page Four
If the foregoing represents your understanding of the terms and
conditions upon which your options have been granted, please execute in the
space provided below, returning an executed copy to the undersigned.
Sincerely,
Larry M. James
Chairman of the Board, Chief
Executive Officer and President
AGREED:
- -------------------------------
[OPTIONEE'S NAME]
<PAGE>
EXHIBIT 10.19
MODIFICATION AND RATIFICATION OF LEASE
THE STATE OF TEXAS Section
Section
COUNTY OF HARRIS Section
This is a Modification and Ratification of Lease ("Agreement") is made and
entered into as of the dates set forth on the signature page hereof, to be
effective as of the 1st day of September, 1997 (the "Effective Date"), between
RIGGS BANK, N.A., AS TRUSTEE OF THE MULTI-EMPLOYER PROPERTY TRUST ("Lessor"),
and U.S. LONG DISTANCE, INC., hereinafter referred to as Lessee ("Lessee"). For
and in consideration of Ten and No/100 Dollars ($10.00) and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
W I T N E S S E T H:
WHEREAS, Lessor and Lessee hereby confirm, ratify and renew, except as
modified below, all of the terms, conditions and covenants in that certain
written Lease Agreement (the "Lease"), dated on or about November 10, 1992,
having a Commencement Date of September 1, 1992, between Lessor and Lessee for
the rental of the following described premises (the "Premises"):
Approximately 6.814 rentable square feet of space identified as
Suite(s) 200 & B100 located at 1001 TEXAS AVENUE, HOUSTON, TEXAS 77002
(the "Building"), which lease space is depicted on Exhibit "1"
attached to the Lease and incorporated herein by this reference.
All capitalized terms used herein which are not otherwise defined herein shall
have the meaning given such terms in the Lease.
WHEREAS, the parties hereto desire to ratify, amend and renew the Lease and
further desire to reduce to writing their agreements regarding such matters.
NOW, THEREFORE, for the consideration above stated, the parties hereto
hereby agree as follows:
1. CONFIRMATION, RATIFICATION AND RENEWAL OF LEASE. Lessor and Lessee
hereby confirm, ratify and renew, except as modified herein, all of the terms,
conditions and covenants of the Lease.
<PAGE>
2. AMENDMENT OF RENT AMOUNT. Pursuant to the first renewal option
granted to Lessee in Paragraph 1 of the Additional Provisions attached to the
Lease, effective September 1, 1997, the Lease is renewed and extended for an
additional term of five (5) years ending August 31, 2002. During the Renewal
term, Lessee shall pay to Lessor the sum of $82,313.12 per year (which
amounts to $6,859.43 per month) and being equivalent to $12.08 per square
foot of Lessee's Net Rentable Area ("NRA") per year, plus additional rentals,
if any, representing Lessee's pro rata share of actual building operating
costs, as explained in paragraph 31.1 of the Lease, collectively referred to
as "Base Rentals." It is agreed by both parties that the current market
rental rate, as referenced in the renewal option clause of the Additional
Provisions exhibit to the Lease, shall be the amount of $12.08 per square
foot of NRA, and neither party shall have any right under any clause of the
Lease to have the Base Rental rate redetermined by any court or other third
party under any circumstance.
3. RENEWAL OPTION. This Agreement represents the Lessee's exercise of
its first of two renewal options. The renewal option, paragraph 1 of the
Additional Provisions (Exhibit 7) to the Lease, is hereby modified by deleting
the existing paragraph 1 and replacing it with the following:
"1. Lessee has the option to renew this lease agreement for one
additional five (5) year period, commencing September 1, 2002, and
ending August 31, 2007, at the then current market rental rate and
terms, by giving written notice of renewal to Lessor at least thirty
(30) days prior to the expiration of the term as then existing. "
4. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, and
inure to the benefit of, the parties hereto, their respective successors and
permitted assigns.
5. LIMITED MODIFICATION. Except as modified in this Agreement, the Lease
is and shall remain in full force and effect in accordance with its terms.
6. SEVERABILITY. In the event any provision of this Agreement is held to
be invalid or unenforceable by final judgment of any court of competent
jurisdiction, then the invalidity or unenforceability of such provision shall
not affect any of the remaining provisions hereof, all of which remaining
provisions shall be and remain in full force and effect to the maximum extent
allowed by law.
7. AUTHORITY. Each party hereto, and the individual executing this
Agreement on behalf of such party, represents and warrants to the other party,
that such party and its individual signatory or representative has full power
and authority to execute and enter into this Agreement and to bind such party to
all of the terms hereof.
8. ENTIRE AGREEMENT. This Agreement represents the entire understanding
and agreement of Lessor and Lessee with regard to the modification, ratification
and renewal of the Lease, and all other prior written or verbal proposals and
discussions (except the Lease), and any
<PAGE>
alleged representations, warranties or agreements, regarding the subject matter
hereof are hereby superseded and rendered null and void and neither party shall
rely thereon.
IN WITNESS WHEREOF, the parties hereto have executed this Modification and
Renewal Agreement as of the dates set forth below, to be effective as of the
Effective Date.
LESSOR:
RIGGS BANK, N.A., TRUSTEE OF THE
MULTI-EMPLOYER PROPERTY TRUST
By: /s/ DAVID DONELSON
--------------------------
Print Name: David Donelson
Title: Managing Director
Dated: 9/17, 1997
LESSEE:
U.S. LONG DISTANCE, INC.
By: /s/ AUDIE LONG
-------------------------------
Print Name: Audie Long
Title: Senior VP
Dated:
<PAGE>
EXHIBIT 10.22
Private Client Group
Merrill Lynch Business
Financial Services Inc.
33 West Monroe Street
22nd Floor
Chicago, Illinois 60603
312/845-1020
MERRILL LYNCH FAX 312/845-9093
October 13, 1997
U.S. Long Distance, Inc.
9311 San Pedro, Suite 300
San Antonio, TX, 78216
RE: WCMA LINE OF CREDIT EXTENSION
Ladies & Gentlemen:
This Letter Agreement will serve to confirm certain agreements of Merrill Lynch
Business Financial Services Inc. ("MLBFS") and U.S. Long Distance, Inc.
("Customer") with respect to: (i) that certain WCMA AND TERM WCMA LOAN AND
SECURITY AGREEMENT NO. 9608340801 between MLBFS and Customer (including any
previous amendments and extensions thereof, and (ii) all other agreements
between MLBFS and Customer in connection therewith (collectively, the "Loan
Documents"). Capitalized terms used herein and not defined herein shall have
the meaning set forth in the Loan Documents.
Subject to the terms hereof, effective as of the "Effective Date" the Loan
Documents are hereby amended as follows:
1. The term "Initial WCMA Maturity Date" shall mean December 31, 1997.
Except as expressly modified hereby, the Loan Documents shall continue in full
force and effect upon all of their terms and conditions.
Customer acknowledges, warrants and agrees, as a primary inducement to MLBFS to
enter into this Agreement, that: (i) no default or Event of Default has occurred
and is continuing under the Loan Documents; (ii) each of the warranties of
Customer in the Loan Documents are true and correct as of the date hereof and
shall be deemed remade as of the date hereof; (iii) Customer does not have any
claim against MLBFS or any of its affiliates arising out of or in connection
with the Loan Documents or any other matter whatsoever; and (iv) Customer does
not has any defense to payment of any amounts owing, or any right of
counterclaim for any reason under, the Loan Documents.
<PAGE>
U.S. Long Distance, Inc.
October 13, 1997
Page No. 2
Provided that no Event of Default, or event which with the giving of notice,
passage of time, or both, would constitute an Event of Default, shall then have
occurred and be continuing under the terms of the Loan Documents, the amendments
and agreements in this Letter Agreement will become effective on the date (the
"Effective Date") upon which: (i) Customer shall have executed and returned the
duplicate copy of this Letter Agreement enclosed herewith; (ii) an officer of
MLBFS shall have reviewed and approved this Letter Agreement as being consistent
in all respects with the original internal authorization hereof; and (iii) to
the extent applicable, MLBFS shall have entered such amendments and agreements
in its computer system (which MLBFS agrees to do promptly after the receipt of
such executed duplicate copy). Notwithstanding the foregoing, if for any reason
other than the sole fault of MLBFS the Effective Date shall not occur within 14
days from the date of this Letter Agreement, then all of said amendments and
agreements herein will, at the sole option of MLBFS, be void.
Very truly yours,
MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.
By: /s/ Bradley S. Polivka
-----------------------------------
Bradley S. Polivka
Credit Services Account Manager
ACCEPTED:
U.S. LONG DISTANCE, INC.
By: /s/ Phillip J. Storin
-----------------------------------
Printed Name: Phillip J. Storin
-------------------------
Title: Sr. V.P. & CFO
--------------------------------
<PAGE>
EXHIBIT 10.24
1993 NON-EMPLOYEE DIRECTOR PLAN OF
USLD COMMUNICATIONS CORP.
PURPOSE. The purpose of this Plan is to advance the interests of USLD
Communications Corp., a Delaware corporation (the "Company"), by providing an
additional incentive to attract and retain qualified and competent directors,
upon whose efforts and judgment the success of the Company is largely dependent,
through the encouragement of stock ownership in the Company by such persons.
DEFINITIONS. As used herein, the following terms shall have the
meaning indicated:
(a) "Annual Director Fee" shall mean a fee payable annually to each
Eligible Person on the business day on or immediately after December 15 of each
year ("Payment Date"), at the election of the Eligible Person, in either cash of
$15,000 or an Option granted pursuant to Section 5 or partly in cash and partly
in an Option granted pursuant to Section 5.
(b) "Board" shall mean the Board of Directors of USLD Communications
Corp.
(c) "Committee" shall mean the committee, if any, appointed by the
Board pursuant to Section 13 hereof.
(d) "Date of Grant" shall mean the date on which an Option is granted
to an Eligible Person pursuant to this Plan.
(e) "Director" shall mean a member of the Board.
(f) "Eligible Person(s)" shall mean those persons who are Directors
of the Company and who are not employees of the Company or a Subsidiary.
(g) "Fair Market Value" of a Share on any date of reference shall be
the closing price on the business day immediately preceding such date. For this
purpose, the closing price of the Shares on any business day shall be (i) if the
Shares are listed or admitted for trading on any United States national
securities exchange, the last reported sale price of Shares on such exchange, as
reported in any newspaper of general circulation, (ii) if actual transactions in
the Shares are included in the Nasdaq Stock Market's National Market ("Nasdaq
National Market") or are reported on a consolidated transaction reporting
system, the last sales price of the Shares on such system, (iii) if Shares are
otherwise quoted on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ"), or any similar system of automated dissemination of
quotations of securities prices in common use, the mean between the closing high
bid and low asked quotations for such day of Shares on such system, (iv) if none
of clause (i), (ii) or (iii) is applicable,
1
<PAGE>
the mean between the high bid and low asked quotations for Shares as reported by
the National Daily Quotation Service if at least two securities dealers have
inserted both bid and asked quotations for Shares on at least five (5) of the
ten (10) preceding days.
(h) "Internal Revenue Code" or "Code" shall mean the Internal Revenue
Code of 1986, as it now exists or may be amended from time to time.
(i) "Nonqualified Stock Option" shall mean an option that is not an
incentive stock option as defined in Section 422 of the Internal Revenue Code.
(j) "Option" (when capitalized) shall mean any option granted under
Section 4, 5 or 6 of this Plan.
(k) "Optionee" shall mean a person to whom a stock option is granted
under this Plan or any successor to the rights of such person under this Plan by
reason of the death of such person.
(l) "Payment Date" shall have the meaning set forth in Section 2(a).
(m) "Plan" shall mean this 1993 Non-Employee Director Plan of USLD
Communications Corp.
(n) "Share(s)" shall mean a share or shares of the common stock, par
value one cent ($0.01) per share, of the Company.
(o) "Subsidiary" shall mean any corporation (other than the Company)
in any unbroken chain of corporations beginning with the Company if, at the time
of the granting of the Option, each of the corporations other than the last
corporation in the unbroken chain owns stock possessing more than fifty percent
(50%) of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
SHARES AND OPTIONS. (a) The maximum number of Shares to be issued
pursuant to Options under this Plan, including shares issued on the exercise of
Shares granted to Eligible Persons prior to the adoption of the Plan under the
Company's outside director option plan adopted in February 1991, shall be SEVEN
HUNDRED FIFTY THOUSAND (750,000) Shares. Shares issued pursuant to Options
granted under this Plan may be issued from Shares held in the Company's treasury
or from authorized and unissued Shares. If any Option granted under this Plan
shall terminate, expire, or be cancelled or surrendered as to any Shares, new
Options may thereafter be granted covering such Shares.
(b) Each Option granted hereunder shall be evidenced by an option
agreement (an "Option Agreement") and shall contain such terms as are not
inconsistent with this Plan or any applicable law. Any person who files with
the Committee, in a form satisfactory to the Committee,
2
<PAGE>
a written waiver of eligibility to receive any Option under this Plan shall not
be eligible to receive any Option under this Plan for the duration of such
waiver. Any Option granted hereunder shall be a Nonqualified Stock Option.
(c) Neither the Plan nor any Option granted under the Plan shall
confer upon any person any right to continue to serve as a Director.
AUTOMATIC GRANT OF OPTIONS. (a) Options shall automatically be
granted to Eligible Persons as follows:
(i) Each Director who is an Eligible Person shall automatically
receive an Option for THIRTY THOUSAND (30,000) Shares on the date such
Eligible Person is initially appointed or elected an outside Director of
the Company, and such Option will vest as to TEN THOUSAND (10,000) Shares
on each of the first three anniversaries of the Date of Grant; and
(ii) Each Director who is an Eligible Person will receive, on the
first business date after the date of each annual meeting of stockholders
of the Company, commencing with the annual meeting of stockholders
immediately following the full vesting of any previously granted Director
Option, an option to purchase THIRTY THOUSAND (30,000) Shares, and such
Option will vest as to TEN THOUSAND (10,000) Shares on each of the first
three anniversaries of the Date of Grant.
(b) The Options automatically granted to Directors under this Plan
shall be in addition to regular director's fees, discretionary Option grants
under Section 6 or other benefits with respect to the Director's position with
the Company or its Subsidiaries.
(c) Any Option that may be granted pursuant to subparagraph (a) of
this Section 4 prior to the approval of this Plan by the stockholders of the
Company may be exercised on or after the Date of Grant subject to the approval
of this Plan by the stockholders of the Company within twelve (12) months after
the effective date of this Plan. If any Optionee exercises an Option prior to
such stockholder approval, the Optionee must tender the exercise price at the
time of exercise and the Company shall hold the Shares to be issued pursuant to
such exercise until the stockholders approve this Plan. If this Plan is
approved by the stockholders, the Company shall issue and deliver the Shares as
to which the Option has been exercised. If this Plan is not approved by the
stockholders, the Company shall return the exercise price to the Optionee.
5. ELECTION WITH RESPECT TO ANNUAL DIRECTOR FEE. Each Eligible Person
may elect to receive the Annual Director Fee in cash or an Option or partly in
cash and partly in an Option. Any election to receive an Option shall be in
writing and must be made not later than December 31 of each year with respect to
the Annual Director Fee to be made on the Payment Date in the subsequent year.
The election may not be revoked or changed after it is made. For purposes of
this election and subject to Section 10, in lieu of receipt of the Annual
Director Fee in cash, as elected
3
<PAGE>
by the Eligible Person, each $2 of cash compensation shall be converted into an
Option, granted as of the Payment Date, to purchase one (1) share of Common
Stock. If an Eligible Person so elects to receive an Option, the Company shall
promptly deliver to such Eligible Person an Option Agreement. Options granted
pursuant to this Section 5 shall vest immediately. To be eligible to receive
the Annual Director Fee, for any year, the Eligible Person must be a Director on
the Payment Date for that Annual Director Fee. Any person who files with the
Committee, in a form satisfactory to the Committee, a written waiver of
eligibility to receive any Option under this Plan shall not be eligible to
receive any Option under this Plan for the duration of such waiver.
6. DISCRETIONARY GRANTS OF OPTIONS. (a) At any time and from time to
time during the duration of this Plan and subject to the provisions herein,
Options may be granted by the Board to any Eligible Person for such number of
Shares as the Board in its discretion shall deem to be in the best interest of
the Company and which will serve to further the purposes of the Plan. Upon the
grant of an Option, the Company shall promptly deliver to such Eligible Person
an Option Agreement. Options granted pursuant to this Section 6 shall vest
according to the vesting schedule provided in the Option Agreement.
(b) The Options granted to Directors pursuant to this Section 6 shall
be in addition to regular directors' fees, automatic grants of Options under
Section 4 herein or any other benefits with respect to the Director's position
with the Company or its Subsidiaries.
7. OPTION PRICE. The option price per Share of any Option granted
pursuant to this Plan shall be one hundred percent (100%) of the Fair Market
Value per Share on the Date of Grant.
8. EXERCISE OF OPTIONS. Options may be exercised at any time after the
date on which the Options, or any portion thereof, are vested until the Option
expires pursuant to Section 9; provided, however, that at least six months must
elapse from the date of the acquisition of the Option to the date of disposition
of the Option (other than upon exercise or conversion) or its underlying Common
Stock. An Option shall be deemed exercised when (i) the Company has received
written notice of such exercise in accordance with the terms of the Option
Agreement, (ii) full payment of the aggregate option price of the Shares as to
which the Option is exercised has been made and (iii) arrangements that are
satisfactory to the Committee in its sole discretion have been made for the
Optionee's payment to the Company of the amount, if any, that the Committee
determines to be necessary for the Company to withhold in accordance with
applicable federal or state income tax withholding requirements. Pursuant to
procedures approved by the Committee, tax withholding requirements, at the
option of an Optionee, may be met by withholding Shares otherwise deliverable to
the Optionee upon the exercise of an Option. Unless further limited by the
Committee in any Option Agreement, the Option price of any Shares purchased
shall be paid solely in cash, by certified or cashier's check, by money order,
with Shares (but with Shares only if permitted by the Option Agreement or
otherwise permitted by the Committee in its sole discretion at the time of
exercise) or by a combination of the above; provided, however, that the
Committee in its sole discretion may accept a personal check in full or partial
payment of any Shares. If the exercise price is paid in whole or in part with
Shares, the value of the Shares surrendered shall be their Fair Market Value on
the date the Shares are received by the Company.
4
<PAGE>
9. TERMINATION OF OPTION PERIOD. The unexercised portion of an Option
shall automatically and without notice terminate and become null and void at the
time of the earliest to occur of the following:
(a) with respect to Options granted automatically pursuant to Section
4(a), thirty (30) days after the date that an Optionee ceases to be a
Director regardless of the reason therefor other than as a result of such
termination by death of the Optionee;
(b) with respect to Options granted automatically pursuant to Section
4(a), (y) one (1) year after the date that an Optionee ceases to be a
Director by reason of death of the Optionee or (z) six (6) months after the
Optionee shall die if that shall occur during the thirty-day period
described in Subsection 9(a); or
(c) the fifth (5th) anniversary of the Date of Grant of the Option.
10. ADJUSTMENT OF SHARES. (a) If at any time while this Plan is in effect
or unexercised Options are outstanding, there shall be any increase or decrease
in the number of issued and outstanding Shares through the declaration of a
stock dividend or through any recapitalization resulting in a stock split-up,
combination or exchange of Shares, then and in such event:
(i) appropriate adjustment shall be made in the maximum number
of Shares then subject to being optioned under this Plan, so that the
same proportion of the Company's issued and outstanding Shares shall
continue to be subject to being so optioned; and
(ii) appropriate adjustment shall be made in the number of Shares
and the exercise price per Share thereof then subject to any
outstanding Option, so that the same proportion of the Company's
issued and outstanding Shares shall remain subject to purchase at the
same aggregate exercise price.
(b) Except as otherwise expressly provided herein, the issuance by
the Company of shares of its capital stock of any class, or securities
convertible into shares of capital stock of any class, either in connection with
a direct sale or upon the exercise of rights or warrants to subscribe therefor,
or upon conversion of shares or obligations of the Company convertible into such
shares or other securities, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number of or exercise price of Shares
then subject to outstanding Options granted under this Plan.
(c) Without limiting the generality of the foregoing, the existence
of outstanding Options granted under this Plan shall not affect in any manner
the right or power of the Company to make, authorize or consummate (i) any or
all adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or its business; (ii) any merger or consolidation
of
5
<PAGE>
the Company; (iii) any issue by the Company of debt securities, or preferred or
preference stock that would rank above the Shares subject to outstanding
Options; (iv) the dissolution or liquidation of the Company; (v) any sale,
transfer or assignment of all or any part of the assets or business of the
Company; or (vi) any other corporate act or proceeding, whether of a similar
character or otherwise.
11. TRANSFERABILITY OF OPTIONS. Each Option Agreement shall provide that
such Option shall not be transferable by the Optionee otherwise than by will or
the laws of descent and distribution or pursuant to a qualified domestic
relations order and that so long as an Optionee lives, only such Optionee or his
or her guardian or legal representative shall have the right to exercise the
related Option.
12. ISSUANCE OF SHARES. No person shall be, or have any of the rights or
privileges of, a stockholder of the Company with respect to any of the Shares
subject to an Option unless and until certificates representing such Shares
shall have been issued and delivered to such person. As a condition of any
transfer of the certificate for Shares, the Committee may obtain such agreements
or undertakings, if any, as it may deem necessary or advisable to assure
compliance with any provision of this Plan, any Option Agreement or any law or
regulation, including, but not limited to, the following:
(i) A representation, warranty or agreement by the Optionee to
the Company, at the time any Option is exercised, that he or she is
acquiring the Shares to be issued to him or her for investment and not
with a view to, or for sale in connection with, the distribution of
any such Shares; and
(ii) A representation, warranty or agreement to be bound by any
legends that are, in the opinion of the Committee, necessary or
appropriate to comply with the provisions of any securities law deemed
by the Committee to be applicable to the issuance of the Shares and
are endorsed upon the Share certificates.
Share certificates issued to an Optionee who is a party to any stockholder
agreement or a similar agreement shall bear the legends contained in such
agreements.
13. ADMINISTRATION OF THE PLAN. (a) This Plan shall be administered by a
stock option committee (the "Committee") consisting of not fewer than three (3)
members of the Board; provided, however, that if no Committee is appointed, the
Board shall administer this Plan and in such case all references to the
Committee shall be deemed to be references to the Board. The Committee shall
have all of the powers of the Board with respect to this Plan. Any member of
the Committee may be removed at any time, with or without cause, by resolution
of the Board, and any vacancy occurring in the membership of the Committee may
be filled by appointment by the Board.
(b) The Committee, from time to time, may adopt rules and regulations
for carrying out the purposes of this Plan. The determinations and the
interpretation and construction of any provision of this Plan by the Committee
shall be final and conclusive.
6
<PAGE>
(c) Any and all decisions or determinations of the Committee shall be
made either (i) by a majority vote of the members of the Committee at a meeting
or (ii) without a meeting by the written approval of a majority of the members
of the Committee.
(d) This Plan is intended and has been drafted to comply with Rule
16b-3, as amended, under the Securities Exchange Act of 1934, as amended. If
any provision of this Plan does not comply with Rule 16b-3, as amended, this
Plan shall be automatically amended to comply with Rule 16b-3, as amended.
14. INTERPRETATION. (a) If any provision of this Plan is held invalid for
any reason, such holding shall not affect the remaining provisions hereof, but
instead this Plan shall be construed and enforced as if such provision had never
been included in this Plan.
(b) THIS PLAN SHALL BE GOVERNED BY THE SUBSTANTIVE LAWS OF THE STATE
OF DELAWARE, WITHOUT REFERENCE TO DELAWARE CONFLICT OF LAW PROVISIONS.
(c) Headings contained in this Plan are for convenience only and
shall in no manner be construed as part of this Plan.
(d) Any reference to the masculine, feminine or neuter gender shall
be a reference to such other gender as is appropriate.
15. SECTION 83(b) ELECTION. If as a result of exercising an Option an
Optionee receives Shares that are subject to a "substantial risk of forfeiture"
and are not "transferable" as those terms are defined for purposes of Section
83(a) of the Code, then such Optionee may elect under Section 83(b) of the Code
to include in his gross income, for his taxable year in which the Shares are
transferred to such Optionee, the excess of the Fair Market Value of such Shares
at the time of transfer (determined without regard to any restriction other than
one which by its terms will never lapse), over the amount paid for the Shares.
If the Optionee makes the Section 83(b) election described above, the Optionee
shall (i) make such election in a manner that is satisfactory to the Committee,
(ii) provide the Company with a copy of such election, (iii) agree to promptly
notify the Company if any Internal Revenue Service or state tax agent, on audit
or otherwise, questions the validity or correctness of such election or of the
amount of income reportable on account of such election, and (iv) agree to such
withholding as the Committee may reasonably require in its sole and absolute
discretion.
16. EFFECTIVE DATE AND TERMINATION DATE. The effective date of this Plan
or any amendment thereto is the date on which the Board adopted this Plan or
such amendment; provided, however, if this Plan is not approved by the
stockholders of the Company within twelve (12) months after the effective date,
then, in such event, this Plan and all Options granted pursuant to this Plan
shall be null and void. This Plan shall terminate on September 17, 2000, and
any Option outstanding on such date will remain outstanding until it has either
expired or has been exercised.
7
<PAGE>
EXHIBIT 10.31
FIRST AMENDMENT TO THE
U.S. LONG DISTANCE CORP.
1995 EMPLOYEE RESTRICTED STOCK PLAN
THIS AGREEMENT by U.S. Long Distance Corp. (the "Sponsor"),
WITNESSETH:
WHEREAS, the Sponsor has executed and maintains a restricted stock plan
entitled "U.S. Long Distance Corp. 1995 Employee Restricted Stock Plan" (the
"Plan"); and
WHEREAS, the Sponsor, through action of its Board of Directors, retained
the right in Section 9 of the Plan to amend the Plan from time to time; and
WHEREAS, the Plan was previously amended on July 2, 1996 pursuant to
resolutions of the Board of Directors of the Sponsor; and
WHEREAS, the Board of Directors of the Sponsor approved resolutions on the
2nd day of July, 1996, authorizing amendment of the Plan to allow for
acceleration of vesting of restricted stock grants at such time as the Plan's
Committee may determine;
NOW, THEREFORE, the Sponsor declares that the Plan is hereby amended,
effective as of the date of execution hereof, as follows:
Section 6A of the Plan is hereby amended by deleting the third
paragraph thereof and substituting the following in its stead:
An Award may be subject to such vesting requirements as may be
fixed by the Committee. Vesting may be accelerated for any reason as
determined by the Committee from time to time in its sole discretion.
IN WITNESS WHEREOF, the Sponsor has executed this Agreement this 2nd day of
July, 1996.
U.S. LONG DISTANCE CORP.
By: /s/ PARRIS H. HOLMES, JR.
----------------------------------
Parris H. Holmes, Jr.
Chairman of the Board and
Chief Executive Officer
<PAGE>
SECOND AMENDMENT TO THE
U.S. LONG DISTANCE CORP.
1995 EMPLOYEE RESTRICTED STOCK PLAN
THIS AGREEMENT by U.S. Long Distance Corp. (the "Sponsor"),
WITNESSETH:
WHEREAS, the Sponsor has executed and maintains a restricted stock plan
entitled "U.S. Long Distance Corp. 1995 Employee Restricted Stock Plan" (the
"Plan"); and
WHEREAS, the Sponsor, through action of its Board of Directors, retained
the right in Section 9 of the Plan to amend the Plan from time to time; and
WHEREAS, the Plan was previously amended on July 2, 1996 pursuant to
resolutions of the Board of Directors of the Sponsor; and
WHEREAS, the Board of Directors of the Sponsor approved resolutions on the
14th day of July, 1997, authorizing amendment of the Plan to increase the number
of shares available for granting of restricted stock awards under the Plan from
500,000 shares to 1,000,000 shares;
NOW, THEREFORE, the Sponsor declares that the Plan is hereby amended,
effective as of the date of execution hereof, as follows:
The first sentence of Section 3 of the Plan is hereby amended to
read as follows, with the remainder of such section to remain
unchanged:
There shall be reserved for Awards under the Plan an
aggregate of 1,000,000 shares of Common Stock.
IN WITNESS WHEREOF, the Sponsor has executed this Agreement this 14th day
of July, 1997.
U.S. LONG DISTANCE CORP.
By: /s/ LARRY M. JAMES
----------------------------------
Larry M. James
Chairman of the Board
and Chief Executive Officer
<PAGE>
EXHIBIT 11.1
USLD COMMUNICATIONS CORP. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Primary
Earnings:
Net income (loss) from continuing operations $ 5,251 $(13,754) $(2,083)
Net income from discontinued operations 0 15,161 14,118
------- -------- -------
Net income applicable to common stock $ 5,251 $ 1,407 $12,035
------- -------- -------
------- -------- -------
Shares:
Weighted average number of shares of
common stock outstanding 15,555 14,607 13,322
Weighted average common share equivalents
applicable to stock options and warrants 1,107 791 1,265
------- -------- -------
Weighted average shares used for computation 16,662 15,398 14,587
------- -------- -------
------- -------- -------
Primary earnings per common share:
Net income (loss) from continuing operations $ 0.32 $ (0.89) $ (0.14)
Income from discontinued operations 0.00 0.98 0.97
------- -------- -------
Net income applicable to common stock $ 0.32 $ 0.09 $ 0.83
------- -------- -------
------- -------- -------
Fully Diluted
Earnings:
Net income (loss) from continuing operations $ 5,251 $(13,754) $(2,083)
Net income from discontinued operations 0 15,161 14,118
------- -------- -------
Net income applicable to common stock $ 5,251 $ 1,407 $12,035
------- -------- -------
------- -------- -------
Shares:
Weighted average number of shares of
common stock outstanding 15,555 14,607 13,322
Weighted average common share equivalents
applicable to stock options and warrants 1,201 866 1,295
------- -------- -------
Weighted average shares used for computation 16,756 15,473 14,617
------- -------- -------
------- -------- -------
Fully diluted earnings per common share:
Net income (loss) from continuing operations $ 0.31 $ (0.89) $ (0.14)
Net income from discontinued operations 0.00 0.98 0.96
------- -------- -------
Net income applicable to common stock $ 0.31 $ 0.09(a) $ 0.82(a)
------- -------- -------
------- -------- -------
</TABLE>
- -------------
(a) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF USLD COMMUNICATIONS CORP.
USLD Communications, Inc. (a Texas corporation)
CalTex Acquisition Corp. (a Texas corporation) - Inactive
Mega Plus Dialing, Inc. (a British Columbia, Canada corporation) - Inactive
U.S. Long Distance, Inc. (a Texas Corporation) - Inactive
U.S. Long Distance Corp. (a Delaware corporation) - Inactive
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into the Company's previously
filed Registration Statements (SEC File No. 33-41039, 33-46567, 33-51604,
33-77404, 33-77612, 33-81686, 33-91260, 33-93942, 333-09723, 333-22151,
333-22213, 333-25047, 333-25149 and 333-31507).
ARTHUR ANDERSEN LLP
San Antonio, Texas
December 11, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 4,816
<SECURITIES> 0
<RECEIVABLES> 53,253
<ALLOWANCES> 2,827
<INVENTORY> 0
<CURRENT-ASSETS> 62,481
<PP&E> 76,161
<DEPRECIATION> 37,637
<TOTAL-ASSETS> 123,003
<CURRENT-LIABILITIES> 36,244
<BONDS> 15,715
0
0
<COMMON> 165
<OTHER-SE> 70,572
<TOTAL-LIABILITY-AND-EQUITY> 123,003
<SALES> 0
<TOTAL-REVENUES> 226,893
<CGS> 0
<TOTAL-COSTS> 150,214
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 9,156
<INTEREST-EXPENSE> 1,456
<INCOME-PRETAX> 9,281
<INCOME-TAX> 4,030
<INCOME-CONTINUING> 5,251
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,251
<EPS-PRIMARY> .32
<EPS-DILUTED> .31
</TABLE>
