<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/x/ Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the quarterly period ended
March 31, 1996
---------------
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 0-21602
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LCI INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 13-3498232
------------------------------- ------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8180 Greensboro Drive, Suite 800
McLean, Virginia 22102
- - ---------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(703) 442-0220
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report.)
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
------ ------
As of April 30, 1996, there were 66,219,294 shares of LCI International, Inc.
Common Stock (par value $.01 per share) outstanding.
<PAGE> 2
LCI INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Statements of Operations--
For the Three Months Ended March 31, 1996 and 1995 3
Unaudited Condensed Consolidated Balance Sheets--
As of March 31, 1996 and December 31, 1995 4 - 5
Unaudited Condensed Consolidated Statement of Shareowners' Equity--
For the Three Months Ended March 31, 1996 6
Unaudited Condensed Consolidated Statements of Cash Flows--
For the Three Months Ended March 31, 1996 and 1995 7
Notes to Interim Unaudited Condensed Consolidated Financial Statements 8 - 13
Report of Independent Public Accountants 14
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 15 - 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURE 26
EXHIBIT INDEX 27
</TABLE>
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
LCI INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(unaudited)
(in thousands, except for per share amounts)
<TABLE>
<CAPTION>
1996 1995
------------ -------------
<S> <C> <C>
REVENUES $ 250,559 $ 144,216
Cost of services 148,587 85,825
------------ ------------
GROSS MARGIN 101,972 58,391
Selling, general and administrative expenses 56,665 31,452
Depreciation and amortization 14,142 9,704
------------ ------------
OPERATING INCOME 31,165 17,235
Other expense, net 273 225
Interest expense, net 7,376 3,242
------------ ------------
INCOME BEFORE INCOME TAXES 23,516 13,768
Income tax expense 8,230 3,304
NET INCOME 15,286 10,464
------------ ------------
Preferred dividends 1,393 1,438
------------ ------------
INCOME ON COMMON STOCK $ 13,893 $ 9,026
============ ============
PER SHARE DATA
--------------
Net Income Per Share -
Primary and Fully Diluted $ 0.18 $ 0.13
============ ============
Primary Weighted Average Number of
Common Shares 86,335 78,384
============ ============
Fully Diluted Weighted Average Number of
Common Shares 86,593 78,822
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
LCI INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1996 1995
------ ----------------- --------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Trade accounts receivable, net $ 176,705 $ 161,640
Current deferred tax assets, net 23,901 23,121
Prepaids and other 10,329 10,120
Other accounts and notes receivable, net 10,002 9,451
---------- ----------
Total current assets 220,937 204,332
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Fiber optic network 380,980 357,294
General office equipment and building lease 103,787 90,806
Less - Accumulated depreciation and amortization (187,763) (181,487)
---------- ----------
297,004 266,613
Plant under construction 30,933 35,334
---------- ----------
Total property, plant and equipment, net 327,937 301,947
---------- ----------
OTHER ASSETS:
Excess of cost over net assets acquired, net 334,030 245,600
Other, net 23,665 21,480
---------- ----------
Total other assets 357,695 267,080
---------- -----------
Total Assets $ 906,569 $ 773,359
========== ===========
</TABLE>
(Continued on next page)
4
<PAGE> 5
LCI INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
LIABILITIES AND SHAREOWNERS' EQUITY 1996 1995
----------------------------------- ------------- ------------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 15,785 $ 39,168
Facility costs accrued and payable 89,750 66,688
Accrued expenses and other 35,407 21,997
---------- ------------
Total current liabilities 140,942 127,853
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LONG-TERM DEBT 369,000 260,700
---------- ------------
CAPITAL LEASE OBLIGATIONS 13,875 14,160
---------- -----------
OTHER LIABILITIES AND DEFERRED CREDITS 22,228 25,868
---------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREOWNERS' EQUITY:
Preferred stock - Authorized 15,000 Shares, Issued and
Outstanding 3,999.7 shares at March 31, 1996 and 4,578.1
shares at December 31, 1995 99,993 114,453
Common stock - Authorized 100,000 Shares, Issued
and Outstanding 66,161 shares at March 31, 1996
and 64,434 shares at December 31, 1995 662 644
Paid-in capital 315,224 298,929
Retained deficit (55,355) (69,248)
---------- ------------
Total shareowners' equity 360,524 344,778
---------- ------------
Total Liabilities and Shareowners' Equity $ 906,569 $ 773,359
========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
LCI INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Preferred Common Paid- Retained
Stock Stock In Capital Deficit Total
---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ 114,453 $ 644 $ 298,929 $ (69,248) $ 344,778
Employee stock purchases -- 1 1,378 -- 1,379
Exercise of options/warrants
and related tax benefits -- 2 472 -- 474
Conversion of preferred stock (14,460) 15 14,445 -- --
Net Income -- -- -- 15,286 15,286
Preferred dividends -- -- -- (1,393) (1,393)
--------- --------- --------- --------- ---------
BALANCE AT MARCH 31, 1996 $ 99,993 $ 662 $ 315,224 $ (55,355) $ 360,524
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
LCI INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 15,286 $ 10,464
Adjustments to reconcile net income:
Depreciation and amortization 14,142 9,704
Change in deferred income taxes 7,646 1,367
Change in trade accounts receivable (11,961) (14,738)
Change in accounts payable and facility
cost accrued and payable (1,527) (9,217)
Change in other assets/liabilities 5,060 (256)
--------- ---------
Net cash provided by (used in) operating activities 28,646 (2,676)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures (29,630) (12,098)
Payments for acquisitions (99,345) --
--------- ---------
Net cash used in investing activities (128,975) (12,098)
--------- ---------
FINANCING ACTIVITIES:
Financing fee payments (2,532) (37)
Net debt borrowings 107,897 20,836
Preferred dividend payments (1,393) (1,438)
Bank overdrafts (5,496) (5,284)
Proceeds from employee stock plans and warrants 1,853 697
--------- ---------
Net cash provided by financing activities 100,329 14,774
--------- ---------
Net increase in cash and cash equivalents -- --
--------- ---------
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD -- --
--------- ---------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ -- $ --
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 7,905 $ 2,585
========= =========
Cash paid for income taxes $ 19 $ 414
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE> 8
LCI INTERNATIONAL, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
(1) GENERAL
The results of operations for the interim periods shown are not
necessarily indicative of results to be expected for the fiscal year. In the
opinion of management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim periods
a fair presentation for the three months ended March 31, 1996 and 1995. All
such adjustments are of a normal recurring nature.
(2) BUSINESS ORGANIZATION AND PURPOSE
The financial statements presented herein include the condensed
consolidated statements of operations of LCI International, Inc., a Delaware
corporation, and its subsidiaries (LCI or the Company), for the three month
periods ended March 31, 1996 and 1995, the condensed consolidated balance
sheets as of March 31, 1996 and December 31, 1995, the condensed consolidated
statement of shareowners' equity for the three months ended March 31, 1996, and
the condensed consolidated statement of cash flows for the three month periods
ended March 31, 1996 and 1995.
LCI is a facilities-based long-distance telecommunications carrier
that provides a broad range of domestic and international voice and data
services to commercial, wholesale, residential, and small business customers.
The Company serves its customers primarily through digital fiber optic
facilities which are both leased and owned.
(3) ACCOUNTING POLICIES
Reference should be made to the Notes to Consolidated Financial
Statements in LCI's 1995 Annual Report, specifically Note 2, for a summary of
the Company's significant accounting policies.
PRINCIPLES OF CONSOLIDATION. The accompanying Unaudited Condensed
Consolidated Financial Statements include the accounts of LCI and its wholly
owned, direct and indirect, subsidiaries. All material intercompany
transactions and balances have been eliminated.
8
<PAGE> 9
WEIGHTED AVERAGE NUMBER OF COMMON SHARES. The weighted average number
of common shares used to calculate earnings per share include common stock and
common stock equivalents. The Company's common stock equivalents include
common stock issuable pursuant to stock options and common stock warrants, and
the 5% Cumulative Convertible Exchangeable Preferred Stock (Preferred Stock).
For the three months ended March 31, 1996 and 1995, the weighted average number
of common shares include the assumed conversion of Preferred Stock into
approximately 10.5 million and 12.1 million shares of common stock,
respectively. For the three months ended March 31, 1996 and 1995, outstanding
stock options and common stock warrants were reflected in the weighted average
number of common shares using the treasury stock method. The fully diluted
weighted average number of common shares was calculated using the end of the
period closing price of the common stock. The primary weighted average number
of common shares was calculated using the average daily closing price of the
common stock for the periods. The March 31, 1995 weighted average number of
common shares have been adjusted to reflect a 2-for-1 stock split effected in
the form of a stock dividend in September 1995.
INCOME PER SHARE. For the three months ended March 31, 1996 and 1995,
the income per share is calculated as net income before preferred dividends
divided by the weighted average number of common shares, as defined above. The
income per share for the three months ended March 31, 1996 and 1995, represents
primary and fully diluted amounts, as the two calculations yield the same
results.
RECLASSIFICATIONS. Certain reclassifications have been made to the
consolidated financial statements for 1995 to conform with the 1996
presentation.
(4) ACQUISITIONS
In January 1996, the Company purchased the long-distance
telecommunications businesses of Teledial America, Inc. (Teledial America),
which does business as U.S. Signal Corporation, and an affiliated company, ATS
Network Communications, Inc. (ATS). Headquartered in Grand Rapids, Michigan,
Teledial America provides long-distance services to commercial customers
located primarily in Michigan and throughout the Midwest under the U.S. Signal
Corporation name. ATS is a regional long-distance carrier that operates in
Tennessee, Mississippi and Arkansas. The Company acquired both companies for
approximately $99 million in cash with an additional maximum of $24 million
contingent on certain revenue performance and customer retention of Teledial
America over an eighteen-month period commencing at the closing date. The
acquisitions were treated as purchases for accounting purposes.
In September 1995, the Company acquired Corporate Telemanagement
Group, Inc. (CTG), a Greenville, South Carolina-based provider of long-distance
services to commercial customers throughout the U.S. Under the terms of the
agreement, the Company acquired all of the outstanding shares of CTG and shares
underlying certain outstanding warrants in exchange for $45 million in cash and
4.6 million shares of the Company's common stock valued at approximately $93.2
million, based on the market price of the shares on the date of the
acquisition. The acquisition was treated as a purchase for accounting purposes.
9
<PAGE> 10
The following unaudited pro forma summary presents the net revenues,
net income and earnings per share from the combination of the operations of the
Company, CTG and Teledial America as if the acquisitions had occurred at the
beginning of the fiscal year. Information is not provided for 1996, as both
acquisitions were included in the results of operations from January 1, 1996.
The pro forma information is provided for information purposes only. It is
based on historical information and does not necessarily reflect the actual
results that would have occurred nor is it necessarily indicative of the future
results of operations of the combined enterprise:
<TABLE>
<CAPTION>
Three Months Ended
(in thousands, except per share amounts) March 31, 1995
------------------
<S> <C>
Net revenues $186,153
Net income 11,477
Earnings per share $ 0.14
</TABLE>
(5) REVOLVING CREDIT FACILITY
In February 1996, the Company increased its existing Revolving Credit
Facility (Credit Facility) to $700 million. This Credit Facility amends the
$450 million Credit Facility commitment received by the Company in June 1995.
The Credit Facility, with a syndicate of banks, is subject to various principal
reductions depending on the outstanding balance, until maturity on March 31,
2001. This Credit Facility bears interest at a rate consisting of two
components: the base rate component is dependent upon a market indicator; the
second component varies from 0.625% to 1.5% depending on the Company's leverage
ratio. The weighted average interest rate on the outstanding borrowings under
the Credit Facility as of March 31, 1996 was approximately 6.70%.
The Credit Facility contains various financial covenants, the most
restrictive being the leverage ratio requirement. As of March 31, 1996, the
Company was in compliance with all Credit Facility covenants.
As of March 31, 1996, the Company has $369.0 million, outstanding
under the Credit Facility. An additional $10.4 million of the Credit Facility
is reserved as of March 31, 1996, as a result of letters of credit issued for
various business matters.
The Company entered into an interest rate cap agreement with a
syndication of commercial banks in February 1996, that limits the Company's
base interest rate exposure on its Credit Facility to 7.5% on a notional
principal balance of $130 million for a two-year period ending February 1998.
In the event of nonperformance by the commercial bank, the Company would have
exposure to the extent of any increase in the base rate component above 7.5%.
The Company believes an event of non-performance by the bank would be remote.
10
<PAGE> 11
(6) COMMITMENTS AND CONTINGENCIES
VENDOR AGREEMENTS. The Company has agreements with certain
telecommunications interexchange carriers and third party vendors that require
the Company to maintain minimum monthly and/or annual billings based on usage.
The Company has a single contract with a minimum annual usage requirement of
approximately $48 million which began in August 1995, with increasing annual
minimums until July 2000, subject to an underutilization charge. The Company's
minimum monthly billing commitments under all other vendor agreements are
approximately $5 million through the end of 1996. The Company has historically
met all minimum billing requirements and believes that the minimum usage
commitments will be met.
LEGAL MATTERS. Thomas J. Byrnes and Richard C. Otto v. LCI
Communications Holdings Co. et al. was filed by two former members of the
Company's management on June 28, 1991 in Common Pleas Court, Franklin County,
Ohio, alleging age discrimination by the Company among other things, and
seeking $42.8 million in compensatory and punitive damages. During 1993, a
jury returned a verdict in favor of the Plaintiffs and the Court awarded
approximately $8.1 million in damages and attorney's fees.
Both the Plaintiffs and the Company appealed this matter to the
appropriate Court of Appeals in Ohio, which in a two-to-one decision, overruled
each of LCI's assignments of error and two of Plaintiffs' claims, and sustained
Plaintiffs' request for approximately $0.1 million in pre-judgment interest, in
addition to the previous award. The Company filed a Notice of Appeal at the
Supreme Court of Ohio (the Court) and in October 1995, the Court agreed to
review the decision by the Court of Appeals. Oral arguments have been scheduled
before the Court for May 1996. The appeal process has extended for several
years and depending on the timing of the ultimate outcome, it is reasonably
possible that between $0 and $2.7 million of additional interest expense could
be incurred.
The Company also has been named as a defendant in various other
litigation matters. Management intends to vigorously defend these outstanding
claims. The Company believes it has adequate accrued loss contingencies and
that current pending or threatened litigation matters will not have a material
adverse impact on the Company's results of operations or financial position.
(7) SHAREOWNERS' EQUITY
COMMON STOCK. The Company has stock option plans under which options
to purchase shares of common stock may be granted to directors and key
employees. During the three months ended March 31, 1996, the Company granted
options to purchase 1,890,000 shares of the Company's common stock. The option
price for all options granted was the fair market value of the shares on the
date of grant. The Company issued 66,387 and 27,148 shares of common stock
during the three months ended March 31, 1996 and 1995, respectively, pursuant
to exercises of options under the stock option plans. The Company also has an
Employee Stock Purchase Plan and maintains a defined contribution plan for its
employees. The Company issued 61,042 and 47,554 shares under its Employee
Stock Purchase Plan and 16,616 and 13,888 shares under the defined contribution
plan for the three months ended March 31, 1996 and 1995, respectively.
11
<PAGE> 12
PREFERRED STOCK. The Company's 5% Cumulative Convertible Exchangeable
Preferred Stock (Preferred Stock) is convertible into shares of common stock
($.01 par value) at the option of the holder, at a conversion rate equal to the
aggregate liquidation preference of the shares of Preferred Stock surrendered
for conversion, divided by the conversion price. The Preferred Stock has a
liquidation preference of $25.00 per share plus accrued and unpaid dividends,
and a conversion price of $9.50 per share. The conversion is at the option of
the holder at anytime. Shareholders converted 578,400 shares of preferred
stock into 1,521,997 shares of common stock during the three months ended March
31, 1996. There were no preferred stock conversions during the same period in
1995.
COMMON STOCK WARRANTS. In 1993 the Company issued warrants
exercisable for 5,408,900 shares of common stock at $2.83 per share that expire
ten years from the date of issue. During the three months ended March 31, 1996
warrant owners exercised 69,968 warrants for 61,923 shares of common stock. No
warrants were exercised during the same period in 1995.
(8) INCOME TAXES
The provision for income taxes for the three months ended March 31,
1996 and 1995, consisted of:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------------------
(in thousands) 1996 1995
--------- ----------
<S> <C> <C>
Current tax expense:
Federal $ 422 $ 1,500
State 162 437
--------- ----------
Total current tax expense 584 1,937
Deferred tax expense: --------- ----------
Increase in deferred tax liabilities 181 705
Decrease in deferred tax asset 8,662 3,168
Decrease in valuation allowance (1,197) (2,506)
--------- ----------
Total deferred tax expense 7,646 1,367
--------- ----------
Total tax expense $ 8,230 $ 3,304
========= ==========
</TABLE>
The decrease in the valuation allowance for the three months ended
March 31, 1996 and 1995 resulted from the Company's expected realization of a
portion of its net operating loss (NOL) carryforwards in future years based on
the Company's growth in recurring operating income in 1996 and 1995, and its
expectation of future taxable income, net of a minor increase relating to
expected state tax credits.
12
<PAGE> 13
The effective income tax rate varies from the Federal statutory rate
for the three months ended March 31, 1996 and 1995, as follows:
<TABLE>
<CAPTION>
Three Months Three Months
(in thousands) Ended March 31, 1996 Ended March 31, 1995
--------------------- --------------------
<S> <C> <C> <C> <C>
Expected tax at Federal
statutory income tax rate: $ 8,231 35.0% $ 4,819 35.0%
Effect of:
State income tax expense 1,178 5.0 437 3.2
Non-deductible expenses 318 1.4 350 2.5
Decrease in valuation allowance (1,197) (5.1) (2,506) (18.2)
Other, net (300) (1.3) 204 1.5
-------- -------- -------- ------
Income Tax Expense $ 8,230 35.0% $ 3,304 24.0%
======== ======== ======== ======
</TABLE>
The effective tax rate for the three months ended March 31, 1996 and
1995 represents the Company's estimated effective tax rate for the periods.
This effective tax rate is adjusted quarterly based on the Company's estimate
of future taxable income, use of NOLs and the related impact on the valuation
allowance. The tax rate reconciliation for the three months ended March 31,
1996 and 1995, reflected the expected financial reporting use of $3.7 million
and $6.1 million, respectively, of NOLs which resulted in a $1.5 million and
$2.5 million reduction of income tax expense, respectively. As of March 31,
1996, the Company had available $17.3 million of NOLs for financial reporting
purposes.
The Company has generated significant NOLs that may be used to offset
future taxable income. Each year's NOL has a maximum 15-year carryforward
period. The Company's ability to fully use its NOL carryforwards is dependent
upon future taxable income. As of March 31, 1996, the Company had total NOL
carryforwards for income tax purposes of $159.9 million subject to various
expiration dates beginning in 1998 and ending in 2010.
The Company's deferred income tax balances include $23.9 million in
current deferred tax assets and $3.1 million in other noncurrent assets as of
March 31, 1996. As of December 31, 1995 deferred income tax balances included
$23.1 million in current deferred tax assets, net and $8.8 million in
noncurrent other assets.
The Company has a valuation allowance remaining of $7.2 million as of
March 31, 1996 and $8.4 million as of December 31, 1995.
13
<PAGE> 14
Report of Independent Public Accountants
To The Board of Directors and Shareowners of LCI International, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of LCI
International, Inc. (a Delaware corporation) and subsidiaries as of March 31,
1996, and the related condensed consolidated statements of operations and cash
flows for the three-month periods ended March 31, 1996 and 1995, and the
condensed consolidated statement of shareowners' equity for the three-month
period ended March 31, 1996. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of LCI International, Inc. and
subsidiaries as of December 31, 1995 (not presented herein), and, in our report
dated March 7, 1996, we expressed an unqualified opinion on that statement.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1995, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
ARTHUR ANDERSEN LLP
Washington D.C.
April 24, 1996
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
INTRODUCTION - INDUSTRY ENVIRONMENT
The Company operates in the almost $80 billion long-distance
telecommunications industry. The current industry environment subjects the
Company to varying degrees of regulatory and legislative oversight on both the
national and state levels. The following potential changes in the regulatory
and/or legislative environment can impact the nature and degree of the
Company's competition.
LEGISLATIVE MATTERS
TELECOMMUNICATIONS ACT OF 1996. In February 1996, the
Telecommunications Act of 1996 (the Act) was passed by the United States
Congress and signed into law by President Clinton. This comprehensive
telecommunications legislation was designed to increase competition in the
long-distance and local telecommunications industries. The legislation will
allow the Regional Bell Operating Companies (RBOCs) to provide long-distance
service in exchange for opening their networks to local competition. Under the
legislation, the RBOCs can immediately provide interstate long-distance
services outside of their local service territories. However, a RBOC must
apply to the Federal Communications Commission (FCC) to provide long-distance
services within any of the states in which such RBOC operates. The RBOCs must
satisfy several pro-competition criteria before the FCC will approve such a
request. With the passage of the legislation, the Company can enter local
telephone markets by reselling service of local telephone companies or building
new facilities.
In early 1996, the FCC has initiated a number of rulemaking
proceedings to comply with the Act. These rulemaking proceedings include
addressing certain tariffing issues, defining universal service and determining
the extent of regulation and pricing guidelines on the resale of local exchange
services. While the Act permits RBOCs to provide out-of-region long-distance
service upon enactment, the FCC is also requesting public comment on whether
the RBOCs should be treated as dominant carriers if they do not provide such
service via a separate subsidiary. The Company is unable to predict what action
will be taken by the FCC or how such action will affect the Company's financial
position and results of operation.
REGULATORY MATTERS
TOLL-FREE SERVICE NUMBERS. The Company is also subject to FCC actions
dealing with the allocation of "800" and "888" numbers for toll-free services.
In February 1996, the FCC authorized carriers to begin reserving "888" numbers
and, in March 1996, the "888" prefix became active. Currently, the Company
does not expect this change to have a material adverse impact on its operations
or financial position.
15
<PAGE> 16
LOCAL SERVICE. The Company is involved in state regulatory
proceedings in various states to secure approval to resell local service which
would enable the Company to provide both local and long-distance services. The
Company has received different levels of approval to resell local service in
Illinois, Texas, Florida, Connecticut, Michigan and California. The Company is
also involved in regulatory proceedings in an effort to require local telephone
companies to provide competitive pricing for local services that can be offered
on a resale basis by long-distance carriers, including the Company. The Company
is unable to predict when and the degree to which it will resell local
services.
COMPETITION
REGULATION OF AT&T. In late 1995, the FCC granted AT&T's request to
be treated as a non-dominant carrier relative to the provision of domestic
services. AT&T is now seeking to be treated as a non-dominant long-distance
carrier relative to its provision of international services. In return for
such status, AT&T has proposed that it would be subject to an increased level
of regulation than other non-dominant carriers. The Company is unable to
predict what action will be taken by the FCC or how such action will affect the
Company's financial position and results of operations.
RBOC MERGERS. In early 1996, SBC Communications Inc. and Pacific
Telesis Group, as well as Bell Atlantic Corp. and NYNEX Corp. (all RBOCs) have
announced plans to merge. The mergers are subject to regulatory approval and
the Company is unable to predict the impact that these mergers might have on
competition in the telecommunications industry or on the Company's ability to
resell local service.
GENERAL - RESULTS OF OPERATIONS
The Company's switched revenues are a function of switched minutes of
use (MOUs) and rate structure (rates charged per MOU), which in turn are a
function of the Company's customer and service mix. Private line revenues are
a function of fixed rates that do not vary with usage. The Company's cost of
services consists primarily of expenses incurred for origination, termination
and transmission of calls through local exchange carriers and transmission
through other long-distance carriers. The Company provides service to its
customers through digital fiber optic facilities which are both leased and
owned. Collectively, these facilities constitute the Company's network (the
Network). These results of operations include the acquisitions of Teledial
America, Inc. (Teledial America) and ATS Network Communications, Inc. (ATS)
from January 1, 1996.
16
<PAGE> 17
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AS COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 1995
REVENUES. Total revenues increased 74% to $250.6 million and 37% to
$144.2 million for the three months ended March 31, 1996 and 1995 over the
comparable periods in the prior year, respectively. Internal growth from the
Company's base business was 38% in the quarter, with acquisitions representing
the remaining increase. The first quarter 1995 growth was generated from the
Company's internal base of business. The following table provides further
information regarding the Company's revenues:
<TABLE>
<CAPTION>
(in thousands, except switched revenue per (MOU) Three Months Ended March 31,
--------------------------------------------
1996 1995 Change
--------------------------------------------
<S> <C> <C> <C>
Total Revenues $ 250,559 $ 144,216 74%
MOUs 1,809,657 1,067,9 57 69%
Switched Revenue per MOU(1) $ 0.1262 $ 0.1190 6%
</TABLE>
(1) Switched revenue divided by MOUs
Switched revenues increased 79% and 39% for the three months ended
March 31, 1996 and 1995 over the comparable periods in the prior year,
respectively, which was primarily due to an increase in volume (as measured in
MOUs) across all service types. This increase in volume accounted for $88.3
million and $42.8 million, respectively of the overall revenue increase. The
Company's new service offerings, internal growth from existing sales channels
and growth from sales by external third-party agents and distributors accounted
for $43.7 million of the first quarter 1996 growth in volumes, whereas
acquisitions accounted for the remaining $44.6 million.
The impact of rate and mix changes was to increase switched revenue by
$12.2 million for the three months ended March 31, 1996 over the comparable
period in 1995. The Company experienced a 6% increase in revenue per MOU for
the three months ended March 31, 1996 as compared to the three months ended
March 31, 1995. This increase in revenue per MOU reflects several factors. An
increasing base of residential/small business and international revenues has
favorably impacted revenue per MOU offsetting expanded growth in dedicated
access services which have a lower rate and cost structure per MOU. Other
factors placing a downward pressure on revenue per MOU include competitive
market conditions and the Company's commitment to grow in all market segments,
including wholesale and national accounts.
For the three months ended March 31, 1995 rate and mix changes
decreased switched revenues by $6.9 million over the comparable period in 1994.
Revenue per MOU decreased 5% for the first quarter of 1995 over the same period
in 1994 due to significant growth in wholesale revenue and dedicated access
services as well as competitive market conditions.
17
<PAGE> 18
Private line revenues increased $5.8 million, or 34%, for the three
months ended March 31, 1996, compared to an increase of $3.1 million, or 22%,
for the three months ended March 31, 1995 over the same period in 1994 and
accounted for the remainder of the overall increase in revenues.
The Company's overall revenue growth rate was due in part to higher
growth rates in residential/small business services and an increase in
international service revenues across all business segments. Residential/small
business service revenues increased almost 200% and 160% for the three months
ended March 31, 1996 and 1995, over the comparable periods in the prior year,
respectively. The 135% and 125% growth in international service revenues for
the first quarter 1996 and 1995, respectively, resulted from the Company's
efforts to take full advantage of opportunities in the global
telecommunications market. As a result of competitive market conditions and the
increasing residential/small business revenue base, the Company has experienced
a higher rate of uncollectible accounts and credits issued to customers in the
first quarter 1996 as compared to the same period in 1995.
The Company uses a variety of sales channels to market its services.
In addition to its internal sales force, the company uses third-party sales
agents to market its commercial and wholesale services. For its
residential/small business services, the Company uses a combination of
advertising, telemarketing and third party sales agents. With respect to
third-party sales agents, compensation for sales is paid to agents in the form
of an ongoing commission based upon collected revenue, and the billing and
customer service functions are performed by the Company. A nationwide network
of third-party sales agents managed by one vendor continued to be the most
successful of the Company's sales agents and is accounting for a significant
portion of the Company's residential/small business sales. The Company's
contract with this vendor has a remaining term of approximately two years and
the Company expects the contract to be renewed.
GROSS MARGIN. The Company's gross margin increased 75% to $102.0
million and 35% to $58.4 million for the three months ended March 31, 1996 and
1995 as compared to the prior year, respectively, primarily due to higher
switched revenues.
The $43.6 million increase in gross margin and the increase in gross
margin as a percentage of revenue for the three months ended March 31,1996 have
resulted from the growth in residential/small business and international
traffic which have a higher revenue per MOU. The combination of this shift in
customer mix, lower access costs due to local exchange carrier rate reductions
and Network efficiencies have favorably impacted gross margin. This favorable
impact was partially offset by competitive pressures in the wholesale and
commercial market segments which reduced revenue per MOU. The higher cost of
traffic from acquisitions which have not yet been integrated into the Network
have also reduced gross margin as a percentage of revenue. The net impact of
these factors was an overall improvement in the gross margin percentage to
40.7% for the three months ended 1996 from 40.5% for the same period in 1995.
18
<PAGE> 19
The Company continues to evaluate strategies to reduce its cost of
services. These strategies include a review of the Company's ability to
leverage its embedded fiber optic capacity, as well as to gain access to fiber
and broadband capacity through contract negotiations or possible participation
in syndications with other carriers. In addition, the Company's most recent
acquisitions have a substantial amount of traffic off the Network. The
Company's objective in the coming months is to identify traffic that can be
cost effectively routed onto the Network and therefore reduce costs. Through
these strategies, LCI will improve the reliability and efficiency of the
Network, as well as reduce its cost of services as a percentage of revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 80% to $56.7 million and 36% to $31.5 million
for the three months ended March 31, 1996 and 1995 as compared to the same
periods in the prior year, respectively. As a percentage of revenues, selling,
general and administrative expenses were approximately 23% and 22% for the same
periods.
The increase in selling, general and administrative expenses reflects,
in part, increased payroll expenses of $8.4 million and $3.1 million for the
three months ended March 31, 1996 and 1995, respectively, due to an increase in
the number of employees resulting from the Company's expansion and
acquisitions. The 63% and 30% increase in the payroll expense over the
comparable periods in 1995 and 1994 was less than the corresponding growth in
revenues for the same periods. Commission expense also increased $8.9 million
and $3.0 million for the same periods, due to the increases in sales and
revenues. Billing services expense increased $3.4 million and $1.3 million for
the three months ended March 31, 1996 and 1995, respectively, over the
comparable periods in the prior year, due to the increase in residential/small
business service call volume. Both commission and billing services expenses
grew at a faster rate than total revenues due to the shift in customer mix
toward residential/small business services.
The remaining significant increase in selling, general and
administrative expenses was primarily from bad debt expense. Bad debt expense
increased as a result of the growth in revenue during the first quarter of
1996 and 1995, the negotiation of new local exchange carrier billing agreements
that initially require a higher rate for uncollectible accounts, and increased
scrutiny of accounts receivable resulting from the transitioning to a new
accounts receivable system. The new accounts receivable system provides
management with the ability to better analyze and monitor the nature of
customer receivable balances. In transitioning to the new accounts receivable
system, the Company has evaluated the status of its accounts receivable and
increased its bad debt expense to reflect credits and the write-off of
uncollectible accounts. As a result of all of the above, an increase in bad
debt expense may continue during the remainder of 1996.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense for the three months ended March 31, 1996 increased 46% over the same
period in 1995. The dollar increase is a result of the increased capital
expenditures required to support the growth in revenue and MOU volumes as well
as additional goodwill amortization from the Company's recent acquisitions.
The growth in revenue has exceeded the growth in depreciation and amortization
expense which has caused depreciation and amortization expense as a percentage
of revenues to decrease to 6% from 7% for the three month period ended March
31, 1996 compared to the same period in 1995. The reduction in depreciation and
amortization expense as a percentage of revenues
19
<PAGE> 20
reflects the Company's ability to maximize the application of its facilities
and achieve economies of scale from its revenue growth.
OPERATING INCOME. Operating income increased 81% to $31.2 million and
54% to $17.2 million for the three months ended March 31, 1996 compared to the
same period in 1995, due to the factors discussed above. As a percentage of
revenues, operating income remained at 12% for the three months ended March
31, 1996 and 1995, reflecting management of expenses during a period of
significant growth in revenues and MOUs.
INTEREST EXPENSE, NET. Interest expense, net of capitalized interest,
increased to $7.4 million and $3.2 million for the three months ended March 31,
1996 and 1995, respectively, as compared to the same periods in the prior
years. These increases during 1996 and 1995 were primarily due to the increase
in outstanding debt compared to the same period in prior years. The Company's
acquisition of CTG increased outstanding debt approximately $66 million and the
acquisitions of Teledial America and ATS increased outstanding debt
approximately $99 million for the three months ended March 31, 1996 over the
comparable period in 1995. The Company has $382.9 million in outstanding debt
and capital leases as of March 31, 1996, as compared to $274.9 million as of
March 31, 1995. The effective weighted average interest rate on all
indebtedness outstanding was 8.02% for the three months ended March 31, 1996,
as compared to 8.42% for the same period in 1995.
OTHER EXPENSE, NET. Other expense remained relatively constant at
$0.3 million and $0.2 million for the three months ended March 31, 1996 and
1995, respectively.
INCOME TAX EXPENSE. Income tax expense was $8.2 million for the three
months ended March 31, 1996, as compared to $3.3 million for the same period in
1995. The change results from an increase in the estimated effective tax rate
from 24% to 35% in 1996 as well as the increase in earnings before income taxes
for the three months ended March 31, 1996 as compared to 1995. The effective
tax rate is lower than the statutory rate primarily due to the Company's
expectation that a portion of the available net operating losses (NOLs) will be
realized in future years as permitted by Statement of Financial Accounting
Standards No. 109 (See Note 8 to the Condensed Consolidated Financial
Statements.)
PREFERRED DIVIDENDS. Preferred dividends were $1.4 million for the
three months ended March 31, 1996 and 1995, as a result of the dividend
requirements on the 5% Cumulative Convertible Exchangeable Preferred Stock
(Preferred Stock), which was issued in August 1993. The Preferred Stock is
convertible into shares of common stock ($.01 par value) of the Company at a
conversion price of $9.50 per share subject to adjustment under certain
conditions. During the first three months of 1996, Preferred Stock conversions
decreased the dividend requirements from the prior years.
INCOME ON COMMON STOCK. The Company generated income on common stock
(after preferred dividends) of $13.9 million for the three months ended March
31, 1996, versus $9.0 million for the comparable period in 1995.
20
<PAGE> 21
For the three months ended March 31, 1996 and 1995, the weighted
average number of shares includes the assumed conversion of Preferred Stock
into approximately 10.5 million and 12.1 million shares of common stock.
Common stock equivalents were reflected in the weighted average number of
common shares using the treasury stock method.
For the three months ended March 31, 1996 and 1995, the income per
share is calculated as net income before preferred dividends divided by the
weighted average number of common shares.
LIQUIDITY AND CAPITAL RESOURCES
LCI International, Inc. is a holding company and conducts its
operations through its direct and indirect wholly owned subsidiaries. There
are no restrictions on the movement of cash within the consolidated group and
the Company's discussion of its liquidity is based on the consolidated group.
The Company measures its liquidity based on cash flow as reported in its
Condensed Consolidated Statements of Cash Flow; however, the Company does use
other operational measures as outlined below to manage its operations.
CASH FLOWS - OPERATING ACTIVITIES. The Company provided $28.6 million
of cash from operations for the three months ended March 31, 1996 which is an
increase of $31.3 million from the same period in 1995. The increase is due
primarily to the significant growth in revenues and net income when comparing
1996 to 1995.
CASH FLOWS - INVESTING ACTIVITIES. The Company has supported its
growth strategy with both capital additions and acquisitions. During the three
months ended March 31, 1996, the Company spent $29.6 million in capital
expenditures to acquire additional switching, transmission and distribution
capacity as well as to develop information systems support, representing an
increase of $17.5 million from the same period in 1995.
During the first quarter of 1996, the Company consummated its
acquisition of Teledial America and ATS with the use of $99.3 million in cash.
The Company had no acquisitions during the same period in 1995.
CASH FLOWS - FINANCING ACTIVITIES. Financing activities provided a net
$100.3 million for the three months ended March 31, 1996, primarily from the
proceeds of the Company's Revolving Credit Facility (Credit Facility),
representing an increase of $85.6 million from the same period in 1995. The
cash provided was used for the acquisitions discussed under the caption Cash
Flow-Investing Activities.
CAPITAL RESOURCES. In February 1996, the Company negotiated an
increase in the Credit Facility to $700 million for a five-year period. The
Credit Facility allows the Company to borrow liquidity on a daily basis. As a
result, the Company uses its available cash to reduce the balance of its Credit
Facility and maintains no cash on hand. The Company had $369.0 million
outstanding under the Credit Facility with $10.4 million reserved as a result
of issued letters of credit. The Company had available $320.6 million under the
Credit Facility as of March 31, 1996.
21
<PAGE> 22
The banks' commitment to lend is subject to various principal
reductions, depending on the outstanding balance, until maturity on March 31,
2001. The Credit Facility contains certain balance sheet, operating cash flow,
capital expenditure and negative covenant requirements. As of March 31, 1996,
the Company was in compliance with all covenants. The interest rate on the
Credit Facility outstanding balance is variable based on several indices (See
Note 5 to the Condensed Consolidated Financial Statements). The weighted
average interest rate on the debt outstanding under the Credit Facility was
6.70% and 8.06% on March 31, 1996 and 1995, respectively.
Although the Company believes it has sufficient operating cash flows
and available borrowing capacity to fund its current operations and anticipated
capital requirements, the Company has also filed a shelf registration statement
with the Securities and Exchange Commission, which would allow the issuance of
an additional $300 million of debt and/or equity securities. The Company has
not yet determined when or if any new capital financing will be completed.
The Company is investigating the possibility of exercising its right
to redeem the outstanding shares of Preferred Stock on or about August 31,
1996. The redemption price would be $25.50 per share plus accrued and unpaid
dividends at the redemption date. The Company believes that substantially all
of the Preferred Stock would be converted into shares of common stock as the
current market value of the Company's common stock is significantly higher than
the equivalent value to be realized upon redemption. The Preferred Stock is
convertible into shares of common stock ($.01 par value) of the Company at the
option of the holder, at any time, at a conversion rate equal to the aggregate
liquidation preference of the shares, divided by the conversion price. The
Preferred Stock has a liquidation preference of $25.00 per share plus accrued
and unpaid dividends, and a conversion price of $9.50 per share. Should the
Preferred stockholders not convert their shares to common stock, the Company
would use funds from its Credit Facility or funds from operations for the
redemption. The conversion of the Preferred Stock would have no impact on
earnings per share as the assumed conversion of the Preferred Stock is already
considered in the weighted average share calculation.
OPERATIONAL MEASURES. The Company uses earnings before interest,
income taxes, other expense, depreciation and amortization (EBITDA) and
borrowing capacity under its Credit Facility as operational measures of its
ability to fund growth and manage expansion. EBITDA should not be considered
(i) as an alternate to net income, (ii) as an indicator of operating
performance or cash flows generated by operating, investing or financing
activities or (iii) as a measure of liquidity.
22
<PAGE> 23
EBITDA increased 68% to $45.3 million for the three months ended March
31, 1996, compared to the same period for 1995. The following table provides a
summary of EBITDA, cash interest and preferred dividends coverage ratio and
capital spending for comparable periods in 1996 and 1995:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
(in thousands) 1996 1995
-------- -------
<S> <C> <C>
EBITDA 45,307 26,939
Cash Interest and Preferred Dividends 8,922 4,023
Coverage Ratio(1) 5.07x 6.69x
Capital Expenditures and Acquisitions 128,975 12,098
</TABLE>
(1) EBITDA divided by cash interest and preferred dividends.
The successful growth in operations, together with the capital changes
discussed above, have significantly improved EBITDA during the periods
presented.
INVESTMENT REQUIREMENTS. In January 1996, the Company purchased the
long-distance telecommunications businesses of Teledial America, Inc. and an
affiliated company, ATS Network Communications, Inc. for approximately $99
million in cash with a maximum of an additional $24 million in cash contingent
on certain revenue performance criteria over an 18 month period commencing at
the closing date (See Note 4 to the Condensed Consolidated Financial
Statements.)
The Company has relied upon strategic acquisitions as a means of
expanding its network, sales and service presence and revenues across the
country. The Company evaluates each potential acquisition to determine its
strategic fit within the Company's growth, operating margin and income
objectives. The Company expects to actively explore potential acquisitions and
may enter into discussions from time to time with potential acquisition
candidates, but there can be no assurance that the Company will be able to
enter into agreements with respect to, or consummate, acquisitions on
acceptable terms.
COMMITMENTS AND CONTINGENCIES. The Company has agreements with
certain interexchange carriers and third party vendors to lease facilities for
originating, terminating and transport services. These agreements require the
Company to maintain minimum monthly and/or annual billings based on usage. The
Company currently has one significant contract with a third party carrier,
however, the costs associated with the contract represent less than 10% of the
Company's revenue (See Note 6 to the Condensed Consolidated Financial
Statements). The Company manages its Network in order to maximize reliability
and redundancy. The Network is managed to keep interruption of service to a
minimum. Although most service failures that the Company has experienced have
been corrected in a relatively short time period, a catastrophic service
failure could interrupt the provision of service by both the Company and its
competitors for a lengthy time period. The restoration period for a
catastrophic service failure cannot be reasonably determined. The Company has
not, however, experienced a catastrophic service failure in its history.
23
<PAGE> 24
The Company has been named as a defendant in various litigation
matters. Management intends to vigorously defend these outstanding claims.
The Company believes that it has adequate accrued loss contingencies and that
current pending or threatened litigation matters will not have a material
adverse impact on the Company's results of operations or financial condition
(See Note 6 to the Condensed Consolidated Financial Statements.)
FEDERAL INCOME TAXES. The Company has generated significant NOLs in
prior years that are available to reduce current cash requirements for income
taxes. See Note 8 of the Condensed Consolidated Financial Statements for a
discussion of the availability and expected utilization of the existing NOLs.
IMPACT OF INFLATION AND SEASONALITY. The Company does not believe
that the relatively moderate levels of inflation which have been experienced
in the United States in recent years have had a significant effect on its net
revenues or earnings.
The Company's long-distance revenue is subject to seasonal variations
based on each business segment. Use of long-distance services by commercial
customers is typically lower on weekends throughout the year, and in the fourth
quarter due to holidays. As residential revenue increases as a proportion of
the Company's total revenues, the seasonal impact due to changes in commercial
calling patterns should be reduced. The Company is unable to predict the
impact of a shift to a larger residential customer base.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 - SAFE HARBOR
CAUTIONARY STATEMENT. Except for historical information provided in this
report, statements made throughout this document, including in this
Management's Discussion and Analysis, are forward-looking statements based on
current expectations that involve a number of risks and uncertainties. The
factors that could cause actual results to differ materially include the
following: general economic conditions; competition in the telecommunications
industry and its impact on pricing; and other risk described from time to time
in the Company's Securities and Exchange Commission filings.
24
<PAGE> 25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Thomas J. Byrnes and Richard C. Otto v. LCI Communications Holdings
Co. et al. was filed by two former members of the Company's management on June
28, 1991 in Common Pleas Court, Franklin County, Ohio, alleging age
discrimination by the Company among other things. During 1993, a jury returned
a verdict in favor of the Plaintiffs and the Court awarded approximately $8.1
million in damages and attorney's fees.
Both the Plaintiffs and the Company appealed this matter to the
appropriate Court of Appeals in Ohio, which in a two to one decision, overruled
each of LCI's assignments of error and two of Plaintiffs' claims, and sustained
Plaintiffs' request for approximately $0.1 million in pre-judgment interest, in
additional to the previous award. The Company filed a Notice of Appeal at the
Supreme Court of Ohio (the Court) and in October 1995, the Court agreed to
review the decision by the Court of Appeals. Oral arguments have been
scheduled before the Court for May, 1996. The appeal process has extended for
several years and depending on the timing of the ultimate outcome, it is
reasonably possible that between $0 and $2.7 million of additional interest
expense could be incurred.
Vanus James v. LCI International, Inc. et al. and American
Communications Network, Inc. was commenced in late May, 1995 in the Supreme
Court, Kings County, New York. The plaintiff purports to bring a class action
lawsuit against the Company, certain of its affiliates, and American
Communications Network, Inc. (ACN), one of the Company's sales agents. The
lawsuit alleges that, in an effort to induce prospective customers to sign up
for the Company's long distance services, the Company and ACN violated various
laws by disseminating false and misleading statements concerning the Company's
rates for calls to certain foreign countries. The lawsuit seeks, among other
things, compensatory damages of $10 million dollars and punitive damages of $30
million dollars. Based upon its overall assessment of the matter, management
is of the opinion that the final resolution of these proceedings will not have
a material adverse effect on the consolidated financial position or results of
operations of the Company.
The Company has also been named as a defendant in various other
litigation matters incident to the character of its business. The Company
believes it has adequate accrued loss contingencies with respect to all
litigation matters and that current pending or threatened litigation matters
will not have a material adverse effect on the consolidated financial position
or results of operations of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The exhibits filed as part of this report are set forth in
the Index of Exhibits on page 25 of this reports.
(b) Reports on Form 8-K: The company did not file any reports on Form 8-K
during the three months ended March 31, 1996.
25
<PAGE> 26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LCI INTERNATIONAL, INC.
DATE: May 13 , 1996 BY: /s/ Joseph A. Lawrence
--------------- -------------------------------------
Joseph A. Lawrence
Chief Financial Officer,
Senior Vice President Finance and
Corporate Development
26
<PAGE> 27
EXHIBIT INDEX
The following Exhibits are included in this Quarterly Report on Form 10-Q:
<TABLE>
<CAPTION>
Exhibit Exhibit
Number Description
- - ------------- ----------------------------------------------------------------
<S> <C>
11 Statement Regarding Computation of Per Share Earnings
15 Letter Regarding Unaudited Interim Financial Information.
27 Financial Data Schedule
</TABLE>
27
<PAGE> 1
Exhibit 11
Primary
<TABLE>
<CAPTION>
LCI INTERNATIONAL, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
PRIMARY
(In thousands, except per share data)
------------------------------------
For the Three Months Ended March 31,
INCOME ON COMMON STOCK 1996 1995
========================================================= ------------------------------------
<S> <C> <C>
NET INCOME $15,286 $10,464
SHARES OUTSTANDING
=========================================================
Weighted Average Number of Common Shares Outstanding 66,078 59,330
Common Shares Issuable Upon the Assumed Exercise of Stock
Options and Stock Warrants 14,604 12,464
Common Shares Repurchased Through Treasury Stock Method
Upon the Assumed Exercise of Stock Options and Stock (4,873) (5,514)
Warrants
Assumed Conversion of Convertible Preferred Stock 10,526 12,104
------------------------------------
Weighted Average Number of Common Shares 86,335 78,384
====================================
EARNINGS PER SHARE
==========================================================
NET INCOME PER COMMON SHARE $ 0.18 $ 0.13
====================================
</TABLE>
<PAGE> 2
Exhibit 11
Fully Diluted
<TABLE>
<CAPTION>
LCI INTERNATIONAL, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
FULLY DILUTED
(In thousands, except per share data)
-----------------------------------
For the Three Months Ended March 31,
INCOME ON COMMON STOCK 1996 1995
========================================================= -----------------------------------
<S> <C> <C>
NET INCOME $15,286 $10,464
SHARES OUTSTANDING
=========================================================
Weighted Average Number of Common Shares Outstanding 66,078 59,330
Common Shares Issuable Upon the Assumed Exercise of Stock
Options and Stock Warrants 14,604 12,464
Common Shares Repurchased Through Treasury Stock Method
Upon the Assumed Exercise of Stock Options and Stock (4,615) (5,076)
Warrants
Assumed Conversion of Convertible Preferred Stock 10,526 12,104
-----------------------------------
Weighted Average Number of Common Shares 86,593 78,822
===================================
EARNINGS PER SHARE
=========================================================
NET INCOME PER COMMON SHARE $ 0.18 $ 0.13
===================================
</TABLE>
<PAGE> 1
EXHIBIT 15
LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION
To LCI International, Inc.:
We are aware that LCI International, Inc. has incorporated by reference in its
Form S-8 Registration Statements File No. 33-64838, No. 33-74246, No. 33-94120
and No. 333-2580 and in its Form S-3 Registration Statement No. 33-96186 its
Form 10-Q for the quarter ended March 31, 1996, which includes our report dated
April 24, 1996, covering the unaudited interim financial information contained
therein. Pursuant to Regulation C of the Securities Act of 1933, that report
is not considered a part of the Registration statement prepared or certified by
our Firm or a report prepared or certified by our Firm within the meaning of
Sections 7 and 11 of the Act.
Washington, D.C.
May 8, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AS OF MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 176,705<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 220,937
<PP&E> 327,937
<DEPRECIATION> (187,763)
<TOTAL-ASSETS> 906,569
<CURRENT-LIABILITIES> 140,942
<BONDS> 0
0
99,993
<COMMON> 662
<OTHER-SE> 259,869
<TOTAL-LIABILITY-AND-EQUITY> 906,569
<SALES> 0
<TOTAL-REVENUES> 250,559
<CGS> 0
<TOTAL-COSTS> 148,587
<OTHER-EXPENSES> 71,080
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,376
<INCOME-PRETAX> 23,516
<INCOME-TAX> 8,230
<INCOME-CONTINUING> 15,286
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,286
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
<FN>
<F1>Trade Accounts Receivable, Less Allowance for Doubtful Accounts.
</FN>
</TABLE>
