<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, 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 0-21602
----------
LCI INTERNATIONAL, INC.
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3498232
- ------------------------------- ------------------------------------
(State or 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)
(703) 442-0220
----------------------------------------------------
(Registrant's telephone number, including area code)
---------------------------------------------------------------------------
(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, 1997, there were 78,022,225 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, 1997 and 1996 3
Unaudited Condensed Consolidated Balance Sheets--
As of March 31, 1997 and December 31, 1996 4 - 5
Unaudited Condensed Consolidated Statement of Shareowners' Equity--
For the Three Months Ended March 31, 1997 6
Unaudited Condensed Consolidated Statements of Cash Flows--
For the Three Months Ended March 31, 1997 and 1996 7
Notes to Interim Unaudited Condensed Consolidated Financial Statements 8 - 17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 18 - 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURE 29
EXHIBIT INDEX 30
EXHIBITS
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
LCI INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
(in millions, except for per share amounts)
<TABLE>
<CAPTION>
1997 1996
----------------- --------------
<S> <C> <C>
REVENUES $ 314.7 $ 250.6
Cost of services 183.6 148.6
----------------- --------------
GROSS MARGIN 131.1 102.0
Selling, general and administrative expenses 71.5 56.7
Depreciation and amortization 18.7 14.1
----------------- --------------
OPERATING INCOME 40.9 31.2
Interest and other expense, net 6.7 7.7
----------------- --------------
EARNINGS BEFORE INCOME TAXES 34.2 23.5
Income tax expense 13.7 8.2
----------------- --------------
NET INCOME 20.5 15.3
Preferred dividends -- 1.4
----------------- --------------
EARNINGS ON COMMON STOCK $ 20.5 $ 13.9
================= ==============
Earnings per Common Share $ 0.24 $ 0.18
================= ==============
Weighted Average Number of Common Shares 86.1 86.6
================= ==============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
LCI INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
ASSETS
------ March 31, December 31,
1997 1996
------------------- ------------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Trade accounts receivable, net $ 95.4 $ 85.2
Current deferred tax assets, net 40.1 48.9
Prepaids and other 20.3 16.4
------------------- ------------------
Total current assets 155.8 150.5
------------------- ------------------
PROPERTY, PLANT AND EQUIPMENT:
Fiber optic network 393.3 392.5
Technology platforms, equipment and building lease 139.7 123.2
Less - Accumulated depreciation and amortization (169.7) (171.8)
------------------- ------------------
363.3 343.9
Plant under construction 65.4 58.9
------------------- ------------------
Total property, plant and equipment, net 428.7 402.8
------------------- ------------------
OTHER ASSETS:
Excess of cost over net assets acquired, net 347.5 350.5
Other, net 44.8 46.2
------------------- ------------------
Total other assets 392.3 396.7
------------------- ------------------
Total Assets $ 976.8 $ 950.0
------------------- ------------------
</TABLE>
(Continued on next page)
4
<PAGE> 5
LCI INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(in millions)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREOWNERS' EQUITY
----------------------------------- March 31, December 31,
1997 1996
--------------- ----------------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 27.4 $ 37.1
Facility costs accrued and payable 125.5 123.0
Accrued expenses and other 56.3 53.3
--------------- ----------------
Total current liabilities 209.2 213.4
--------------- ----------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
242.2 235.8
OTHER LIABILITIES AND DEFERRED CREDITS 69.3 70.0
--------------- ----------------
COMMITMENTS AND CONTINGENCIES
SHAREOWNERS' EQUITY:
Preferred Stock - Authorized 15.0 shares, no shares issued
and outstanding - -
Common stock - Authorized 300.0 shares, issued and outstanding
78.0 shares as of March 31, 1997 and 77.5 shares as of
December 31, 1996 0.8 0.8
Paid-in capital 432.0 427.2
Retained earnings 23.3 2.8
--------------- ----------------
Total shareowners' equity 456.1 430.8
--------------- ----------------
Total Liabilities and Shareowners' Equity $ 976.8 $ 950.0
=============== ================
</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, 1997
(Unaudited)
(in millions)
<TABLE>
<CAPTION>
Common Stock
----------------------------
Issued
and $.01 Par Paid- Retained
Outstanding Value In Capital Earnings Total
-------------- ----------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 77.5 $ 0.8 $ 427.2 $ 2.8 $ 430.8
Employee stock purchases and
exercise of options/warrants,
including related tax benefits .5 -- 4.8 -- 4.8
Net Income -- -- -- 20.5 20.5
-------------- ----------- -------------- ------------ --------------
BALANCE AT MARCH 31, 1997 78.0 $ 0.8 $ 432.0 $ 23.3 $ 456.1
============== =========== ============== ============ ==============
</TABLE>
The accompanying notes are an integral part of this statement.
6
<PAGE> 7
LCI INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
(in millions)
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash provided by operating activities $ 39.2 $ 28.6
----------------- -----------------
INVESTING ACTIVITIES:
Capital expenditures (40.9) (29.6)
Payments for acquisitions and other (5.0) (99.3)
----------------- -----------------
Net cash used in investing activities (45.9) (128.9)
----------------- -----------------
FINANCING ACTIVITIES:
Net debt borrowings 1.9 99.9
Preferred dividend payments -- (1.4)
Proceeds from employee stock plans and warrants 4.8 1.8
----------------- -----------------
Net cash provided by financing activities 6.7 100.3
----------------- -----------------
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 $ -- $ --
================= =================
</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 a fair statement of the results for the three
months ended March 31, 1997 and 1996. All such adjustments are of a normal
recurring nature.
(2) BUSINESS ORGANIZATION AND PURPOSE
The financial statements presented herein are for LCI International,
Inc., a Delaware corporation, and its subsidiaries (collectively LCI or the
Company). Included are the condensed consolidated statements of operations for
the three months ended March 31, 1997 and 1996, the condensed consolidated
balance sheets as of March 31, 1997 and December 31, 1996, the condensed
consolidated statement of shareowners' equity for the three months ended March
31, 1997, and the condensed consolidated statements of cash flows for the three
months ended March 31, 1997 and 1996.
LCI is a facilities-based telecommunications company that provides
voice and data transmission services to residential and business customers, as
well as other telecommunications carriers throughout the United States and
international locations. The Company serves its customers through owned and
leased digital fiber-optic facilities.
(3) ACCOUNTING POLICIES
Note 2 of the Notes to Consolidated Financial Statements in LCI's 1996
Annual Report summarizes the Company's significant accounting policies.
PRINCIPLES OF CONSOLIDATION. The accompanying Condensed Consolidated
Financial Statements (Unaudited) include the accounts of LCI and its
wholly-owned subsidiaries. All material intercompany transactions and balances
have been eliminated.
WEIGHTED AVERAGE NUMBER OF COMMON SHARES. For all periods presented,
the weighted average number of common shares includes the Company's Common
Stock, par value $.01 per share (Common Stock), and the impact of Common Stock
equivalents using the treasury stock method. For 1996, the weighted average
number of common shares includes the actual common shares issued for the
conversion of previously outstanding 5% Cumulative Convertible Exchangeable
Preferred Stock, par value $.01 per share (Preferred Stock) and the assumed
conversion of any remaining Preferred Stock outstanding during the period.
8
<PAGE> 9
EARNINGS PER COMMON SHARE. For the three months ended March 31, 1997
and 1996, the earnings per common share is calculated as net income before
preferred dividends divided by the weighted average number of common shares, as
defined above. Primary earnings per common share were not materially different
from fully diluted earnings per share, for the three months ended March 31,
1997 and 1996,
(4) ACCOUNTS RECEIVABLE SECURITIZATION
Under the Company's agreement to sell trade accounts receivable
balances (Securitization Program), LCI SPC I, Inc. (SPC), a bankruptcy-remote
subsidiary of the Company, had sold but not yet collected, a total of $112
million of accounts receivable as of March 31, 1997. The proceeds were used to
reduce the outstanding balance of the Company's long-term debt. The accounts
receivable balances sold are not included in the accompanying condensed
consolidated balance sheet as of March 31, 1997. The Company retains
substantially the same risk of credit loss as if the receivables had not been
sold, and has established reserves for such estimated credit losses.
Under the Securitization Program, the Company acts as agent for the
purchaser of the receivables by performing recordkeeping and collection
functions on the participation interest sold. The agreement also contains
certain covenants regarding the quality of the accounts receivable portfolio,
as well as financial covenants which are substantially identical to those
contained in the Company's Credit Facility (See Note 5). Except in certain
limited circumstances, SPC is subject to certain contractual prohibitions
concerning the payment of dividends and the making of loans and advances to
LCI.
(5) LONG-TERM DEBT
The Company can borrow up to $700 million from a syndicate of banks
under a Revolving Credit Facility (Credit Facility). The amount that can be
borrowed under the Credit Facility is subject to reduction based on the
outstanding balance beginning on June 30, 1998 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% based on the relationship of the
level of borrowings to operating cash flow (leverage ratio). The weighted
average interest rate on the outstanding borrowings under the Credit Facility
on March 31, 1997 was 6.17%. The Credit Facility contains various financial
covenants, the most restrictive being the leverage ratio requirement. As of
March 31, 1997, the Company was in compliance with all Credit Facility
covenants and had $215 million outstanding under the Credit Facility. The
carrying amount of the Credit Facility approximates its fair value as the
underlying instruments are variable rate notes that reprice frequently based on
market changes.
The Company has various financial instruments to manage interest rate
risk on its Credit Facility. These instruments include an interest rate cap
agreement, which limits the base interest rate to 7.5%, and an interest rate
swap agreement, which has the effect of changing the variable-rate payments on
the Credit Facility into fixed-rate payments. In the event of non-performance
by the banks, the Company would be obligated to make the contractual payments
under the Credit Facility. The Company believes that the probability of such an
event is remote.
9
<PAGE> 10
(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 five-year contract with a particular third-party
carrier which began in August 1995. This contract has minimum annual usage
requirements and an increasing cumulative minimum usage requirement, which if
not met, subject the Company to an underutilization charge. Through March 31,
1997, the Company has exceeded the cumulative minimum usage of $103 million
established for the second year. The Company's minimum monthly billing
commitments under all other vendor agreements are approximately $15 million
through the end of 1997. The Company has historically met all minimum billing
requirements and believes that the minimum usage commitments will be met.
CAPITAL REQUIREMENTS. During 1997, the Company expects that its nonbinding
commitment for capital expenditures (excluding acquisitions) will increase from
the levels expended in 1996 and is dependent on the Company's geographic and
revenue growth. The Company's capital requirements are primarily for switching
and transmission facilities and technology platforms arising from the Company's
strategic expansion plans.
In addition to its ongoing capital requirements, the Company entered
into an agreement, in February 1997, to extend its fiber-optic network. This
commitment will extend the Company's fiber-optic network by over 3,100 route
miles, and is expected to require incremental capital expenditures between $115
million and $125 million. The amount paid and the timing of payment will
depend on the delivery of the facilities, which is expected in the second half
of 1997 and early 1998.
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. The suit alleged age discrimination by the Company among other things,
and sought $42.8 million in compensatory and punitive damages. During 1993, a
jury returned a verdict in favor of the Plaintiffs and the Common Pleas Court
awarded approximately $8.1 million in damages and attorney's fees.
The matter was appealed by both the Plaintiffs and the Defendant
through various courts. In December 1996, the Supreme Court of Ohio reversed
the lower courts, finding that, as a matter of law, there was insufficient
evidence to sustain the verdict for the Plaintiffs. On April 15, 1997, the
Plaintiffs filed a Petition for Writ of Certiorari (Petition) asking the United
States Supreme Court to review the case. At this time, the Company is unable
to determine whether the United States Supreme Court will accept the case for
review.
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,
although the ultimate outcome of these claims cannot be ascertained at this
time, current pending or threatened litigation matters will not have a material
adverse impact on the Company's results of operations or financial position.
10
<PAGE> 11
(7) SHAREOWNERS' EQUITY
SHAREOWNER RIGHTS PLAN AND PREFERRED STOCK. In January 1997, the
Company adopted a rights agreement (Rights Agreement), designed to ensure the
shareowners receive fair and equal treatment in the event of any proposed
takeover of the Company. One preferred share purchase right (Right) was
issued for each share of the Company's Common Stock to shareowners of record on
January 22, 1997. Until the occurence of a Distribution Date (as defined in
the Rights Agreement), the Rights will be evidenced by the Common Stock
certificates and may be transferred only with the Common Stock. Each Right,
when exercisable, represents the right to purchase one one-thousandth of a
share of a new issue of preferred stock of the Company, designated as Junior
Participating Preferred Stock, par value $.01 per share or, in certain
circumstances, to purchase shares of Common Stock at less than the prevailing
market price. As of March 31, 1997 no such preferred stock was issued or
outstanding. The Rights will be exercisable only in the event that any person
or entity, together with its affiliates or associates, acquires more than a
certain percentage of Common Stock of the Company.
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, 1997, the Company granted
options to purchase 2.2 million shares of 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 0.4 million shares of Common Stock during the three
months ended March 31, 1997 pursuant to exercises of options under all stock
option plans.
The Company also has an Employee Stock Purchase Plan and maintains a
defined contribution plan for its employees which allows participants to invest
in Common Stock of the Company. The Company issued a total of 0.1 million
shares of its Common Stock under these plans for the three months ended March
31, 1997.
(8) INCOME TAXES
The provision for income taxes for the three months ended March 31,
1997 and 1996, consists of :
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------------------------
(in millions) 1997 1996
---------------- ----------------
<S> <C> <C>
Current tax expense:
Federal $ 0.7 $ 0.4
State 0.3 0.2
---------------- ----------------
Total current tax expense 1.0 0.6
---------------- ----------------
Deferred tax expense:
Increase in deferred tax liabilities 1.2 0.2
Decrease in deferred tax asset 11.5 8.6
Decrease in valuation allowance, net -- (1.2)
---------------- ----------------
Total deferred tax expense 12.7 7.6
---------------- ----------------
Total income tax expense $ 13.7 $ 8.2
================ ================
</TABLE>
11
<PAGE> 12
The effective income tax rate varies from the Federal statutory income
tax rate for the three months ended March 31, 1997 and 1996, as follows:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------------------------
1997 1996
---------------- ---------------
<S> <C> <C>
Expected tax expense at federal
statutory income tax rate: 35.0% 35.0%
Effect of:
State income tax expense 3.7 5.0
Non-deductible expenses 1.3 1.4
Decrease in valuation allowance, net -- (5.1)
Other, net -- (1.3)
---------------- ---------------
Income tax expense 40.0% 35.0%
================ ===============
</TABLE>
The effective tax rate of 40% and 35% for the three months ended March
31, 1997 and 1996, respectively, 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.
The Company has generated significant net operating losses (NOLs) that
may be used to offset future taxable income. Each 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, 1997, the Company had
NOL carryforwards for income tax purposes of $78 million, subject to various
expiration dates from 2000 to 2010. The Company believes the utilization of
such NOLs is likely.
The Company's deferred income tax balances include $40.1 million in
current deferred tax assets, net and $55.0 million in other noncurrent
liabilities as of March 31, 1997. As of December 31, 1996, deferred income tax
balances included $48.9 million in current deferred tax assets, net and $53.4
million in noncurrent other liabilities.
12
<PAGE> 13
(9) EARNINGS PER SHARE
In February 1997, Statement of Financial Accounting Standards (SFAS) No.
128 "Earnings per Share" was issued, which changes the methodology for
calculating earnings per share. Implementation of SFAS 128 is required for
financial statements issued for periods ending after December 15, 1997,
including interim periods; earlier adoption is not permitted. Pro forma
information in accordance with SFAS 128 is:
<TABLE>
<CAPTION>
(in millions, except per share amounts) For the Three Months Ended March 31, 1997
---------------------------------------------------
Per-Share
Income Shares Amount
------------- --------------- ---------------
<S> <C> <C> <C>
Net income $ 20.5
Less: preferred stock dividends -
-------------
Basic Earnings per Share
Income available to common shareowners 20.5 77.7 $ 0.26
===============
Effect of Dilutive Securities
Stock Options - 4.0
Warrants - 4.4
------------- ---------------
Diluted Earnings per Share
Income available to common shareowners
plus assumed conversions $ 20.5 86.1 $ 0.24
===================================================
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended March 31, 1996
---------------------------------------------------
Per-Share
Income Shares Amount
------------- --------------- ---------------
<S> <C> <C> <C>
Net income $ 15.3
Less: preferred stock dividends (1.4)
Basic Earnings per Share
Income available to common shareowners 13.9 66.1 $ 0.21
===============
Effect of Dilutive Securities
Stock Options 5.1
Warrants 4.6
Convertible preferred stock 1.4 10.5
------------- ---------------
Diluted Earnings per Share
Income available to common shareowners
plus assumed conversions $ 15.3 86.3 $ 0.18
===================================================
</TABLE>
Options to purchase 2.4 million shares of common stock were outstanding
during the three months ended March 31, 1997 but were not included in the
computation of diluted earnings per share because the exercise prices of the
options were greater than the average market price of the Common Stock for the
period.
13
<PAGE> 14
(10) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company has an effective shelf registration statement registering
$300 million of debt and/or equity securities, for issuance on a delayed or
continuous basis. Any debt securities issued may be guaranteed by certain of
the Company's wholly-owned subsidiaries (Guarantor Subsidiaries). Such
guarantees will be full, unconditional and joint and several. Certain of the
Company's subsidiaries would not provide any guarantees (Non-Guarantor
Subsidiaries) primarily as a result of contractual prohibitions. The primary
Non-Guarantor Subsidiary is SPC, discussed in Note 3. Separate financial
statements of the Guarantor Subsidiaries have not been presented because the
Company's management has determined that they would not be material to
investors. The following supplemental financial information sets forth, on an
unconsolidated basis, statement of operations, balance sheet, and statement of
cash flow information for the parent company only (Parent Company), the
Guarantor Subsidiaries and the Non-Guarantor Subsidiaries. The comparative
statements for 1996 have not been presented as the Non-Guarantor information is
not material to the consolidated financial statements for that period. The
supplemental financial information reflects the Company's investments in
subsidiaries using the equity method of accounting. Certain immaterial
reclassifications have been made to provide for uniform disclosure for the
period presented.
14
<PAGE> 15
(10) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
(Unaudited)
(in millions)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------ -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ -- $ 314.7 $ -- $ -- $ 314.7
Cost of services -- 183.6 -- -- 183.6
------------ -------------- -------------- -------------- --------------
Gross margin 131.1 -- -- 131.1
Selling, general and
administrative expenses -- 71.5 -- -- 71.5
Depreciation and amortization -- 18.7 -- -- 18.7
------------ -------------- -------------- -------------- --------------
Operating income -- 40.9 -- -- 40.9
Interest and other (income)
expense, net 4.3 4.7 (2.3) -- 6.7
Intercompany (income) expense (8.7) 8.7 -- -- --
Equity in earnings of subsidiaries (17.9) -- -- 17.9 --
------------ -------------- -------------- -------------- --------------
Income before income taxes 22.3 27.5 2.3 (17.9) 34.2
Income tax expense 1.8 11.0 .9 -- 13.7
------------ -------------- -------------- -------------- --------------
Net income $ 20.5 $ 16.5 $ 1.4 $ (17.9) $ 20.5
============ ============== ============== ============== ==============
</TABLE>
(Continued on next page)
15
<PAGE> 16
(10) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(Unaudited)
(in millions)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Trade accounts receivable, net $ -- $ 17.6 $ 77.8 $ -- $ 95.4
Current deferred tax assets, net 14.5 25.6 -- -- 40.1
Prepaids and other 14.6 15.7 -- (10.0) 20.3
Intercompany receivable 376.1 -- -- (376.1) --
--------------- --------------- -------------- -------------- --------------
Total current assets 405.2 58.9 77.8 (386.1) 155.8
Property, plant and equipment, net -- 428.7 -- -- 428.7
Excess of cost over net assets acquired, net -- 347.5 -- -- 347.5
Investment in affiliates 268.6 -- -- (268.6) --
Other, net 16.0 28.3 .5 -- 44.8
--------------- --------------- -------------- -------------- --------------
Total Assets $ 689.8 $ 863.4 $ 78.3 $ (654.7) $ 976.8
=============== =============== ============== ============== ==============
LIABILITIES AND SHAREOWNERS' EQUITY
- -----------------------------------
CURRENT LIABILITIES:
Accounts payable $ -- $ 27.4 $ -- $ -- $ 27.4
Facility costs accrued and payable -- 125.5 -- -- 125.5
Intercompany payable -- 363.1 13.0 (376.1) --
Accrued expenses and other -- 65.3 1.0 (10.0) 56.3
--------------- --------------- -------------- -------------- --------------
Total current liabilities -- 581.3 14.0 (386.1) 209.2
Long-term debt and
Capital lease obligations 229.6 12.6 -- -- 242.2
Other liabilities and deferred credits 4.1 65.1 .1 -- 69.3
SHAREOWNERS' EQUITY:
Preferred Stock 66.5 66.5 (66.5) (66.5) --
Common stock .8 -- 12.0 (12.0) .8
Paid-in capital 432.0 43.2 60.5 (103.7) 432.0
Retained (deficit) earnings 23.3 94.7 (8.3) (86.4) 23.3
--------------- --------------- -------------- -------------- --------------
Total shareowners' equity 456.1 204.4 64.2 (268.6) 456.1
--------------- --------------- -------------- -------------- --------------
Total Liabilities and
Shareowners' Equity $ 689.8 $ 863.4 $ 78.3 $ (654.7) $ 976.8
=============== =============== ============== ============== ==============
</TABLE>
(Continued on next page)
16
<PAGE> 17
(10) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997
(Unaudited)
(in millions)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net cash provided by (used in)
operating activities $ (11.5) $ 50.7 $ -- $ -- $ 39.2
------------- -------------- -------------- -------------- --------------
INVESTING ACTIVITIES:
Capital expenditures -- (40.9) -- -- (40.9)
Payments for acquisitions and other -- (5.0) -- -- (5.0)
------------- -------------- -------------- -------------- --------------
Net cash (used in) investing activities -- (45.9) -- -- (45.9)
------------- -------------- -------------- -------------- --------------
FINANCING ACTIVITIES:
Net debt payments 6.7 (4.8) -- -- 1.9
Proceeds from employee stock
plans and warrants 4.8 -- -- -- 4.8
------------- -------------- -------------- -------------- --------------
Net cash provided by (used in)
financing activities 11.5 (4.8) -- -- 6.7
------------- -------------- -------------- -------------- --------------
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 $ -- $ -- $ -- $ -- $ --
============= ============== ============== ============== ==============
</TABLE>
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<PAGE> 18
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION - INDUSTRY ENVIRONMENT
Historically, the Company has operated in the $80 billion
long-distance telecommunications industry. Recent legislative and regulatory
activity is designed to create one telecommunications industry to encompass
both long-distance and local telecommunications services. The Company intends
to provide combined local and long-distance services to compete in what is
estimated to be a $150 billion combined market. The current industry
environment subjects the Company to varying degrees of legislative and
regulatory oversight on both the national and state levels. The following
potential changes in the legislative and regulatory environment can impact the
nature and degree of the competition in the telecommunications industry.
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 local networks to competition. Under the legislation, the RBOCs
can immediately provide long-distance service between Local Access Transport
Areas (interLATA) outside of their local service territories. However, an RBOC
must apply to the Federal Communications Commission (FCC) to provide interLATA
long-distance services within any of the states in which the RBOC currently
operates. An RBOC must satisfy a set of pro-competitive criteria before the
FCC will approve an RBOC's request to provide in-region interLATA long-distance
services. In addition, the FCC must consult with the applicable state relative
to the RBOC's compliance with the requirements of the Act. Finally, the FCC
must consult with the Department of Justice (DOJ) and give substantial weight
to the DOJ's comments.
On January 2, 1997, Ameritech of Michigan became the first RBOC to apply for
in-region long-distance authority. Ameritech withdrew its application on
February 11, 1997, after the FCC struck from the record the interconnection
agreement between Ameritech and AT&T, because it was not a binding agreement
approved under the Act. On April 11, 1997, SBC Communications, Inc.
(SBC), applied to the FCC for authority to provide in-region long-distance
within the state of Oklahoma. On April 21, 1997, the Association for Local
Telecommunications Services filed a motion to dismiss SBC's request on the
grounds that its application does not comply with the requirements of the Act.
LCI will be a participant in the SBC proceeding.
The legislation provides a framework for the Company and other
long-distance carriers to compete with incumbent local exchange carriers (LECs)
by reselling service of local telephone companies, interconnecting with LEC
network facilities at various points in the network (i.e., unbundled network
elements) or building new local-service facilities. The Company has signed
local-service agreements with Ameritech, BellSouth and NYNEX, and is currently
in formal negotiations with other LECs to reach local service agreements. LCI
intends to vigorously compete in the local service market. Initially, the
Company will provide local service to customers on a bundled resale basis. In
the future, the Company may decide to buy and resell unbundled network
elements, which could also be used as a platform to provide total access
services as well as local
18
<PAGE> 19
services. The Company could also decide in the future to build local-service
facilities or use a competitive access provider to provide local service. The
Company's decision on the method to provide local service is dependent on the
economic viability of the options and the outcome of several regulatory
proceedings, which may be different state-by-state.
REGULATORY MATTERS
In order to implement the Act, the FCC was required to undertake a
variety of regulatory actions which can impact competition in the
telecommunications industry. Certain of these regulatory actions are described
below.
Interconnection Order. In August 1996, the FCC adopted a comprehensive
regulatory framework to implement policies, rules and procedures regarding
local-service competition as required under the Act (Interconnection Order).
The Interconnection Order establishes a minimum national framework for
interconnection, the purchase of unbundled local network elements, resale
discounts and procedures by which agreements for the provision of local service
through LECs are to be arbitrated. Under the Interconnection Order, the states
will have an important role implementing and applying local interconnection
policies, rules and procedures.
Several states, companies, associations and other entities appealed the
Interconnection Order. The United States Court of Appeals for the Eighth
Circuit issued a stay of the rules implementing the pricing and most favored
nation provisions of the Act adopted in the Interconnection Order, pending the
outcome of the appeals. Because the legal outcome of these appeals is
uncertain, the Company is unable to predict what impact the pending judicial
proceedings will have on local service competition or on RBOC provision of
in-region interLATA long-distance services.
Access Charge Reform. In December 1996, the FCC proposed changes to
access charges levied by LECs on long-distance service providers and universal
service. Access charges currently represent approximately one-half of the
revenues for the long-distance telecommunications industry. The FCC's intention
is to require the charges for access services to be consistent with actual
economic cost. The FCC has proposed two approaches for access charge reform:
The first proposed solution is a market-based approach that relies on
competitive pressure, while the second is a prescriptive approach which would
involve FCC intervention. It is widely expected that material changes to
current industry costs structures could result from these proceedings. The
Company intends to vigorously participate in these proceedings, which are
expected to be resolved during the second quarter of 1997. In light of the
uncertainty regarding the FCC's ultimate actions in these proceedings, the
Company is unable to predict what impact the pending proceedings will have on
the Company's cost structure.
Payphone Compensation. On September 20, 1996, the FCC adopted an order
implementing certain requirements of the Act pertaining to compensation for the
use of payphones. The order established, for the initial year of
implementation, a specific monthly fee to be paid to each payphone service
provider (PSP) by all long-distance carriers with annual revenue equal or
exceeding $100 million. The FCC established a total monthly compensation per
payphone of $45.85 and the Company's allocation of this total was established
at $.45 per phone on a monthly basis. Beginning with the second year after
adoption of the order, long-distance carriers and interLATA toll providers
(including LECs) will be required to pay compensation to the PSP on a per
completed call basis. The fee will be required on all "dial-around" calls,
including debit card and calling card calls for intrastate, interstate, and
international calls. The FCC has established a per call default rate
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<PAGE> 20
of $.35 per call. In the third year, per call compensation will be based upon
the local coin rate set by the PSP. Long-distance carriers are permitted to
pass through actual compensation costs to the end-user customer. LCI has filed
a challenge to the FCC's payphone compensation order in the District of
Columbia Circuit Court of Appeals, in conjunction with AT&T Corp. (AT&T), MCI
Telecommunications Corporation (MCI), Sprint Corporation (Sprint) and Cable &
Wireless. The order, if upheld, will increase the Company's cost of providing
long-distance service from payphones that are not subscribed to LCI.
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 combined local and long-distance services to
existing and prospective customers. The Company has received approval to
resell local service in 24 states and the District of Columbia, and has
applications for local service authority pending in another four states. The
Company is currently reselling local telecommunications service in 18 markets.
COMPETITION
The long-distance telecommunications market is highly competitive. The
principal competitive factors affecting the Company's market share are pricing,
regulatory developments as described above, customer service, and diversity of
services and features. As a result of the passage of the Act, the nature of the
industry is expected to change by allowing carriers other than LECs to provide
local service while RBOCs will be permitted to provide long-distance service.
As a result, the Company expects competition within the industry to increase in
both the long-distance and local markets.
Several of the Company's competitors are substantially larger and have
substantially greater financial, technical and marketing resources. As the
Company grows, it expects to face increased competition, particularly from
AT&T, MCI, and Sprint. The Company also competes with other interexchange
carriers and resellers as well as LECs in various types of long-distance
services. The Company's pricing strategy is to offer a simple, flat-rate
pricing structure with rates generally below those of AT&T, MCI and Sprint.
Certain long-distance carriers offer flat-rate pricing programs and recently
one carrier began an incremental rounding program, that may appear similar to
the Company's services. LCI continues to believe its Simple, Fair and
Inexpensive marketing and service pricing approach is very competitive in
retaining existing customers, as well as obtaining new customers. The Company's
ability to compete effectively will depend on maintaining exceptional customer
service and high quality, market-driven services at prices generally equal to
or below those charged by its major competitors.
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<PAGE> 21
GENERAL - RESULTS OF OPERATIONS
The Company's revenues primarily consist of switched and private-line
revenues. Switched revenues are a function of switched minutes of use (MOUs)
and rate structure (rates charged per MOU), which 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 provides service to its
customers through leased and owned digital fiber-optic facilities.
Collectively, these facilities constitute the Company's network (the Network).
The Company's cost of services consists primarily of expenses incurred for
origination, termination and transmission of calls through LECs and over the
Company's Network, and transmission through other long-distance carriers.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AS COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 1996
REVENUES. Revenues for the three months ended March 31, 1997
increased 26% to $314.7 million on 2.5 billion MOUs as compared to $250.6
million on 1.8 billion MOUs for the three months ended March 31, 1996. The
following table provides further information regarding the Company's revenues:
<TABLE>
<CAPTION>
Three Months
(in millions, except switched revenue per MOU) Ended March 31,
----------------------------------------------
1997 1996 Change
----------------------------------------------
<S> <C> <C> <C>
Total Revenues $ 314.7 $ 250.6 26%
MOUs 2,509 1,810 39%
Switched Revenue per MOU (1) $ 0.1159 $ 0.1262 (8)%
</TABLE>
(1)Switched revenue divided by MOUs
Revenues from business customers increased approximately 20%
year-over-year for the three months ended March 31, 1997, and continued to
represent two-thirds of the Company's total revenues. Residential/small
business revenues represented approximately one-third of total revenues and
increased approximately 50% year-over-year for the three months ended March 31,
1997. Growth in international service revenues across all revenue service lines
was approximately 50% for the three months ended March 31, 1997 compared to the
same period in 1996.
The Company experienced an 8% year-over-year decrease in revenue per
MOU for the three months ended March 31, 1997. Revenue per MOU is affected by
changes in the underlying cost structure and revenue mix changes. Changes in
revenue per MOU are not necessarily indicative of the performance that can be
expected in the Company's gross margin. The Company has continued to respond to
competitive pricing pressure in the business market and has experienced a
change in the mix of its business volumes from switched services to dedicated
access services, which have a lower revenue per MOU. The growth in business and
international service volumes, as measured in MOUs, exceeded the growth in
revenue due to declining prices. Costs for access charges, especially in
international terminating costs, have declined with the declines in revenue
rates. The Company's growth in various segments, which have different rate
structures and generate a variety of gross margins, has changed its revenue mix
and consequently impacted the average revenue per MOU. The Company is committed
to growing in all market segments.
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<PAGE> 22
The Company experienced an increase in its sales allowance in 1997,
reflected as a charge to gross revenue, as a result of the growth in revenue
and a shift in the customer mix toward the residential/small business service
segment. A significant portion of the residential/small business accounts
receivable balance is billed and collected through LECs. The Company receives
information from the LECs about uncollectible accounts three to thirteen months
after the account is billed. Due to the delay of information from the LECs, the
Company is continually updating its estimated liability for future
uncollectible accounts, that will be settled in later periods. The Company has
increased sales allowance through a charge to gross revenue to include a higher
estimate for these LEC billed receivables.
The Company uses a variety of channels to market its services. In
addition to its internal sales force, the Company uses a combination of other
channels, such as advertising, telemarketing and third-party sales agents. With
respect to certain third-party sales agents, compensation for sales is paid to
agents in the form of an ongoing commission based upon collected revenue
attributable to customers signed up by the agents to use the Company's
long-distance services. Responsibility for the customer relationship, including
billing and customer service, is maintained by the Company. American
Communications Network, Inc., a nationwide network of third-party sales agents,
continued to be the most successful of the Company's sales agents. During 1997,
the Company expects to continue the expansion of its sales presence across the
country through a variety of channels.
GROSS MARGIN. The Company's gross margin increased 29% to $131.1
million for the three months ended March 31, 1997 from $102.0 million for the
three months ended March 31, 1996. During the three months ended March 31,
1997, gross margin as a percentage of revenue increased to 41.7% year-over-year
from 40.7% for the same period in 1996. The increase in the gross margin
percentage demonstrates the efficient use of the Network and the identification
of variable-cost off-network traffic that was cost-effectively routed onto the
Company's fixed-cost Network. In addition, the full integration of traffic from
acquired companies provided network synergies and efficiencies in 1997, as
compared to the volume of acquisition traffic that was carried by off-network
providers, at a higher cost in 1996. The Company experienced a decrease in the
cost per MOU during periods of higher volumes of MOUs as a result of these
Network efficiencies and optimization techniques.
The fiber expansion planned for the second half of 1997, will
temporarily result in redundant facilities and increased costs during the
transition period from the current leased facilities to the new owned
facilities. However, once the transition is completed, the Company will realize
a lower cost of service. The Company expects to realize the cost savings from
these new facilities beginning in early 1998. The Company continues to evaluate
strategies to reduce its cost of service, improve the reliability and
efficiency of the Network, and pursue opportunities to reduce its cost of
service per MOU.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 26% to $71.5 million for the three months
ended March 31, 1997, as compared to the same period in 1996. As a percentage
of revenues, selling, general and administrative expenses were 22.7% for the
three months ended March 31, 1997, as compared to 22.6% for the three months
ended March 31, 1996.
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<PAGE> 23
The growth in residential/small business revenue to approximately
one-third of the Company's total revenues as of March 31, 1997 was responsible
for a significant portion of the growth in selling, general and administrative
expenses. Although the residential/small business service line resulted in
increased costs, it also provided a higher gross margin, allowing the Company
to achieve growth in operating income.
The Company's selling, general and administrative expense increases
year-over-year are impacted substantially by three items: payroll, commissions
and billing services. Payroll expenses increased $5.8 million and $8.4 million
for the three months ended March 31, 1997 and 1996, respectively, as a result
of increased employees in sales and customer support. Annualized revenue per
employee has remained at approximately $500,000 per employee through the first
quarter of 1997.
The increase in selling, general and administrative expenses reflects,
in part, the $4.0 million and $8.9 million increase in commission expense for
the three months ended March 31, 1997 and 1996, respectively, over the
comparable prior periods. The growth in residential/small business revenue sold
by third-party sales agents with an ongoing commission was the primary cause of
the increase in commission expense. The costs incurred for commissions
primarily replace other variable marketing and selling expenses for this
revenue segment. Billing services expense increased $1.4 million and $3.4
million year-over-year for the three months ended March 31, 1997 and 1996,
respectively, primarily for residential/small business billing services, which
are performed by LECs. LEC billing costs declined year-over-year on a per-bill
basis, but the increase in residential/small business customers and the related
revenue, caused an overall increase in this expense for 1997 as compared to
1996. Both commission and billing services expenses grew at a rate comparable
to the total revenue growth during the three months ended March 31, 1997.
The Company anticipates an incremental increase in selling, general
and administrative expenses with the expansion of its geographic sales presence
and its entrance into the local service market. The Company also expects
continued increases in selling, general and administrative expenses as a result
of the growth in the residential/small business segment, which incurs higher
proportional costs but also provides a higher gross margin than other segments.
During the three months ended March 31, 1997, these increased expenses were
offset by productivity improvements and efficiencies.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense for the three months ended March 31, 1997 increased 32% over the same
period in 1996. The increase was due to the Company's higher level of capital
expenditures on the infrastructure for sales, customer service and other
service delivery systems in support of its growth in revenues and MOUs. In
addition, newly purchased technology has a shorter depreciable life than
compared to the previous asset base. The Company has experienced increased
depreciation resulting from the shorter depreciable lives for new technology as
compared to the Company's asset base, as well as increased amortization from
acquisitions. Depreciation and amortization expense as a percentage of revenues
remained at 6% for the first quarter of both 1997 and 1996.
OPERATING INCOME. Operating income increased 31% to $40.9 million for
the three months ended March 31, 1997, a faster rate than the growth in
revenues for the same period. As a percentage of revenues, operating income
increased to 13.0% for the three months ended March 31, 1997 compared to 12.4%
for the same period in 1996, reflecting management of Network and
23
<PAGE> 24
selling, general and administrative expenses during a period of significant
growth in revenues and MOUs.
INTEREST AND OTHER EXPENSE, NET. Interest and other expense, net of
capitalized interest, decreased to $6.7 million for the three months ended
March 31, 1997, from $7.7 million for the same period in 1996. The Company was
able to reduce its outstanding debt as of March 31, 1997 compared to the same
period in 1996, as a result of strong operating cashflow and the Securitization
Program established in August 1996 (See Note 4 to the Condensed Consolidated
Financial Statements). Through the Securitization Program the Company reduced
its long-term debt and thereby reduced the Company's leverage ratio. The
decrease in the leverage ratio resulted in a reduction of the interest rate on
the Revolving Credit Facility (Credit Facility) and accordingly decreased
interest expense for the period. The interest rate on the Company's debt is
sensitive to market rate fluctuations.
INCOME TAX EXPENSE. Income tax expense was $13.7 million for the
three months ended March 31, 1997 as compared to $8.2 million for the same
period in 1996 due to the increase in the estimated effective tax rate and the
growth in earnings before taxes. The estimated effective tax rate increased to
40% in 1997 from 35% in 1996. No net operating loss (NOL) carryforwards for
financial statement purposes were available in 1997 as a result of their full
utilization during 1996.
PREFERRED DIVIDENDS. The previously outstanding shares of 5% Cumulative
Convertible Exchangeable Preferred Stock (Preferred Stock) were redeemed on
September 3, 1996, thereby eliminating the corresponding preferred dividend
payments. The elimination of future dividend payments will result in an annual
savings of approximately $5.8 million, based upon the original 4.6 million
shares issued in August 1993.
LIQUIDITY AND CAPITAL RESOURCES
LCI International, Inc. (LCI) is a holding company and conducts its
operations through direct and indirect wholly-owned subsidiaries. LCI SPC I,
Inc. (SPC) is a wholly-owned subsidiary of LCI and facilitates the
Securitization Program. Except in certain limited circumstances, SPC is subject
to certain contractual restrictions concerning paying of cash dividends or
making loans or advances to LCI. There are however, no restrictions on the
movement of cash among the Company and the other subsidiaries in the
consolidated group, and the Company's discussion of its liquidity is based on
the consolidated group.
CASH FLOWS - OPERATING ACTIVITIES. The Company provided $39.2 million
of cash from operations for the three months ended March 31, 1997, an increase
of $10.6 million from the same period in 1996. The increase is due to the
significant growth in revenues and net income for the period, as well as
strong working capital results.
CASH FLOWS - INVESTING ACTIVITIES. The Company has supported its
growth strategy with capital expenditures and acquisitions, resulting in $45.9
million in cash used for investing activities during the first quarter of 1997.
The decrease of $83.0 million compared to the same period in the prior year,
was due to the Company's acquisitions in the first quarter of 1996. During the
three months ended March 31, 1997, the Company spent $40.9 million in capital
expenditures to acquire additional switching, transmission and distribution
capacity as well as to develop and license information systems support,
representing an increase of $11.3 million from the same period in 1996.
The Company reduced its long-term debt and thereby reduced the
Company's leverage ratio. The decrease in the leverage ratio resulted in a
reduction of the interest rate on the Revolving Credit Facility (Credit
Facility) and accordingly decreased interest expense.
24
<PAGE> 25
CASH FLOWS - FINANCING ACTIVITIES. Financing activities provided a net
$6.7 million for the three months ended March 31, 1997, compared with $100.3
million during the same period in 1996. A higher amount was used for
acquisitions in the first quarter of 1996.
CAPITAL RESOURCES. The Company has a $700 million Revolving Credit
Facility with a syndicate of banks, which allows the Company to borrow funds on
a daily basis. As a result, the Company uses its available cash to reduce the
balance of its borrowings and maintains no cash on hand. Under the Credit
Facility, the Company had $215 million outstanding as of March 31, 1997.
The amount that can be borrowed under the Credit Facility is subject
to reduction based on the outstanding balance beginning June 30, 1998 until
maturity on March 31, 2001. The interest rate on the debt outstanding 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 6.17% as of March 31, 1997. The
Credit Facility contains certain financial and negative covenant requirements.
As of March 31, 1997, the Company was in compliance with all covenants.
The Company has two separate Discretionary Lines of Credit agreements
(Lines of Credit) with commercial banks for a total of $50 million. The Lines
of Credit provide flexible short-term borrowing facilities at competitive rates
dependent upon a market indicator. The interest rate on the Lines of Credit as
of March 31, 1997 was 7.56%. As of March 31, 1997 there was $14.6 million
outstanding on the Lines of Credit. The outstanding balance is reflected in
long-term debt in the accompanying consolidated balance sheets due to the
availability under the Credit Facility.
The Company maintains a Securitization Program to sell a percentage
ownership interest in a defined pool of the Company's trade accounts
receivable. The Company can transfer an undivided interest in a designated pool
of accounts receivable on an ongoing basis to maintain the participation
interest up to $150 million. At March 31, 1997, the pool of trade accounts
receivable which was available for sale totaled approximately $123 million and
the amount of receivables sold totaled $112 million.
Although the Company believes it has sufficient operating cash flows
and available borrowing capacity to fund its current operations and anticipated
capital requirements for the forseeable future, the Company continues to
evaluate other sources of financing. The Company has an effective shelf
registration statement registering $300 million of debt and/or equity
securities. The Company continues to evaluate when, or if, additional financing
maybe required.
CAPITAL REQUIREMENTS. During 1997, the Company expects that its non-binding
commitment for capital expenditures (excluding acquisitions) will increase from
the 1996 levels and is dependent on the Company's geographic and revenue
growth. These capital requirements are primarily for switching and transmission
facilities, technology platforms and information systems applications.
The Company has relied upon strategic acquisitions as one of its means
of expanding its network, sales and service presence, and revenues across the
country. The Company evaluates each
25
<PAGE> 26
potential acquisition to determine its strategic fit within the Company's
growth, operating margin and income objectives. The Company expects to
continue to actively explore potential acquisitions and may enter into
discussions from time to time with potential acquisition candidates, but there
can be no assurance the Company will be able to enter into or complete
acquisition agreements on acceptable terms.
In addition to its ongoing capital requirements, the Company entered
into an ageement to extend its fiber-optic network by over 3,100 route miles.
The Company will make payments between $115 million and $125 million for the
fiber-optic network expansion. The amount paid and the timing of payment will
depend on the delivery of the facilities, which is expected in the second half
of 1997 and early 1998.
COMMITMENTS AND CONTINGENCIES. The Company has agreements with certain
interexchange carriers, LECs and third-party vendors to lease facilities for
originating, terminating and transport services. The third-party carriers
include WorldCom Network Services, Inc. d/b/a WilTel, Sprint and MCI.
In addition, the Company uses services provided by each RBOC, GTE and other
smaller LECs. These agreements require the Company to maintain minimum monthly
and/or annual billings based on usage. The Company has met and expects to
continue to meet such minimum usage requirements. The Company currently has
one significant contract with a third-party carrier. Subject to the ability of
that carrier to meet the Company's operational requirements, the Company is
obligated to use this carrier for a significant percentage of services that the
Company provides through its leased facilities. The amounts payable under that
contract, however, represent less than 10% of the Company's revenue on an
annual basis. (See Note 6 to the Condensed Consolidated Financial Statements.)
The Company has engineered its Network to minimize the impact on its customers
of a service failure by any third-party carrier and has established contingency
plans to reroute traffic as quickly as possible if a service failure by a
third-party carrier should occur. 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;
however, neither the Company nor the industry has experienced a catastrophic
service failure in its history.
The Company has an agreement through April 2011, with American
Communications Network, Inc. (ACN), a third-party sales agent, who had
accounted for a significant portion of the Company's residential/small business
growth. The agreement contains a provision whereby ACN will receive a payment
if there is a change in the control of the Company. In consideration for this
change in control payment, the acquiring company would receive a 31% reduction
in the ongoing commission rates paid to ACN. The change in control payment is
calculated based on a multiple of three times the average monthly collected
revenue generated by customers signed up by ACN to use the Company's
long-distance services. The monthly collected revenue average is calculated
over a 24-month performance period subsequent to the change in control. The
amount of this payment is therefore dependent upon ACN's level of performance
during the entire performance period, and cannot be reasonably estimated at
this time.
The Company has been named as a defendant in various litigation
matters. Management intends to vigorously defend these outstanding claims. The
Company believes it has adequate accrued loss contingencies and 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.)
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<PAGE> 27
FEDERAL INCOME TAXES. The Company has generated significant NOLs in
prior years that are available to reduce 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 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 on seasonality.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 - SAFE HARBOR
CAUTIONARY STATEMENT. This report contains forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995 (the Reform
Act). These forward-looking statements express the beliefs and expectations of
management regarding LCI's future results and performance and include, without
limitation, the following: statements concerning the Company's future outlook;
the Company's plans to enter the local service market; the effect of FCC and
judicial rulings pertaining to the Telecommunications Act of 1996, local
service competition and RBOC entry into the long-distance market; the
impact of marketplace competition on pricing strategies and rates; expected
revenue growth; the cost reduction strategies and opportunities to expand the
Network which may allow for increased gross margin; the expected future
interest rates and interest savings from the Securitization Program; funding of
capital expenditures and operations; the Company's beliefs regarding a
catastrophic service failure; and other similar expressions concerning matters
that are not historical facts.
Such statements are based on current expectations and involve a number
of known and unknown risks and uncertainties that could cause the actual
results, performance and/or achievements of the Company to differ materially
from any future results, performance or achievements, expressed or implied by
the forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements and any such statement is
qualified by reference to the following cautionary statements. In connection
with the safe harbor provisions of the Reform Act, the Company's management is
hereby identifying important factors that could cause actual results to differ
materially from management's expectations including, without limitation, the
following: increased levels of competition in the telecommunications industry
(including the competitive factors described in the Introduction-Industry
Environment), including RBOC entry into the interLATA long-distance industry
and the impact on pricing; the adoption and application of rules and
regulations in implementing the Act; the ability to negotiate appropriate local
service agreements with the appropriate LECs; and other risks described from
time to time in the Company's periodic filings with the Securities and Exchange
Commission. The Company is not required to publicly release any changes to
these forward-looking statements for events occurring after the date hereof or
reflect other unanticipated events.
27
<PAGE> 28
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. The suit alleged age
discrimination by the Company among other things and sought $42.8 million in
compensatory and punitive damages. During 1993, a jury returned a verdict in
favor of the Plaintiffs and the Common Pleas Court awarded approximately $8.1
million in damages and attorney's fees.
Both the Plaintiffs and the Company appealed the matter to the Court of
Appeals in Ohio, which, in a two-to-one decision, overruled each of the
Company's assignments of error and two of the Plaintiffs' claims, and sustained
the Plaintiffs' request for approximately $0.1 million in pre-judgment interest
in addition to the previous award. The Company appealed the matter to the
Supreme Court of Ohio (the Court). On December 11, 1996, the Court reversed the
Court of Appeals, finding that, as a matter of law, there was insufficient
evidence to sustain the verdict for Plaintiffs. In December 1996, the
Plaintiffs filed with the Court a Motion for Reconsideration, which was denied
by the Court in January 1997. On April 15, 1997, the Plaintiffs filed a
Petition for Writ of Certiorari (Petition) asking the United States Supreme
Court to review the case. The Company will be opposing the Petition and, at
this time, is unable to determine whether the United States Supreme Court will
accept the case for review.
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 purported to bring a class action
lawsuit against the Company, certain of its affiliates, and American
Communications Network, Inc., one of the Company's sales agents. In March 1997,
the court approved a settlement of this class action suit which became
effective as of April 25, 1997. The Company expects the final resolution of
this matter during 1997. The settlement will not have a material adverse impact
on the Company's results of operations or financial condition.
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, although the ultimate outcome of these claims cannot be
ascertained at this time, 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 30 of this report.
(b) Reports on Form 8-K: On January 22, 1997, the Company filed a report
on Form 8-K to announce its Rights Agreement.
28
<PAGE> 29
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 5, 1997 BY: /s/ Joseph A. Lawrence
------------ ----------------------
Chief Financial Officer,
Senior Vice President Finance and
Corporate Development
(as duly authorized officer and
principal financial officer)
29
<PAGE> 30
EXHIBIT INDEX
The following Exhibits are included in this Quarterly Report on Form 10-Q:
<TABLE>
<CAPTION>
Exhibit Exhibit
Number Description
------ ---------------------------------------------------------------
<S> <C>
3(i)(a) Amended and Restated Certificate of Incorporation. (1)
3(ii) Amended and Restated By-laws. (2)
4(h) Rights Agreement, dated as of January 22, 1997, between LCI
International, Inc. and Fifth Third Bank, as Rights Agent. (3)
11 Statement Regarding Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
(1) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1996.
(2) Incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 33-60558).
(3) Incorporated by reference from the Company's Current Report on
Form 8-K, dated January 22, 1997.
30
<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,
--------------------------------------------
1997 1996
--------------------------------------------
<S> <C> <C>
INCOME (LOSS) ON COMMON STOCK
===================================================
NET INCOME (LOSS) $ 20.5 $ 15.3
SHARES OUTSTANDING
===================================================
Weighted Average Number of Common Shares Outstanding 77.7 66.1
Common Shares Issuable Upon the Assumed Exercise of Stock
Options and Stock Warrants 12.7 14.6
Common Shares Repurchased Through Treasury Stock Method
Upon the Assumed Exercise of Stock Options and Stock Warrants (4.3) (4.9)
Assumed Conversion of Convertible Preferred Stock - 10.5
--------------------------------------------
Weighted Average Number of Common Shares 86.1 86.3
============================================
EARNINGS PER SHARE
===================================================
NET INCOME PER COMMON SHARE $ 0.24 $ 0.18
============================================
</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,
--------------------------------------------
1997 1996
--------------------------------------------
<S> <C> <C>
INCOME (LOSS) ON COMMON STOCK
===================================================
NET INCOME (LOSS) $ 20.5 $ 15.3
SHARES OUTSTANDING
===================================================
Weighted Average Number of Common Shares Outstanding 77.7 66.1
Common Shares Issuable Upon the Assumed Exercise of Stock
Options and Stock Warrants 12.7 14.6
Common Shares Repurchased Through Treasury Stock Method
Upon the Assumed Exercise of Stock Options and Stock Warrants (4.3) (4.6)
Assumed Conversion of Convertible Preferred Stock - 10.5
--------------------------------------------
Weighted Average Number of Common Shares 86.1 86.6
============================================
EARNINGS PER SHARE
===================================================
NET INCOME PER COMMON SHARE $ 0.24 $ 0.18
============================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q as
of March 31, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 95,419<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 155,797
<PP&E> 598,387
<DEPRECIATION> (169,691)
<TOTAL-ASSETS> 976,837
<CURRENT-LIABILITIES> 209,292
<BONDS> 0
0
0
<COMMON> 779
<OTHER-SE> 455,277
<TOTAL-LIABILITY-AND-EQUITY> 976,837
<SALES> 0
<TOTAL-REVENUES> 314,650
<CGS> 0
<TOTAL-COSTS> 255,074
<OTHER-EXPENSES> 18,674
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,730
<INCOME-PRETAX> 34,172
<INCOME-TAX> 13,669
<INCOME-CONTINUING> 20,503
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,503
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
<FN>
<F1>Trade Accounts Receivable, Less Allowance for Doubtful Accounts
</FN>
</TABLE>
