SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[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 333-16265
USN COMMUNICATIONS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3947804
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 South Riverside Plaza, Suite 401, Chicago, Illinois 60606
--------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 906-3600
N/A
----------------------------------------------------
(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 May 13, 1997, there were 721,251 shares outstanding of the
registrant's Class A Common Stock, par value $.01 per share.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 40,638,708 $ 60,569,365
Accounts receivable, net 4,346,484 3,004,408
Prepaid expenses 391,231 187,051
Other receivables 168,333 172,567
Interest receivable 99,119 249,113
------------ ------------
Total current assets 45,643,875 64,182,504
PROPERTY AND EQUIPMENT - Net 6,063,492 3,507,350
OTHER ASSETS 9,947,229 10,362,438
------------- ------------
TOTAL ASSETS $ 61,654,596 $ 78,052,292
============= ============
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND COMMON STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 6,615,995 $ 7,907,654
Accrued expenses and other liabilities 3,956,145 3,176,762
Capital lease obligations - current 284,305 277,844
Current maturities on notes payable 311,222 386,522
------------- ------------
Total current liabilities 11,167,667 11,748,782
Capital lease obligations - noncurrent 248,343 312,280
Notes payable 28,450 49,727
14% Senior Discount Notes, net of
Original Issue Discount 32,317,611 31,242,614
9% Convertible Subordinated Discount
Notes, net of Original Issue
Discount 28,888,399 28,259,555
------------- ------------
Total liabilities 72,650,470 71,612,958
REDEEMABLE PREFERRED STOCK:
9% Cumulative Convertible Pay-In-Kind
Preferred stock: par value $1:
30,000 shares authorized; 10,450
shares outstanding at 1997 and 1996 10,450 10,000
Accumulated unpaid dividends - 225,000
Additional paid-in capital 10,259,735 9,810,185
------------- ------------
Total redeemable preferred stock 10,270,185 10,045,185
COMMON STOCKHOLDERS' DEFICIT:
Common stock: par value $.01: 2,500,000
shares authorized; 718,526 shares
issued at 1997 and 1996 7,185 7,185
Additional paid-in capital 54,305,121 54,179,423
Accumulated deficit (75,577,288) (57,791,382)
Common stock held in Treasury: 1997 and
1996 - 1,000 shares (1,077) (1,077)
------------- ------------
Total common stockholders' equity (21,266,059) (3,605,851)
------------- ------------
TOTAL LIABILITIES, REDEEMABLE PREFERRED
STOCK, AND COMMON STOCKHOLDERS' DEFICIT $ 61,654,596 $ 78,052,292
============= ============
</TABLE>
See notes to Condensed Consolidated Financial Statements
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
----------------------------------
1997 1996
---------------- --------------
(UNAUDITED) (UNAUDITED)
NET SERVICE REVENUE $ 3,822,703 $ 2,280,629
COST OF SERVICES 3,507,554 1,960,653
--------------- -------------
Gross margin 315,149 319,976
EXPENSES:
Sales and marketing 10,023,979 1,603,219
General and administrative 6,462,343 2,964,611
--------------- -------------
OPERATING LOSS (16,171,173) (4,247,854)
OTHER INCOME (EXPENSE):
Interest income 643,290 148,398
Interest expense (2,036,327) (6,840)
Other income 3,305 8,093,813
--------------- -------------
Other income (expense) - net (1,389,732) 8,235,371
NET INCOME (LOSS) $ (17,560,905) $ 3,987,517
=============== =============
ACCUMULATED UNPAID PREFERRED
DIVIDENDS $ - $ 4,962,966
=============== =============
NET LOSS PER COMMON SHARE $ (24.47) $ (2.30)
=============== =============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 717,526 423,909
=============== =============
See notes to Condensed Consolidated Financial Statements
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1996
--------------- -------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ (17,560,905) $ 3,987,517
Adjustments to reconcile net income (loss)
to net cash flows from operating activities:
Depreciation and amortization 361,243 73,435
Amortization of organization costs and
intangibles 676,996 178,794
Interest accreted on debt obligation 1,703,841 -
Stock compensation award expense 125,697 -
Gain on disposal of assets - (8,078,901)
Changes in:
Accounts receivable, net (1,342,076) (630,662)
Prepaid expenses (204,180) 37,696
Other receivables 4,234 (325,142)
Interest receivable 149,994 9,858
Other assets (294,338) 99,775
Accounts payable (1,291,659) 223,034
Accrued expenses and other liabilities 779,383 (234,451)
------------- -------------
Net cash flows from operating activities (16,891,770) (4,659,047)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,917,385) (37,686)
Proceeds from sale of assets - 9,532,600
------------- -------------
Net cash flows from investing activities (2,917,385) 9,494,914
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock - 3,298
Repurchase of common stock - (1,077)
Deposits 32,550 (91,783)
Repayment of notes payable (96,577) (121,435)
Repayment of capital lease obligations (57,476) (21,808)
------------- -------------
Net cash flows from financing activities (121,503) (232,805)
------------- -------------
NET INCREASE (DECREASE) IN CASH (19,930,658) 4,603,062
CASH AND CASH EQUIVALENTS - Beginning of period 60,569,366 13,705,025
CASH AND CASH EQUIVALENTS - End of period $40,638,708 $ 18,308,087
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Dividends Paid in Kind $ 450,000 -
============== =============
Dividends Declared but Unpaid - $ 1,152,966
============== =============
Cash Paid for Interest $ 26,464 $ 7,628
============== =============
Cash Paid for Income Taxes - -
============== =============
</TABLE>
See notes to Condensed Consolidated Financial Statements
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited, condensed consolidated financial statements of USN
Communications, Inc. (the "Company") included herein have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission. The interim financial statements reflect all adjustments which
are, in the opinion of management, necessary for a fair presentation of the
results for the interim periods presented. The condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's latest
annual report on Form 10-K. The results of operations for the interim
periods should not be considered indicative of results to be expected for
the full year.
2. GAIN CONTINGENCY
In 1995, a subsidiary of the Company, USN Communications Northeast,
Inc. ("USNCN"), submitted a claim of approximately $1.4 million with TelCo
One requesting that certain revenues, purportedly not billed by TelCo One
to its USNCN customers, be paid to USNCN. In the fourth quarter of 1996,
USNCN recorded $867,000 of this claim as revenue. TelCo One is in the
process of reviewing USNCN's remaining claim and has not formally concluded
on the amount or terms of a settlement. While USNCN believes its claim has
merit, it is unable to predict, at this time, whether it will be successful
in fully resolving this matter favorably.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company commenced operations in April 1994 as a provider of
local and long distance telecommunications services to meet the needs of
small and medium-sized business subscribers, through the purchase of US
Network Corporation ("US Network"). US Network had four months of
operations prior to being acquired by the Company. Operations during this
four month period included limited administrative expenses and no revenues,
and assets consisted primarily of cash and organization costs. In October
1995, the Company, through a newly formed wholly owned acquisition
subsidiary, Quest United, Inc. ("Quest"), acquired certain assets and
assumed certain liabilities of Quest America, LP., a telecommunications
reseller and consulting firm (the "Quest Acquisition").
Initially, the Company entered the local telecommunications market
as a facilities-based competitive access provider with network facilities
in Ohio. Due to the high costs associated with the initial construction,
installation and expansion of each local network facility, including
right-of-way costs, franchise fees, interconnection charges and other
operating expenses and in anticipation of the impact of the passage of the
Telecommunications Act of 1996, the Company refocused its operations. The
Company sold its existing facilities in Ohio and certain other assets in
February 1996, and transferred certain liabilities with respect to those
facilities, to pursue a non-facilities-based approach to the local
telecommunications market.
The Company negotiated for the first broad based resale agreement
with Ameritech for local services, which was signed in November 1995, and
negotiated with NYNEX for a comprehensive local resale agreement which was
signed in July 1996. The Company also consummated various other agreements
in 1996 with certain carriers for the resale of long distance and enhanced
and other value-added services. The Company commenced the marketing and
provisioning of services under those agreements during the latter half of
1996. Although management believes that its current strategy will have a
positive effect on the Company's results of operations over the long-term,
through an increase in its subscriber base and product offerings, this
strategy is expected to have a negative effect on the Company's results of
operations over the short-term. The Company anticipates losses and negative
cash flow for the foreseeable future, attributable in part to significant
investments in operating, sales, marketing, management information
systems and general and administrative expenses. To date, the Company's
growth, including capital expenditures, has been funded primarily by the
capital contributions of Chase Venture Capital Associates, L P., CIBC Wood
Gundy Ventures, Inc., Hancock Venture Partners IV - Direct Fund, L.P., BT
Capital Partners, Inc., Northwood Capital Partners LLC, Northwood Ventures
and Enterprises & Transcommunications, LP and by the proceeds from the
September 30, 1996 sale to Merrill Lynch Global Allocation Fund, Inc. of
debt securities and warrants to purchase Class A Common Stock.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 Compared to
Three Months Ended March 31, 1996
Net service revenue increased to $3.8 million for the three months
ended March 31, 1997 from $2.3 million for the three months ended March 31,
1996. The increase in net service revenue was due primarily to a 127%
increase in the subscriber base in the Company's geographic markets, (from
approximately 1,245 customers at March 31, 1996 to approximately 2,825
customers at March 31, 1997).
Gross margin of $0.3 million for the three months ended March 31,
1997 remained flat compared to the three months ended March 31, 1996.
However, the gross margin rate decreased from 14.0% for the first quarter
of 1996 to 8.2% for the same quarter in 1997. Due to the significant change
in the Company's business strategy and corresponding change in cost
structure from the original facilities-based business to a
non-facilities-based reseller of a variety of telecommunications services,
the year to year gross margins are not comparable. The fourth quarter of
1996 was the first full quarter of operations under the new reseller
business. Negative gross margins were realized in that quarter due to the
start up of the business. The first quarter of 1997 has significantly
improved from the fourth quarter in 1996 as the reseller business is
becoming more established and policies and procedures are being
streamlined. Future quarterly gross margins are expected to continue to
improve.
Sales and marketing expenses increased $8.4 million, or 625%, from
$1.6 million for the three months ended March 31, 1996 to $10.0 million for
the three months ended March 31, 1997. The increase was due primarily to an
increase in the number of sales and marketing employees from approximately
115 at March 31, 1996 to approximately 420 at March 31, 1997, which
resulted in increases to salaries and benefits of approximately $4.9
million, travel and training costs of approximately $0.9 million,
recruitment costs of approximately $0.5 million and facility and office
related expenses of approximately $0.6 million. Additionally, advertising
costs increased approximately $1.4 million due to product launches in the
Company's target markets.
General and administrative expenses increased $3.5 million, or
218%, to $6.5 million for the three months ended March 31, 1997 versus $3.0
million for the three months ended March 31, 1996. The increase was due
primarily to an increase in the number of operations and administrative
employees from approximately 70 at March 31, 1996 to over 200 at March 31,
1997, which resulted in increases to salaries and benefits of approximately
$1.8 million and facility and office costs of approximately $0.6 million.
Additionally, fees paid to consultants and other professionals increased
approximately $0.4 million, primarily relating to the development and
expansion of the Company's customer service, billing and administrative
information systems and facilities.
Interest and other income decreased to $0.6 million for the three
months ended March 31, 1997 from $8.2 million for the three months ended
March 31, 1996 due primarily to an $8.1 million non-recurring gain on the
sale of the Company's switching facilities in Ohio in February 1996.
Interest expense increased to $2.0 million for the three months
ended March 31, 1997 from $7,000 for the three months ended March 31, 1996.
This increase was due primarily to interest expense attributable to the
Senior Notes and Convertible Notes issued in September 1996.
As a result of the factors described above, the Company had a net
loss of $17.6 million for the three months ended March 31, 1997 compared to
a net income of $4.0 million for the three months ended March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations primarily
through cash from its investors. As of March 31, 1997, the Company had cash
and cash equivalents of $40.6 million and working capital of $34.5 million.
The Company's operating activities utilized cash of approximately $16.9
million for the three months ended March 31, 1997 and $4.7 million for the
three months ended March 31, 1996.
The Company's investing activities have consisted primarily of
property and equipment purchases of $2.9 million and $38,000 the three
months ended March 31, 1997 and 1996, respectively. In 1997, these
expenditures were primarily related to the buildout of new office space in
several of the Company's target markets. In February 1996, the Company
received $9.5 million in proceeds from the December 1995 sale of facilities
in Ohio.
Although at March 31, 1997, the Company had working capital of
approximately $34.5 million, the projected cash usage in 1997 combined with
an anticipated net loss in 1997, absent the infusion of additional capital
resources, is anticipated to fully deplete the Company's working capital
prior to December 31, 1997. Such events would place substantial doubt about
the Company's ability to continue as a going concern. Although the
Company's management believes that the Company will be able to raise
sufficient funds, through capital contributions or additional equity or
debt financings, to meet its operating expenses and other cash
requirements, there can be no assurance that the Company would be able to
complete such contributions or financing or that any such contributions or
financing would be completed on terms satisfactory to the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standard Boards issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
which simplifies the method for computing earnings per share. Under the new
requirements, primary earnings per share will be replaced with basic
earnings per share. The statement, which will not impact the results of
operations, financial position or cash flows of the Company, is effective
for financial statements issued for periods ending after December 15, 1997
and will be adopted by the Company in the fourth quarter of 1997.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is party to routine litigation and
proceedings in the ordinary course of its business. The Company and its
subsidiaries are not aware of any current or pending litigation that the
Company believes would have a material adverse effect on the Company's
results of operations or financial condition. The Company and its
subsidiaries continue to participate in regulatory proceedings before the
FCC and state regulatory agencies concerning the authorization of services
and the adoption of new regulations.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11. Statement Re Computation of Net Loss per Common Share
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
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.
USN COMMUNICATIONS, INC.
(Registrant)
Date: May 14, 1997 /s/ GERALD J. SWEAS
----------------------------------
Executive Vice President and Chief
Financial Officer (Duly authorized
officer and principal financial
officer of the registrant)
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT DESCRIPTION PAGE
------- ------------------- -----------
11 Statement Regarding Computation of Per
Share Earnings 12
27 Financial Data Schedule 13
COMPUTATION OF NET LOSS PER COMMON SHARE
A. Primary: See the Condensed Consolidated Statements of Operations in
Item 1.
B. Full Dilution: The weighted average number of common shares
outstanding was adjusted for the net effects of the exercise of stock
options and warrants and the conversion of convertible debt and of
preferred stock.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------
1997 1996
----------------- ---------------
<S> <C> <C>
Net loss $ (17,560,905) $ 3,987,517
Accumulated unpaid preferred dividends - 4,962,966
----------------- ---------------
Net loss to common shareholders $ (17,560,905) $ (975,449)
Average common and common equivalent
shares:
Average common shares outstanding per
primary computation 717,526 423,909
Assuming conversion of preferred stock 70,623 -
Assuming conversion of convertible debt 268,497 -
Assuming exercise of stock options 115,899 18,880
Assuming exercise of stock warrants 61,550 -
----------------- ---------------
Average common and anti-dilutive common
equivalent shares as adjusted 1,234,095 442,789
----------------- ---------------
Net loss per common share assuming full
dilution $ (14.23) $ (2.20)
================= ===============
</TABLE>
This calculation is submitted in accordance with Regulation S-K item
601(b)(11) of the Securities Exchange Act, although it is contrary to
paragraph 40 of APB Opinion No. 15 because it produces an anti-dilutive
result.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> The Schedule Contains Summary Financial
Information Extracted From the Combined Balance
Sheets as of December 31, 1996 of LaSalle
Partners Limited Partnership and Subsidiaries
and LaSalle Partners Management Limited
Partnership and Subsidiaries and the Related
Combined Statements of Earnings for the Twelve
Months then Ended and is Qualified in its
Entirety by Reference to Such Financial
Statements.
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<PERIOD-TYPE> YEAR
<CASH> 7,207
<SECURITIES> 0
<RECEIVABLES> 87,283
<ALLOWANCES> 2,100
<INVENTORY> 0
<CURRENT-ASSETS> 98,723
<PP&E> 37,859
<DEPRECIATION> 23,310
<TOTAL-ASSETS> 156,614
<CURRENT-LIABILITIES> 75,808
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 156,614
<SALES> 0
<TOTAL-REVENUES> 175,967
<CGS> 0
<TOTAL-COSTS> 148,060
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 986
<INTEREST-EXPENSE> 5,730
<INCOME-PRETAX> 21,171
<INCOME-TAX> 1,207
<INCOME-CONTINUING> 19,964
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,964
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
