SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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 November 14, 1997, there were 7,212,511 shares outstanding
of the registrant's Class A Common Stock, par value $.01 per share.
The Registrant hereby amends and restates its Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1997,
filed with the Securities and Exchange Commission on November 14,
1997, to revise certain common stock information to reflect a stock
dividend declared by the Company in the third quarter.
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS September 30, December 31,
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 1997 1996
-------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 117,943,711 $ 60,818,478
Accounts receivable, net 15,445,860 3,004,408
Prepaid expenses 271,430 187,051
Other receivables 338,502 172,567
------------- -------------
Total current assets 133,999,503 64,182,504
PROPERTY AND EQUIPMENT - Net 12,604,307 3,507,350
OTHER ASSETS 32,553,221 10,362,438
------------- -------------
TOTAL ASSETS $ 179,157,031 $ 78,052,292
============= =============
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND COMMON STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 17,268,085 $ 7,907,654
Accrued expenses and other liabilities 11,315,296 3,176,762
Capital lease obligations - current 544,213 277,844
Current maturities on notes payable 121,874 386,522
------------- -------------
Total current liabilities 29,249,468 11,748,782
14 5/8% Senior Discount Notes, net of
Original Issue Discount 101,830,062 --
14% Senior Discount Notes, net of
Original Issue Discount 34,579,844 31,242,614
9% Convertible Subordinated Notes, net
of Original Issue Discount 30,188,376 28,259,555
Capital lease obligations - noncurrent 664,421 312,280
Notes payable 24,547 49,727
------------- -------------
Total liabilities 196,536,718 71,612,958
REDEEMABLE PREFERRED STOCK:
9% Cumulative Convertible Pay-In-Kind
Preferred Stock: par value $1:
30,000 shares authorized; 10,920
and 10,000 shares outstanding at
1997 and 1996 10,920 10,000
9% Cumulative Convertible Pay-In-Kind
Preferred Stock, Series A: par
value $1: 150,000 shares authorized;
30,209 shares outstanding at 1997 30,209 --
Accumulated unpaid dividends 317,195 225,000
Additional paid-in capital 40,690,299 9,810,185
------------- -------------
Total redeemable preferred stock 41,048,623 10,045,185
COMMON STOCKHOLDERS' DEFICIT:
Common stock: par value $.01: 30,000,000
shares authorized; 7,222,511 and
7,185,260 shares issued at 1997 and 1996 72,226 71,853
Additional paid-in capital 73,941,796 54,114,755
Accumulated deficit (132,441,255) (57,791,382)
Common stock held in Treasury: 1997 and
1996 - 10,000 shares (1,077) (1,077)
------------- -------------
Total common stockholders' deficit (58,428,310) (3,605,851)
------------- -------------
TOTAL LIABILITIES, REDEEMABLE PREFERRED
STOCK, AND COMMON STOCKHOLDERS' DEFICIT $ 179,157,031 $ 78,052,292
============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Three months ended September 30,
---------------------------------
1997 1996
------------ ------------
(unaudited) (unaudited)
NET SERVICE REVENUE $15,277,025 $2,795,148
COST OF SERVICES 13,463,290 2,508,890
------------- ------------
Gross Profit 1,813,735 286,258
EXPENSES:
Sales and marketing 15,751,862 2,291,632
General and administrative 11,868,658 4,583,786
------------- ------------
OPERATING LOSS (25,806,785) (6,589,160)
OTHER INCOME (EXPENSE):
Interest income 874,410 120,077
Interest expense (4,443,751) (26,418)
Other income 1,438 3,476
------------- ------------
Other income (expense) - net (3,567,903) 97,135
------------- ------------
NET LOSS ($29,374,688) ($6,492,025)
============= ============
ACCUMULATED PREFERRED DIVIDENDS 552,319 1,131,307
------------- ------------
NET LOSS TO COMMON SHAREHOLDERS ($29,927,007) ($7,623,332)
============= ============
NET LOSS PER COMMON SHARE ($4.15) ($1.65)
============= ============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
7,212,511 4,624,411
============= ============
See Notes to Condensed Consolidated Financial Statements
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Nine months ended September 30,
--------------------------------
1997 1996
------------- -------------
(unaudited) (unaudited)
NET SERVICE REVENUE $26,998,315 $7,598,705
COST OF SERVICES 23,983,125 6,587,126
------------- -------------
Gross Profit 3,015,190 1,011,579
EXPENSES:
Sales and marketing 43,087,112 5,837,437
General and administrative 26,881,801 10,919,589
------------- -------------
OPERATING LOSS (66,953,723) (15,745,447)
OTHER INCOME (EXPENSE):
Interest income 1,883,861 472,667
Interest expense (8,572,952) (45,957)
Other income 5,386 8,099,593
------------- -------------
Other income (expense) - net (6,683,705) 8,526,303
------------- -------------
NET LOSS ($73,637,428) ($7,219,144)
============= =============
ACCUMULATED PREFERRED DIVIDENDS 1,012,445 3,465,976
------------- -------------
NET LOSS TO COMMON SHAREHOLDERS ($74,649,873) ($10,685,120)
============= =============
NET LOSS PER COMMON SHARE ($10.35) ($2.44)
============= =============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 7,212,511 4,384,993
============== =============
See Notes to Condensed Consolidated Financial Statements
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
9% PIK Series A Series A-2 Series A Accumulated Additional
Preferred 9% PIK Preferred Preferred Unpaid Paid-in
Stock Preferred Stock Stock Dividends Capital Total
Stock
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ 26,235 $ 16,200 $ 3,810,000 $40,543,605 $44,396,040
Accumulated dividends on
Series A and A-2
Preferred Stock 3,465,976 3,465,976
Conversion of Series A and
A-2 Preferred Stock
to Class A Common Stock (26,235) (16,200) (7,275,976) (40,543,605) (47,862,016)
Issuance of 10,000 shares
of 9% PIK preferred stock $ 10,000 9,990,000 10,000,000
Costs incurred related to
issuance of 9% PIK
preferred stock (179,815) (179,815)
Accumulated dividends on
9% PIK preferred stock 225,000 225,000
----------- ----------- ----------- ----------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 10,000 225,000 9,810,185 10,045,185
Issuance of 30,209 shares of
Series A 9% PIK preferred
stock $ 30,209 30,178,863 30,209,072
Costs incurred related to
issuance of Series A
9% PIK preferred stock (218,079) (218,079)
Accumulated dividends on
9% PIK preferred stock 695,250 695,250
Accumulated dividends on
Series A 9% PIK preferred
stock 317,195 317,195
Payment of dividends on
9% PIK preferred stock 920 (920,250) 919,330 --
----------- ----------- ----------- ----------- ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1997 $ 10,920 $ 30,209 $ -- $ -- $ 317,195 $40,690,299 $41,048,623
=========== =========== =========== =========== ============ ============ ============
</TABLE>
See notes to consolidated financial statements
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Common Additional Accumulated Common Stock Total
Stock Paid-in Deficit Held In
Capital Treasury
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ 31,374 $ 254,718 $ (29,053,815) $ (28,767,723)
Conversion of Series A and A-2
Preferred Stock to Class A
Common Stock 26,763 47,835,253 47,862,016
Issuance of 50,000 shares of
common stock 500 5,000 5,500
Compensation grants of 220,000
shares of common stock 2,200 30,800 33,000
Repricing of common stock 11,016 (11,016)
Repurchase of 10,000 shares
of common stock $ (1,077) (1,077)
Issuance of stock warrants 6,000,000 6,000,000
Accumulated dividends on
9% PIK preferred stock (3,690,976) (3,690,976)
Net loss (25,046,591) (25,046,591)
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1996 71,853 54,114,755 (57,791,382) (1,077) (3,605,851)
Issuance of 37,251 shares of
common stock 373 3,723 4,096
Issuance of stock warrants 19,351,727 19,351,727
Compensation expense on stock
options 471,591 471,591
Accumulated dividends on
9% PIK preferred stock (695,250) (695,250)
Accumulated dividends on
Series A 9% PIK preferred
stock (317,195) (317,195)
Net loss (73,637,428) (73,637,428)
------------- ------------- ------------- ------------- -------------
BALANCE, SEPTEMBER 30, 1997 $ 72,226 $ 73,941,796 $(132,441,255) $ (1,077) $ (58,428,310)
============= ============= ============= ============= =============
</TABLE>
See notes to consolidated financial statements
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS
ENDED SEPTEMBER 30, 1997 AND 1996
Three months ended September 30,
--------------------------------
1997 1996
------------- --------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 29,374,688) ($ 6,492,025)
Adjustments to reconcile net loss
to net cash flows from operating
activities:
Depreciation and amortization 859,730 94,377
Amortization of organization costs
and intangibles 11,355 748,160
Non-cash interest on debt obligations 4,373,314 --
Stock compensation award expense 172,947 --
Changes in:
Accounts receivable, net (7,416,250) (466,673)
Prepaid expenses 411,923 51,568
Other receivables (159,374) 96,687
Other assets (102,096) (116,896)
Accounts payable 7,544,282 1,292,182
Accrued expenses and other
liabilities 3,361,974 40,794
------------- -------------
Net cash flows from operating
activities (20,316,883) (4,751,826)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,899,807) (102,839)
Purchase of minority interest -- (1,601,207)
------------- -------------
Net cash flows from investing
activities (2,899,807) (1,704,046)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock -- --
Issuance of preferred stock 30,209,072 10,000,000
Financing costs (218,079) (147,389)
Proceeds from Senior Notes 100,001,276 30,203,375
Proceeds from Convertible Notes -- 27,644,400
Debt acquisition costs (4,436,579) (2,732,664)
Deposits 40,740 (163,213)
Repayment of notes payable (1,815) (57,676)
Repayment of capital lease
obligations (154,464) (40,561)
------------- -------------
Net cash flows from financing
activities 125,440,151 64,706,272
------------- -------------
NET INCREASE IN CASH 102,223,461 58,250,400
CASH AND CASH EQUIVALENTS - Beginning
of period 15,720,250 13,226,940
------------- -------------
CASH AND CASH EQUIVALENTS - End of
period $ 117,943,711 $ 71,477,340
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Dividend Paid in Kind $ 470,250 --
============= =============
Declared Dividends $ 552,319 $ 1,131,307
============= =============
Issuance of Stock Warrants $ 19,351,727 $ 6,000,000
============= =============
Conversion of Series A and A-2
Preferred Stock to Class A
Common Stock -- $ 47,862,016
============= =============
Capital Lease Obligations Incurred $ 483,052 $ 185,362
============= =============
CASH PAID FOR INTEREST $ 47,100 $ 48,369
============= =============
CASH PAID FOR INCOME TAXES -- --
============= =============
See Notes to Condensed Consolidated Financial Statements
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS
ENDED SEPTEMBER 30, 1997 AND 1996
Nine months ended September 30,
-------------------------------
1997 1996
------------- -------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 73,637,428) ($ 7,219,144)
Adjustments to reconcile net loss
to net cash flows from operating
activities:
Depreciation and amortization 1,902,049 254,049
Amortization of organization costs
and intangibles 622,884 1,105,748
Non-cash interest on debt obligations 8,456,677 --
Stock compensation award expense 471,591 33,000
Gain on disposal of assets -- (8,078,901)
Changes in:
Accounts receivable, net (12,441,452) (1,469,127)
Prepaid expenses (84,379) 109,434
Other receivables (165,935) (229,940)
Other assets (444,960) (18,205)
Accounts payable 9,360,431 1,440,563
Accrued expenses and other
liabilities 8,138,534 (19,641)
------------- -------------
Net cash flows from operating
activities (57,821,988) (14,092,164)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (10,071,051) (284,774)
Proceeds from sale of assets -- 9,532,600
Purchase of Minority Interest -- (1,601,207)
------------- -------------
Net cash flows from investing
activities (10,071,051) 7,646,619
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 4,096 3,300
Issuance of preferred stock 30,209,072 10,000,000
Financing costs (218,079) (147,389)
Repurchase of common stock -- (1,077)
Proceeds from Senior Notes 100,001,276 30,203,375
Proceeds from Convertible Notes -- 27,644,400
Debt Acquisition Costs (4,436,579) (2,732,664)
Deposits 57,758 (393,884)
Repayment of notes payable (289,828) (335,442)
Repayment of capital lease
obligations (309,445) (83,774)
------------- -------------
Net cash flows from financing
activities 125,018,271 64,156,845
------------- -------------
NET INCREASE IN CASH 57,125,232 57,711,300
CASH AND CASH EQUIVALENTS - Beginning
of period 60,818,479 13,766,040
------------- -------------
CASH AND CASH EQUIVALENTS - End of
period $ 117,943,711 $ 71,477,340
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Dividend Paid in Kind $ 920,250 --
============= =============
Declared Dividends $ 1,012,445 $ 3,465,976
============= =============
Issuance of Stock Warrants $ 19,351,727 $ 6,000,000
============= =============
Conversion of Series A and A-2
Preferred Stock to Class A
Common Stock -- $ 47,862,016
============= =============
Capital Lease Obligations Incurred $ 927,955 $ 537,478
============= =============
CASH PAID FOR INTEREST $ 91,993 $ 68,000
============= =============
CASH PAID FOR INCOME TAXES -- --
============= =============
See Notes to Condensed Consolidated Financial Statements
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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. PRIVATE PLACEMENT OFFERING
On August 18, 1997, the Company received approximately $96.5 million
in cash, net of commissions paid, in exchange for the issuance of 152,725
units consisting of $152.7 million aggregate principal amount at maturity
of 14 5/8% Senior Discount Notes due 2004 ("14 5/8% Senior Notes") and
warrants to purchase 2,053,900 shares of Class A Common Stock. In
connection with this offering, the Company paid a consent fee to the
holders of the outstanding 14% Senior Discount Notes due 2003 ("14%
Senior Notes") and 9% Convertible Subordinated Notes due 2004 ("9%
Convertible Notes") consisting of warrants to purchase 145,160 shares of
Class A Common Stock. The Company also granted those holders an option,
which was exercised on October 24, 1997, to purchase up to $10.0 million
in aggregate proceeds to the Company of convertible notes of the Company
on terms substantially similar to the existing 9% Convertible Notes.
Additionally, the Company granted to holders of the 14% Senior Notes an
option, for a specified period of time, to exchange all of the 14% Senior
Notes for 14 5/8% Senior Notes having an accreted value equal to the
accreted value of such 14% Senior Notes at the time of such exchange.
The Senior Notes were sold at a unit price, before commissions, of
$654.78 per $1,000 face amount. These notes will accrete interest at an
annual rate of 14 5/8% from August 18, 1997 to August 15, 2000.
Thereafter, the notes will bear interest at an annual rate of 14 5/8%
payable semiannually in arrears in cash.
3. CHANGES IN EQUITY
In August 1997, the Board of Directors authorized the issuance of up
to 150,000 shares of a series of $1 par value preferred stock designated
as 9% Cumulative Convertible Pay-in-Kind Preferred Stock, Series A
("Series A Preferred Stock"). In connection with the private placement
offering described in Note 2, the Company issued 30,209 shares of its
Series A Preferred Stock to certain of its existing stockholders and
their affiliates for an aggregate purchase price of $30.2 million.
In September 1997, the Board of Directors approved a nine-for-one
dividend on the Class A Common Stock. Share and per share data and certain
common stock information have been retroactively adjusted to reflect this
stock dividend.
4. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Initially, the Company entered the local telecommunications market
as a facilities-based CLEC 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, 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. As part of the Company's strategy to refocus its operations, the
Company, through a newly formed wholly owned acquisition subsidiary,
Quest United, Inc. ("Quest"), acquired certain assets and assumed certain
liabilities of Quest America, L.P., a telecommunications reseller and
consulting firm, in October 1995 (the "Quest Acquisition").
The Company negotiated for the first total service resale agreement
with Ameritech Corporation for local services, which was signed in
November 1995, and negotiated with NYNEX for a similar comprehensive
local resale agreement which was signed in July 1996. The Company also
executed various other agreements in 1996 and 1997 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 customer 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
capital contributions, sales of preferred stock and by the proceeds from
the private placement of debt securities.
In August 1997, Merrill Lynch Global Allocation Fund, Inc.
("MLGAFI") and Merrill Lynch Equity/Convertible Series (Global Allocation
Portfolio) (collectively, "MLAM"), the current beneficial holders of the
Company's 14% Senior Notes due 2003 ("14% Senior Notes") and 9%
Convertible Subordinated Notes due 2004 ("9% Convertible Notes")
consented (the "Consent") to the amendment of the indentures with respect
to the 14% Senior Notes and the 9% Convertible Notes to allow the Company
to issue the 14-5/8% Senior Discount Notes due 2004 (the "14 5/8% Senior
Notes"). In connection with the Consent, the Company paid a consent fee
to MLAM consisting of warrants to purchase 145,160 shares of Common
Stock, at an exercise price of $.01 per share. The Company also granted
to MLAM an option to purchase up to $10.0 million in aggregate proceeds
to the Company of convertible notes of the Company on terms substantially
similar to the 9% Convertible Notes (the "Consent Convertible Notes") and
granted to holders of the 14% Senior Notes an option, for a specified
period of time, to exchange all of the 14% Senior Notes for 14 5/8%
Senior Notes having an accreted value equal to the accreted value of such
14% Senior Notes at the time of such exchange. On October 24, 1997, MLAM
provided a notice to exercise its option to purchase the Consent
Convertible Notes.
The Company's net service revenue consists primarily of sales
revenue from telecommunications resale service net of certain
adjustments, including unbillable call records. The Company bills its
customers for local and long distance usage based on the type of local
service utilized, the number, time and duration of calls, the geographic
location of the terminating phone numbers and the applicable rate plan in
effect at the time of the call.
Cost of services includes the cost of local and long distance
services charged by carriers for recurring charges, per minute usage
charges and feature charges, as well as the cost of fixed facilities for
dedicated services and special regional calling plans.
Sales and marketing expense consists of the costs of providing sales
and other support services for customers including salaries of sales
force personnel. General and administrative expense consists of the costs
of the billing and information systems and personnel required to support
the Company's operations and growth as well as bad debts, customer
allowances, and all amortization expenses. Depreciation is allocated
throughout sales, marketing, general and administrative expense based on
asset ownership.
The Company has experienced significant growth in the past and,
depending on the extent of its future growth, may experience significant
strain on its management, personnel and information systems. To
accommodate this growth, the Company will continue to implement and
improve operational, financial and management information systems. In an
effort to support its growth, the Company added several senior management
positions and added over 250 employees in 1996 and over 385 employees in
the first nine months of 1997. Also, the Company is implementing new
information systems that will provide improved recordkeeping for customer
information and management of uncollectible accounts and fraud control.
The Company has to date outsourced certain billing services to two
outside vendors. The significant growth experienced by the Company over
the past year has strained the capabilities of the Company's internal
billing systems and those of the billing vendor supporting the sales
pursuant to the Company's resale agreements with Ameritech Corporation.
As a result, the Company has experienced delays in accurately billing its
customers in a timely manner and instances of toll fraud. Therefore, the
Company's revenue assurance and margin utilization systems and operating
controls are being strengthened. Gross margins will be lower than
originally anticipated for 1997 and estimated bad debt provisions and
customer allowances will be higher than expected, as a percent of revenue,
since some billings from carriers may not be billed to customers.
As a result of evaluating the capabilities of the Company's two
billing vendors to support the anticipated growth of the Company, a
decision was made to transition to a single vendor that has the strongest
current capabilities and the best potential to support the expansion and
related increased number of customers and access lines of the Company.
The Company selected the billing vendor that has supported its sales
pursuant to the Company's resale agreement with Nynex Corporation for the
past two years. The transition to a single vendor is expected to be
completed during the fourth quarter of 1997.
Results of Operations
Three Months Ended September 30, 1997 Compared to
Three Months Ended September 30, 1996
Net service revenue increased 447% to $15.3 million for the three
months ended September 30, 1997 from $2.8 million for the three months
ended September 30, 1996. In addition, net service revenue increased 96%
from the second quarter 1997 revenue of $7.8 million. The number of new
local access lines sold in the third quarter of 1997 was 55,851 and
cumulative access lines sold as of September 30, 1997 were 135,172. The
number of local access lines provisioned in the third quarter of 1997 was
51,449 and cumulative access lines provisioned as of September 30, 1997
were 116,591. The substantial increases in net service revenue and local
access lines were due primarily to the significant change in the
Company's business strategy and the corresponding deployment of a large
direct sales organization. This business strategy change has resulted in
an almost nine-fold increase in the subscriber base in the Company's
geographic markets (from approximately 1,400 customers at September 30,
1996 to approximately 12,000 customers in service at September 30, 1997).
Gross profit for the three months ended September 30, 1997 increased
534% to $1.8 million compared to $0.3 million for the three months ended
September 30, 1996. Due to the significant change in the Company's
business strategy and the corresponding change in cost structure from the
original facilities-based business, the year to year gross margins are
not comparable. Gross margin for the third quarter of 1997 of 11.9% was
an improvement over second quarter 1997 gross margin of 9.2%.
Consolidated gross margins are expected to continue to improve each
quarter primarily as revenue assurance and margin utilization systems and
operating controls are being strengthened, as described above, and as the
mix of revenues from higher margin products increases and the mix of
revenue from the lower margin legacy products decreases. In addition, the
Company has continued to negotiate price reductions with its carriers,
the full impact of which is not yet fully reflected in the results of
operations.
Sales and marketing expenses increased $13.5 million from $2.3
million for the three months ended September 30, 1996 to $15.8 million
for the three months ended September 30, 1997. The increase was due
primarily to the substantial increase in the number of sales and
marketing employees from approximately 130 at September 30, 1996 to
approximately 530 at September 30, 1997. The higher headcount resulted in
increases to salaries and benefits of approximately $9.7 million,
recruitment, training and travel costs of approximately $1.6 million, and
facility and office related expenses of approximately $1.4 million.
Additionally, advertising and promotional costs increased approximately
$0.5 million due to product launches in the Company's target markets.
General and administrative expenses increased $7.3 million to $11.9
million for the three months ended September 30, 1997 versus $4.6 million
for the three months ended September 30, 1996. The increase was due
primarily to the substantial increase in the number of operations and
administrative employees from approximately 90 at September 30, 1996 to
over 320 at September 30, 1997. This increase resulted in increases to
salaries and benefits of approximately $2.8 million, facility and office
related costs of approximately $0.7 million and approximately $0.4
million in recruiting expenses. Additionally, professional fees increased
approximately $0.5 million, primarily relating to the development and
expansion of the Company's customer service, billing and administrative
information systems and facilities. Additionally, the Company recorded a
charge of $2.8 million in the third quarter of 1997 for estimated
additional provisions for bad debts and customer allowances to cover
instances of toll fraud and other matters described above.
Interest and other income increased to $0.9 million for the three
months ended September 30, 1997 from $0.1 million for the three months
ended September 30, 1996 due to an increase in the average cash balance
for the three month period ended September 30, 1997 versus September 30,
1996.
Interest expense increased to $4.4 million for the three months
ended September 30, 1997 from $26,000 for the three months ended
September 30, 1996. This increase was due primarily to interest expense
attributable to the 14% Senior Notes and 9% Convertible Notes issued in
September 1996 and the 14 5/8% Senior Notes issued in August 1997.
As a result of the factors described above, the Company had a net
loss of $29.4 million for the three months ended September 30, 1997
compared to a net loss of $6.5 million for the three months ended
September 30, 1996.
Nine Months Ended September 30, 1997 Compared to
Nine Months Ended September 30, 1996
Net service revenue increased 255% to $27.0 million for the nine
months ended September 30, 1997 from $7.6 million for the nine months
ended September 30, 1996, resulting from the significant change in the
Company's business strategy and the corresponding growth in access lines
and customers noted above. The number of access lines sold at September
30, 1997 increased 2,819% from September 30, 1996 and 70% from June 30,
1997. The number of access lines provisioned at September 30, 1997
increased 2,577% from September 30, 1996 and 79% from June 30, 1997.
Gross profit for the nine months ended September 30, 1997 increased
198% to $3.0 million compared to $1.0 million for the nine months ended
September 30, 1996. Due to the significant change in the Company's
business strategy and the corresponding change in cost structure from the
original facilities-based business, the year to year gross margins are
not comparable. As noted above, consolidated gross margins are expected
to continue to improve each quarter primarily as revenue assurance and
margin utilization systems and operating controls are being strengthened,
as described above, and as the mix of revenues from higher margin
products increases and the mix of revenue from the lower margin legacy
products decreases. In addition, the Company has continued to negotiate
price reductions with its carriers, the full impact of which is not yet
fully reflected in the results of operations.
Sales and marketing expenses increased $37.3 million from $5.8
million for the nine months ended September 30, 1996 to $43.1 million for
the nine months ended September 30, 1997. The increase was due primarily
to the aforementioned increase in the number of sales and marketing
employees which resulted in increases to salaries and benefits of
approximately $22.6 million, recruitment, training and travel costs of
approximately $5.7 million, and facility and office related expenses of
approximately $3.3 million. Additionally, advertising and promotional
costs increased approximately $4.3 million due to product launches in the
Company's target markets.
General and administrative expenses increased $16.0 million to $26.9
million for the nine months ended September 30, 1997 versus $10.9 million
for the nine months ended September 30, 1996. The increase was due
primarily to the aforementioned increase in the number of operations and
administrative employees which resulted in increases to salaries and
benefits of approximately $7.3 million, facility and office costs of
approximately $1.4 million, and recruitment, training and travel costs of
approximately $1.6 million. Professional fees increased approximately
$1.2 million, primarily relating to the development and expansion of the
Company's customer service, billing and administrative information
systems and facilities. Billing costs increased approximately $1.6
million in correlation with increased revenue. Additionally, as noted
above, the Company recorded a charge of $2.8 million in the third quarter
of 1997 for estimated additional provisions for bad debts and customer
allowances to cover instances of toll fraud and other matters.
Interest and other income decreased to $1.9 million for the nine
months ended September 30, 1997 from $8.6 million for the nine months
ended September 30, 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, which was somewhat offset by the additional interest
income earned on the higher average cash balance.
Interest expense increased to $8.6 million for the nine months ended
September 30, 1997 from $46,000 for the nine months ended September 30,
1996. This increase was due primarily to interest expense attributable to
the 14% Senior Notes and 9% Convertible Notes issued in September 1996
and the 14 5/8% Senior Notes issued in August 1997.
As a result of the factors described above, the Company had a net
loss of $73.6 million for the nine months ended September 30, 1997
compared to a net loss of $7.2 million for the nine months ended
September 30, 1996.
Liquidity and Capital Resources
Since inception, the Company has funded its operations primarily
through cash from its investors and private placements of debt securities.
As of September 30, 1997, the Company had cash and cash equivalents of
$118.0 million and working capital of $104.8 million. The Company's
operating activities utilized cash of approximately $20.3 million and
$57.8 million for the three and nine month periods ended September 30,
1997, respectively, versus $4.8 million and $14.1 million for the three
and nine month periods ended September 30, 1996, respectively.
The Company's investing activities in 1997 have consisted primarily
of property and equipment purchases of $2.9 million and $10.1 million for
the three and nine month periods ended September 30, 1997, respectively,
primarily related to sales office expansion in several of the Company's
target markets. In the fourth quarter of 1997, the Company anticipates
spending approximately $5.0 million for capital expenditures, a substantial
portion of which has been allocated to investments in information
technology to support the growth of the customer base with more robust
provisioning, billing and customer care systems. The anticipated continued
high growth in the customer base in 1998 will require a similar level of
investment in information technology. In 1996, the Company's investing
activities consisted of $9.5 million in proceeds received in February 1996
from the December 1995 sale of facilities in Ohio, partially offset by a
$1.6 million purchase of the remaining minority interest of a subsidiary
in the third quarter 1996 and capital expenditures of $0.1 million and
$0.3 million for the three and nine month periods ended September 30, 1996,
respectively.
The Company's financing activities generated $125.4 million and
$125.0 million for the three and nine month periods ended September 30,
1997, respectively, and $64.7 million and $64.1 million for the three and
nine month periods ended September 30, 1996, respectively. In August
1997, the Company raised $96.5 million in net proceeds through a private
placement of the 14 5/8% Senior Notes and $30.2 million in net proceeds
from sales of its Series A Preferred Stock, and in October 1997 the
Company issued and sold Series A Preferred Stock for an aggregate
purchase price of $15.0 million pursuant to agreements contemplated by a
letter of intent entered into in August 1997. In September 1996, the
Company raised approximately $55.0 million in net proceeds through a
private placement of the 14% Senior Notes and 9% Convertible Notes and
$10.0 million from sales of its 9% Preferred Stock.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board 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.
Date: December 8, 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 22
27 Financial Data Schedule 24
Exhibit 11
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
preferred stock.
Three months ended September 30,
1997 1996
Net loss $(29,374,688) $ (6,492,025)
Less accumulated preferred dividends 552,319 1,131,307
------------ ------------
Net loss to common shareholders
per primary computation $(29,927,007) $ (7,623,332)
Add back accumulated preferred
dividends 552,319 1,131,307
Add interest expense on convertible
debt 649,989 --
------------ ------------
Net loss to common shareholders
assuming full dilution $(28,724,699) $ (6,492,025)
============ ============
Average common and common equivalent
shares:
Average common shares outstanding
per primary computation 7,212,511 4,624,411
Assuming conversion of preferred stock 3,140,282 --
Assuming conversion of convertible debt 3,042,355 --
Assuming exercise of stock options 1,668,204 377,462
Assuming exercise of stock warrants 1,725,246 --
Average common and anti-dilutive common
equivalent shares as adjusted
------------ ------------
16,788,598 5,001,873
============ ============
Net loss per common share assuming
full dilution $ (1.71) $ (1.30)
============ ============
This calculation is submitted in accordance with Regulation S-K item
601(b)(11) of the Securities Exchange Act of 1934, although it is
contrary to paragraph 40 of APB Opinion No. 15 because it produces an
anti-dilutive result.
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
preferred stock.
Nine months ended September 30,
1997 1996
Net loss $(73,637,428) $ (7,219,144)
Less accumulated preferred dividends 1,012,445 3,465,976
------------ ------------
Net loss to common shareholders $(74,649,873) $(10,685,120)
Add back accumulated preferred
dividends 1,012,445 3,465,976
Add interest expense on convertible
debt 1,921,977 --
------------ ------------
Net loss to common shareholders
assuming full dilution $(71,715,451) $ (7,219,144)
============ ============
Average common and common equivalent
shares:
Average common shares outstanding
per primary computation 7,212,511 4,384,993
Assuming conversion of preferred stock 1,534,814 --
Assuming conversion of convertible debt 2,805,078 --
Assuming exercise of stock options 1,411,972 237,648
Assuming exercise of stock warrants 988,456 --
Average common and anti-dilutive common
equivalent shares as adjusted
------------ ------------
13,952,831 4,622,641
============ ============
Net loss per common share assuming
full dilution $ (5.14) $ (1.56)
============ ============
This calculation is submitted in accordance with Regulation S-K item
601(b)(11) of the Securities Exchange Act of 1934, although it is
contrary to paragraph 40 of APB Opinion No. 15 because it produces an
anti-dilutive result.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<PERIOD-TYPE> 3-MOS 9-MOS
<CASH> 117,944 117,944
<SECURITIES> 0 0
<RECEIVABLES> 16,377 16,377
<ALLOWANCES> 931 931
<INVENTORY> 0 0
<CURRENT-ASSETS> 134,000 134,000
<PP&E> 15,332 15,332
<DEPRECIATION> 2,728 2,728
<TOTAL-ASSETS> 179,157 179,157
<CURRENT-LIABILITIES> 29,249 29,249
<BONDS> 166,598 166,598
41,049 41,049
0 0
<COMMON> 74,014 74,014
<OTHER-SE> (132,441) (132,441)
<TOTAL-LIABILITY-AND-EQUITY> 179,157 179,157
<SALES> 15,277 26,998
<TOTAL-REVENUES> 15,277 26,998
<CGS> 13,463 23,983
<TOTAL-COSTS> 13,463 23,983
<OTHER-EXPENSES> 27,621 69,969
<LOSS-PROVISION> 2,225 2,657
<INTEREST-EXPENSE> 4,444 8,573
<INCOME-PRETAX> (29,375) (73,637)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (29,375) (73,637)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (29,375) (73,637)
<EPS-PRIMARY> (4.15) (10.35)
<EPS-DILUTED> (1.71) (5.14)
</TABLE>
