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, 1998
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 (I.R.S. Employer
of 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 April 30, 1998, there were 23,137,513 shares outstanding of
the registrant's Common Stock, par value $.01 per share.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
-------------- ----------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 108,162,625 $ 87,454,418
Marketable equity securities 12,341,365 8,180,824
Accounts receivable, net of allowances for doubtful accounts of
$7,684,000 at 1998 and $4,537,000 at 1997 47,521,094 23,917,093
Inventory 1,217,187 -
Other current assets 2,621,170 1,443,575
-------------- ----------------
Total current assets 171,863,441 120,995,910
Property and equipment-net 22,762,708 16,802,065
Goodwill, net of accumulated amortization of $369,000 at 1998 49,611,970 -
Other assets 50,822,231 33,402,271
============== ================
Total assets $ 295,060,350 $ 171,200,246
============== ================
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 28,457,007 $ 20,485,168
Accrued expenses and other liabilities 19,648,351 7,178,373
Capital lease obligations and notes payable 618,440 559,223
-------------- ----------------
Total current liabilities 48,723,798 28,222,764
14 5/8% Senior Discount Notes, net of Original Issue Discount 133,285,939 105,486,381
14% Senior Discount Notes, net of Original Issue Discount 12,969,222 35,790,140
9% Convertible Subordinated Discount Notes, net of Original Issue 31,546,854 30,867,615
Discount
9% Consent Convertible Notes, net of Original Issue Discount 10,187,500 -
Capital lease obligations and notes payable 652,954 555,960
-------------- ----------------
Total liabilities 237,366,267 200,922,860
REDEEMABLE PREFERRED STOCK:
9% Cumulative Convertible Pay-In-Kind Preferred Stock: par
value $1; 30,000 shares authorized at 1997; 10,920 shares
outstanding at December 31,1997 - 10,920
9% Cumulative Convertible Pay-In-Kind Preferred Stock,
Series A: par value $1; 150,000 shares authorized
at 1997; 45,209 shares outstanding at December 31, 1997 - 45,209
Accumulated unpaid dividends - 1,516,355
Additional paid-in-capital - 55,704,861
-------------- ----------------
Total redeemable preferred stock 57,277,345
COMMON STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value, 100,000,000 shares authorized
at March 31, 1998 and 30,000,000 shares authorized at December 31,
1997; 22,082,333 and 7,282,511 shares issued at March 31, 1998 and
December 31, 1997, respectively 220,823 72,826
Additional paid-in capital 259,826,741 74,642,145
Treasury stock, 10,000 shares at December 31, 1998 and 1997 (1,077) (1,077)
Accumulated other comprehensive income:
Unrealized gain on available-for-sale securities 12,341,365 8,180,824
Accumulated deficit (214,693,769) (169,894,677)
-------------- ----------------
Total common stockholders' equity (deficit) 57,694,083 (86,999,959)
-------------- ----------------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK, AND
COMMON STOCKHOLDERS' EQUITY (DEFICIT) $ 295,060,350 $ 171,200,246
============== ================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
NET SERVICE REVENUE $ 32,420,538 $ 3,916,839
COST OF SERVICES 26,636,511 3,435,022
------------------ ------------------
Gross profit 5,784,027 481,817
EXPENSES:
Sales and marketing 24,425,177 10,190,647
General and administrative 20,087,841 6,462,343
------------------ ------------------
OPERATING LOSS (38,728,991) (16,171,173)
OTHER INCOME (EXPENSE):
Interest income 1,568,417 643,290
Interest expense (7,062,533) (2,036,327)
Other income 2,749 3,305
------------------ ------------------
Other income (expense) - net (5,491,367) (1,389,732)
------------------ ------------------
NET LOSS $ (44,220,358) $ (17,560,905)
================== ==================
ACCUMULATED PREFERRED DIVIDENDS $ 578,734 $ 225,000
================== ==================
NET LOSS TO COMMON SHAREHOLDERS $ (44,799,092) $ (17,785,905)
================== ==================
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (3.12) $ (2.48)
================== ==================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 14,366,749 7,175,250
================== ==================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SERIES A
9% PIK 9% PIK ACCUMULATED ADDITIONAL
PREFERRED PREFERRED UNPAID PAID-IN
STOCK STOCK DIVIDENDS CAPITAL TOTAL
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $10,000 $225,000 $9,810,185 $10,045,185
Issuance of 920 shares of 9% PIK Preferred
Stock as payment of dividends 920 (920,251) 919,331 -
Issuance of 45,209 shares of Series A 9%
PIK Preferred Stock $45,209 45,163,863 45,209,072
Costs incurred related to issuance of
Series A 9% PIK Preferred Stock (188,518) (188,518)
Accumulated dividends on 9% PIK Preferred
Stock 940,957 940,957
Accumulated dividends on Series A 9% PIK
Preferred Stock 1,270,649 1,270,649
----------- ------------ --------------- ------------- ------------
BALANCE, DECEMBER 31, 1997 10,920 45,209 1,516,355 55,704,861 57,277,345
----------- ------------ --------------- ------------- ------------
Accumulated dividends on 9% PIK
Preferred Stock 113,847 113,847
Accumulated dividends on Series A 9%
PIK Preferred Stock 464,887 464,887
Conversion of 9% PIK and Series A 9%
PIK Preferred Stock to common stock (10,920) (45,209) (2,095,089) (55,704,861) (57,856,079)
----------- ------------ --------------- ------------- -------------
BALANCE, MARCH 31, 1998 $ - $ - $ - $ - $ -
=========== ============ =============== ============= =============
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND YEAR ENDED DECEMBER 31, 1997
ACCUMULATED
ADDITIONAL COMMON OTHER ACCUMU-
COMMON PAID-IN STOCK HELD COMPREHENSIVE LATED
STOCK CAPITAL IN TREASURY INCOME DEFICIT TOTAL
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 71,853 $ 54,114,755 $ (1,077) $ (57,791,382) $ (3,605,851)
Issuance of 97,251 shares of common
stock 973 531,125 532,098
Compensation expense on stock options 644,538 644,538
Issuance of stock warrants 19,351,727 19,351,727
Accumulated dividends on 9% PIK
Preferred Stock (940,957) (940,957)
Accumulated dividends on Series A 9%
PIK Preferred Stock (1,270,649) (1,270,649)
Comprehensive income (loss):
Net loss (109,891,689) (109,891,689)
Other comprehensive income (loss),
net of tax:
Unrealized gain of
available-for-sale securities $8,180,824 8,180,824
-------------
Comprehensive loss (101,710,865)
---------- ------------- ----------- ------------ ------------- -------------
BALANCE, DECEMBER 31, 1997 72,826 74,642,145 (1,077) 8,180,824 (169,894,677) (86,999,959)
---------- ------------ ---------- ------------ ------------- -------------
Issuance of 8,669,636 shares of common
stock 86,696 137,981,195 138,067,891
Costs incurred related to issuance of
stock (10,764,324) (10,764,324)
Accumulated dividends on 9% PIK
Preferred Stock (113,847) (113,847)
Accumulated dividends on Series A 9%
PIK Preferred Stock (464,887) (464,887)
Conversion of 9% PIK and Series A 9%
PIK Preferred Stock to common stock 61,301 57,794,778 57,856,079
Compensation expense on stock options 172,947 172,947
Comprehensive income (loss):
Net loss (44,220,358) (44,220,358)
Other comprehensive income (loss),
net of tax:
Unrealized gain of 4,160,541 4,160,541
available-for-sale securities -----------
Comprehensive loss (40,059,817)
---------- ------------- ----------- ---------------- ----------------------------
BALANCE, MARCH 31, 1998 $ 220,823 $259,826,741 $ (1,077) $ 12,341,365 $ (214,693,769) $ 57,694,083
========== ============= ========== ============== ============== =============
See notes to consolidated financial statements.
</TABLE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
1998 1997
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (44,220,358) $ (17,560,905)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization 2,152,404 361,243
Amortization of organization costs and intangibles 62,546 364,646
Non-cash interest on debt obligations 7,017,247 2,016,191
Stock compensation award expense 172,947 125,697
Changes in:
Accounts receivable (18,361,904) (1,342,077)
Allowance for doubtful accounts 1,244,661 120,032
Other current assets (269,147) (199,945)
Other assets - (294,338)
Accounts payable 2,868,484 (1,291,659)
Accrued expenses 9,089,488 779,384
----------------- -----------------
Net cash flows from operating activities (40,243,632) (17,041,763)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,763,436) (2,917,385)
Purchase of subsidiary, net of cash acquired (69,053,616) -
----------------- -----------------
Net cash flows from investing activities (74,817,052) (2,917,385)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Consent Convertible Notes 10,000,000 -
Issuance of common stock 138,067,891 -
Costs incurred related to issuance of stock (10,764,324) -
Deposits (1,390,224) 32,550
Repayment of capital lease obligations and notes payable (144,452) (154,053)
----------------- -----------------
Net cash flows from financing activities 135,768,891 (121,503)
----------------- -----------------
NET INCREASE (DECREASE) IN CASH 20,708,207 (20,080,651)
CASH AND CASH EQUIVALENTS - Beginning of period 87,454,418 60,818,478
----------------- -----------------
CASH AND CASH EQUIVALENTS - End of period $ 108,162,625 $ 40,737,827
================= =================
SUPPLEMENTAL CASH FLOW INFORMATION:
Conversion of Preferred Stock to Common Stock $ 57,856,079 -
================= =================
Dividends Paid in Kind $ 2,095,089 $ 450,000
================= =================
Declared Dividends $ 578,734 $ 225,000
================= =================
Capital Lease Obligations Incurred $ 287,617 -
================= =================
Cash Paid for Interest $ 45,286 $26,464
================= =================
Cash Paid for Income Taxes - -
================= =================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
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,
consisting only of normal recurring 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. NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income", which
establishes standards for reporting and display of comprehensive income and
its components. Other comprehensive income consists solely of unrealized
gains on available-for-sale securities.
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (in thousands):
March 31, 1998 December 31, 1997
---------------- ------------------
Billed $21,191 $10,790
Unbilled 34,014 17,664
------ ------
Gross accounts receivable 55,205 28,454
Allowance for doubtful accounts (7,684) (4,537)
------- -------
Net accounts receivable $47,521 $23,917
======= =======
Unbilled accounts receivable comprises access charges, features and
usage for revenue earned but not yet billed to customers. Substantially all
unbilled accounts receivable were billed within 45 days after the quarter.
4. PRIVATE PLACEMENT OFFERINGS
In August 1997, in connection with the 1997 private placement
offering, the Company issued an option to the holders of 14% Senior
Discount Note due 2003 (the "14% Senior Notes") to purchase $13.0 million
aggregate principal amount at maturity of the Company's 9% Convertible
Subordinated Discount Notes due 2006 ("Consent Notes"), for an aggregate
purchase price of $10 million and convertible into common stock at a
conversion price of $10.121 per share based on accreted value at the time of
conversion. Pursuant to the option, which was exercised by the holders in
October 1997, the Consent Notes were sold in January 1998 at a price before
commissions of $767.90 per $1,000 face amount. These notes will accrete
interest at an annual rate of 9%, compounded semiannually, until January
13, 2001. Thereafter interest will be paid semiannually in arrears in cash.
In March 1998, the holders of the 14% Senior Notes exchanged $31.5
million aggregate principal amount at maturity of the Company's 14% Senior
Notes for $33.6 million aggregate principal amount at maturity of the
Company's 14 5/8% Senior Discount Notes due 2004 (the "14 5/8% Senior
Notes").
5. CHANGES IN EQUITY
In February 1998, the Company issued and sold 8,600,000 shares of
Common Stock (of which 600,000 shares were sold pursuant to the
underwriters' over-allotment options) in its initial public offering for
net proceeds of approximately $127.0 million. In March 1998, the Company
issued and sold 28,861 additional shares solely to cover underwriters'
over-allotment options for net proceeds of $0.4 million. In conjunction
with the initial public offering, all of the Company's outstanding 9%
Preferred Stock and Series A 9% Preferred Stock, including dividends
accrued through the conversion date, were converted to 6,130,175 shares of
Class A Common Stock. Subsequently, all of the shares of the Company's
Class A Common Stock were converted to an equal number of the Company's
newly created Common Stock.
6. ACQUISITION
On February 20, 1998, the Company used a portion of the net proceeds
from its initial public offering to acquire all of the outstanding capital
stock of Hatten Communications Holding Company, Inc., a Connecticut
corporation ("Hatten Communications"), pursuant to a Stock Purchase
Agreement dated January 7, 1998, for approximately $69.1 million, net of
cash acquired, including the repayment of approximately $14.0 million of
existing indebtedness and the payment of certain fees and expenses.
The acquisition was recorded under the purchase method of accounting,
and accordingly, the results of operations of Hatten Communications have
been included in the consolidated financial statements since the date of
acquisition. The purchase price has been allocated to assets acquired and
liabilities assumed based on their fair market value at the date of the
acquisition as summarized below (in thousands):
Current assets $8,317
Long-term assets 1,291
Intangible assets 17,961
Goodwill 49,981
Current liabilities (8,496)
-------
Purchase price $69,054
=======
Goodwill of $50.0 million is being amortized on a straight-line basis
over 15 years. Additionally, the fair market value ascribed to the acquired
customer list of $15.0 million, included in intangible assets, is being
amortized on a straight-line basis over 5 years. Management is in the
process of reviewing the final allocation of the purchase price.
The following table reflects unaudited pro forma combined results of
operations of the Company and Hatten Communications on the basis that the
acquisition had taken place on January 1, 1997 (in thousands, except per
share data):
<TABLE>
<CAPTION>
Pro Forma Pro Forma
March 31, 1998 March 31, 1997
----------------- ---------------
<S> <C> <C>
Net service revenue $43,156 $11,899
Net loss to common shareholders $(48,706) $(20,284)
Net loss per common share - basic and diluted $(3.39) $(2.83)
Weighted average common shares outstanding 14,367 7,175
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
In 1994, 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 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. 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, LP., a telecommunications reseller and consulting firm (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 Corporation (now Bell Atlantic
Corporation) 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 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 or public offering of debt and equity securities.
In August 1997, the beneficial holders of all of the 14% Senior
Notes and the 9% Convertible Subordinated Notes due 2003 (the "Convertible
Notes") consented (the "Consent") to the amendment of the indentures with
respect to the 14 % Senior Notes and the Convertible Notes to allow the
Company to consummate the private placement of the 14 5/8% Senior Notes. In
connection with the Consent, the Company paid a consent fee to such holders
consisting of warrants to purchase 145,160 shares of Common Stock, at an
exercise price of $.01 per share. The Company also granted to such holders
an option to purchase the Consent Notes, which have terms substantially
similar to the Convertible Notes, for an aggregate purchase price of $10.0
million. The option was exercised in October 1997 and the Consent Notes
were issued in January 1998. Additionally, the Company granted to holders
of the 14% Senior Notes an option, for a specified period of time, to
exchange all, or a portion, 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. In March 1998, such holders
exchanged $31.5 million aggregate principal amount at maturity of 14%
Senior Notes for $33.6 million aggregate principal amount at maturity of 14
5/8% Senior Notes.
In February 1998, the Company issued and sold 8,600,000 shares of
its Common Stock (of which 600,000 shares were sold pursuant to the
underwriters' over-allotment options) in its initial public offering for
net proceeds of approximately $127.0 million. In March 1998, the Company
issued and sold 28,861 additional shares solely to cover underwriters'
over-allotment options for net proceeds of $0.4 million. Also, in February
1998, the Company completed the acquisition of Hatten Communications for
approximately $69.1 million, which included the repayment of approximately
$14.0 million of existing indebtedness and the payment of certain fees and
expenses. The first quarter 1998 results include the operations of Hatten
Communications from the acquisition date.
The Company's net service revenue consists primarily of sales
revenue from telecommunications resale services net of certain adjustments,
including credits and allowances. The Company bills its subscribers for
local, long distance and other service usage based on the type of 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 service includes the cost of local, long distance and
other 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
salesforce 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 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 over 600 employees in 1997 and over 400 employees in the first quarter
of 1998. Also, the Company is implementing new information systems that
will provide improved recordkeeping for customer information and management
of uncollectible accounts and fraud control.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Net service revenue increased to $32.4 million for the three
months ended March 31, 1998 from $3.9 million for the three months ended
March 31, 1997. The number of local access lines in service at March 31,
1998 was 226,084 compared to 18,557 as of March 31, 1997. The net increase
in access lines was 54,122 lines for the first quarter of 1998 compared to
10,193 lines for the first quarter of 1997. The increase in net service
revenue was due primarily to the substantial increase in the Company's
installed base and the corresponding increase in the customer base in the
Company's geographic markets.
Gross profit increased to $5.8 million for the three months ended
March 31, 1998 from $0.5 million for the three months ended March 31, 1997.
The increase in gross profit is attributable to the above mentioned
increase in customer base. The gross margin percentage was 17.8% for the
first quarter of 1998, up from 12.3% for the first quarter of 1997 and
14.4% for the fourth quarter of 1997. The acquisition of Hatten
Communications in the first quarter of 1998 contributed to the favorable
increase in the gross profit percentage.
Sales and marketing expenses increased $14.2 million, or 139%,
from $10.2 million for the three months ended March 31, 1997 to $24.4
million for the three months ended March 31, 1998. The increase was due
primarily to an increase in the number of sales and marketing employees
from approximately 420 at March 31, 1997 to approximately 835 at March 31,
1998 to support the growth in customer base. This increase in headcount
resulted in increases to salaries and benefits of approximately $9.8
million, travel and training costs of approximately $1.7 million,
recruitment costs of approximately $1.3 million and facility and office
related expenses of approximately $0.9 million. These increases were offset
by a decrease of $1.0 million in advertising costs.
General and administrative expenses increased $13.6 million, or
209%, to $20.1 million for the three months ended March 31, 1998 versus
$6.5 million for the three months ended March 31, 1997. The increase was
due primarily to an increase in the number of operations and administrative
employees from approximately 200 at March 31, 1997 to approximately 615 at
March 31, 1998 to support the growth in the customer base, which resulted in
increases to salaries and benefits of approximately $3.6 million, increased
bad debt expense of approximately $2.2 million, billing costs of
approximately $2.0 million, fees paid to consultants and other
professionals of approximately $1.9 million and facility related costs of
approximately $1.4 million.
Interest and other income increased to $1.6 million for the three
months ended March 31, 1998 from $0.6 million for the three months ended
March 31, 1997 due primarily to an increase in the average cash and cash
equivalents balance for the three month period ended March 31, 1998 versus
the three month period ended March 31, 1997.
Interest expense increased to $7.1 million for the three months
ended March 31, 1998 from $2.0 million for the three months ended March 31,
1997. This increase was due primarily to interest expense attributable to
the 14 5/8% Senior Notes issued in August 1997 and the Consent Notes issued
in January 1998.
As a result of the factors described above, the Company had a net
loss of $44.2 million for the three months ended March 31, 1998 compared to
a net loss of $17.6 million for the three months ended March 31, 1997. The
first quarter 1998 EBITDA was a negative $36.5 million versus a negative
$15.4 million in the first quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations primarily
through proceeds from the issuance of debt and equity securities. As of
March 31, 1998, the Company had cash and cash equivalents of $108.2 million
and working capital of $123.1 million. The Company's operating activities
utilized cash of approximately $40.2 million for the three months ended
March 31, 1998 and $17.0 million for the three months ended March 31, 1997.
The Company's investing activities for the three months ended
March 31, 1998 of $74.8 million consists of $69.1 million for the purchase
of Hatten Communications and property and equipment purchases of $5.8
million related to the development of systems infrastructure and the
increase in computer equipment and office buildouts related to the
corresponding increase in headcount. For the three months ended March 31,
1997, the Company's investing activities consisted of $2.9 million of
property and equipment purchases for sales office expansion in the
Company's geographic markets.
The Company's financing activities generated $135.8 million for
the three months ended March 31, 1998. In January 1998, the Company issued
$13.0 million aggregate principal amount at maturity of Consent Notes for
an aggregate purchase price of $10.0 million. In February 1998, the Company
issued and sold 8,600,000 shares of Common Stock (of which 600,000 shares
were sold pursuant to the underwriters' over-allotment options) in its
initial public offering for net proceeds of approximately $127.0 million.
In March 1998, the Company issued and sold 28,861 additional shares solely
to cover underwriters' over-allotment options for net proceeds of $0.4
million. Cash utilized for financing activities for the three months ended
March 31, 1997 of approximately $122,000 related primarily to the repayment
of capital lease obligations and notes payable.
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
In February 1998, in connection with the Company's initial public
offering, all of the Company's 9% Preferred Stock and Series A 9% Preferred
Stock, including dividends accrued through the conversion date, were
converted into shares of the Company's Class A Common Stock. Such Class A
Common Stock, along with the Company's Class A Common Stock previously
outstanding, was converted into the Company's Common Stock, par value $.01
per share, in connection with the initial public offering.
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
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
Form 8-K dated January 8, 1998 to report the execution of a
definitive agreement for the acquisition, by the Company, of Hatten
Communications.
Form 8-K dated March 6, 1998 to report the closing of the
acquisition, by the Company, of Hatten Communications.
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 15, 1998 /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
27 Financial Data Schedule 17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> The schedule contains summary financial information
extracted from the Condensed Consolidated Balance
Sheets at March 31, 1998 of USN Communications, Inc.
and Subsidiaries and the related Condensed Consolidated
Statements of Operations for the Three Months
ended March 31, 1998 and is qualified in its entirety by
reference to such financial statements.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 108,163
<SECURITIES> 12,341
<RECEIVABLES> 55,205
<ALLOWANCES> 7,684
<INVENTORY> 1,217
<CURRENT-ASSETS> 171,863
<PP&E> 28,865
<DEPRECIATION> 6,103
<TOTAL-ASSETS> 295,060
<CURRENT-LIABILITIES> 48,724
<BONDS> 187,990
0
0
<COMMON> 260,048
<OTHER-SE> (202,354)
<TOTAL-LIABILITY-AND-EQUITY> 295,060
<SALES> 32,421
<TOTAL-REVENUES> 32,421
<CGS> 26,637
<TOTAL-COSTS> 26,637
<OTHER-EXPENSES> 44,513
<LOSS-PROVISION> 2,442
<INTEREST-EXPENSE> 7,063
<INCOME-PRETAX> (44,220)
<INCOME-TAX> 0
<INCOME-CONTINUING> (44,220)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (44,220)
<EPS-PRIMARY> (3.12)
<EPS-DILUTED> (3.12)
</TABLE>
