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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 333-64717
US XCHANGE, L.L.C.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-33505418
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
20 MONROE AVENUE NW, SUITE 450, GRAND RAPIDS, MICHIGAN 49503
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (616) 493-7000
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 |_|
At May 13, 1999, all of the membership interests of the registrant were
held by two affiliates of the registrant.
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US XCHANGE, L.L.C.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page No.
PART I FINANCIAL INFORMATION........................................................................................3
Item 1. Financial Statements.........................................................................................3
Consolidated Balance Sheets.......................................................................................3
Consolidated Statements Of Operations.............................................................................5
Consolidated Statements Of Cash Flows.............................................................................6
Notes To Consolidated Financial Statements........................................................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................................15
PART II OTHER INFORMATION..........................................................................................16
Item 6. Exhibits and Reports on Form 8-K............................................................................16
SIGNATURES..........................................................................................................17
INDEX TO EXHIBITS...................................................................................................18
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
US XCHANGE, L.L.C.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1999 1998
--------------- ---------------
(UNAUDITED)
ASSETS
Current Assets
Cash and equivalents.................................................. $10,463,257 40,018,552
Restricted investments................................................ 27,406,656 28,525,109
Accounts Receivable, less allowance for doubtful accounts
of $259,000 and $174,000........................................... 2,773,748 1,865,503
Other current assets.................................................. 944,382 700,411
---------------------------------
TOTAL CURRENT ASSETS............................................. 41,588,043 71,109,575
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NETWORKS AND EQUIPMENT
Networks and networks in process (cost to complete of $19,053,000).... 96,648,069 85,821,872
Furniture and equipment............................................... 15,966,088 14,017,604
Leasehold improvements................................................ 5,666,057 3,937,223
---------------------------------
118,280,214 03,776,699
Less accumulated depreciation and amortization........................ 5,474,308 3,432,193
---------------------------------
NET NETWORKS AND EQUIPMENT................................................. 112,805,906 00,344,506
---------------------------------
OTHER ASSETS
Restricted investments................................................ 42,782,486 56,206,738
Debt issuance costs, net.............................................. 6,967,734 6,793,770
Miscellaneous......................................................... 509,179 261,328
---------------------------------
TOTAL OTHER ASSETS.................................................... 50,259,399 63,261,836
=================================
TOTAL ASSETS.......................................................... $204,653,348 $34,715,917
=================================
LIABILITIES AND MEMBERS' CAPITAL (DEFICIT)
CURRENT LIABILITIES
Accounts payable...................................................... $8,533,613 11,264,241
Accrued interest...................................................... 7,521,257 15,521,634
Accrued other liabilities............................................. 2,795,834 1,185,820
Current maturities of long-term debt.................................. 800,000 800,000
---------------------------------
TOTAL CURRENT LIABILITIES......................................... 19,650,704 28,771,695
LONG-TERM DEBT, LESS CURRENT MATURITIES...............................
15% Senior Notes...................................................... 200,000,000 00,000,000
Notes payable......................................................... 2,400,000 2,533,333
---------------------------------
TOTAL LIABILITIES................................................. 222,050,704 31,305,028
MEMBERS' CAPITAL (DEFICIT)
Capital contributions................................................. 60,000,000 60,000,000
Accumulated deficit................................................... (77,397,356) (56,589,111)
---------------------------------
TOTAL MEMBERS' CAPITAL (DEFICIT).................................. (17,397,356) 3,410,889
=================================
$204,653,348 $ 34,715,91
==================================
See accompanying notes to unaudited consolidated financial statements.
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US XCHANGE, L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-------------------------------------
1999 1998
-------------------------------------
REVENUES................................................................. $ 4,339,437 $ 565,203
Costs and Expenses.......................................................
Cost of communication services...................................... 8,207,998 1,129,975
Selling, general and administrative................................. 10,086,505 4,482,745
Depreciation and amortization....................................... 2,229,520 213,247
---------------------------------
TOTAL COSTS AND EXPENSES...................................... 20,524,023 5,825,967
Loss from operations................................................ (16,184,586) (5,260,764)
Interest Expense......................................................... (5,933,845) (60,735)
---------------------------------
Interest Income.......................................................... 1,310,186 --
---------------------------------
NET LOSS............................................................ $ (20,808,245) $(5,321,499)
=================================
See accompanying notes to unaudited consolidated financial statements.
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US XCHANGE, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------------------------
1999 1998
---------------- -----------------
OPERATING ACTIVITIES
Net loss.................................................................... $ (20,808,245) $ (5,321,499)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.......................................... 2,229,520 213,246
Provision for doubtful accounts........................................ 85,000 5,600
Interest earned on restricted investments.............................. (957,295) --
Changes in assets and liabilities:
Accounts receivable................................................ (993,245) (220,988)
Other current assets............................................... (243,971) (201,776)
Accounts payable................................................... (2,730,628) 4,048,325
Accrued liabilities................................................ (6,390,363) 186,170
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NET CASH USED IN OPERATING ACTIVITIES.............................. (29,809,227) (1,290,922)
---------------------------------
INVESTING ACTIVITIES
Decrease in restricted investments.......................................... 15,500,000 --
Purchase of networks and equipment.......................................... (14,503,515) (14,517,222)
Increase in other assets.................................................... (259,395) (149,789)
---------------------------------
NET CASH USED IN INVESTING ACTIVITIES.............................. 737,088 (14,667,011)
---------------------------------
FINANCING ACTIVITIES
Proceeds from long-term debt................................................ -- 1,211,000
Repayment of long-term debt................................................. (133,333) --
Advances from affiliated company............................................ -- 61,211
Direct costs of financing................................................... (349,825) --
Members' capital contributions.............................................. -- 16,000,000
---------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......................... (483,158) 17,272,211
---------------------------------
NET INCREASE IN CASH AND EQUIVALENTS............................... (29,555,295) 1,314,278
Cash and equivalents, beginning of period................................... 40,018,552 100,590
=================================
Cash and equivalents, end of period......................................... $ 10,463,257 $ 1,414,868
=================================
Supplemental Disclosure of Cash Flow Information
Interest Paid (net of amounts capitalized)......................... $ 15,558,846 $ 60,798
=================================
During the three months ended March 31, 1998, affiliated company
advances of $21,100,000 were converted to members' capital contributions.
See accompanying notes to unaudited consolidated financial statements.
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US XCHANGE, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated balance sheet of US Xchange, L.L.C. (the "Company") at
December 31, 1998 was obtained from the Company's audited balance sheet as of
that date. All other financial statements contained herein are unaudited and, in
the opinion of management, contain all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation. Operating
results for the three months ended March 31, 1999 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1999. The
Company's accounting policies and certain other disclosures are set forth in the
notes to the Company's audited consolidated financial statements as of and for
the year ended December 31, 1998.
2. RESTRICTED INVESTMENTS
Restricted investments consist of U.S. government securities and money
market funds plus accrued interest thereon purchased in connection with the 15%
Notes (see Note 3) to secure the first three years' (six semi-annual) interest
payments on these notes. All these investments are classified as
held-to-maturity securities. Such investments are stated at cost, which
approximates fair value, and are reported in both current and long-term assets,
based upon the maturity dates of the individual securities.
3. LONG-TERM DEBT
On June 25, 1998, the Company completed a sale of $200 million
principal amount of 15% Senior Notes due 2008 (the "15% Notes"). Of the total
net proceeds approximating $193.0 million, the Company placed approximately
$82.5 million, representing funds, together with interest thereon, sufficient to
pay the first six semi-annual interest payments on the 15% Notes, into an escrow
account for the benefit of the holders. Issuance costs approximating $7 million
are being amortized ratably over the term of the debt. Interest on the 15% Notes
is payable semi-annually, on January 1 and July 1, commencing January 1, 1999.
The 15% Notes are non-callable and mature in full on July 1, 2008.
The 15% Notes are unsubordinated, unsecured senior indebtedness of the
Company. The Company's subsidiaries have no obligation to pay amounts due on the
15% Notes and do not guarantee the 15% Notes. Therefore, the 15% Notes are
effectively subordinated to all existing and future liabilities (including trade
payables) of the Company's subsidiaries.
The 15% Notes are subject to certain covenants that, among other
things, restrict the ability of the Company and certain subsidiaries to incur
additional indebtedness, pay dividends or make distributions or redemptions in
respect of membership interests.
On August 28, 1997, the Company entered into a credit facility
agreement with a local bank that provided for borrowings of up to $4,000,000 for
the acquisitions of office furniture, equipment and computer software and for
construction costs related to leasehold improvements of office and switch site
locations. In March 1998, the credit facility was fully utilized and converted
into a term note payable in 60 equal monthly installments commencing April 1998.
Amounts borrowed bear interest at 1/2% under the bank's prime rate or 2% over
the bank's cost of funds, at the Company's option. The effective rate was
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7.0% at March 31, 1999. Specific assets and the guarantee of an affiliated
company owned by the Company's majority member secure all borrowings. The credit
facility also provides that the affiliated company maintains minimum debt to
tangible net worth and current ratio levels. At March 31, 1999, the affiliated
company was in compliance with the covenant requirements.
The aggregate principal repayments of long-term debt over the next five
years are as follows:
YEAR ENDING DECEMBER 31,
1999 (9 months)............................. $600,000
2000........................................ 800,000
2001........................................ 800,000
2002........................................ 800,000
2003........................................ 133,000
4 RELATED PARTY TRANSACTIONS
In connection with the Company's issuance of the 15% Notes, advances
from an affiliated company owned by the Company's majority member of $21.1
million were converted to members' capital as of March 31, 1998. Under an
expense sharing agreement with the affiliated company, the Company incurred
$82,153 and $81,979 relating to management and administrative services for the
three months ended March 31, 1999 and 1998, respectively.
In June 1997, the Company entered into a lease agreement with another
affiliated company owned by the majority member for aircraft transportation
services. Total travel costs incurred under this arrangement for the three
months ended March 31, 1999 and 1998 were $33,350 and $20,045, respectively.
5 LEASES
The Company leases administrative and sales office facilities,
operating sites and certain equipment under noncancelable operating leases
having initial or remaining terms of more than one year. Certain of the
Company's facility leases include renewal options, and most leases include
provisions for rent escalation to reflect increased operating costs and/or
require the Company to pay certain maintenance and utility costs. Total rental
expense for all operating leases for the three months ended March 31, 1999 and
1998 was $1,193,260 and $128,228, respectively.
Future minimum lease payments under noncancelable operating leases at
March 31, 1999 were as follows:
YEAR ENDING DECEMBER 31, OPERATING SITE
OFFICE FACILITIES FACILITIES EQUIPMENT TOTAL
- -------------------------- ----------------------- ----------------------- ----------------------- -----------------------
1999 (9 months)....... $1,336,087 $459,967 $718,084 $2,514,138
2000................. 2,096,834 612,107 927,105 3,636,046
2001................. 2,078,594 620,111 450,190 3,148,895
2002................. 1,860,429 613,189 183,163 2,656,781
2003-2007............ 1,780,200 1,321,161 5,378 3,106,739
2008-2012............ -- 181,881 -- 181,881
================================================================================================== =======================
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6 SUBSEQUENT EVENTS
In April 1999, pursuant to a Loan and Security Agreement among our
wholly-owned subsidiary US Xchange Finance Company, L.L.C., as borrower, the
Company and its operating subsidiaries, as guarantors, the lender parties
thereto and General Electric Capital Corporation, as Administrative Agent and
lender, the Company obtained a $50.0 million senior secured revolving credit
facility, $4.4 million of which was utilized as of May 13, 1999. Loans under
this facility bear interest at a floating rate equal to either a defined base
rate plus 3.0% or at LIBOR plus 4.0%, at the borrower's option. Interest is
payable at least on a quarterly basis. During the initial two years, unused
portions of this facility are subject to a commitment fee ranging between .75%
and 1.25% of the unused amount. The aggregate outstanding principal is repayable
is quarterly installments, commencing July 31, 2002 and continuing through April
30, 2007 based upon the following annual debt reduction formula: 10%, 15%, 20%,
25% and 30%. Borrowings are secured by all present and future real and personal
property, assets and revenues of the borrower and its subsidiaries. The Company
and the subsidiaries of the borrower have guaranteed the repayment of all
indebtedness under this facility.
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ITEM 2...MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
EXCEPT FOR HISTORICAL INFORMATION, THE DISCUSSION IN THIS ITEM 2 CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF A NUMBER OF FACTORS. THESE FACTORS INCLUDE, BUT ARE
NOT LIMITED TO, THE RISKS WE DISCUSS BELOW AND UNDER THE CAPTION "RISK FACTORS"
IN EXHIBIT 99.1 TO OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998, WHICH IS INCORPORATED HEREIN BY REFERENCE.
OVERVIEW
Our operations have resulted in significant losses, negative cash flows
from operating and investing activities and negative EBITDA since our inception
in August 1996. We expect that planned capital expenditures, together with the
associated operating expenses in each of our markets, will result in operating
losses, negative cash flows from operating and investing activities and negative
EBITDA for approximately 24 to 36 months after we commence facilities-based
switched operations in each market. Accordingly, we expect to experience
increasing consolidated losses as we expand our operations, deploy our networks
and switching facilities and develop our customer base.
FACTORS AFFECTING RESULTS OF OPERATIONS
REVENUES
We direct our sales and marketing efforts primarily towards small to
medium-sized business customers, internet service providers and governmental and
other institutional end users in selected underserved markets. In each of our
markets, we initially resell incumbent carrier services to establish a market
presence. After our network switching system becomes commercially operational in
a market, we transition our resale customers to our own switch-based network. We
believe that this strategy results in faster penetration of the available
customer base. We compete primarily on the basis of competitive pricing,
superior service and products and innovative service and product offerings.
We also generate revenues from the sale of our services to residential
customers. We believe that our bundled service offerings, high degree of front
office and back office automation and automated customer care, billing and
credit-checking systems and procedures enhance our ability to offer services to
residential customers in our markets. In addition, we believe we have
significant operating leverage and a relatively low marginal cost of providing
service to residential customers. We target creditworthy residential customers
who we believe are likely to have needs for multiple services. We market our
residential services through various affinity group and other cost-effective
marketing programs and service packages specifically designed to appeal to these
customers.
To further leverage our fixed costs, we have identified selective channels
for the sale of our services on a wholesale basis. For example, we have begun
offering our local and internet access services on a wholesale basis to internet
service providers in certain of our markets and have concluded an exclusive
distribution arrangement with an interconnect company. We intend to establish
strategic alliances with and supply wholesale services to electric utilities and
other selected telecommunications providers for resale to their own customers.
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OPERATING EXPENSES
Our primary operating expenses consist of the cost of communication
services, selling, general and administrative expenses and depreciation and
amortization charges.
Cost of Communication Services. Cost of communication services consists of
the fixed costs of leased facilities, minutes-of-use charges for origination and
termination services and access line charges for local and long distance
services, including the costs to use incumbent local telephone company unbundled
network elements, costs for installation and initial service turn-up and support
services outsourced to Lucent, and costs of network personnel. We also incur
rights-of-way costs and, in certain markets, franchise fees and taxes paid to
local governments based on revenue. After we install our network infrastructure
and activate our switching systems, we can add customers and associated revenues
with lower incremental cost of communication services, so that such customers
provide greater contributions to our operating cash flows and EBITDA. While we
primarily target businesses, internet service providers, and governmental and
other institutional customers, we believe that, once a network is operational,
the marginal cost of providing our services to residential customers is low
enough to allow us to economically address these customers because they
generally require less complex services than other customers. Cost of
communication services does not include depreciation and amortization.
Selling, General and Administrative. Our selling, general and
administrative expenses include sales and marketing costs, customer service and
technical support, billing and collection, and general management and overhead
expenses. These costs grow significantly as we expand our operations, and
administrative overhead is a large portion of these expenses during the
deployment of our networks. However, as we expand our customer base, we expect
these expenses will represent a smaller percentage of our revenues.
Depreciation and Amortization. We depreciate and amortize our property and
equipment using the straight-line method over the estimated useful life of the
assets, ranging from five to eight years for equipment, 20 years for fiber,
three to five years for third-party software costs and the lesser of 10 years or
the lease term for leasehold improvements.
INTEREST EXPENSE
Prior to our issuance of the 15% Senior Notes in June 1998, we did not
incur material interest expense. Since then, however, we have incurred and
expect to continue to incur substantial interest expense.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Revenues for the three months ended March 31, 1999 totaled $4.3 million, of
which $648,000 were derived from our facilities-based switched operations and
$3.7 million were from resale services. This compares to $565,000 in the first
quarter of 1998, all of which were resale revenues. At March 31, 1999, we had a
total of approximately 34,000 installed access lines in service of which
approximately 21% were served by our own facilities.
Cost of communication services increased to $8.2 million for the first
quarter of 1999 from $1.1 million for the same period in 1998. Of the $7.1
million increase, approximately $4.4 million relates to the costs of leased
telecommunications facilities and services in connection with the growth of our
local and long distance services. Our facilities-based network operating costs
also increased approximately $2.7 million
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due to the continued expansion of our networks into planned markets. Cost of
communication services, as a percentage of revenues, decreased to 190.7% in the
first quarter of 1999, compared to 194.7% during the same period of 1998,
reflecting the expansion and activation of our networks.
Selling, general and administrative expenses increased $5.6 million to
$10.1 million for the three months ended March 31, 1999 compared to $4.5 million
for the same period in 1998. The increase was due primarily to personnel costs
associated with the expansion of our selling, customer and technical support
services and administrative activities to support our growth. Selling, general
and administrative expenses decreased to 234.9% of revenues in the first quarter
of 1999, from 796.5% during the same period in 1998, primarily as a result of
the expansion of our customer base.
Depreciation and amortization expenses increased to $2.2 million for the
quarter ended March 31, 1999, from $213,000 for the comparable period in 1998.
The increase primarily reflects the eight switches and networks that were
commercially operational during the first quarter of 1999 compared to none in
operation for the same quarter of 1998.
Gross interest expense increased $7.5 million to $7.6 million all of which
relates to the accrual of interest on the 15% Notes. Interest costs of $1.6
million and $0 were capitalized during the three months ended March 31, 1999 and
1998, respectively, relating to network construction projects.
Interest income of $1.3 million for the quarter ended March 31, 1999,
resulted primarily from interest earnings on the short-term investment of the
cash proceeds from the issuance of the 15% Notes.
Net loss increased to $20.8 million for the three months ended March 31,
1999, from $5.3 million for the same period in 1998. The increase of $15.5
million results primarily from significant expenditures we incur, before the
realization of revenues, due to expansion of our local and long distance
services, the added depreciation expense resulting from the construction and
expansion of our networks and the net interest expense on our indebtedness to
fund our network development and expansion.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1999, cash and cash equivalents
decreased $29.6 million to $10.5 million. Our deficiency in net cash used in
operations increased to $29.8 million during the first quarter of 1999,
primarily the result of our increased net loss for the quarter and the reduction
of our accounts payable and accrued liabilities by $9.1 million. For the same
period in 1998, cash for operating activities was used primarily to fund our net
loss of $5.3 million, offset in part by an increase in accounts payable of $4.0
million.
Our investing activities for the three months ended March 31, 1999 provided
cash of $737,000, primarily due to the reduction in our restricted investments
for the semi-annual payment of interest on our 15% Notes. This reduction was
substantially offset by $14.5 million of capital expenditures during the first
quarter of 1999 for the construction of our switching and fiber optic networks.
Cash used for investing activities during the same period in 1998 was $14.7
million, of which $14.5 was used for the purchase and construction of our local
networks.
During the first quarter of 1999, cash of $483,000 was used for financing
activities to repay principal on our $4.0 million bank credit facility of
$133,000 and to pay $350,000 of direct financing costs incurred in connection
with our new secured senior credit facility, described below. Cash of $17.3
million was provided by financing activities in the first quarter of 1998,
primarily the result of additional member capital
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contributions of $16.0 million and borrowings of $1.2 million under our bank
credit facility. At March 31, 1999, we had $3.2 million of outstanding
indebtedness under this bank credit facility. The borrowings bear interest at an
annual rate equal to (1) 1/2% under the bank's prime lending rate or (2) 2% over
the bank's costs of funds, at our option. The effective annual interest rate of
the bank credit facility was 7.0% at March 31, 1999. The borrowings are
repayable in monthly installments of $66,667 through March 31, 2003 and are
secured by specific assets of the Company and one of our wholly-owned
subsidiaries and by the guarantees of the same subsidiary and of RVP Development
Corporation.
On June 25, 1998, we issued and sold $200 million aggregate principal amount
of our 15% Senior Notes due July 1, 2008. Of the $193.0 million of net proceeds
that we received for these Notes, we used approximately $82.5 million to
purchase U.S. government securities, including accrued interest, to secure and
fund our first six scheduled semi-annual payments of interest on these Notes.
Through March 31, 1999, we have spent approximately $100.6 million of the
remaining net proceeds to fund the installation and deployment of our networks
and their associated operating losses.
In April 1999, pursuant to a Loan and Security Agreement among our
wholly-owned subsidiary US Xchange Finance Company, L.L.C., as borrower, US
Xchange and our operating subsidiaries, as guarantors, the lender parties
thereto and General Electric Capital Corporation, as Administrative Agent and
lender, we obtained a $50.0 million senior secured revolving credit facility,
$4.4 million of which was utilized as of May 13, 1999. Loans under this facility
bear interest at a floating rate equal to either a defined base rate plus 3.0%
or at LIBOR plus 4.0%, at our option. Interest is payable at least on a
quarterly basis. During the initial two years, unused portions of this facility
are subject to a commitment fee ranging between .75% and 1.25% of the unused
amount. The aggregate outstanding principal is repayable is quarterly
installments, commencing July 31, 2002 and continuing through April 30, 2007
based upon the following annual debt reduction formula: 10%, 15%, 20%, 25% and
30%. Borrowings are secured by all present and future real and personal
property, assets and revenues of the borrower and its subsidiaries. US Xchange
and the subsidiaries of the borrower have guaranteed the repayment of all
indebtedness under this facility.
The terms of our indebtedness impose certain financial and operating
restrictions on us and our restricted subsidiaries. These restrictions limit,
among other things, our ability to:
-- incur additional indebtedness;
-- create liens;
-- engage in sale-leaseback transactions;
-- sell assets;
-- effect consolidations or mergers;
-- make investments or certain other restricted payments;
-- pay dividends or make distributions in respect of membership interests;
-- redeem membership interests;
-- issue or sell membership interests of our restricted subsidiaries; and
-- enter into transactions with any of our members or affiliates.
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While these limitations are subject to a number of important qualifications and
exceptions, if we were to fail to comply with these restrictions and, in some
cases, were to fail to cure our noncompliance, the lenders could declare a
default.
Our operations have required a substantial capital investment for the
purchase of telecommunications equipment and the construction and development of
our networks. Since the beginning of fiscal 1997 and through March 31, 1999, we
have spent approximately $118.3 million on capital expenditures. We have funded
these expenditures through our existing equity capital, borrowings under our
credit facilities and the net proceeds from the sale of our 15% Senior Notes.
The costs associated with the initial installation and expansion of
each of our networks, including development, installation, certain
organizational costs and early operating expenses, and the construction of our
planned long haul routes interconnecting our commercial regions are
significant. We expect to experience negative cash flow for each market until
we establish an adequate customer base and revenue stream. We estimate that, as
of March 31, 1999, our future capital requirements (including requirements for
capital expenditures, working capital, debt service and operating losses) to
fund the installation, deployment and operating losses of our current networks
and the planned installation of long-haul fiber interconnecting these networks
will total approximately $100 million. We plan to finance these capital
requirements with the remaining net proceeds from the issuance of our 15%
Senior Notes (approximately $9.9 million as of March 31, 1999), the net proceeds
of our $50 million senior secured credit facility, cash expected to be
generated from future revenues and additional debt financing. We currently
have no commitments for such additional debt financing, and we can give no
assurance that such additional debt financing will be available to us on terms
we consider acceptable or at all. If we are unable to secure additional debt
financing on acceptable terms, we may be required to modify or delay some of
our planned capital expenditures, which could have a material adverse effect on
our business.
However, the actual amount and timing of our capital requirements may vary
significantly from our estimates based upon a number of factors, including,
among other things:
-- the timing and success of our current development plans;
-- shortfalls in our revenue and cost projections;
-- demand for our services;
-- regulatory, technological and competitive developments;
-- any decision to expand our operations into additional commercial regions
or markets; and
-- any acquisitions or joint ventures that we decide to undertake.
Actual revenues and costs may vary materially from expected amounts, and such
variations will likely affect our future cash flow requirements. Accordingly, we
cannot assure you that our actual capital requirements will not exceed our
current estimates.
YEAR 2000 COMPLIANCE
The year 2000 issue is a matter of particular worldwide concern for
telecommunications carriers because it affects many aspects of
telecommunications technology, including the computer systems and software
applications that are essential for network administration and operations. A
significant portion of telecommunications voice and data networking and network
management devices have date-sensitive processing in them which affect network
administration and operations functions such as service activation, service
assurance and billing processes. However, because we have recently commenced
operations and acquired our key processing systems, our costs relating to year
2000 issues have not been material. Lucent and the other system vendors have
represented to us that their systems are year 2000 compliant without any
required modification. We will require confirmation of year 2000 compliance in
our future requests for
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proposals from Lucent and our other equipment and software vendors. Pursuant to
our year 2000 compliance plan, we have modified and tested all of our
mission-critical systems and believe they are now year 2000 compliant. However,
until the year 2000, we cannot assure you that our computer systems and software
applications will accommodate the year 2000.
The failure of our computer systems and software applications to
accommodate the year 2000 could have a material adverse effect on our business
and financial condition. Further, if the networks and systems of the incumbent
local telephone companies, long distance carriers and others on whose services
we depend and with whom our networks and systems must interface are not year
2000 functional, it could have a material adverse effect on the operation of our
networks and, as a result, on our business and customers. The Telco Year 2000
Forum, a group representing the nation's largest local telephone companies, has
announced, based upon six months of interoperability testing, that such
companies remain confident that the public will be able to place telephone calls
at the start of 2000. However, other domestic and international carriers may not
be year 2000 functional. We have not yet established a contingency plan that
addresses our response to any potential failure of our systems, or those of
other entities on whose services we depend or with whom our networks and systems
must interface, to accommodate year 2000 issues. However, we have been
participating in industry interoperability testing processes and plan to
implement the contingency plans being put in place by industry organizations. We
intend to continue to monitor the performance of our accounting, information and
processing systems and software applications and those of our third-party
constituents to identify and resolve any year 2000 issues.
While we believe all of our mission-critical systems are now year 2000
compliant, we can give no assurance that we will not have to replace, upgrade or
reprogram certain existing systems and software applications to ensure that our
systems and interoperability applications are year 2000 functional. However,
based on current information, we do not believe that we will incur costs for any
replacement, upgrade or reprogramming of our computer systems and software
applications to resolve any year 2000 issues that will be material to our
business, financial condition or results of operations.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Among other
provisions, this standard requires that entities recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. Gains and losses resulting from changes in the fair values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. This standard is effective for
fiscal years beginning after June 15, 1999, though earlier adoption is
encouraged and retroactive application is prohibited. Historically, we have not
entered into, and we currently have no plans to enter into, any derivative
instruments. Accordingly, we believe that this standard will not have a material
impact on our consolidated financial position, results of operations or cash
flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits filed with (or incorporated by reference into) this
report:
3.1 Articles of Organization of US Xchange, L.L.C.
(incorporated by reference to Exhibit 3.1 to our
registration statement on Form S-4 (Commission File No.
333-64717) filed September 26, 1998, the "Form S-4")
3.2 Operating Agreement of US Xchange, L.L.C. dated as of
August 1, 1996, incorporated herein by reference to
Exhibit 3.2 to the Form S-4.
4.1 Loan and Security Agreement dated as of April 29, 1999,
among US Xchange Finance Company, L.L.C., as Borrower,
US Xchange, L.L.C. and certain operating subsidiaries
of US Xchange, L.L.C., as Guarantors, and General
Electric Capital Corporation, as Administrative Agent
and lender thereunder.
27.1 Financial Data Schedule for Three Months Ended
March 31, 1999
27.2 Financial Data Schedule for Three Months Ended
March 31, 1998
99.1 Risk Factors, incorporated herein by reference to
Exhibit 99.1 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998 .
--------------
(b) Reports on Form 8-K:
The Registrant filed no reports on Form 8-K during the quarter ended
March 31, 1999.
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SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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.
US XCHANGE, L.L.C.
May 13, 1999 By:/s/ Richard Postma
----------------------------------------------
Richard Postma
Co-Chairman and Chief Executive Officer
May 13, 1999 By:/s/ Donald Offringa
----------------------------------------------
Donald Offringa
Vice President of Finance (Principal Financial
Officer and Principal Accounting Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------------------------------
3.1 Articles of Organization of US Xchange, L.L.C. (incorporated
by reference to Exhibit 3.1 to our registration statement on
Form S-4 (Commission File No. 333-64717) filed September 26,
1998, the "Form S-4")
3.2 Operating Agreement of US Xchange, L.L.C. dated as of August
1, 1996 (incorporated by reference to Exhibit 3.2 to the
Form S-4)
4.1 Loan and Security Agreement dated as of April 29, 1999,
among US Xchange Finance Company, L.L.C., as Borrower, US
Xchange, L.L.C. and certain operating subsidiaries of US
Xchange, L.L.C., as Guarantors, and General Electric Capital
Corporation, as Administrative Agent and lender thereunder.
27.1 Financial Data Schedule for Three Months Ended
March 31, 1999
27.2 Financial Data Schedule for Three Months Ended
March 31, 1998
99.1 Risk Factors, incorporated herein by reference to Exhibit
99.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
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