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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No.1
(Mark One)
/x/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1996
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or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to _____________
Commission file number 0-21602
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LCI INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3498232
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(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8180 Greensboro Drive, Suite 800
McLean, Virginia 22102
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(Address of principal executive offices) (Zip Code)
(703) 442-0220
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(Registrant's telephone number, including area code)
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(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
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As of July 31, 1996, there were 72,555,430 shares of LCI International, Inc.
Common Stock (par value $.01 per share) outstanding.
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LCI INTERNATIONAL, INC.
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 3 - 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURE 15
EXHIBIT INDEX
EXHIBITS 16
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
INTRODUCTION - INDUSTRY ENVIRONMENT
The Company operates in the almost $80 billion long-distance
telecommunications industry. The current industry environment subjects the
Company to varying degrees of legislative and regulatory oversight on both the
national and state levels. The following potential changes in the legislative
and/or regulatory environment can impact the nature and degree of the Company's
competition.
LEGISLATIVE MATTERS
TELECOMMUNICATIONS ACT OF 1996. In February 1996, the
Telecommunications Act of 1996 (the Act) was passed by the United States
Congress and signed into law by President Clinton. This comprehensive
telecommunications legislation was designed to increase competition in the
long-distance and local telecommunications industries. The legislation will
allow the Regional Bell Operating Companies (RBOCs) to provide long-distance
service in exchange for opening their networks to local competition. Under the
legislation, the RBOCs can immediately provide interstate long-distance
services outside of their local service territories. However, an RBOC must
apply to the Federal Communications Commission (FCC) to provide long-distance
services within any of the states in which such RBOC currently operates. The
RBOCs must satisfy several pro-competition criteria before the FCC will approve
such a request. With the passage of the legislation, the Company can enter
local telephone markets by reselling service of local telephone companies or
building new facilities.
Under the Act, a telecommunications provider can request initiation of
interconnection/resale negotiations with a local exchange company (LEC). In
early March, the Company requested in writing to begin good faith negotiations
with the RBOCs and several other LECs. On June 27, 1996, the Company notified
the RBOCs, Cincinnati Bell, GTE and Sprint United that it was withdrawing from
formal negotiations for local service under the Act. LCI's action came as a
result of the Company's unsuccessful attempts to reach local service agreements
with each of the respective LECs. LCI withdrew from formal negotiations with
several of the LECs because they failed to provide the necessary technical and
pricing information fundamental to offering competitive local telephone
service. The Act provides that if the parties have not reached an agreement
between 135 to 160 days from the beginning of negotiations, the Company may
request arbitration from the appropriate state agency. The Company's
withdrawal, which occurred before the 160 day deadline, preserves LCI's rights
to arbitrate any unresolved issues. In the case of Ameritech, Bell South and
Sprint United, the parties mutually consented to withdraw from negotiations.
While LCI has formally withdrawn from local service negotiations, it
continues to have discussions with various LECs, competitive access providers
and other telecommunications service providers relative to providing local
service. The Company will continue to pursue its strategy of offering local
service and does not believe that its withdrawal from formal negotiations will
impede or significantly delay its entry into the local service market.
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REGULATORY MATTERS
LOCAL INTERCONNECTION AND RESALE. On August 1, 1996, the FCC adopted
an order to implement policies and rules regarding local service competition as
required under the Act. In preliminary form, the FCC has established a minimal
national framework for the purchase of unbundled local network elements, resale
discounts, and procedures by which agreements for the provision of local
service through LECs are to be arbitrated. The Company views the FCC's action
as an effective first step toward facilitating competition in local services.
The FCC has also initiated a number of other rulemaking proceedings to
comply with the Act. These rulemaking proceedings include addressing certain
tariff-related issues, the definition of universal service, accounting and
non-accounting safeguards relative to the RBOCs' provision of in-region long
distance service, and rate deaveraging. The Company is unable to predict what
action will be taken by the FCC or how such action will affect the Company's
financial position and results of operation.
LOCAL SERVICE. The Company is involved in state regulatory proceedings
in various states to secure approval to resell local service which would enable
the Company to provide combined local and long-distance services to existing
and prospective customers. The local service industry is estimated to be an
$80 billion market. The Company believes that it has significant opportunities
in this industry. The Company has received different levels of approval to
resell local service in Illinois, Texas, Florida, Connecticut, Michigan,
California, Maryland, Tennessee and New York and has applications for local
service authority pending in nineteen other states. The Company is unable to
predict when and the degree to which it will resell local services.
RBOC ENTRY INTO OUT-OF-REGION LONG DISTANCE. The Act granted the RBOCs
the authority to provide out-of-region long-distance services. In response, the
FCC granted the ability for an RBOCs that provides interstate interexchange
services through an affiliate to obtain non-dominant regulatory treatment on an
interim basis, if the affiliate complies with certain safeguards. The
safeguards require that the affiliate maintain separate books of accounts, does
not jointly own transmission or switching facilities with the RBOC, and obtain
any tariffed services from the affiliated RBOC at tariffed rates and
conditions.
RBOC MERGERS. In early 1996, SBC Communications Inc. and Pacific
Telesis Group, as well as Bell Atlantic Corp. and NYNEX Corp. (all are RBOCs)
announced plans to merge. The mergers are subject to review and approval by
various state and Federal agencies. The Company is unable to predict what
impact, if any, these potential mergers, if approved, might have on competition
in the telecommunications industry or on the Company.
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GENERAL - RESULTS OF OPERATIONS
The Company's switched revenues are a function of switched minutes of
use (MOUs) and rate structure (rates charged per MOU), which in turn are a
function of the Company's customer and service mix. Private line revenues are
a function of fixed rates that do not vary with usage. The Company's cost of
services consists primarily of expenses incurred for origination, termination
and transmission of calls through local exchange carriers and transmission
through other long-distance carriers. The Company provides service to its
customers through digital fiber optic facilities which are both leased and
owned. Collectively, these facilities constitute the Company's network (the
Network). These results of operations include the acquisition of Pennsylvania
Alternative Communications, Inc. (PACE) from June 1, 1996, and the acquisitions
of Teledial America, Inc. (Teledial America) and ATS Network Communications,
Inc. (ATS) from January 1, 1996.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AS
COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 1995
REVENUES. Total revenues increased 77% to $269.4 million and 76% to
$520.0 million for the three months and six months ended June 30, 1996,
respectively, over the comparable periods in 1995. Internal growth from the
Company's base business was 42% in the quarter, with acquisitions representing
the remaining increase. The following table provides further information
regarding the Company's revenues:
(in thousands, Three Months Six Months
except switched revenue per MOU) Ended June 30, Ended June 30,
------------------------------- --------------------------------
1996 1995 Change 1996 1995 Change
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Total Revenues $ 269,419 $ 152,000 77% $ 519,978 $ 296,215 76%
MOUs 1,954,998 1,112,945 76% 3,764,655 2,180,903 73%
Switched Revenue per MOU(1) $ 0.1272 $ 0.1210 5% $ 0.1267 $ 0.1200 6%
(1)Switched revenue divided by MOUs
Commercial revenues increased approximately 60% for three and six
months ended June 30, 1996 compared to the same periods in 1995 and continued
to represent more than half of the Company's total revenues. Residential/small
business service revenues increased approximately 170% and 180% for the three
and six months ended June 30, 1996, respectively, over the comparable periods
in the prior year. The residential/small business segment represented
approximately 30% of total revenues for the three and six months ended June 30,
1996 as compared to approximately 20% for the same periods in prior years. The
wholesale segment experienced higher growth rates of approximately 35% and 25%
for the three and six months ended June 30, 1996, respectively, as compared to
the same periods in 1995, as a result of the Company's continual evaluation of
the potential margin in this service line and the decision to take advantage of
profitable opportunities. The wholesale service line represented approximately
15% of total revenue during 1996 compared to 20% of total revenue during 1995.
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Growth in international service revenues across all business segments
continued in excess of 135% for both the three months and six months ended June
30, 1996 compared to the same periods in 1995 and resulted from the Company's
efforts to take full advantage of opportunities in the global
telecommunications market.
The Company experienced a 5% and 6% increase in revenue per MOU for
the three and six months ended June 30, 1996, respectively, as compared to the
same periods in 1995. This increase in revenue per MOU reflects several
factors. An increasing base of residential/small business and international
revenues with higher rate structures per MOU has favorably impacted revenue per
MOU, but this increase was partially offset by the higher level of sales
allowance required in 1996. Other factors placing a downward pressure on
revenue per MOU include competitive market conditions, a mix shift in
international service to countries with lower rate structures in 1996 compared
to 1995, expanded growth in dedicated access services and the Company's
commitment to grow in all market segments, including wholesale and national
accounts, all of which have a lower rate structure per MOU.
The Company uses a variety of channels to market its services. In
addition to its internal sales force, the Company uses a combination of
advertising, telemarketing and third-party sales agents. With respect to
third-party sales agents, compensation for sales is paid to agents in the form
of an ongoing commission based upon collected revenue attributable to customers
identified by the agents. Service responsibilities including billing and
customer service functions for such customers are performed by the Company.
American Communications Network, Inc. (ACN), a nationwide network of
third-party sales agents, continued to be the most successful of the Company's
sales agents and accounted for a significant portion of the Company's
residential/small business sales growth. In June 1996, the Company extended
its contract with ACN through April 2011. In consideration for the contract
extension, as well as exclusivity and non-compete provisions, the Company
committed to make two payments on designated dates which will be amortized over
the life of the contract. A portion of these payments is contingent on future
performance by ACN. The agreement also contains a provision whereby ACN will
receive a payment if there is a change in the control of the Company. In
consideration for this change in control payment, the Company will receive a
31% reduction in the ongoing commission rates paid to ACN. The change in
control payment is calculated based on a multiple of three times the average
monthly collected revenue generated by customers identified by ACN. Average
monthly collected revenue is calculated over a 24-month performance period
subsequent to the change in control. The amount of this payment is therefore
dependent upon ACN's level of performance during this period.
GROSS MARGIN. The Company's gross margin increased 80% to $111.8
million and 77% to $213.7 million for the three and six months ended June 30,
1996, respectively, as compared to the prior year. The $50.0 million and $93.2
million increases over the prior year are primarily a result of the continued
increase in revenues. During the three and six months ended June 30, 1996, the
gross margin percentage increased to 41.5% and 41.1%, respectively, from 40.9%
and 40.7%, respectively, for the same periods in 1995.
The growth in the Company's gross margin as well as the increase in
gross margin as a percentage of revenue, resulted from the net impact of
several items. The growth in residential/small business and international
traffic, which has a higher revenue per MOU compared to other service
offerings, had a favorable impact on gross margin. Even with the mix shift in
international service to countries with lower rates per MOU, management has
reduced the cost per MOU at a greater rate than the mix shift. The improvements
in Network efficiencies and lower access costs due to local exchange carrier
rate reductions provided cost savings which also favorably impacted gross
margin. During the second quarter of 1996 approximately 95% of the Company's
domestic traffic was carried on the Network compared to approximately 90% for
the comparable period in 1995. The Network efficiencies were a result of the
integration of acquisition traffic onto the Network and improved application of
Network optimization techniques.
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The favorable impact on gross margin was partially offset by
competitive pressures in the commercial market segment which reduced revenue
per MOU and related gross margins. The higher cost of traffic from acquisitions
which has not yet been integrated onto the Network has also reduced gross
margin as a percentage of revenue. The net impact of all of these factors
resulted in an overall improvement in the gross margin as a percentage of
revenue.
The Company continues to evaluate strategies to reduce its cost of
services. These strategies include a review of the Company's ability to
leverage its embedded fiber optic capacity, as well as gain access to fiber
optic and broadband capacity through contract negotiations or other
arrangements with carriers. In addition, the Company continues to identify
off-network traffic from acquisitions that can be cost effectively routed onto
the Network and therefore reduce costs. Through these strategies, LCI plans to
improve the reliability and efficiency of the Network as well as reduce its
cost of services per MOU.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 83% to $61.6 million and 82% to $118.2
million for the three and six months ended June 30, 1996, respectively, as
compared to the same periods in the prior year. The increases in selling,
general and administrative expenses resulted primarily from corresponding
increases in revenue for the same periods. As a percentage of revenues,
selling, general and administrative expenses were approximately 22.8% and 22.7%
for the three and six months ended June 30, 1996, respectively, which
represented an increase over the percentage of revenues of approximately 22.2%
and 22.0% for the same periods in 1995, respectively.
The increase in selling, general and administrative expenses reflects,
in part, the $10.0 million and $18.8 million increase in commission expense for
the three months and six months ended June 30, 1996, respectively, over the
comparable periods in 1995 due to the increases in sales and revenues. Billing
services expense increased $3.8 million and $7.2 million for the same periods
in 1996, respectively, over the comparable periods in 1995 due to the increase
in residential/small business service call volume. Both commission and billing
services expenses grew at a faster rate than revenues due to the shift in
customer mix toward residential/small business services which were growing
faster than their related costs. The Company expects the continued increase in
the residential/small business segments, with the corresponding shift in the
customer mix, will result in continued increases in these components of
selling, general and administrative expenses.
Payroll expenses increased $9.4 million and $17.8 million for the
three and six months ended June 30, 1996, respectively, due to an increase in
the number of employees resulting from the Company's expansion and
acquisitions. The growth in the payroll expense during 1996 over the comparable
periods in 1995 was less than the corresponding growth in revenues for the same
periods.
Another increase in selling, general and administrative expenses
during the three month and six months ended June 30, 1996 was caused by the
increase in bad debt expense. Bad debt expense increased as a result of the
growth in revenue during 1996, the increase in the customer mix toward the
residential/small business service segment, the geographic mix of the
residential/small business moving outside the midwest which historically has a
lower bad debt rate, as well as increased scrutiny of accounts receivable
resulting from the transition to a new accounts receivable system. The new
accounts receivable system provided management with the ability to better
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analyze and monitor the nature of customer receivable balances. The Company
evaluated the status of its accounts receivable and increased its provision for
bad debt expense to reflect credits and the write-off of uncollectible
accounts. As a result of all of the above, an increase in bad debt expense may
continue during the remainder of 1996, but as a percentage of revenues bad debt
expense increased slightly during the three and six months ended June 30, 1996
over the comparable periods in 1995.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense for the three and six months ended June 30, 1996 increased 51% and 49%,
respectively, over the same periods in 1995. The dollar increase is a result of
the increased capital expenditures required to support the growth in revenue
and MOU volumes, as well as additional goodwill amortization from the Company's
recent acquisitions. The growth in revenue exceeded the growth in depreciation
and amortization expense which caused depreciation and amortization expense as
a percentage of revenues to decrease to 6% for the three and six month periods
ended June 30, 1996, respectively, from 7% for the same periods in 1995. The
reduction in depreciation and amortization expense as a percentage of revenues
reflects the Company's ability to maximize the application of its facilities
and achieve economies of scale from its revenue growth.
OPERATING INCOME. Operating income increased 90% to $34.7 million and
86% to $65.9 million for the three and six months ended June 30, 1996,
respectively, compared to the same period in 1995 due to the factors discussed
above. As a percentage of revenues, operating income increased to 13% for the
three and six months ended June 30, 1996 compared to 12% for the same periods
in 1995, reflecting management of expenses during a period of significant
growth in revenues and MOUs.
INTEREST AND OTHER EXPENSE, NET. Interest and other expense, net of
capitalized interest, increased to $7.5 million and $15.2 million for the three
and six months ended June 30, 1996, respectively, from $3.7 million and $7.1
million for the same periods in 1995, respectively. The higher levels of
outstanding debt during 1996 compared to the same periods in 1995 resulted in
increased interest expense during these periods. The Company's acquisitions of
CTG, Teledial America, ATS and PACE increased outstanding debt approximately
$173 million for the three and six months ended June 30, 1996 over the
comparable periods in 1995. The Company had $393.9 million in outstanding debt
and capital leases as of June 30, 1996 as compared to $178.4 million as of June
30, 1995. The effective weighted average interest rate on all indebtedness
outstanding was 7.71% and 7.87% for the three and six months ended June 30,
1996, respectively, as compared to 8.16% and 8.29% for the same periods in
1995, respectively.
INCOME TAX EXPENSE. Income tax expense was $9.5 million and $ 17.7
million for the three and six months ended June 30, 1996, respectively, as
compared to $3.5 million and $6.8 million for the same periods in 1995,
respectively. The increase in income tax expense was a result of an increase in
the estimated effective tax rate to 35% in 1996 from 24% in 1995, as well as
the increase in income before income taxes for the periods in 1996 as compared
to 1995. The effective tax rate is lower than the statutory rate primarily due
to the Company's expectation that a portion of the available net operating
losses (NOLs) will be realized in future years as permitted by Statement of
Financial Accounting Standards No. 109 (See Note 8 to the Condensed
Consolidated Financial Statements.)
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PREFERRED DIVIDENDS. Preferred dividends were $0.9 million and $2.3
million for the three and six months ended June 30, 1996, respectively, as a
result of the dividend requirements on the 5% Cumulative Convertible
Exchangeable Preferred Stock (Preferred Stock), which was issued in August
1993. During the first three and six months of 1996 Preferred Stock conversions
of 578,400 and 2,854,788, respectively, decreased the amount of Preferred Stock
outstanding. As a result of the conversions the corresponding preferred
dividend payments decreased during 1996 as compared to 1995.
INCOME ON COMMON STOCK. The Company generated income on common stock
(after preferred dividends) of $16.8 million and $30.7 million for the three
and six months ended June 30, 1996, respectively, as compared to $9.7 million
and $18.7 million for the same periods in 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
LCI International, Inc. is a holding company and conducts operations
through its direct and indirect wholly-owned subsidiaries. There are no
restrictions on the movement of cash within the consolidated group and the
Company's discussion of its liquidity is based on the consolidated group. The
Company measures its liquidity based on cash flow as reported in its Condensed
Consolidated Statements of Cash Flow; however, the Company does use other
operational measures as outlined below to manage its operations.
CASH FLOWS - OPERATING ACTIVITIES. The Company provided $68.0 million
of cash from operations for the six months ended June 30, 1996 which is an
increase of $58.1 million from the same period in 1995. The increase is due to
stronger cash collections in 1996 when compared to 1995 and the significant
growth in revenues and net income for the same period.
CASH FLOWS - INVESTING ACTIVITIES. The Company has supported its
growth strategy with both capital additions and acquisitions. During the six
months ended June 30, 1996, the Company spent $64.0 million in capital
expenditures to acquire additional switching, transmission and distribution
capacity as well as to develop information systems support, representing an
increase of $26.3 million from the same period in 1995.
The Company's acquisitions of Teledial America and ATS in the first
quarter of 1996, as well as the acquisitions of PACE and other intangible
assets in the second quarter of 1996 resulted in the use of $118.1 million in
cash for the six months ended June 30, 1996. The Company had no acquisitions
during the same period in 1995.
CASH FLOWS - FINANCING ACTIVITIES. Financing activities provided a net
$114.1 million for the six months ended June 30, 1996, primarily from the
proceeds of the Company's Revolving Credit Facility (Credit Facility),
representing an increase of $86.3 million from the same period in 1995. The
cash provided was primarily used for the acquisitions and capital expenditures
discussed under the caption Cash Flow- Investing Activities.
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CAPITAL RESOURCES. In February 1996, the Company negotiated an
increase in the Credit Facility to $700 million for a five-year period. The
Credit Facility allows the Company to borrow on a daily basis. As a result,
the Company uses its available cash to reduce the balance of its Credit
Facility and maintains no cash on hand. The Company had $380.4 million
outstanding under the Credit Facility with $10.4 million reserved as a result
of issued letters of credit, resulting in $309.2 million available under the
Credit Facility as of June 30, 1996.
The banks' commitment under the Credit Facility is subject to various
principal reductions, depending on the outstanding balance, until maturity on
March 31, 2001. The Credit Facility contains certain balance sheet, operating
cash flow, capital expenditure and negative covenant requirements. As of June
30, 1996, the Company was in compliance with all covenants. The interest rate
on the Credit Facility outstanding balance is variable based on several indices
(See Note 5 to the Condensed Consolidated Financial Statements). The weighted
average interest rate on the debt outstanding under the Credit Facility was
6.46% and 7.06% at June 30, 1996 and 1995, respectively.
Although the Company believes it has sufficient operating cash flows
and available borrowing capacity to fund its current operations and anticipated
capital requirements, the Company continues to evaluate other sources of
financing. The Company has filed a shelf registration statement with the
Securities and Exchange Commission, which would allow the issuance of an
additional $300 million of debt and/or equity securities. The Company is also
investigating a securitization program of accounts receivable balances to
provide an additional source of capital. If completed, the funds from the
transaction would be used to reduce the balance on the Credit Facility. The
Company has not yet determined when or if any new capital financing will be
completed.
On June 3, 1996, the Company announced its intention to redeem the
outstanding shares of Preferred Stock on September 3, 1996. The redemption
price will be $25.50 per share plus accrued and unpaid dividends through August
31, 1996. The Company believes that substantially all of the Preferred Stock
will be converted into shares of common stock as the value to be realized upon
conversion (based upon the current market value of the Company's common stock)
is significantly higher than the redemption price. The Preferred Stock is
convertible into shares of common stock ($.01 par value) of the Company at the
option of the holder, at any time, at a conversion rate equal to the aggregate
liquidation preference of the shares, divided by the conversion price. The
Preferred Stock has a liquidation preference of $25.00 per share plus accrued
and unpaid dividends, and can be converted into shares of common stock based on
a conversion price of $9.50 per share. If all preferred stockholders do not
convert their shares to common stock, the Company will use funds from
operations or from its Credit Facility for the redemption. Neither the
conversion nor the redemption of the Preferred Stock will have an impact on
earnings per share as the assumed conversion of the Preferred Stock is
currently reflected in the weighted average share calculation. Upon conversion
or redemption of all of the Preferred Stock outstanding, the dividend payments
will no longer be required resulting in annual savings of $5.7 million, based
upon the original 4.6 million shares issued in August 1993.
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OPERATIONAL MEASURES. The Company uses earnings before interest,
income taxes, other expense, depreciation and amortization (EBITDA) and
borrowing capacity under its Credit Facility as operational measures of its
ability to fund growth and manage expansion. EBITDA should not be considered
(i) as an alternate to net income, (ii) as an indicator of operating
performance or cash flows generated by operating, investing or financing
activities or (iii) as a measure of liquidity.
EBITDA increased 76% to $50.2 million and 72% to $95.5 million for the
three and six months ended June 30, 1996, respectively, compared to the same
period for 1995. The following table provides a summary of EBITDA, cash
interest and preferred dividends coverage ratio and capital spending for
comparable periods in 1996 and 1995:
Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------ --------------------------
(in thousands) 1996 1995 1996 1995
----------- ----------- ----------- ------------
EBITDA $50,196 $28,500 $ 95,503 $55,440
Cash Interest and Preferred Dividends 7,544 5,762 16,466 9,784
Coverage Ratio (1) 6.65x 4.95x 5.80x 5.67x
Capital Expenditures and Acquisitions $53,178 $25,663 $182,153 $37,761
(1) EBITDA divided by cash interest and preferred dividends.
The successful growth in operations, together with the capital changes
discussed above, have significantly improved EBITDA during the periods
presented.
CAPITAL REQUIREMENTS. In June 1996, the Company purchased the
long-distance assets of PACE for approximately $8 million in cash with a
maximum payment of an additional $5 million in cash contingent on certain
revenue performance over a seven-month period. In January 1996, the Company
purchased the long-distance telecommunications businesses of Teledial America,
Inc. and an affiliated company, ATS Network Communications, Inc. for
approximately $99 million in cash with a maximum payment of an additional $24
million in cash contingent on certain revenue performance criteria over an
eighteen-month period commencing on the closing date. (See Note 4 to the
Condensed Consolidated Financial Statements.)
The Company has relied upon strategic acquisitions as a means of
expanding its network, sales and service presence and revenues across the
country. The Company evaluates each potential acquisition to determine its
strategic fit within the Company's growth, operating margin and income
objectives. The Company expects to actively explore potential acquisitions and
may enter into discussions from time to time with potential acquisition
candidates, but there can be no assurance that the Company will be able to
enter into agreements in the future with respect to, or consummate,
acquisitions on acceptable terms.
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During May the Company extended an agreement with a distributor. A
similar arrangement with an affiliated party is expected to be finalized during
the next quarter. In consideration for the contract extension as well as
exclusivity and non-compete provisions, the Company will make payments on
various designated dates over several years in accordance with the two
agreements. These payments will be amortized over the respective contract
terms.
COMMITMENTS AND CONTINGENCIES. The Company has agreements with
certain interexchange carriers and third-party vendors to lease facilities for
originating, terminating and transport services. These agreements require the
Company to maintain minimum monthly and/or annual billings based on usage. The
Company currently has one significant contract with a third-party carrier,
however, the costs associated with the contract represent less than 10% of the
Company's revenue (See Note 6 to the Condensed Consolidated Financial
Statements). The Company manages its Network in order to maximize reliability
and redundancy and is managed to keep interruption of service to a minimum.
Although most service failures that the Company has experienced have been
corrected in a relatively short time period, a catastrophic service failure
could interrupt the provision of service by both the Company and its
competitors for a lengthy time period. The restoration period for a
catastrophic service failure cannot be reasonably determined. The Company has
not, however, experienced a catastrophic service failure in its history.
The Company has been named as a defendant in various litigation
matters. Management intends to vigorously defend these outstanding claims.
The Company believes that it has adequate accrued loss contingencies and that
current pending or threatened litigation matters will not have a material
adverse impact on the Company's results of operations or financial condition
(See Note 6 to the Condensed Consolidated Financial Statements.)
FEDERAL INCOME TAXES. The Company has generated significant NOLs in
prior years that are available to reduce current cash requirements for income
taxes. See Note 8 of the Condensed Consolidated Financial Statements for a
discussion of the availability and expected utilization of the existing NOLs.
IMPACT OF INFLATION AND SEASONALITY. The Company does not believe that the
relatively moderate levels of inflation which have been experienced in the
United States in recent years have had a significant effect on its net revenues
or earnings.
The Company's long-distance revenue is subject to seasonal variations
based on each business segment. Use of long-distance services by commercial
customers is typically lower on weekends throughout the year, and in the fourth
quarter due to holidays. As residential revenue increases as a proportion of
the Company's total revenues, the seasonal impact due to changes in commercial
calling patterns should be reduced. The Company is unable to predict the
impact of a shift to a larger residential customer base.
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PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 - SAFE HARBOR
CAUTIONARY STATEMENT. Except for historical information provided in this
report, including, without limitation, statements in this report expressing the
beliefs and expectations of management regarding the Company's future results
and performance, are forward-looking statements based on current expectations
that involve a number of risks and uncertainties. The factors that could cause
actual results to differ materially from management expectations include the
following: general economic conditions; competition in the telecommunications
industry, including RBOC entry into the long distance industry and its impact
on pricing; the ability of the Company's direct sales force and alternative
channels of distribution to obtain new sales; the adoption and application of
rules and regulations implementing the Telecommunications Act of 1996; and
other risks described from time to time in the Company's Securities and
Exchange Commission filings.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The exhibits filed as part of this report are set forth in the Index
of Exhibits on page 28 of this report.
(b) Reports on Form 8-K:
On June 3, 1996, the Company filed a report on Form 8-K to announce
that its Board of Directors had authorized the redemption of the
outstanding shares of the Company's 5% Cumulative Convertible
Exchangeable Preferred Stock on September 3, 1996.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LCI INTERNATIONAL, INC.
DATE: February 20, 1997 BY: /s/ Joseph A. Lawerence
----------------- -----------------------
Joseph A. Lawrence
Chief Financial Officer,
Senior Vice President Finance and
Corporate Development
(as duly authorized officer and
principal financial officer)
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EXHIBIT INDEX
The following Exhibits are included in this Quarterly Report on Form 10-Q:
Exhibit Exhibit
Number Description
- ------------- -------------------------------------------------------------------------------------
3(i)(a) Amended and Restated Certificate of Incorporation(3)
3(ii) Amended and Restated By-laws(2)
10(l)(xx) Employment Agreement, dated as of March 19, 1996 between LCI International Management
Services, Inc. and Roy Gamse(3)
10(q)(iiii) Contractor Agreement dated May 1, 1996 between LCI International Telecom Corp. and American
Communications Network, Inc.(1)
11 Statement Regarding Computation of Per Share Earnings(3)
15 Letter Regarding Unaudited Interim Financial Information(3)
27 Financial Data Schedule(3)
(1) Confidential treatment has been requested for portions of this exhibit.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (No. 33-60558).
(3) Incorporated by reference to the Registrant's Form 10-Q for quarterly
period ended June 30, 1996 filed Aug 13, 1996.
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