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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1993
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number: 1-11966
ALLNET COMMUNICATION SERVICES, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 36-3098226
(State of incorporation) (IRS Employer ID No.)
30300 Telegraph Road, Bingham Farms, Michigan 48025
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (810) 647-6920
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
9% Senior Subordinated Notes due 5/15/03 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [x]
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 February 21, 1994, all 1,000 outstanding shares of the registrant's common
stock were held by ALC Communications Corporation.
As of February 21, 1994, the registrant had 1,000 shares of Common Stock
outstanding.
OMMISSION OF INFORMATION BY CERTAIN WHOLLY-OWNED SUBSIDIARIES
The registrant meets the conditions set forth in General Instruction (J) (1)
(a) and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format.
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PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
Combined Network, Inc., the predecessor of Allnet
Communication Services, Inc., a Michigan corporation ("Allnet" or the
"Registrant"), was founded in Chicago, Illinois in 1980. Its name was changed
to Allnet Communication Services, Inc. in 1983. On December 19, 1985, Allnet
and Lexitel Corporation ("Lexitel"), two long distance companies, became
affiliated and commenced business as a wholly owned subsidiary of ALC
Communications Corporation, a Delaware corporation ("ALC"). Allnet now has the
former businesses and operations of both Allnet and Lexitel. ALC conducts no
other business other than its position as a holding company for its subsidiary,
Allnet.
Unless the context otherwise requires, the term
"Company" includes ALC, its wholly owned subsidiary, Allnet, and all of the
wholly owned subsidiaries of Allnet. The principal executive offices of the
Company are located at 30300 Telegraph Road, Bingham Farms, Michigan 48025
(313/647-4060).
In the summer of 1990 the Company had begun an
overall refinancing (the "Refinancing") of substantially all of its funded debt
and in 1992 concluded the second phase of the Refinancing by substantially
deferring or reducing the debt service obligations of the Company.
In August 1992, the Company's then majority
shareholder, Communications Transmission, Inc. ("CTI") conveyed the ALC Common
Stock (the "Common Stock or "ALC Stock"), Class B Preferred Stock (the "Class B
Preferred") and Class C Preferred Stock (the "Class C Preferred") it owned to
NationsBank of Texas, N.A., The First National Bank of Chicago, National
Westminster Bank USA, CoreStates Bank, N.A. and First Union National Bank of
North Carolina (the "Banks") pro-rata in exchange for the release of certain
portions of CTI's obligations to each of the Banks. The Banks, in the
aggregate, acquired all of the outstanding Class B Preferred and Class C
Preferred, as well as 14,324,000 shares of Common Stock. In October 1992, the
Company completed a stock offering (the "1992 Equity Offering") for 9,863,600
shares of Common Stock, a portion of which resulted from the exchange of the
Class A Preferred Stock (the "Class A Preferred") held by individual
stockholders and the remainder of which was due to Common Stock held by other
entities, including the Banks. The Banks sold, in the aggregate, 3,000,000
shares of Common Stock in the 1992 Equity Offering.
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In January 1993, the Company filed a registration
statement (the "shelf registration") under the Securities Act of 1933, as
amended (the "Securities Act") to permit the sale, from time to time, of up to
19,500,909 shares of Common Stock held by certain stockholders, including the
Banks, or issuable upon exercise of certain outstanding warrants or conversion
of outstanding Class B Preferred and Class C Preferred. Pursuant to the shelf
registration, in March 1993, the Company completed a stock offering (the "March
1993 Equity Offering") whereby the Banks and the Prudential Insurance Company
of America ("Prudential") sold an aggregate of 10,350,000 shares of Common
Stock to the public. As part of the March 1993 Equity Offering, the Banks
converted all outstanding shares of Class B Preferred and Class C Preferred to
Common Stock. The Class B Preferred and Class C Preferred were retired
effective March 25, 1993. The Banks subsequently reduced their ownership
interest in the Company to a minimal position through subsequent sales and the
transfer of other shares to Prudential by four of the five Banks. In February
1994 the one remaining Bank, First Union National Bank of North Carolina, sold
shares in a series of brokerage transactions, then transferred the remaining
balance of shares to or as directed by Prudential.
In May 1993, the Company completed an offering of
$85.0 million principal amount 9% Senior Subordinated Notes ("1993 Notes") and
in June 1993 redeemed all of the 11-7/8% Subordinated Notes then outstanding,
which were issued as part of the note exchange offer which occurred during the
1992 phase of the Refinancing.
As of June 30, 1993, the Company executed an
agreement for a $40.0 million line of credit (the "Revolving Credit Facility"),
replacing the Company's prior revolving credit facility.
Effective December 31, 1993, the Company redeemed
the issued and outstanding Class A Preferred Stock (the "Class A Preferred").
Following such redemption, the Class A Preferred was retired effective January
4, 1994. For more detailed information regarding stock ownership in the
Company, reference is hereby made to "Item 13. Certain Relationships and
Related Transactions."
In July 1993, the Company acquired the specialized
800 customer base of Call Home America, Inc. Call Home America, Inc. had
approximately 50,000 customers, including parents of college students and
frequent travelers, who continue to receive services under the Call Home
America(R) name. These customers, who were then generating annualized revenue
of approximately $20 million, are also able to utilize a wide range of other
telecommunications services from the Company.
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(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates in one industry segment. All
significant revenues relate to sales of telecommunication services to the
general public.
(C) NARRATIVE DESCRIPTION OF BUSINESS
ALC is the holding company for Allnet and conducts
no other business. Allnet provides long distance telecommunications services
primarily to commercial and, to a lesser extent, residential subscribers in the
majority of the United States and completes subscriber calls to all directly
dialable locations worldwide. Allnet is one of the few nationwide carriers of
long distance services and in 1993 carried in excess of 800 million calls over
its network.
The Company operates its own switches, develops and
implements its own products, monitors and deploys its transmission facilities
and prepares and designs its own billing and reporting systems. The Company
focuses on a highly profitable segment of the long distance industry with high
operating margins, specifically, commercial accounts, whose calling volume
consists primarily of calls made during regular business hours which command
peak-hour pricing.
Commercial subscribers tend to make most of their
calls on weekdays during normal business hours, while the Company's residential
subscribers tend to make most of their calls in the evening and on weekends,
when business usage is lowest. Neither commercial nor residential subscribers'
access to the Company's service is limited as to the time of day or day of
week.
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SEASONALITY
The Company experiences certain limited seasonality
in the use of its services due to periods where commercial subscribers
experience higher levels of time-off by their employees, such as during
national holidays and vacation periods. Fewer business days during a calendar
month will also impact usage. The Company will experience decreased commercial
usage resulting from these factors. Seasonality in usage from residential
subscribers tends to vary with the return of students to college and national
holidays. The Company will experience increased residential usage resulting
from these factors.
PRODUCTS AND SERVICES
The Company provides a variety of long distance
telephone products and services to commercial and residential subscribers
nationwide. The bulk of the Company's revenue is derived from outbound and
inbound long distance services which are all under the "Allnet(R)" trademark.
Many of the Company's products, however, differ from those of certain of its
competitors due to the level of value-added services the Company offers, the
flexibility of product pricing to maintain competitiveness and its broader
geographic reach.
The variety of products offered are categorized by
the Company based upon certain primary characteristics: pricing, value-added
services, reporting and 800 Services.
Pricing. All of the Company's customers are
identified by their telephone number, dedicated trunk or validated access code,
and have a rating which is used to determine the price per minute that they pay
on their outbound or inbound long distance calls. Rates typically vary by the
volume of usage, the distance of the calls, the time of day that calls are
made, the region that originates the call, and whether or not the product is
being provided on a promotional basis. The outbound commercial product line is
broken into three major types of services.
Regional: Rates vary by area code or region and
subscribers pay a flat rate for all long distance
calls within these area codes or regions. Rates are
determined by competitive positioning and vary
according to the regions which the Company
currently services. These products are priced at
the area code level, and rates offered on these
products are the primary method used to compete with
small and more regionalized carriers.
Nationwide: Rates are by mileage bands set at a
distance around the call initiating point.
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Long Haul: Rates are designed for users who tend to
make substantial bicoastal and international calls.
These products offer distance-insensitive domestic
pricing and two time-of-day period rates, along with
aggressive international pricing options.
The Company's outbound residential product line is
made up of Allnet "Dial 1" Service which also has two special discount options
to service employees of commercial accounts ("EBP") and members of associations
("ABP").
Different rates are applied to inbound telephone
services than to outbound telephone services. The inbound product line is
provided for commercial accounts which use 800 telephone numbers to receive and
pay for calls from customers and potential prospects and for residential
accounts wishing similar type services.
Value-added Services. When customers subscribe to
value-added services on the Company's network, their calls are charged a fee
based on the services provided. Customers access value-added services through
Allnet Access(R), which is an interactive voice response system that allows
subscribers to interact with the phone system by pressing numbers on the
telephone. Allnet Access(R) is a customized platform or menu from which
customers select the desired services to which they have subscribed. For
example, a customer who would like to deliver a prerecorded message would dial
an Allnet Access(R) 800 number or through a new streamlined dialing method
known as "00 Platform" from an Allnet presubscribed Touch Tone(R) telephone and
select "call delivery" from the voice menu. If the customer had subscribed to
other services, these services would be offered on the menu as well. Once the
customer makes a selection, the call is routed and charged accordingly.
The Company's value-added services are aimed
primarily at the business subscriber, although the Company also offers
products for residential customers. Value-added services include: Allnet Call
Delivery(R), a message delivery service which enables a customer to send a
prerecorded message to a number; VoiceQuote, an interactive stock quotation
service; Allnet InfoReach(R), numerous audio/text programs such as news and
weather; a voice mail service; Option USA(R), a service to provide calls to the
U.S. from selected international locations on Allnet Access(R); and three
different teleconferencing services.
During 1992 the Company launched a full spectrum of
facsimile services including Allnet Broadcast FAX(R), which allows the customer
to send or fax documents to multiple locations at the same time; fax on demand,
which allows the customer to make a fax document available to people who call
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an 800 number; fax mail, which allows a customer to receive facsimile messages
in a fax mailbox and pick them up at a later date; PC software, which allows
the customer to manage his facsimile lists and documents from a PC; and special
international pricing to accommodate short duration facsimile traffic.
During 1993 the Company began to focus on mobile
products and services, offering MobileLine, the resale of cellular service
provided by the regional Bell Operating Companies ("BOCs"), along with
consolidated billing. In addition, the Company currently plans to introduce
PageLine, a nationwide paging resale and consolidated billing product, in the
second quarter of 1994.
Reporting. The Company offers its customers a
variety of billing options and media (two sizes of paper invoices [8-1/2X11 or
4X7 inches], diskette, and magnetic tape) aimed primarily at business
customers. When a new commercial account is opened, the customer is offered
the opportunity to custom design the format of its reports. For example, the
Company can include company accounting codes or internal auditing codes for
each call made with each billing statement. If a customer would like to change
a particular reference code for a telephone line, the code can be changed
automatically. The Company's primary product in this area is Allnet ESP(R) or
Executive Summary Profile. A typical Allnet ESP(R) statement breaks out calls
in a number of ways: by initiating caller number, by terminating number, by
ranking, by department, by frequently dialed number/area/country or by time of
day. Allnet customers pay a fixed monthly fee for these custom-tailored
billing services. In late 1992, Allnet ESP(R) II was launched which gives
customers graphic reports of traffic patterns on a nationwide basis by state,
within state by area of dominant influence ("ADI") and within ADI by zip code.
The Company believes this will be useful to certain customers for direct
response and customer service applications.
In mid-1992, the Company also launched its
proprietary personal computer reporting service Allnet Invoice Manager(sm)
("AIM") which allows customers to design their own reports, prepare separate
itemized bills, do mark-up reporting and generate numerous other customized
reports.
800 Services. The Company greatly expanded its 800
product offerings, capitalizing on opportunities resulting from FCC mandated
portability in May 1993 (which allows customers to select a different long
distance carrier without changing their 800 number). These new offerings
include area code blocking and routing; time of day routing; Home
Connection 800(sm), fractional 800 service which allows residential customers
to acquire 800 service utilizing a 4 digit security Personal Identification
Number ("PIN");
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Multi-Point(sm) 800 services, which allow the customer to use accounting codes
on an 800 number or route a single 800 number to numerous locations
simultaneously; Follow-Me 800, which allows a customer to change his routing
from a Touch Tone(R) telephone; and TargetLine(sm) 800, which routes calls to
the closest location and provides custom prompts based upon a customer specific
database. To supplement the Company's internal growth in this market, the
Company also will evaluate strategic external growth opportunities. For
example, in July 1993, the Company acquired the specialized 800 customer base
of Call Home America, Inc. These customers, who were then generating
annualized revenue of approximately $20 million, are also able to utilize a
wide range of other telecommunications services from the Company.
TRANSMISSION
The Company endeavors to have sufficient switching
capacity, local access circuits and long distance circuits at and between its
network switching centers to permit subscribers to obtain access to the
switching centers and its long distance circuits on a basis which exceeds
industry standards regarding clarity, busy signals or delays.
The network utilizes fiber optic and digital
microwave transmission circuits to complete long distance calls. With the
exception of a digital microwave system located in California for which Allnet
holds the Federal Communications Commission ("FCC") licenses, such facilities
are leased on a fixed price basis under both short and long term contracts.
The California microwave facilities are on leased real estate and are subject
to zoning and other land use restrictions. In recent years abundant
availability and declining prices have dictated a strategy of generally
obtaining new capacity for terms between six months and one year. While the
Company has several long term contracts, these contracts have either annual
"mark-to-market" clauses or, in one case, a "most favored nation" clause.
These provisions function to keep the price the Company pays at or near current
market rates. An important aspect of the Company's operation is planning the
mix of the types of circuits and transmission capacity to be leased or used for
each network switching center so that calls are completed on a basis which is
cost effective for the Company without compromising prompt service and high
quality to subscribers. Over 99% of the Company's domestic traffic is carried
on owned or leased facilities ("on-net").
In establishing a network switching center, the
Company can select equipment with varying capacities in order to meet the
anticipated needs of the service origination region(s) served by the center.
The equipment used by the Company is, for the most part, designed to permit
expansion to its capacity by the addition of standard components. If the
maximum capacity of the equipment in any center is
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reached, the Company replaces it with higher capacity switching equipment and
attempts to move the replaced unit to a network switching center in a different
service origination region. The Company is dependent upon the local telephone
company for installing local access circuits and providing related service when
establishing a network switching center. As of December 31, 1993, the Company
had 16 network switching centers which originate traffic in all Local Access
Transport Areas ("LATAs") in the United States. International service is
provided through participation in the International Carrier Group ("ICG") with
three other major long distance companies. The ICG in turn contracts with other
long distance companies and foreign entities to provide high quality
international service at competitive rates.
MARKETING
Approximately 60% of the Company's employees are
engaged in sales, marketing or customer services. The Company markets its
services and products through personal contacts with an emphasis on customer
service, network quality, value-added services, reporting, rating and
promotional discounts. Allnet currently operates a sales network with 48
offices in the United States. The Company employs 866 sales, marketing and
customer service individuals. Field sales representatives focus on making
initial sales to commercial users. They solicit business through face-to-face
meetings with small- to medium-sized businesses. Each field sales
representative earns a commission dependent on the customer's usage and
value-added services. The Company's sales strategy is to make frequent
personal contact with existing and potential customers.
The prices and promotions offered for the Company's
services are designed to be competitive with other long distance carriers.
Prices will vary as to interstate or intrastate calls as well as with the
distance, duration and time-of-day of a call. In addition, the Company may
offer promotional discounts based upon duration of commitment to purchase
services, incremental increases in service or "free" trial use of the many
value-added and reporting services. Volume discounts are also offered based
upon amount of monthly usage in the day, evening and night periods or based
solely on total volume of usage.
The Company has three groups which provide ongoing
customer service designed to maximize customer satisfaction and increase usage.
First, customer service personnel located in Southfield, Michigan are available
telephonically free of charge 24 hours a day, seven days a week. Second, a
customer service center in Columbus, Ohio processes calls from customers with
significant usage levels who have been enrolled in the Company's "Select
Service" programs. Third, communications specialists located at the sales
offices provide personal service to large commercial accounts.
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The Company services more than 295,000 customers.
Of these customers, approximately 137,000 are commercial accounts, with the
remainder being residential accounts. During the past two years, the Company
has become more geographically diversified, adding new markets as necessary.
The Company is currently focusing on an agent program to increase customer
acquisition in specific target markets.
COMPETITION AND GOVERNMENT REGULATION
Competition is based upon pricing, customer service,
network quality and value-added services. The Company views the long distance
industry as a three tiered industry which is dominated on a volume basis by the
nation's three largest long distance providers: American Telephone and
Telegraph Company ("AT&T"), MCI Telecommunications Corporation ("MCI") and
Sprint Communications, Inc. ("Sprint"). AT&T, MCI and Sprint, which generate
an aggregate of approximately 88% of the nation's long distance revenue of $65
billion, comprise the first tier. Allnet is positioned in the second tier with
four other companies with annual revenues of $250 million to $1.5 billion each.
The third tier consists of more than 300 companies with annual revenues of less
than $250 million each, the majority below $50 million each. Allnet targets
small- and medium-sized commercial customers ($100 to $50,000 in monthly long
distance volume) with the same focus and attention to customer service that
AT&T, MCI and Sprint offer to large commercial customers. Allnet is one of the
few long distance companies with the ability to offer high quality value-added
services to small- and medium-sized commercial customers on a nationwide basis.
A number of the Company's competitors are primarily regional in nature, limited
by the size of their transmission systems or dependent on third parties for
their billing services and product offerings.
Generally, the current trend is toward lessened
regulation for both the Company and its competitors. Regulatory trends have
had, and may have in the future, both positive and negative effects upon
Allnet. For example, more markets are opening up to Allnet, as state
regulators allow Allnet to compete in markets from which it was previously
barred. On the other hand, the largest competitor, AT&T, has gained increased
pricing flexibility over the years, allowing it to price its services more
aggressively.
As a nondominant Interexchange Carrier ("IXC"), the
Company is not required to maintain a certificate of public convenience and
necessity with the FCC other than with respect to international calls, although
the FCC retains general regulatory jurisdiction over the sale of interstate
long distance services by IXCs, including the requirement that calls be charged
on a nondiscriminatory, just and
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reasonable basis. Although the FCC had previously ruled that nondominant
carriers, such as Allnet, do not need to file tariffs for their interstate
service offerings, a recent Court of Appeals decision has vacated that FCC
ruling. The impact of the Court of Appeals decision on Allnet was minimal and
primarily administrative in nature. Allnet has already taken any necessary
steps to comply with that decision, including filing an interstate tariff with
the FCC. The FCC has since adopted reduced requirements regarding the filing
of tariffs for non-dominant carriers, including Allnet. The Company believes
that it has operated and continues to operate in compliance with all applicable
tariffing and related requirements of the Communications Act of 1934, as
amended.
In the FCC decision implementing certain provisions
of the Telephone Operator Consumer Services Improvement Act ("TOCSIA"), Allnet
was designated subject to the payment of charges by "private payphone owners."
Allnet presently is challenging that designation with the FCC and in the
courts, as it does not believe that it is engaged in the sort of activity
intended to be regulated under TOCSIA.
In addition, by virtue of its ownership of
interstate microwave facilities located in California (as described in
"Transmission"), Allnet is subject to the FCC's common carrier radio service
regulations.
In 1984, pursuant to the AT&T Divestiture Decree,
AT&T divested its 22 Bell Operating Companies ("BOCs"). In 1987, as part of
the triennial review of the AT&T Divestiture Decree, the U.S. District Court
for the District of Columbia denied the BOCs' petition to enter, among other
things, the long distance ("inter-LATA") telecommunications market. The
District Court's ruling was appealed to the United States Court of Appeals for
the District of Columbia which, in 1990, affirmed the District Court's decision
to retain the inter-LATA prohibition for the BOCs.
Currently pending before Congress is legislation
that would allow the BOCs into the inter-LATA business in competition with long
distance carriers, such as Allnet. The recently introduced "Brooks-Dingell
Bill" (in the House of Representatives, H.R. 3626) and the "Hollings Bill" (in
the Senate, S. 1822) set forth various time frames and certain entry
requirements for the BOCs to enter certain markets, including the long distance
market, from which the BOCs are currently barred under the AT&T Divestiture
Decree. As initially proposed, the Brooks-Dingell Bill would allow entry into
various segments of the long distance business when various combinations of
conditions and timing requirements have been satisfied. Some entry
requirements may be successfully applied almost immediately upon the passage of
the bill, while others may not be applied until 18 months or 60 months have
passed. In contrast, as initially proposed,
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the Hollings Bill would require that long distance only be offered by a BOC
through a separate subsidiary, but only after the FCC, after consultation with
the Attorney General, finds that the BOCs have met certain entry requirements.
Under the Hollings Bill, there is one set of entry tests for "out-of-market"
services, and another for "in-market" services. To allow a BOC to provide long
distance service outside of its market area through a separate subsidiary, the
FCC must find there is no substantial possibility that the BOC could use its
market power to impede competition in the long distance market that the BOC
seeks to enter. To allow a BOC to provide long distance service in its local
market (i.e., where it provides telephone exchange or exchange access
services), the FCC must make additional findings that the BOC has opened up its
local network to competitors, and that it faces actual and demonstrable
competition based on objective standards of competitive penetration set forth
in the Hollings Bill. It cannot be determined at this time whether these or
other bills will be adopted or the timing of such adoption or, if adopted,
whether the final legislation will be similar to either of these proposed
bills. To the extent final legislation, if any, results in the BOCs being
permitted to provide inter-LATA long distance telecommunications services and
to compete in the long distance market, existing IXCs, including the Company,
would likely face substantial additional competition from local BOC monopolies.
As part of the AT&T Divestiture Decree, the divested
BOCs were required to charge AT&T and all other carriers (including Allnet)
equal per minute rates for "local transport" service (the transmission of
switched long distance traffic between the BOCs' central offices and the IXCs'
points of presence). BOC and other local exchange company ("LEC") tariffs for
local transport service have been based upon these "equal per unit" rules since
1984, pursuant to the AT&T Divestiture Decree and the FCC's waiver of certain
local transport pricing rules. Although the portion of the AT&T Divestiture
Decree containing this rule ceased to be effective by its terms on September 1,
1991, the FCC had extended its effect until it concluded the rulemaking
proceeding in which it considered whether to retain or modify the "equal per
unit" local transport pricing structure. On September 17, 1992, the FCC voted
to maintain the existing "equal per unit" pricing rules until late 1993. A two
year interim would then begin. Based on the interim plan rates that have now
taken effect as of January 1, 1994, Allnet does not anticipate a material
impact during 1994 and 1995. To moderate IXC costs, the FCC has ordered that
non-recurring charges for reconfiguring a carrier's access lines should be
waived until May 1994, to accommodate the change in access pricing structure.
The FCC has left open the access rate structure issue for the post 1995 period.
The FCC issued a Further
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Notice of Proposed Rulemaking for consideration of a permanent rate structure
to take effect beginning no earlier than late 1995. The FCC has also recently
voted to allow expanding competition for monopoly local access through expanded
local switched access interconnection. This could ultimately provide Allnet
with alternatives to purchasing its local access from the monopoly local
exchange carriers.
The FCC has issued orders stating that carriers,
such as Allnet, were entitled to refunds for overcharges paid to a number of
local exchange carriers during the 1985-1986 and 1987-1988 periods. These
awards have, in most cases, been paid to Allnet. Although these awards are in
the aggregate significant, they are not a material portion of the Company's
total access costs. Some local exchange carriers have appealed the orders and
some of the awards which were paid are conditioned on the outcome of the
appeals. In addition Allnet has pending claims for overcharges during the
1989-1990 period. Two of the four claims have been settled. At this time,
Allnet is not aware of any pending rulings on the remaining claims.
The intrastate long distance telecommunications
operations of the Company are also subject to various state laws and
regulations, including certification requirements. Generally, the Company must
obtain and maintain certificates of public convenience and necessity as well as
tariffs from regulatory authorities in most states in which it offers
intrastate long distance services, and in most of these jurisdictions, must
also file and obtain prior regulatory approval of tariffs for its intrastate
offerings. At the present time, the Company can provide originating services
to customers in all 50 states and the District of Columbia. Those services may
terminate in any state in the United States, and may also terminate to
countries abroad. Only 31 states have public utility commissions that actively
assert regulatory oversight over the services currently offered by the Company.
Like the FCC, many of these regulating jurisdictions are relaxing the
regulatory restrictions currently imposed on telecommunication carriers for
intrastate service. While some of these states restrict the offering of
intra-LATA services by the Company and other IXCs, the general trend is toward
opening up these markets to the Company and other IXCs. Those states that do
permit the offering of intra-LATA services by IXCs generally require that end
users desiring to access these services dial special access codes which place
the Company and other IXCs at a disadvantage as compared to LEC intra-LATA toll
service which generally requires no access code.
PATENTS
In December 1992, MCI filed a lawsuit in the United
States District Court for the District of Columbia against AT&T. The complaint
seeks, among other things, a declaration
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that certain AT&T patents relating to basic long distance services, toll free
"800" service, and other telephone services are invalid or unenforceable
against MCI (and other similarly situated telecommunications providers). AT&T
counterclaimed against MCI for patent infringement. Contemporaneously with the
filing of its declaratory judgment action, MCI requested the court in the AT&T
Divestiture Decree case to rule that AT&T should be barred from asserting its
pre-divestiture patents to impede competition in the interexchange
telecommunications market. Both of the foregoing actions are currently
pending.
AT&T has generally indicated that it believes that
long distance telecommunications companies may be infringing on certain AT&T
patents and has offered to license such patents. AT&T has numerous patents,
some of which may pertain to the provision of services similar to those
currently provided or to be provided by the Company or to equipment similar to
that used or to be used by the Company. If it were ultimately determined that
the Company has infringed on any AT&T patents and the Company is required to
license such patents and pay damages for infringement, such costs could have an
adverse effect on the Company.
EMPLOYEES
As of December 31, 1993, the Company employed 1,488
employees in the United States, none of whom were subject to any collective
bargaining agreements.
ITEM 2. PROPERTIES
On December 31, 1993, the Company had under lease
approximately 113,000 square feet of office space in Bingham Farms, Michigan
for executive and administrative functions and approximately 43,000 square feet
in Southfield, Michigan for customer service, collections, and data processing.
The Company also leases approximately 290,000 square feet in the aggregate for
sales and administrative offices, network switching centers and unmanned
microwave sites in 90 other locations in the continental United States.
Most of the leased premises are for an initial term
of five-to-ten years with, in many cases, options to renew. All properties
presently being used for operations of the Company are suitable, well
maintained and equipped for the purposes for which they are used.
ITEM 3. LEGAL PROCEEDINGS
None.
13
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
Omitted pursuant to General Instruction J.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Allnet is a wholly owned subsidiary of ALC.
Therefore, there is no established public trading market for the common stock,
no par value, of Allnet (the "Allnet Common Stock").
Since its inception, Allnet has not declared or paid
any dividends on the Allnet Common Stock. The Company is allowed to pay
dividends by the terms of its Revolving Credit Facility as long as (a) the sum
of such dividend distribution does not exceed at any one time an amount equal
to 30 percent of cumulative Net Adjusted Income (calculated after January 1,
1993) and (b) no default in payment of any Obligations or Event of Default
exists at the time such distribution is made, or would be created by any such
distribution (capitalized terms not otherwise defined herein are defined in the
Revolving Credit Facility).
14
16
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth for the indicated
fiscal years and periods ended, selected historical financial information for
the Company. Such information is derived from financial statements presented
in Part IV, Item 14. of this Annual Report on Form 10-K and should be read in
conjunction with such financial statements and related notes thereto.
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
Selected Financial Data
As of and for the years ended December 31,
-----------------------------------------------------------------
1993 1992 1991 1990 1989
-----------------------------------------------------------------
(In thousands except per share data)
Income Statement Data:
Revenue $436,432 $376,064 $346,873 $326,004 $333,765
Income (loss) before extraordinary items
and Cumulative Effect of Accounting Change $ 39,676 $ 13,826 $ 2,717 ($19,643) ($22,689)
Income (loss) per common share before extraordinary items
and Cumulative Effect of Accounting Change (1) $ 1.07 $ 0.43 ($0.17) ($2.29) ($10.43)
Net income (loss) $ 45,686 $ 20,826 $ 5,347 ($19,643) ($21,324)
Net income (loss) per common share (1) $ 1.23 $ 0.74 ($0.02) ($2.29) ($9.93)
Balance Sheet Data:
Total assets $193,541 $143,266 $140,846 $149,375 $161,015
Long term obligations (2) $ 87,598 $ 83,950 $105,355 $181,450 $ 77,655
- -------------
(1) 1989 and 1990 have been restated to reflect the 1:5 reverse stock split.
(2) 1989 through 1992 include Class A Preferred Stock.
15
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
By 1993, ALC had completed a multi-year series of refinancing
transactions which provided for the simplification and improvement of the debt
and capital structure of the Company. ALC was successfully transformed from a
Company that in 1990 was owned by a controlling interest stockholder,
Communications Transmission, Inc. ("CTI"), and had an equity structure that
included three issues of preferred stock. In addition, at December 31, 1990
the Company had a debt structure which required principal and interest payments
of as much as $79 million in 1992, a level which could not be met from
operating cash flow and therefore required significant refinancing actions.
Accordingly, during 1992, the Company completed the Refinancing which
included the rescheduling of substantially all debt, resulting in significantly
reduced or deferred debt service obligations. In 1992, the Company's major
debt instrument represented by the Company's Original Debentures, Replacement
Debentures, PIK Debentures and accrued interest was replaced by 11 7/8%
Subordinated Notes of Allnet ("1992 Notes"). As part of the restructuring of
the Debentures, 3,400,000 ALC Common Stock warrants were issued representing
10.2% of the fully-diluted equity of ALC. These debentures were replaced in
May 1993 with 9% Senior Subordinated Notes ("1993 Notes") which do not mature
until May 2003. Additional debt including the $20.0 million Restructured
Promissory Note and the approximately $8.0 million balance on the 1990 Note
Agreements was paid in full. As a result, at December 31, 1993 ALC has a
single debt instrument outstanding, $85.0 million of 9% Senior Subordinated
Notes.
During 1992, the Refinancing also included the restructuring and
simplification of the equity of ALC. In August 1992, the equity interest of
CTI represented by 14,324,000 shares of ALC Common Stock, and the ALC Class B
and Class C Convertible Preferred Stock ("Preferred Stock") was transferred to
a group of five banks ("Banks"). Subsequently such Preferred Stock was
converted into 3,796,000 shares of ALC Common Stock.
A series of stock offerings in 1992 and 1993 was used to facilitate the
sale of substantially all of the shares held by the Banks. As part of the
stock offering in October 1992, the Company also completed an Exchange
Agreement which provided for the exchange of 2,144,044 Class A Preferred Shares
for 6,399,227 shares of ALC Common Stock at an effective 40% discount.
16
18
During 1992 and continuing throughout 1993, the Company achieved both
the successful completion of the Refinancing and a significant financial
turnaround which included twelve consecutive quarters of income through the
quarter ended December 31, 1993. Net income grew from a level of $3.3 million
for the first quarter of 1992 to $12.4 million for the fourth quarter of 1993.
Net income for the year ended 1993 increased approximately 90% over the
previous year (excluding the effect of the extraordinary item and cumulative
effect of the accounting change in 1993). The results of operations for 1992
and 1993 reflect increases in both billable minutes and revenue and a
significant reduction in operating expenses as a percent of revenue.
RESULTS OF OPERATIONS
The Company reported net income of $45.7 million for the year ended
December 31, 1993. This includes the impact of both the $13.5 million
cumulative effect of a change in method of accounting for income taxes and the
$7.5 million net loss related to early retirement of debt. Excluding these
items, income for the year ended December 31, 1993 totalled $39.7 million on
revenue of $436.4 million. This compares to net income of $20.8 million on
revenue of $376.1 million and $5.3 million on revenue of $346.9 million for the
years ended December 31, 1992 and 1991, respectively.
Operating income increased from $23.9 million for the year ended
December 31, 1991 to $40.7 million in 1992 to $68.9 million in 1993. This
improvement is primarily the result of increased revenue from increased
billable minutes and improved gross margin.
Operating Results as a Percent of Revenue
-----------------------------------------
Year Ended December 31,
-----------------------------------------
1993 1992 1991
---- ---- ----
Revenue 100.0% 100.0% 100.0%
Communication services (53.8) (57.7) (61.3)
------ ------ ------
Gross Margin 46.2 42.3 38.7
Sales, general & admin. (27.5) (28.5) (28.2)
Depreciation & amort. (2.9) (3.0) (3.6)
------ ------ ------
Operating Income 15.8% 10.8% 6.9%
------ ------ ------
------ ------ ------
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REVENUE
Revenue increased 16.1% to $436.4 million from 1992 to 1993 resulting
from an 18.9% increase in billable minutes offset somewhat by a decrease in the
revenue per minute. Revenue per minute decreased from 1992 to 1993 resulting
from certain changes in the sales mix which were more than offset by additional
efficiencies in network costs. Billable minutes have continued to increase
since the third quarter of 1990 when compared to the same quarter in the prior
year. Most importantly, billable minutes reached their highest level in 1993.
The increase in billable minutes results from traffic generated by new customers
and increased minutes per customer.
Beginning in May 1993, the Company benefited from new traffic growth
generated from the availability of 800 portability. Beginning in July 1993, the
Company had additional revenue from the acquisition of the customer base of Call
Home America, Inc. ("CHA") which represented 2.5% of the increase in revenue for
the year ended December 31, 1993 compared to 1992. In addition, resellers
contributed an additional $20.0 million to revenue during 1993.
Revenue increased from $346.9 million in 1991 to $376.1 million in
1992. The 8.4% increase in revenue represents a 9.6% increase in billable
minutes offset by a modest decrease in the revenue per minute. Revenue per
minute decreased slightly from 1991 to 1992 resulting from lower unit prices
which were more than offset by the impact of reduced cost of communication
services as a percent of revenue.
The revenue generated from customers' first full month of service in
1993 was 30.7% higher than in 1992 and 7.5% higher in 1992 than in 1991. The
increased revenue from new sales along with revenue from existing customers is
outpacing revenue lost from customer attrition. Attrition improved from 2.0% in
1991 to 1.8% in 1992. Attrition increased in 1993 to 2.4%, reflecting the
change to the portability of 800 numbers from carrier to carrier.
The provision for uncollectible revenue, which is deducted from gross
revenue to arrive at reported revenue, was 1.9% for the year ended December 31,
1993, 3.0% for the year ended December 31, 1992, and 3.4% for the year ended
December 31, 1991. During the last three years, procedures were implemented to
improve the collection process and provide earlier detection of credit risks.
Procedures include an expanded system for initial credit review and screening,
monitoring of early usage levels on new accounts, modification of dunning and
collection methods and timing, and improved collection processes on past due
accounts.
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20
COST OF COMMUNICATION SERVICES
The cost of communication services increased from $212.7 million and
$216.9 million to $234.8 million for the years 1991, 1992, and 1993,
respectively. The increase in cost of communication services is due to the 18.9%
and 9.6% increase in billable minutes in 1993 and 1992. These increases were
offset by unit cost reductions for transmission capacity experienced in 1992 and
further efficiencies gained during 1993.
The cost of communication services decreased, however, as a percent of
revenue from 61.3% for 1991 to 53.8% in 1993, the lowest rate in the Company's
history. Switched access costs per hour as a percent of revenue declined 3.5%
reflecting lower tariffed rates. A combination of the use of high volume, fixed
price leased facilities to transmit traffic and reduced international costs
through contractual agreements have contributed to this percentage decline. In
addition, the Company has continued to reconfigure its network to optimize
utilization.
The Company's use of high volume, fixed price transmission capacity is
significantly more cost effective than the use of measured services. By
utilizing fixed price leased facilities to transmit traffic, the Company has
successfully decreased its network costs without the capital expenditures
associated with construction of its own fiber optic or digital microwave
network. Over 99% of traffic traverses low cost "on-net" digital facilities.
OTHER EXPENSES
Sales, general and administrative expense was $98.0 million, $107.3
million and $119.8 million for the years 1991, 1992 and 1993, respectively.
Sales, general and administrative expense for 1993 increased $12.5
million or 11.7% compared to 1992. The increase reflects increased commissions,
taxes other than income, and other expenses related to sales. Sales, general
and administrative expense, however, declined as a percent of revenue which
reflects management's continuing focus on cost containment. Procedures
implemented to improve efficiencies and contain expenses included improved
budgeting techniques, continued review of actual expenses against budgeted
levels, incentive programs tied directly to achievement of budget objectives,
and detailed review of general expense programs.
19
21
Sales, general and administrative expense for 1992 increased $9.3
million or 9.5% compared to 1991. Sales expense increased 19.6% from 1991 which
resulted from increased advertising and marketing expenses as well as increased
commissions reflecting higher first full month revenue as well as enhancements
to the commission plan to encourage customer retention. General and
administrative expenses continued to decrease as a percent of net revenue.
The increase in depreciation and amortization from $11.2 million in 1992
to $12.8 million in 1993 is primarily the result of depreciation on newly
capitalized fixed assets and intangible assets reflecting the increase in
capital expenditures in 1992 and 1993 and the purchase of CHA. The decrease
from 1991 to 1992 reflected the termination of depreciation on analog multiplex
and switch equipment, for which the Company provided a reserve, and the
termination of depreciation as assets reach the end of their useful lives. These
reductions in depreciation were partially offset by depreciation on assets
capitalized during the period.
INTEREST EXPENSE
Interest expense has dramatically decreased from $18.1 million in 1991
and $17.2 million in 1992 to $10.5 million in 1993. This resulted from reduced
interest related to the replacement of the 11 7/8% Subordinated Notes, which
had an effective interest rate of 13.6%, with the 9% Senior Subordinated Notes.
In connection with the Refinancing, the Restructured Promissory Note and the
1990 Note Agreement were paid in full in 1993 and 1992, respectively. Interest
expense also declined due to lower average balances on the Revolving Credit
Facility, as well as lower interest rate charged under the new Revolving Credit
Facility.
INCOME TAXES
Effective January 1, 1993, the required implementation date, the Company
adopted the Financial Accounting Standards Board Statement 109 "Accounting for
Income Taxes" ("Statement 109"). Application of the new rules resulted in the
recording of a net deferred tax asset and additional income of $13.5 million as
of January 1, 1993, related primarily to the future tax benefits which are
expected to be realized upon utilization of a portion of the Company's tax net
operating loss carryforwards ("NOLs"). Statement 109 requires that the tax
benefit of NOLs be recorded as an asset to the extent that management assesses
that the realization of such NOLs is "more likely than not". Management
believes that realization of the benefit of the NOLs beyond a three-year period
is difficult to predict and therefore has recorded a valuation allowance which
has the effect of limiting the recognition of future NOL benefits to those
expected to be realized within the three year period. The Company has not
applied Statement 109
20
22
retroactively and thus did not restate prior year financial statements to
reflect adoption of the new rules.
Prior to January 1, 1993, the Company accounted for income taxes in
accordance with Accounting Principles Board Opinion No. 11. The tax provisions
for the years ended December 31, 1992 and 1991 included an amount that would
have been payable except for the availability of NOLs. The tax benefits of the
loss carryforwards utilized were reported as an extraordinary item for the years
ended 1992 and 1991. With the adoption of Statement 109, the income tax expense
for 1993 includes the benefit of utilizing net operating losses. In 1992 and
1993 the Company was subject to regular tax and due to a Code Section 382
"ownership change", the utilization of net operating losses was limited. In
1991, the Company was subject to alternative minimum tax and the operating
losses were utilized to offset 90% of the taxable income.
SECTION 382 LIMITATION
Section 382 (in conjunction with Sections 383 and 384) of the Code
provides rules governing the utilization of certain tax attributes, including a
corporation's NOLs, "built-in-losses," capital loss carryforwards, unused
investment tax credits ("ITCs") and other unused credits, following significant
changes in ownership of a corporation's stock. Generally, Section 382 provides
that if an ownership change occurs, the taxable income of a corporation
available for offset by these tax attributes will be subject to an annual
limitation ("382 Limitation").
The transfer of ALC Common Stock, Class B Preferred and Class C
Preferred by CTI to the Banks in August 1992 resulted in an ownership change
with a 382 Limitation of approximately $10 million per annum. As a result of
this annual limitation, along with the 15 year carryforward limitation, the
maximum cumulative NOLs and ITCs which can be utilized for federal income tax
purposes in 1994 and future years are limited to approximately $120 million,
assuming no future ownership change or built-in gain recognition. The Company
is also subject to numerous state and local income tax laws which limit the
utilization of NOLs after an ownership change.
Future events beyond the control of the Company could reduce or
eliminate the Company's ability to utilize the tax benefit of its NOLs and
ITCs. Any future ownership change under Section 382 would require a new
computation of the 382 Limitation based on the value of the Company and the
long term tax-exempt rate in effect at that time. Furthermore, the tax benefit
of NOLs would be reduced to zero if the Company fails to satisfy the continuity
of business enterprise requirement for the two-year period following an
ownership change. Under the continuity of business requirement, the Company
must either continue its historic business or use a significant portion of its
pre-ownership change assets in a business.
21
23
SEASONALITY
The Company's long distance revenue is subject to certain limited
seasonal variations. Because most of the Company's revenue is generated by
commercial customers, the Company traditionally experiences decreases in long
distance usage and revenue in those periods with holidays. In past years the
Company's long distance traffic has declined slightly during fourth quarters
from previous quarters due to the holiday periods. However, in 1993 and 1992
the impact of this trend was more than offset by strong year over year traffic
growth, which was up 26.0% and 12.3% from the fourth quarter of 1992 and 1991,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
For the years ended December 31, 1993, 1992 and 1991, the Company
generated positive cash flow from operations of $59.4 million, $30.4 million and
$27.3 million, respectively, reflecting the strong trend of profitability. The
positive cash flow reflects fourteen consecutive quarters of increased revenue
and operating profits as of December 31, 1993 versus prior year comparable
quarters.
The positive cash flow from operations resulted in working capital of
$1.4 million at December 31, 1993 compared to negative $31.7 million at
December 31, 1992. The increase in working capital is largely attributable to:
(a) the pay down of the Revolving Credit Facility which was classified at
December 31, 1992 as a short term liability, (b) the increase in accounts
receivable due to the increase in revenue, and (c) the reduced balance in the
current portion of notes payable due to the payoff of the Restructured
Promissory Notes and payments made on capital leases.
In addition to the positive cash flow from operations, the Company's
short term liquidity position is further strengthened by the unused availability
under the Revolving Credit Facility. As of June 30, 1993 the Company executed
an agreement for a $40.0 million line of credit, replacing the previous
Facility. The new Revolving Credit Facility expires June 30, 1995. Under this
Revolving Credit Facility, the Company is able to minimize interest expense by
structuring the borrowings under three alternatives. Each alternative has a
varying interest rate calculation associated with it. The effective rate under
the Facility during 1993 approximated 5.8%. The agreement includes financial
covenants which allow the Company to further reduce interest expense on
outstanding borrowings beginning in July 1994. A .375% per annum charge is made
on the unused portion of the line. Advances under the Revolving Credit Facility
are made based on the level of receivables. As of December 31, 1993, the
Company had availability of $39.8 million under the line and no balance
outstanding.
22
24
Further evidence of the Company's stronger liquidity position was the
Company's ability to finance the cash needs of $19.6 million for the CHA
customer base acquisition and $10.4 million for the redemption including accrued
dividends of Class A Preferred Stock from cash flow from operations.
Because the Company has chosen to lease rather than own its transmission
facilities, the Company's requirements for capital expenditures are modest.
Capital expenditures totalled $16.2 million in 1993. Capital expenditures
during the year ended December 31, 1993 included projects for enhanced
efficiency and technical advancement in the network, information systems and
customer service. The future investment requirements for capital expenditures
relate directly to traffic growth which necessitates the purchase of switching
and related equipment. In addition, a major component of the capital budget
relates to technological advancements as the Company continually updates its
network capabilities to offer enhanced products and services. The level of
capital expenditures for 1994 is expected to be $20 - $25 million.
In March 1993, an equity offering was completed in which an aggregate of
10,350,000 shares of ALC Common Stock were sold by certain stockholders of ALC
at $14.25 per share. ALC did not receive any of the proceeds from the sale of
these shares, although it did receive $1.9 million upon exercise of 963,684
warrants.
In May 1993, the Company completed an offering of $85.0 million of 9%
Senior Subordinated Notes. Interest on the 1993 Notes is payable semiannually
commencing November 15, 1993. The 1993 Notes will mature on May 15, 2003 but
are redeemable at the option of the Company on or after May 15, 1998. Management
used the $84.3 million of proceeds of this offering to repay the outstanding
1992 Notes aggregating $72.4 million, and to reduce the amount outstanding under
the Revolving Credit Facility. The 1993 Notes provide additional benefits on
both short and long term liquidity by reducing interest expense as well as
deferring redemption requirements.
In September 1993, an equity offering was completed in which an
aggregate of 7,763,391 shares of ALC Common Stock were sold by certain
shareholders at $25.50 per share. This offering included the exercise of
3,240,025 warrants. In October 1993, an additional 177,100 warrants were
exercised, and the shares subsequently sold to the public. ALC did not receive
any proceeds from the sale of any of these shares but did receive $6.9 million
from the exercise of warrants.
In December 1993, the Company redeemed the remaining 355,956 shares of
Class A Preferred for $10.4 million including $3.2 million of accrued dividends.
Management believes that the Company's cash flow from operations will
provide adequate sources of liquidity to meet the Company's anticipated short
and long-term liquidity needs.
23
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by
this Item 8. are set forth in Part IV, Item 14. of this Annual Report on Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to General Instruction J.
ITEM 11. EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction J.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Omitted pursuant to General Instruction J.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to General Instruction J.
24
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) Documents filed as a part of this report
1. Financial Statements. The following consolidated financial
statements of the Company required by Part II, Item 8. are included
in Part IV of this Report:
Page
Report of Ernst & Young F-1
Consolidated Balance Sheets as of December F-2
31, 1993 and December 31, 1992
Consolidated Statements of Operations for F-4
the years ended December 31, 1993, 1992
and 1991
Consolidated Statements of Cash Flows F-5
for the years ended December 31, 1993,
1992 and 1991
Consolidated Statements of Preferred Stock F-6
and Stockholders' Equity for the years
ended December 31, 1993, 1992 and 1991
Notes to Consolidated Financial Statements F-8
2. Financial Statement Schedules Page
Schedule V Property and Equipment F-21
Schedule VI Accumulated Depreciation
on Property and Equipment F-22
Schedule VIII Valuation and Qualifying
Accounts and Reserves F-23
Schedule IX Short-Term Borrowings F-24
25
27
3. Exhibits required by Item 601 of Regulation S-K
EXHIBIT INDEX
[refer to definitions at end of Index]
Incorporated Page
Exhibit Filed Herein by Number
Number Description Herewith Reference to*: Herein
- ------ ----------- -------- ------------- ------
2.1 Asset Purchase Exhibit 2.1 to
Agreement among July 3, 1993 Form
Call Home America, 8-K
Inc., Steve R.
Dutton, William A.
Freed and Jeffrey T.
Schlesinger and Allnet
June 30, 1993
3.1 Allnet Articles Exhibit 3.1 to Allnet
of Incorporation Second Quarter 1992
Form 10-Q
3.2 Allnet Amended and Exhibit 3.2 to Allnet
Restated Bylaws Second Quarter 1992
Dec. 15, 1989 as Form 10-Q
amended March 19, 1991,
Jan. 23, 1992
4.1 Indenture, ALC, Allnet Exhibit 4.1 to
Star Bank, N.A. Second Quarter
May 15, 1993 1993 Form 10-Q
10.1 Form of Note and Warrant Exhibit 4.3 to
Agreement, as amended June 7, 1990 Form 8-K
June 4, 1990 Exhibit 10.1 to Second
Quarter 1991 Form 10-Q
Exhibits 4.4 and 4.5
to Second Quarter 1992
Form 10-Q
10.2** Officer Perquisites Exhibit 10.7 to
1993 Form 10-K
10.3** Short Term Incentive Exhibit 10.8 to
1993 Form 10-K
10.4** Form Severance Exhibit 10.9 to
Agreement, amended, 1993 Form 10-K
restated Jan. 7, 1994
____________________________
* Except as otherwise indicated, all references to "Forms" are to
those of ALC.
** Management contract or compensation plan or arrangement
required to be identified by Item 14(a)(3) of this report
26
28
Incorporated Page
Exhibit Filed Herein by Number
Number Description Herewith Reference to: Herein
- ------- ----------- -------- --------------- ------
10.5** Form of Amended and Re- Exhibit 10.10 to
stated Employment Agree- 1993 Form 10-K
ments with ALC, Allnet
and John M. Zrno, Marvin
C. Moses and William
H. Oberlin, Jan. 7, 1994
10.6** Form of Director Exhibit 10.11 to
Indemnification Agr. Allnet Second Quar-
ter 1992 Form 10-Q
10.7 Master Lease Agreement Exhibit 10.1 to
Meridian Leasing Corp., Second Quarter
Allnet Dec. 19, 1989 Form 10-Q
1985
10.8 Mastergroup Route Exhibit 10.8 to
Facilities Lease Agr. Registration No.
Allnet, Times 33-1578
Mirror Microwave
Communications Co.
June 14, 1983
10.9 Transmission Capacity Exhibit 10.14 to
Lease: Times Mirror Registration No.
Microwave Communications 33-1578
Co., Lexitel Corp.,
October 8, 1985
10.10 Fiber Optic Lease Agree- Exhibit 10.3 to
ment; Mutual Signal First Quarter
Corporation, Lexitel 1991 Form 10-Q
Corporation Nov. 5, 1985
10.11 Amendment No. 4, Option Exhibit 10.1 to
Agreement and Consent: Third Quarter
Allnet, MSM Associates, 1992 Form 10-Q
GECLC August 7, 1992
10.12 Master Service Agreement Exhibit 10.2
Allnet, Western to Third Quarter
Tele-Communications, 1992 Form 10-Q
Inc. May 5, 1992 CONFIDENTIAL
TREATMENT GRANTED
_______________
** Management contract or compensation plan or arrangement
required to be identified by Item 14(a)(3) of this report
27
29
Incorporated Page
Exhibit Filed Herein by Number
Number Description Herewith Reference to: Herein
- ------- ----------- -------- --------------- ------
10.13 Termination Agreement Exhibit 10.39 to
Allnet, Western 1992 Form 10-K
Tele-Communications,
Inc. Feb. 19, 1993
10.14 Digital Service Exhibit 10.2 to
Agreement CTI. First Quarter 1993
Allnet, as amended Form 10-Q
February 10, 1989 Exhibit 28.4 to
June 7, 1990
Form 8-K
Exhibit 10.6 to
Third Quarter
1991 Form 10-Q
10.15 Digital Service Exhibit 10.5 to
Agreement, ALC, Second Quarter 1992
CTGI June 4, 1992 Form 10-Q
10.16 Second Amended and Exhibit 10.9 to
Restated Loan Agree- Second Quarter 1992
ment Allnet, ALC, Form 10-Q
Banks, August 6, 1992
10.17 Form of 1992 Note Exhibit 10.10 to
ALC, Star Bank, N.A. Second Quarter
July 1, 1992 1992 Form 10-Q
10.18 Revolving Credit and Exhibit 10.3 to
Security Agreement Second Quarter
Bank One, Columbus, NA, 1993 Form 10-Q
Star Bank, NA, Allnet, CONFIDENTIAL
ALC June 30, 1993 TREATMENT GRANTED
10.19 Amended and Restated Exhibit 28.2 to
General Loan and June 7, 1990
Security Agreement Form 8-K
Allnet, Foothill Exhibits 10.11,
June 1, 1990, 10.12 and 10.13 to
as amended Second Quarter
1992 Form 10-Q
10.20 Real Estate Lease, Exhibit 10.45 to
Allnet, Balcor Allnet Second Quarter
Equity Pension 1992 Form 10-Q
Investors, Ltd. Exhibit 10.6 to
March 26, 1987, Second Quarter
as amended 1991 Form 10-Q
28
30
Incorporated Page
Exhibit Filed Herein by Number
Number Description Herewith Reference to: Herein
- ------- ----------- -------- --------------- ------
10.21 Real Estate Lease, Exhibit 10.47 to
ALC, Kirco-Oak Allnet Second Quarter
Hollow-Limited 1992 Form 10-Q
Partnership Exhibit 10.5 to
Feb. 25, 1987, Second Quarter
as amended 1991 Form 10-Q
11.1 Computation of Per Exhibit 11.1 to
Share Earnings 1993 Form 10-K
23.1 Consent of Exhibit 23.1 to
Ernst & Young 1993 Form 10-K
DEFINITIONS: ALLNET: ALC: Allnet Communication Services, Inc.
BANKS: ALC Communications Corporation
NationsBank of Texas, N.A.; First
National Bank of Chicago; First Union
National Bank of North Carolina;
CoreStates Bank, N.A.; and National
Westminster Bank USA
CTGI: Communications Transmission Group, Inc.
CTI: Communications Transmission, Inc.
FOOTHILL: Foothill Capital Corporation
FORM OF NOTE AND WARRANT AGREEMENT:
Form of Note and Warrant Purchase
Agreement among ALC, Allnet and (i)
GE Trust ($3,500,000), (ii) Prudential
($3,000,000), (iii) Grumman Hill and
Grumman Hill LP ($650,000)
GECLC: General Electric Credit and Leasing
Corporation
GE TRUST: Trustees of General Electric Pension
Trust
GRUMMAN HILL: Grumman Hill Associates, Inc.
GRUMMAN HILL LP: Grumman Hill Investments, L.P.
MSM ASSOCIATES: MSM Associates, Limited Partnership
PRUDENTIAL: The Prudential Insurance Company of
America
The Registrant hereby agrees to furnish the Commission a copy of each of the
Indentures or other instruments defining the rights of security holders of the
long-term debt securities of the Registrant and any of its subsidiaries for
which consolidated or unconsolidated financial statements are required to be
filed.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1993.
(c) Refer to Item 14(a)(3) above for Exhibits required by Item 601
of Regulation S-K.
29
31
(d) Schedules other than those set forth in response to Item
14(a)(2) above for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
30
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has caused this report to be
signed on its behalf by the duly authorized, undersigned individual on the 29th
day of March, 1994.
Allnet Communication Services, Inc.
Registrant
By: /s/ John M. Zrno
John M. Zrno, Director,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this Annual Report on Form 10-K has been signed below by the following
persons in their respective capacities on behalf of the registrant as of the
29th day of March, 1994.
Signature Title
- --------- -----
/s/ John M. Zrno President, Chief Executive
- ----------------------------
John M. Zrno Officer, Director
/s/ Richard D. Irwin Chairman of the Board,
- ----------------------------
Richard D. Irwin Director
/s/ Marvin C. Moses Executive Vice President and
- ----------------------------
Marvin C. Moses Chief Financial Officer,
(Principal Financial Officer) Director
/s/ Marilyn M. Lesnau Vice President, Controller
- ---------------------------
Marilyn M. Lesnau
(Principal Accounting Officer)
/s/ William H. Oberlin Executive Vice President and
- ---------------------------
William H. Oberlin Chief Operating Officer,
Director
/s/ Richard J. Uhl Director
- ---------------------------
Richard J. Uhl
/s/ Michael E. Faherty Director
- ---------------------------
Michael E. Faherty
31
33
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND STOCKHOLDERS
ALC COMMUNICATIONS CORPORATION
We have audited the accompanying consolidated balance sheets of ALC
Communications Corporation and subsidiary as of December 31,1993 and 1992, and
the related consolidated statements of operations, cash flows, and preferred
stock and stockholders' equity for each of the three years in the period ended
December 31, 1993. Our audits also included the financial statement
schedules listed in the Index at Item 14(a). These financial statements and
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
ALC Communications Corporation and subsidiary at December 31, 1993 and 1992,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1993, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects
the information set forth therein.
/s/ ERNST & YOUNG
Ernst & Young
Detroit, Michigan
January 25, 1994
F-1
34
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, December 31,
1993 1992
------------ ------------
(In Thousands)
Current Assets:
Cash $ 1,819 $ 112
Accounts receivable, less allowance for doubtful accounts of
$3,974,000 and $3,334,000 (Note D) 58,761 45,327
Other current assets 4,543 3,000
------------ ------------
Total Current Assets $ 65,123 $ 48,439
Fixed Assets (Notes A, D & H):
Communication systems $ 81,752 $ 74,002
Other equipment and leasehold improvements 29,785 28,371
Construction in progress 6,722 3,443
------------ ------------
$118,259 $105,816
Less accumulated depreciation and amortization 69,918 63,872
------------ ------------
Total Fixed Assets $ 48,341 $ 41,944
Cost in excess of net assets acquired less accumulated
amortization of $12,198,000 and $10,673,000 (Note A) 48,792 50,317
Deferred income taxes (Note F) 10,240
Intangibles and other assets (Note A) 21,045 2,566
------------ ------------
Total Assets $193,541 $143,266
------------ ------------
------------ ------------
F-2
35
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES, CLASS A PREFERRED STOCK AND STOCKHOLDERS' EQUITY
December 31, December 31,
1993 1992
------------ ------------
(In Thousands)
Current Liabilities:
Accounts payable $ 1,397 $ 3,508
Accrued liabilities 16,855 11,895
Accrued network costs 33,482 28,676
Taxes other than income 11,592 9,889
Revolving Credit Facility (Note B) 14,802
Notes payable, capitalized leases and other long-term debt
(Notes B, D, H, & I) 392 11,417
----------- -----------
Total Current Liabilities $ 63,718 $ 80,187
Notes payable,capitalized leases and other long-term debt
(Notes B, D, H & I) 3,263 12,308
Subordinated Notes (Notes B & D) 84,335
Senior Subordinated Debentures (Note B) 61,983
Class A Preferred Stock, $0.01 par value; authorized, issued and
outstanding -- 356,000 shares in 1992, aggregate redemption value
of $7,119,000 less discount of $364,000 plus accrued
but undeclared dividends of $2,904,000 (Notes B & E) 9,659
Stockholders' Equity:
Class B Preferred Stock, $0.01 par value; authorized, issued
and outstanding -- 1,000,000 shares in 1992 (Note I) $ 10
Class C Preferred Stock, $0.01 par value; authorized, issued
and outstanding -- 1,000,000 shares in 1992 (Note I) 10
Preferred Stock, $0.01 par value; authorized -- 14,784,000
shares; issued and outstanding -- none
Common Stock, par value $0.01; authorized -- 200,000,000
shares; issued and outstanding -- 32,948,000 and 23,794,000
shares (Notes B & E) $ 329 238
Capital in excess of par value 132,378 110,146
Paid-in capital--Warrants (Notes G & I) 12,129 17,022
Accumulated deficit (102,611) (148,297)
------------ ------------
Total Stockholders' Equity $ 42,225 $(20,871)
------------ ------------
Total Liabilities, Class A Preferred Stock and
Stockholders' Equity $193,541 $143,266
------------ ------------
------------ ------------
See notes to consolidated financial statements
F-3
36
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-----------------------------------------
1993 1992 1991
---------- ---------- -----------
(In Thousands Except Per Share Amounts)
Revenue $436,432 $376,064 $346,873
Operating Expenses:
Cost of communication services, including amounts
with related parties of $16,004,000 in 1992
and $18,000,000 in 1991 (Note I) $234,849 $216,889 $212,716
Sales, general and administrative 119,841 107,294 97,964
Depreciation and amortization 12,840 11,197 12,343
---------- ---------- -----------
Total Operating Expenses $367,530 $335,380 $323,023
---------- ---------- -----------
Operating Income $ 68,902 $ 40,684 $ 23,850
Interest expense including amounts with
related parties of $5,000,000 in 1992
and $4,640,000 in 1991 10,476 17,158 18,128
---------- ---------- -----------
Income Before Income Taxes, Extraordinary Items and
Cumulative Effect of Accounting Change $ 58,426 $ 23,526 $ 5,722
Income taxes (Note F) 18,750 9,700 3,005
---------- ---------- -----------
Income Before Extraordinary Items and
Cumulative Effect of Accounting Change $ 39,676 $ 13,826 $ 2,717
Extraordinary Items:
Loss related to early retirement of debt (net of
income tax benefit of $4,000,000) (Note B) (7,490)
Utilization of operating loss carryforward 7,000 2,630
Cumulative effect of change in method of accounting
for income taxes (Note F) 13,500
---------- ---------- -----------
Net Income $ 45,686 $ 20,826 $ 5,347
---------- ---------- -----------
---------- ---------- -----------
Earnings per common and common equivalent share (Note G):
Income (loss) before extraordinary items and cumulative
effect of accounting change $ 1.07 $ 0.43 $ (0.17)
Extraordinary Items:
Loss related to early retirement of debt $ (0.21)
Utilization of operating loss carryforward $ 0.31 $ 0.15
Cumulative effect of change in method of accounting
for income taxes $ 0.37
---------- ---------- -----------
Net Income (Loss) $ 1.23 $ 0.74 $ (0.02)
---------- ---------- -----------
---------- ---------- -----------
Weighted average common and common
equivalent shares 36,348 22,141 17,216
---------- ---------- -----------
---------- ---------- -----------
See notes to consolidated financial statements
F-4
37
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------
1993 1992 1991
---------- ---------- -----------
(In Thousands)
Operating Activities
Net income $ 45,686 $ 20,826 $ 5,347
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation expense 9,810 10,094 10,603
Amortization of intangible assets and bond discount 3,858 4,415 3,520
Provision for deferred income taxes (Note F) (11,838)
Accrued interest converted to debentures 7,998
Loss (gain) on retirement of debt, net of tax 7,490 (59)
(Increase) decrease in accounts receivable and
other current assets (13,680) (3,371) 2,558
Increase (decrease) in current liabilities 18,033 (1,523) (2,774)
---------- ---------- -----------
Net Cash Provided by Operating Activities $ 59,359 $ 30,382 $ 27,252
Financing Activities
Proceeds from (payments on) Revolving Credit Facility
(Note B) $(14,802) $ 5,400 $ (9,896)
Proceeds from subordinated notes (Notes B & D) 84,335 1,321
Payments on long-term debt (19,602) (22,818) (12,562)
Proceeds from issuance of stock (Note B) 12,776 607 109
Payment to Preferred A Stockholders (1,286)
Redemption of Class A Preferred Stock (7,119)
Payment of dividends on Class A Preferred Stock (3,357)
Payment of stock issuance costs (620)
Retirement of debentures (Note B) (947)
Retirement of senior subordinated notes (Notes B & D) (72,380)
---------- ---------- -----------
Net Cash Used in Financing Activities $(20,149) $(19,664) $(21,028)
Investing Activities
Expenditures for fixed assets $(16,207) $(10,233) $ (6,276)
Increase in other non-current assets (1,686) (596) (67)
Purchase of Customer Base (Note C) (19,610)
---------- ---------- -----------
Net Cash Used in Investing Activities $(37,503) $(10,829) $ (6,343)
---------- ---------- -----------
Increase (Decrease) in Cash During Year $ 1,707 $ (111) $ (119)
Cash at beginning of year 112 223 342
---------- ---------- -----------
Cash at end of year $ 1,819 $ 112 $ 223
---------- ---------- -----------
---------- ---------- -----------
Interest paid $ 9,686 $ 15,572 $ 9,945
---------- ---------- -----------
---------- ---------- -----------
Income taxes paid $ 7,464 $ 1,862 $ 225
---------- ---------- -----------
---------- ---------- -----------
See notes to consolidated financial statements
F-5
38
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CLASS A PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Years Ended December 31, 1993, 1992 and 1991
(In Thousands)
Stockholders' Equity
------------------------------------------
Class A Preferred Class B Preferred Class C Preferred
-------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
------ ------- ------- -------- -------- --------
Balance, December 31, 1990 2,500 $57,766 1,000 $10 1,000 $10
Accretion of discount on Class A
Preferred Stock 1,043
Employee Stock Purchase
Accrued undeclared dividends on Class A
Preferred Stock (Note E) 4,000
Accretion of contract payment to certain
Class A Preferred Stockholders 643
Exercise of Stock Options (Note G)
Net income for the year ended
December 31, 1991
------ ------- ------- ------ ------- ------
Balance, December 31, 1991 2,500 $63,452 1,000 $10 1,000 $10
Accretion of discount on Class A
Preferred Stock 860
Accrued undeclared dividends on Class A
Preferred Stock (Note E) 3,254
Accretion of contract payment to certain
Class A Preferred Stockholders 268
Contract payment to certain Class A
Preferred Stockholders (1,286)
Exercise of Stock Options (Note G)
Issuance of warrants
Repricing of warrants
Conversion of Class A Preferred Stock
to Common Stock (Notes B & E) (2,144) (56,889)
Issuance of Common Stock (Notes B & G)
Stock Issuance costs
Net income for the year ended
December 31, 1992
------ ------- ------- ------ ------- ------
Balance, December 31, 1992 356 $ 9,659 1,000 $10 1,000 $10
Stockholders' Equity
-------------------------------------------------------------------------------------
Common Stock Capital in excess Paid-in Capital Warrants Accumlated
--------------- ------------------------
Shares Amount of par value Shares Amount Deficit Total
------ ------ ------------ ------ ------ --------- --------
Balance, December 31, 1990 17,141 $171 $ 63,296 5,469 $ 8,913 ($174,470) ($102,070)
Accretion of discount on Class A
Preferred Stock (1,043) (1,043)
Employee Stock Purchase 71 1 79 80
Accrued undeclared dividends on Class A
Preferred Stock (Note E) (4,000) (4,000)
Accretion of contract payment to certain
Class A Preferred Stockholders (643) (643)
Exercise of Stock Options (Note G) 9 29 29
Net income for the year ended
December 31, 1991 5,347 5,347
------ ------ ------------ ------ ------ --------- --------
Balance, December 31, 1991 17,221 $172 $ 57,718 5,469 $ 8,913 ($169,123) ($102,300)
Accretion of discount on Class A
Preferred Stock (860) (860)
Accrued undeclared dividends on Class A
Preferred Stock (Note E) (3,254) (3,254)
Accretion of contract payment to certain
Class A Preferred Stockholders (268) (268)
Contract payment to certain Class A
Preferred Stockholders
Exercise of Stock Options (Note G) 174 2 605 607
Issuance of warrants 3,400 3,400 3,400
Repricing of warrants 4,709 4,709
Conversion of Class A Preferred Stock
to Common Stock (Notes B & E) 56,825 56,825
Issuance of Common Stock (Notes B & G) 6,399 64 64
Stock Issuance costs (620) (620)
Net income for the year ended
December 31, 1992 20,826 20,826
------ ------ ------------ ------ ------ --------- --------
Balance, December 31, 1992 23,794 $238 $110,146 8,869 $17,022 ($148,297) $(20,871)
F-6
39
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CLASS A PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Years Ended December 31, 1993, 1992 and 1991
(In Thousands)
Stockholders' Equity
----------------------------------------------------
Class A Preferrd Stock Class B Preferred Stock Class C Preferred Stock
---------------------- ----------------------- -----------------------
Shares Amount Shares Amount Shares Amount
--------- ------- ------ ------- -------- -------
Balance, December 31, 1992 356 $9,659 1,000 $10 1,000 $10
Accretion of discount on Class A
Preferred Stock 364
Accrued dividends on Class A Preferred
Stock (Note E) 453
Dividends paid (3,357)
Conversion of Class B Preferred to
Common Stock (Notes B & G) (1,000) (10)
Conversion of Class C Preferred to
Common Stock (Notes B & G) (1,000) (10)
Exercise of Stock Options (Note G)
Tax benefit from exercise of stock
options (Note F)
Exercise of Warrants
Redemption of Class A Preferred
Stock (Notes B & E) (356) (7,119)
Net income for the year ended
December 31, 1993
---- ------ ---- ------ ------- -----
Balance, December 31, 1993 0 $ 0 0 $ 0 0 $ 0
---- ------ ---- ------ ------- -----
---- ------ ---- ------ ------- -----
Stockholders' Equity
---------------------------------------------------------------------------------------
Common Stock Capital in excess Paid-in Capital Warrants
------------------- of par value ------------------------- Accumulated
Shares Amount Shares Amount Deficit Total
------ ------- ----------------- ------- -------- ---------- -----
Balance, December 31, 1992 23,794 $238 $110,146 8,869 $17,022 $(148,297) $(20,871)
Accretion of discount on Class A
Preferred Stock (364) (364)
Accrued dividends on Class A
Preferred Stock (Note E) (453) (453)
Dividends paid
Conversion of Class B Preferred to
Common Stock (Notes B & G) 1,898 19 (9) 0
Conversion of Class C Preferred to
Common Stock (Notes B & G) 1,898 19 (9) 0
Exercise of Stock Options (Note F) 755 7 2,796 2,803
Tax benefit from exercise of stock
options (Note F) 5,452 5,452
Exercise of Warrants 4,603 46 14,819 (4,603) (4,893) 9,972
Redemption of Class A Preferred
Stock (Notes B & E)
Net income for the year ended
December 31, 1993 45,686 45,686
------ ------ --------- ------- ---------- ---------- --------
Balance, December 31, 1993 32,948 $329 $132,378 4,266 $12,129 $(102,611) $ 42,225
------ ------ --------- ------- ---------- ---------- --------
------ ------ --------- ------- ---------- ---------- --------
See notes to consolidated financial statements
F-7
40
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1992
Note A -- Summary of Significant Accounting Policies
Description of Business
Allnet Communication Services, Inc. ("Allnet"), the operating
subsidiary of ALC Communications Corporation ("ALC" or the "Company"), provides
long distance telecommunications services primarily to commercial and, to a
lesser extent, residential subscribers in a majority of the United States and
completes subscriber calls to all directly dialable locations worldwide. The
Company transmits long distance telephone calls through its network facilities
over transmission lines which are leased from other long haul transmission
providers. All of the transmission facilities utilized by the Company are
digital.
Basis of Consolidation
The consolidated financial statements include the accounts of ALC and
its wholly-owned subsidiary, Allnet Communication Services, Inc. Intercompany
transactions have been eliminated.
Fixed Assets
Fixed assets are stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives or lease terms of the
assets. Maintenance and repairs are charged to operations as incurred.
Intangible Assets
The cost in excess of net assets acquired of $61.0 million, resulting
from the acquisition of Lexitel is being amortized on a straight line basis
over 40 years.
In July 1993, the Company acquired the customer base of Call Home
America, Inc. ("CHA") (Note C). The purchase price has been allocated between
the value of the customer base acquired and the covenant not to compete which
are being amortized over seven years and 42 months, respectively.
Additionally, the Company is amortizing over five years the costs incurred
under a marketing agreement with CHA. Amortization expense related to the
acquisition and marketing agreement totaled $1.2 million in 1993.
F-8
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Amortization expense, including amortization of cost in excess of net
assets acquired and cost associated with the issuance of debentures and the
Revolving Credit Facility as well as amortization associated with CHA,
totaled $3.1 million, $1.8 million and $1.8 million for the years ended
December 31, 1993, 1992 and 1991, respectively.
Revenue Recognition
Customers are billed as of monthly cycle dates. Revenue is recognized
as service is provided and unbilled usage is accrued.
Accrued Facility Costs
In the normal course of business, the Company estimates its accrual for
facility costs. Subsequently, the accrual is adjusted based on invoices
received from local exchange carriers.
Income Taxes
The Company adopted Statement of Financial Standards No. 109
"Accounting for Income Taxes" as of January 1, 1993, the required
implementation date (Note F). Prior to January 1, 1993, income taxes were
accounted for in accordance with Accounting Principles Board Opinion No. 11
("APB 11").
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
NOTE B -- Refinancing Events
During 1992, the Company completed a comprehensive refinancing plan
("Refinancing") which included the rescheduling of substantially all debt and
resulted in significantly reduced or deferred debt service obligations. The
Refinancing resulted in a simplified equity structure and a revised redemption
and maturity schedule. The Company anticipates it will be able to meet these
obligations from expected cash flow from operations. Highlights of the
Refinancing include the following:
* A Note Exchange Offer was completed in August 1992 whereby the Company's
Original Debentures, Replacement Debentures, PIK Debentures, and accrued
interest on the
F-9
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
nonconsenting Debentures totalling $73.3 million were replaced by 11
7/8% Subordinated Notes of Allnet ("1992 Notes"). As part of the Note
Exchange Offer, 3,400,000 Common Stock warrants ("1992 Warrants") were
issued representing 10.2% of the fully diluted equity of ALC at an
exercise price of $5.00 per share of Common Stock.
* In August 1992, the Restructured Promissory Note was restated and extended
to June 30, 1995 and a $5.0 million principal prepayment was made. The
note was subsequently paid in full in May 1993.
* In August 1992, 14,324,000 shares of ALC Common Stock and the ALC Class B
and Class C Preferred Stock ("Preferred Stock") held by Communications
Transmission Inc. ("CTI") were transferred to a group of five banks
("Banks"). Subsequently, the Preferred Stock was converted into 3,796,000
shares of Common Stock.
* In October 1992 an equity offering for 9,863,600 shares of ALC Common
Stock at $5.50 per share was completed. A portion of the 1992 equity
offering relating to 3,464,373 shares was to facilitate the sale of shares
for existing major holders.
* The remaining 6,399,227 shares of the equity offering were issued in
conjunction with an Exchange Agreement with the major holders of the Class
A Preferred Stock ("Class A Preferred"). The major holders of the Class A
Preferred agreed to exchange the 2,144,044 shares of Class A Preferred
with an aggregate redemption value of $58.7 million, including all accrued
and unpaid dividends, for shares of ALC Common Stock at an effective 40%
discount.
* The 1990 Note Agreements with a principal balance of approximately $8.0
million were paid in full by December 1992.
Financing activities in 1993 included:
* In March 1993, an equity offering was completed in which an aggregate of
10,350,000 shares of ALC Common Stock were sold at $14.25 per share. ALC
did not receive the proceeds from the sale of these shares by existing
major holders, although it did receive $1.9 million upon exercise of
963,784 warrants.
* In May 1993, the Company completed an offering of $85.0 million 9%
Senior Subordinated Notes ("1993 Notes").
F-10
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The net proceeds of $84.3 million were used to repay the outstanding 11
7/8% Senior Subordinated Notes of Allnet aggregating $72.4 million and to
reduce the amount outstanding under the short term Revolving Credit
Facility. The early retirement of the 1992 Notes resulted in an
extraordinary loss of $7.5 million, net of the related tax effect of $4.0
million.
* As of June 30, 1993, the Company executed an agreement for a $40.0 million
long term line of credit, replacing the previous Revolving Credit
Facility.
* In September 1993, an equity offering was completed in which an aggregate
of 7,763,391 shares of ALC Common Stock were sold at $25.50 per share.
This offering included the exercise of 3,240,025 warrants. ALC did not
receive any proceeds from the sale of these shares by existing major
holders, but did receive $6.9 million from the exercise of warrants.
* As of December 31, 1993, the Company redeemed the remaining 355,956
shares of Class A Preferred for a total of $10.4 million including $3.2
million of accrued dividends.
Note C - Purchase of Customer Base
During July 1993, the Company acquired the specialized 800 customer
base of Call Home America, Inc. for $15.5 million plus a future payment to be
made based on certain average monthly revenue generated by the customers in
April, May and June 1994.
The Company is also acquiring additional customers from CHA under a
marketing agreement from August 1993 through 1994. Under this agreement, an
additional $4.1 million has been allocated to the purchase price for customers
acquired during 1993.
The following unaudited proforma summary presents the Company's
revenue and income as if the transaction occurred at the beginning of the
periods presented. The proforma financial data is not necessarily indicative
of the results that actually would have occurred had the transactions taken
place on the dates presented and do not project the Company's results of
operations.
Years Ended December 31,
--------------------------------
1993 1992
---------- ----------
(in thousands except per share amounts)
Revenue $447,077 $385,591
F-11
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income Before Extraordinary Items
and Cumulative Effect of
Accounting Change 41,457 13,655
Net Income 47,467 20,655
Earnings Per Common and Common
Equivalent Share:
Income before extraordinary
items and cumulative effect
of accounting change $1.12 $0.42
Net Income $1.28 $0.73
NOTE D - Long Term Debt and Other Financing
Long-term debt, including amounts due within one year, consists of:
December 31,
------------------------------
1993 1992
--------- --------
(In Thousands)
Restructured Promissory Note $ 12,566
11 7/8% Subordinated Notes of Allnet
due 1999 - face value of $72,380,000
less discount of $10,397,000 61,983
9% Senior Subordinated Notes
due 2003 - face value of $85,000,000
less discount of $665,000 $ 84,335
Capitalized lease obligations (Note H) 541 8,851
Other long-term debt 3,114 2,308
-------- -------
$ 87,990 $ 85,708
Due within one year 392 11,417
-------- -------
$ 87,598 $ 74,291
-------- --------
-------- --------
Revolving Credit Facility
The Company has a $40.0 million Revolving Credit Facility which
expires on June 30, 1995. Under this Facility, the Company is able to minimize
interest expense by structuring borrowings under three alternatives. Each
alternative has a varying interest rate calculation associated with it. The
effective rate under the Facility during 1993 approximated 5.8%. The agreement
includes financial covenants which allow the Company to further reduce interest
expense on outstanding borrowings beginning in July 1994.
F-12
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A .375% per annum charge is made on the unused portion of the line.
Availability under the Facility is based on the level of
eligible accounts receivable. As of December 31, 1993, the Company had $39.8
million of availability under the line. Borrowings under the facility (none at
December 31, 1993) are collateralized by accounts receivable.
9% Senior Subordinated Notes
In May 1993, the Company issued the 1993 Notes with a face value of
$85.0 million. Interest on the 1993 Notes is payable semi-annually commencing
November 15, 1993. The Notes will mature on May 15, 2003, but are redeemable
at the option of the Company, in whole or in part, on or after May 15, 1998.
In the event of an ownership change, the holders have the right to require the
Company to purchase all or part of the 1993 Notes. The 1993 Notes contain
restrictive covenants which could limit additional indebtedness and restrict the
payment of dividends.
Other Long-Term Debt
Other long-term debt represents deferred liabilities relating to
certain operating leases.
Future Maturities
The future maturities of long-term debt at December 31, 1993 are as
follows:
(In Thousands)
Year Ended December 31:
1994 $ 392
1995 1,449
1996 808
1997 716
1998 108
1999 and thereafter 85,182
-------
$88,655
Less discount on 1993 Notes 665
-------
$87,990
-------
-------
NOTE E - Redeemable Preferred Stock
As of December 31, 1991, the Company had 2,500,000 shares of Class A
Preferred outstanding with a redemption value of $48.9 million plus accrued
dividends. In October 1992, pursuant to the
F-13
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Exchange Agreement with the major holders of the Class A Preferred the Company
exchanged 2,144,044 shares of Class A Preferred for 6,399,227 shares of ALC
Common Stock at an effective 40% discount.
In September 1992, ALC paid approximately $1.3 million to certain
major holders of the Class A Preferred in connection with a concession
agreement entered into in June 1990.
In July 1993, a dividend of $0.32 per share was declared which was
subsequently paid September 30, 1993. In December 1993, the Company redeemed
the remaining 355,956 shares of Class A Preferred for $10.4 million including
$3.2 million of accrued dividends.
NOTE F - Taxes on Income
Effective as of January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement 109"). Under Statement 109, the liability method is used in
accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax basis of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when those differences are expected to
reverse.
As permitted by Statement 109, the Company has elected not to restate
the financial statements of any prior years. The cumulative effect of the
change resulted in recording net deferred tax assets and increasing net income
in 1993 by $13.5 million.
Income tax expense and the extraordinary item as shown in the
Consolidated Statement of Operations are composed of the following:
Statement 109 APB 11
------------- -------------------------------
1993 1992 1991
-------- -------- --------
(in thousands)
Federal
- -------
Income tax expense $16,150 $8,075 $2,240
Extraordinary item $6,445 $2,095
State
- -----
Income tax expense $ 2,600 $1,625 $ 765
Extraordinary item $ 555 $ 535
Due to the change of ownership which occurred in August 1992 and the
resulting limitation on the utilization of net operating loss carryforwards
("NOLs"), the Company is subject to the regular tax, resulting in federal taxes
currently payable of $6.7 million
F-14
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for 1993 and $1.6 million for 1992. In 1991, the Company was subject to
alternative minimum tax which was imposed at a 20% rate on the Company's
alternative minimum taxable income. NOLs were used to offset 90% of the
taxable income resulting in federal taxes currently payable of $100,000 for
1991.
The provisions for state and local income taxes reflect the effect of
filing separate company state and local income tax returns for members of the
consolidated group. This amount is reduced, where appropriate, by the
availability to utilize state and local portions of operating loss
carryforwards. State and local income taxes currently payable were $1.2
million, $1.1 million, and $200,000 in 1993, 1992, and 1991, respectively.
The $5.5 million tax benefit realized from the exercise of stock
options in 1993 was added to capital in excess of par value and is not
reflected in operations.
A reconciliation between the statutory federal and the effective
income tax rates follows:
Percentage of pre-tax income
1993 1992 1991
------ ------ ------
Income tax at statutory rate 35.0% 34.0% 34.0%
Goodwill amortization 0.9 2.2 9.1
State taxes
(net of federal benefit) 2.8 4.6 8.9
Utilization of operating loss
carryforwards under Stmt. 109 (5.9)
Other ( .7) .4 .5
----- ----- -----
Income tax expense 32.1% 41.2% 52.5%
Extraordinary item, utilization
of operating loss carryforwards
under APB 11 (29.8) (46.0)
------ ------- ------
Income tax expense, net of
extraordinary item 32.1% 11.4% 6.5%
------ ------- ------
------ ------- ------
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting and income tax purposes. Significant components of the
Company's deferred taxes as of December 31, 1993 are as follows (in thousands):
Deferred tax liability:
Prepaid expenses $ (1,500)
Deferred tax assets:
Future tax benefit of NOL
carryforward $ 44,700
Bad debt expense 1,500
F-15
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Compensation 900
Depreciation and other 1,138
--------
$ 48,238
Valuation allowance for
deferred tax assets (34,900)
---------
Total deferred tax assets $ 13,338
---------
Net deferred tax assets $ 11,838
---------
---------
The Company has tax net operating loss, alternative tax net operating
loss and investment tax credit ("ITC") carryforwards which can be utilized
annually to offset future taxable income. Because of the "ownership changes"
which occurred in 1989 and 1992 under provisions of Internal Revenue Code
Section 382, the utilization of carryforwards is presently limited to
approximately $10 million per year through 2005. This annual limitation,
coupled with the 15 year carryforward limitation, results in a maximum
cumulative NOL and ITC carryforward which may be utilized of approximately $120
million as of December 31, 1993. Because it is difficult to predict the
realization of the NOL benefit beyond a period of three years, the Company has
established a valuation allowance of $34.9 million as of December 31, 1993.
NOTE G - Earnings Per Share and Stockholders' Equity
Earnings per share
Earnings per share are computed using weighted average shares
outstanding, adjusted for the one for five reverse stock split in 1991, and
common stock equivalents. To arrive at income available for common
stockholders, the Company's net income is adjusted by amounts relating to the
accretion of discount and dividends accrued on Class A Preferred, and in 1992
and 1991, the accretion of a contract payment to certain major holders of the
Class A Preferred. Anti-dilutive securities for 1992 were warrants and options
and for 1991 also included Class B and Class C Preferred Stock. Earnings per
share for the third and fourth quarters of 1992 and for all of 1993 include the
impact of the exercise of outstanding stock options and warrants utilizing the
Treasury Stock Method.
Common Stock Warrants
As of December 31, 1993, warrants for the purchase of 428,090 shares of
Common Stock at $2.00 per share, 3,177,856 shares at $5.00 per share and 660,000
shares at $63.75 per share were outstanding. The warrants expire in June 2005,
June 1997 and December 1995, respectively. The $2.00 and $5.00 warrants were
issued in connection with the Company's refinancings and the difference between
the exercise price and the fair value of the warrants at
F-16
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the time of issuance was recorded as a discount on the related notes and an
increase to Paid-in-capital - warrants.
Employee Stock Options
The Company has two Employee Stock Option Plans. The maximum number
of shares for which options may be granted under both plans is 6,000,000
(adjusted for certain events such as a recapitalization). The plans provide
for the granting of stock options and stock appreciation rights to key
employees.
Shares under option are summarized below:
Number Option Price
of ----------------
Shares Per Share Total
------ --------- ------
(Totals in thousands)
Shares under option
December 31, 1990 2,999,353 $ 3.50 - $48.75 $13,455
Options Terminated (294,799) $ 3.50 - $48.75 (3,986)
Options Granted 106,000 $ 3.50 - $ 4.40 448
Options Exercised (8,838) $ 3.50 (31)
---------- ---------------- --------
Shares under option
December 31, 1991 2,801,716 $ 3.50 - $ 4.40 $ 9,886
Options Terminated (72,219) $ 3.50 - $ 5.88 (297)
Options Granted 1,080,876 $ 4.38 - $ 7.69 5,796
Options Exercised (173,345) $ 3.50 (607)
--------- ---------------- --------
Shares under option
December 31, 1992 3,637,028 $ 3.50 - $ 7.69 $14,778
Options Terminated (17,318) $ 3.50 - $ 5.88 (90)
Options Granted 1,630,500 $25.06 - $26.25 40,973
Options Exercised (755,265) $ 3.50 - $ 7.69 (2,803)
--------- --------------- --------
Shares under option
December 31, 1993 4,494,945 $ 3.50 - $26.25 $52,858
---------- --------------- --------
---------- --------------- --------
Options exercisable,
December 31, 1991 1,009,002 $ 3.50 $ 3,532
---------- --------------- --------
---------- --------------- --------
Options exercisable,
December 31, 1992 2,012,566 $ 3.50 - $ 4.68 $ 7,131
---------- --------
---------- --------
Options exercisable,
December 31, 1993 1,893,888 $ 3.50 - $ 5.88 $ 7,078
---------- --------------- --------
---------- --------------- --------
NOTE H - Leases
F-17
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum rental payments under non-cancelable operating leases
with initial or remaining terms of one or more years are $36.4 million, $24.8
million, $20.2 million, $14.7 million, $11.6 million and $15.0 million for
1994, 1995, 1996, 1997, 1998 and 1999 and thereafter, respectively.
The Company's lease arrangements frequently include renewal options
and/or bargain purchase or fair market value purchase options, and for leases
relating to office space, rent increases based on the Consumer Price Index or
similar indices.
Non-cancelable operating leases relate primarily to intercity
transmission facilities, building and office space, and office equipment.
Rental expense was $49.9 million, $52.3 million, and $56.9 million for the
years ended December 31, 1993, 1992 and 1991, respectively.
Fixed assets include amounts financed by capital leases of $600,000 net
of $400,000 of accumulated depreciation, and $11.4 million, net of $9.4 million
of accumulated depreciation as of December 31, 1993 and 1992, respectively.
NOTE I - Transactions with Related Parties
The Company leases transmission capacity, multiplexing and various
other technical equipment on both capital and operating leases from an
affiliate of CTI, a major shareholder through August 1992. Amounts paid under
the leases were $17.7 million and $19.7 million for the years ended December
31, 1992 and 1991, respectively.
In June 1992, the Company paid $2.0 million to CTI for the purchase of
certain assets including an $800,000 note from a major holder of Class A
Preferred which was paid in full upon closing of the 1992 equity offering.
Consideration for the transaction also included $1.2 million of prepaid
transmission capacity to be utilized over a 37 month period.
During August 1992, CTI conveyed 14,324,000 shares of ALC Common Stock,
1,000,000 shares of Class B Preferred Stock and 1,000,000 shares of Class C
Preferred Stock to the Banks in exchange for the release of certain
obligations of CTI. This exchange effected a transfer of controlling interest
in the Company from CTI to the Banks. Pursuant to this transfer, The
Prudential Insurance Company of America ("Prudential") became a related party
through beneficial ownership of options on the stock held by the Banks. During
1992, Prudential held $3.4 million of 1990 Notes which were paid in full in
August 1992. As of December 31, 1992, Prudential owned 1990 Warrants to
purchase
F-18
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1,975,804 shares of ALC Common Stock. During the March 1993 equity offering
Prudential sold 1,963,784 shares of which 963,784 represented the exercise of a
portion of their warrants. Prudential exercised their remaining 1,012,020
warrants during the September 1993 equity offering and as a result of these
sales, no longer has a substantial equity position in ALC.
The transfer of stock during August 1992 from CTI to the Banks gave
NationsBank of Texas, N.A. and The First National Bank of Chicago related party
status through their ownership of Common, Class B Preferred Stock and Class C
Preferred Stock. The March 1993 equity offering facilitated the sale by the
Banks of 8,386,216 shares of which 3,796,000 were received upon the conversion
of all the Class B and Class C Preferred Stock. The Banks further reduced
their ownership interest in the Company to a minimal position through
subsequent sales and the transfer of other shares to Prudential. The Banks
held the Restructured Promissory Note which was paid in full in May 1993.
As of December 31, 1993, Grumman Hill Associates, Inc. and Grumman
Hill Investments L.P., of which Richard D. Irwin (the Chairman of the Board of
Directors of the Company) is the General Partner, held an aggregate of 622,486
warrants to purchase shares of Common Stock. Additionally, Grumman Hill
Investments, L.P. holds options to purchase 153,163 shares of Common Stock.
F-19
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J - Selected Quarterly Financial Data (Unaudited)
Three Months Ended
-----------------------------------------------------------------
March 31, June 30, Sept. 30, Dec.31,
1993 1993 1993 1993
--------- --------- --------- ----------
(in thousands except per share amounts)
Revenue $101,844 $104,233 $113,098 $117,257
Gross Margin $ 46,377 $ 47,409 $ 52,537 $ 55,260
Income before
extraordinary item
and cumulative
effect of accounting
change $ 8,004 $ 8,392 $ 10,854 $ 12,426
Net income $ 21,504 $ 902 $ 10,854 $ 12,426
Income per common and
common equivalent
share before
extraordinary item
and cumulative
effect of accounting
change $ 0.23 $ 0.23 $ 0.29 $ 0.32
Net income per
common and common
equivalent share $ 0.61 $ 0.02 $ 0.29 $ 0.32
Three Months Ended
-----------------------------------------------------------------
March 31, June 30, Sept. 30, Dec.31,
1992 1992 1992 1992
--------- --------- --------- ----------
(in thousands except per share amounts)
Revenue $ 92,043 $ 92,659 $ 95,673 $ 95,689
Gross Margin $ 35,993 $ 37,423 $ 42,943 $ 42,816
Income before
extraordinary item $ 1,941 $ 2,712 $ 4,190 $ 4,983
Net income $ 3,267 $ 4,434 $ 5,882 $ 7,243
Income per common and
common equivalent
share before
extraordinary item $ 0.03 $ 0.07 $ 0.15 $ 0.16
Net income per
common and common
equivalent share $ 0.09 $ 0.15 $ 0.20 $ 0.23
F-20
53
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY SCHEDULE V
Property and Equipment
Balance at
beginning of Balance at
Description period Additions Retirements end of period
- ------------------------------- ------------- ------------ ------------ -------------
Year ended December 31, 1993
Furniture & fixtures $ 6,662,000 $ 414,000 ($1,261,000) $ 5,815,000
Office equipment 18,695,000 3,907,000 (1,929,000) 20,673,000
Leasehold improvements 7,100,000 333,000 (379,000) 7,054,000
Switch equipment 34,444,000 5,679,000 35,000 40,158,000
Ancillary equipment 18,578,000 597,000 (198,000) 18,977,000
Transmission systems 16,589,000 1,834,000 (19,000) 18,404,000
Construction in progress 3,443,000 3,279,000 6,722,000
Transportation equipment 305,000 164,000 (13,000) 456,000
------------- ------------ ------------ -------------
$105,816,000 $16,207,000 ($3,764,000) $118,259,000
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
Year ended December 31, 1992
Furniture & fixtures $ 6,748,000 $ 190,000 ($ 276,000) $ 6,662,000
Office equipment 17,753,000 2,339,000 (1,397,000) 18,695,000
Leasehold improvements 7,518,000 41,000 (459,000) 7,100,000
Switch equipment 32,171,000 3,158,000 (885,000) 34,444,000
Ancillary equipment 18,009,000 1,168,000 (599,000) 18,578,000
Transmission systems 15,713,000 1,313,000 (437,000) 16,589,000
Construction in progress 1,349,000 2,094,000 3,443,000
Transportation equipment 167,000 138,000 305,000
------------- ------------ ------------ -------------
$ 99,428,000 $10,441,000 ($4,053,000) $105,816,000
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
Year ended December 31, 1991
Furniture & fixtures $ 7,322,000 $ 176,000 ($ 750,000) $ 6,748,000
Office equipment 18,353,000 1,730,000 (2,330,000) 17,753,000
Leasehold improvements 8,037,000 52,000 (571,000) 7,518,000
Switch equipment 32,027,000 2,400,000 (2,256,000) 32,171,000
Ancillary equipment 18,975,000 976,000 (1,942,000) 18,009,000
Transmission systems 14,293,000 918,000 502,000 15,713,000
Construction in progress 728,000 621,000 1,349,000
Transportation equipment 167,000 167,000
------------- ------------ ------------ -------------
$ 99,735,000 $ 7,040,000 ($7,347,000) $ 99,428,000
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
Depreciable lives used are as
follows:
Years
-------------
Furniture & fixtures 10
Office equipment 3 - 5
Leasehold improvements 1 - 10
Switch equipment 10
Ancillary equipment 10
Transmission systems 10
Transportation equipment 3
F-21
54
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY SCHEDULE VI
Accumulated Depreciation on Property and Equipment
Balance at Additions Retirements
beginning of charged to and Balance at
Descriptions period expense transfers end of period
------------ ------------ ------------ --------------
Year ended December 31, 1993
Furniture & Fixtures $4,701,000 $ 495,000 ($1,287,000) $ 3,909,000
Office Equipment 14,133,000 2,244,000 (1,898,000) 14,479,000
Leashold Improvements 6,522,000 228,000 (377,000) 6,373,000
Switch Equipment 15,245,000 3,640,000 16,000 18,901,000
Ancillary Equipment 13,045,000 1,527,000 (195,000) 14,377,000
Transmission Systems 10,128,000 1,532,000 (16,000) 11,644,000
Transportation Equipment 98,000 144,000 (7,000) 235,000
------------ ------------ ------------ --------------
$63,872,000 $9,810,000 ($3,764,000) $69,918,000
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
Year ended December 31, 1992
Furniture & Fixtures $ 4,427,000 $ 503,000 ($ 229,000) $ 4,701,000
Office Equipment 13,875,000 1,653,000 (1,395,000) 14,133,000
Leashold Improvements 6,592,000 351,000 (421,000) 6,522,000
Switch Equipment 12,464,000 3,409,000 (628,000) 15,245,000
Ancillary Equipment 11,442,000 1,982,000 (379,000) 13,045,000
Transmission Systems 8,950,000 1,437,000 (259,000) 10,128,000
Transportation Equipment 11,000 87,000 98,000
------------ ------------ ------------ --------------
$57,761,000 $9,422,000 ($3,311,000) $63,872,000
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
Year ended December 31, 1991
Furniture & Fixtures $ 4,404,000 $ 746,000 ($ 723,000) $ 4,427,000
Office Equipment 14,231,000 1,849,000 (2,205,000) 13,875,000
Leashold Improvements 6,688,000 442,000 (538,000) 6,592,000
Switch Equipment 11,001,000 3,291,000 (1,828,000) 12,464,000
Ancillary Equipment 10,733,000 2,616,000 (1,907,000) 11,442,000
Transmission Systems 6,924,000 1,949,000 77,000 8,950,000
Transportation Equipment 11,000 11,000
------------ ------------ ------------ --------------
$53,981,000 $10,904,000 ($7,124,000) $57,761,000
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
F-22
55
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY SCHEDULE VIII
Valuation and Qualifying Accounts and Reserves
Additions Additions
Balance at charged to charged to Balance at
beginning cost and other end of
Description of period expenses accounts Deductions (3) period
------------ ------------- ------------ ------------- ------------
Year ended December 31, 1993
Allowance for doubtful accounts $3,334,000 $12,638,000 (1) $11,998,000 $ 3,974,000
------------ ------------- ------------ ------------- ------------
------------ ------------- ------------ ------------- ------------
Deferred tax asset $ 0 $37,000,000 (2) $ 2,100,000 $34,900,000
------------ ------------- ------------ ------------- ------------
------------ ------------- ------------ ------------- ------------
Year ended December 31, 1992
Allowance for doubtful accounts $3,676,000 $14,551,000 (1) $14,893,000 $ 3,334,000
------------ ------------- ------------ ------------- ------------
------------ ------------- ------------ ------------- ------------
Year ended December 31, 1991
Allowance for doubtful accounts $3,229,000 $14,649,000 (1) $14,202,000 $ 3,676,000
------------ ------------- ------------ ------------- ------------
------------ ------------- ------------ ------------- ------------
- -----------------------
(1) Amounts accounted for as a reduction of revenue.
(2) In connection with the Company's adoption of Statement of Financial
Standards No. 109, "Accounting for Income Taxes", a valuation allowance
for deferred tax assets of $37,000,000 was recorded January 1, 1993. (See
Note F to the Consolidated Financial Statements).
(3) Uncollectible accounts written off, net of recoveries.
F-23
56
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY SCHEDULE IX
Short-term Borrowings
Weighted
Maximum Average average
Weighted amount amount interest
Balance at average outstanding outstanding rate
Category of aggregate end of interest during during during
short-term borrowings (4) period rate the period the period the period
------------ ------------ ------------ ------------ -------------
(1) (2)
Year ended December 31, 1993
Notes payable $ 0 $12,500,000 $ 3,899,653 12.30%
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Line of Credit (3) $ 0 $22,633,000 $11,637,000 13.20%
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Year ended December 31, 1992:
Notes payable $12,500,000 $27,985,000 $19,801,364 10.19%
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Line of Credit $14,802,000 $21,791,000 $12,077,000 12.36%
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Year ended December 31, 1991:
Notes payable $27,985,000 $27,985,000 $16,325,000 8.00%
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Line of Credit $ 9,402,000 $19,298,000 $14,114,000 14.11%
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
(1) Based on month end amounts outstanding during the period
(2) Based on total interest expense for the period and average amount
outstanding during the period
(3) Line of Credit was classified as short-term through May 1993, upon
refinancing the line in June 1993, the balance was transfered to
long-term.
F-24