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FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: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 48025-4510
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (810) 647-6920
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
As of May 2, 1994, the registrant had 1,000 shares of Common Stock
outstanding.
OMISSION OF INFORMATION BY CERTAIN WHOLLY-OWNED SUBSIDIARIES
The registrant meets the conditions set forth in General Instruction H(1)(a)
and (b) of Form 10-Q and is therefore filing this Form with the reduced
disclosure format.
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ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1994 1993
--------- ---------
(Unaudited)
(In Thousands)
Current Assets:
Cash and cash equivalents $21,169 $1,819
Accounts receivable, less allowance for doubtful accounts of
$3,973,000 and $3,974,000 67,896 58,761
Other current assets 5,227 4,543
--------- ---------
Total Current Assets $94,292 $65,123
Fixed Assets:
Communication systems $85,418 $81,752
Other equipment and leasehold improvements 31,245 29,785
Construction in progress 5,998 6,722
--------- ---------
$122,661 $118,259
Less accumulated depreciation and amortization 72,304 69,918
--------- ---------
Total Fixed Assets $50,357 $48,341
Cost in excess of net assets acquired 48,410 48,792
Deferred income taxes 10,240 10,240
Intangibles and other assets 22,138 21,045
--------- ---------
Total Assets $225,437 $193,541
--------- ---------
--------- ---------
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ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1994 1993
-------- --------
(Unaudited)
(In Thousands)
Current Liabilities:
Accounts payable $3,038 $1,397
Accrued liabilities 24,729 16,855
Accrued network costs 38,553 33,482
Taxes other than income 10,662 11,592
Notes payable, capitalized leases and other long-term debt 313 392
-------- --------
Total Current Liabilities $77,295 $63,718
Long-term Liabilities:
Notes payable, capitalized leases and other long-term debt $3,588 $3,263
Senior Subordinated Notes 84,346 84,335
-------- --------
Total Long-Term Liabilities $87,934 $87,598
-------- --------
Total Liabilities $165,229 $151,316
Stockholders' equity:
Preferred Stock, $0.01 par value; authorized -- 15,500,000 and
14,784,000; issued and outstanding -- none
Common Stock, par value $0.01; authorized -- 200,000,000
shares; issued and outstanding -- 33,321,000
and 32,948,000 shares $333 $329
Capital in excess of par value 135,929 132,378
Paid-in capital -- Warrants 11,912 12,129
Accumulated deficit (87,966) (102,611)
-------- --------
Total Stockholders' Equity $60,208 $42,225
-------- --------
Total Liabilities and Stockholders' Equity $225,437 $193,541
-------- --------
-------- --------
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ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
---------------------
March 31, March 31,
1994 1993
--------- ---------
(In Thousands Except Per Share Amounts)
Revenue $129,789 $101,844
Operating Expenses:
Cost of communication services $ 70,010 $ 55,467
Sales, general and administrative 31,231 28,515
Depreciation and amortization 4,027 2,854
-------- --------
Total Operating Expenses $105,268 $ 86,836
-------- --------
Operating Income $ 24,521 $ 15,008
Interest expense 1,626 3,654
-------- --------
Income Before Income Taxes and Cumulative Effect
of Accounting Change $ 22,895 $ 11,354
Income taxes 8,250 3,350
-------- --------
Income Before Cumulative Effect of Accounting
Change $ 14,645 $ 8,004
Cumulative effect of change in method of
accounting for income taxes 13,500
-------- --------
Net Income $ 14,645 $ 21,504
-------- --------
-------- --------
Earnings per common and common equivalent share:
Income before cumulative effect of accounting
change $ 0.38 $ 0.23
Cumulative effect of change in method of
accounting for income taxes $ 0.38
-------- --------
Net Income $ 0.38 $ 0.61
-------- --------
-------- --------
Weighted average common and common
equivalent shares 38,301 35,247
-------- --------
-------- --------
See notes to consolidated financial statements
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ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
---------------------
March 31, March 31,
1994 1993
-------- --------
(In Thousands)
Operating Activities
Net income $14,645 $21,504
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,667 3,491
Amortization of intangible assets and bond discount 1,372
Gain (loss) on sale of assets (98) 4
Cumulative effect of change in accounting principle (13,500)
Increase in accounts receivable and
other current assets (9,818) (5,007)
Increase in current liabilities 15,817 4,741
-------- --------
Net Cash Provided by Operating Activities $24,585 $11,233
Financing Activities
Proceeds from revolving credit facility $424
Payments on long-term debt ($243) (11,257)
Proceeds from issuance of common stock 1,665 2,589
-------- --------
Net Cash Provided by (Used in) Financing Activities $1,422 ($8,244)
Investing Activities
Expenditures for fixed assets ($4,706) ($1,777)
Proceeds from sale of fixed assets 120
Change in other non-current assets 301 (1,242)
Purchase of customer base (2,372)
-------- --------
Net Cash Used in Investing Activities ($6,657) ($3,019)
-------- --------
Increase (Decrease) in Cash $19,350 ($30)
Cash at beginning of period 1,819 112
-------- --------
Cash and cash equivalents at end of period $21,169 $82
-------- --------
-------- --------
Interest paid $61 $3,222
-------- --------
-------- --------
Income taxes paid $1,531 $928
-------- --------
-------- --------
See notes to consolidated financial statements
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ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three Months Ended March 31, 1994
(Unaudited)
Paid-in capital
Common Stock Capital in -- Warrants
------------------ excess of --------------------- Accumulated
Shares Amount par value Shares Amount deficit Total
-------- -------- -------- -------- -------- -------- --------
(In Thousands)
Balance, December 31, 1993 32,948 $329 $132,378 4,266 $12,129 ($102,611) $42,225
Exercise of stock options 156 2 577 579
Tax benefit from stock option exercises 1,673 1,673
Exercise of warrants 217 2 1,301 (217) (217) 1,086
Net income for the three months
ended March 31, 1994 14,645 14,645
-------- -------- -------- -------- -------- -------- --------
Balance, March 31, 1994 33,321 $333 $ 135,929 4,049 $11,912 ($87,966) $60,208
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
See notes to consolidated financial statements
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ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1993 AND 1994
NOTE A -- MANAGEMENT'S REPRESENTATION
The consolidated financial statements included herein have been
prepared by ALC management, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. Certain prior year amounts
have been reclassified to conform to current year presentation. In the opinion
of ALC management, all adjustments considered necessary for a fair presentation
have been included and are of a normal recurring nature, and the accompanying
consolidated financial statements present fairly the financial position as of
March 31, 1994 and December 31, 1993, and the results of operations and cash
flows for the three month periods ended March 31, 1994 and 1993.
The balance sheet at December 31, 1993 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. It is suggested that these consolidated
financial statements be read in conjunction with the financial statements and
notes included in the Company's Form 10-K for the fiscal year ended December
31, 1993.
NOTE B -- SUBSEQUENT EVENT
In April 1994, the Company acquired, on the open market, $5.0 million
of its 9.0% Senior Subordinated Debentures at the Company's approximate book
value.
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Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company reported net income of $14.6 million on revenue of $129.8
million for the three month period ended March 31, 1994. This compares to net
income (before the cumulative effect of accounting change) of $8.0 million on
revenue of $101.8 million for the same period in 1993. Gross margin
increased to 46.1% from 45.5% in the year earlier period. The significant
improvement in operations was reflected by the increase in operating income of
$9.5 million over the same period one year earlier. The improved
operating results for the first quarter of 1994 were primarily due to an
increase in long distance traffic and operating expense reductions as a percent
of revenue.
OPERATING RESULTS AS A PERCENT OF REVENUE
Three Months Ended
March 31,
------------------
1994 1993
------ ------
Revenue 100.0% 100.0%
Communication Services (53.9) (54.5)
------ ------
Gross Margin 46.1% 45.5%
Sales, general and administrative (24.1) (28.0)
Depreciation and amortization ( 3.1) ( 2.8)
------ ------
Operating income 18.9% 14.7%
------ ------
------ ------
During the first quarter of 1993, the Company adopted
Financial Accounting Standards Board Statement No. 109 "Accounting
for Income Taxes" ("Statement 109") which resulted in the recording
of a net deferred tax asset related primarily to future tax
benefits which are expected to be realized upon utilization of a
portion of the Company's tax net operating loss carryforwards. The
cumulative effect of the change in method of accounting for income
taxes resulted in an increase in income of $13.5 million in the
first quarter of 1993. Net income for the three months ended March
31, 1993 was $21.5 million.
Billable minutes have continued to increase since the third
quarter of 1990 when compared to the same quarter in the prior year.
For the third quarter in a row, billable minutes have reached the
highest level in the Company's history. The increase in billable
minutes results from traffic growth generated by new customers,
minutes from the acquisition of a customer base, increased sales
productivity, the introduction of new products and increased
minutes per customer offset by billable minutes lost through
attrition of existing customers. The results of operations for the
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three months ended March 31, 1994 reflect a continuation of the trend
of strong financial performance as indicated by an 83.0% increase in income
before the cumulative effect of the accounting change from the comparable
quarter of 1993.
REVENUE
Revenue increased by 27.4% for the three months ended March 31, 1994
from the comparable period of 1993. Billable minutes again reached the
highest level in the history of the Company, increasing by 33.0% for the three
months ended March 31, 1994 over the comparable period in 1993. Additionally,
resellers contributed $18.1 million to revenue during the quarter, up over 160%
from the comparable quarter one year earlier. The Company's revenue per minute
continues to be above the industry average, though it has decreased from the
prior year quarter resulting from changes in the sales mix.
The first full month revenue from new sales in the first quarter of
1994 was significantly higher than the same period one year earlier. The
increased revenue from new sales along with growth in revenue from existing
customers continues to outpace revenue lost from the attrition of customers.
The provision for uncollectible revenue was 1.8% of gross revenue for
the three months ended March 31, 1994 and 2.6% for the same period of 1993.
Controls and procedures continue to be reviewed to improve the collection
process and provide earlier detection of credit risks.
OPERATING EXPENSES
The Company's primary cost is for communication services, which
represents the costs of originating and terminating calls via local exchange
carriers (primarily Bell Operating Companies). Also included in communication
services are the costs of owning and leasing long-haul bulk transmission
capacity.
The cost of communication services increased $14.5 million during the
three month period ended March 31, 1994 compared to the same period in 1993.
This cost, however, declined as a percent of net revenue for the comparable
periods. By the use of high volume fixed price leased facilities to transmit
traffic and lower prevailing unit prices for such capacity, the Company has
successfully reduced its network costs as a percent of revenue.
Sales, general and administrative expenses increased by 9.5% for the
three month period ended March 31, 1994 from the same period one year earlier
(but was lower as a percent of revenue). The increase reflects increased
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commissions, new sales channel program costs and other expenses related to
greater sales activity. First quarter 1994 results include a $1.2 million
addition to pre-tax income resulting from the settlement of a state
telecommunications excise tax dispute.
Depreciation and amortization increased 41.1% from the first quarter of
1993 to the same quarter in 1994. This is primarily due to the amortization of
the costs related to the acquisition of a customer base.
INTEREST EXPENSE
Net interest expense decreased 55.5% for the three months ended March
31, 1994 compared to the same period in 1993. This resulted from principal
payments in 1993, reduced interest related to the replacement of the 1992 Notes
with the 1993 Notes, increased interest income due to higher cash balances, the
elimination of borrowings under the Revolving Credit Facility as well as
capital Lease expirations.
INCOME TAXES
The effective tax rate increased from 29.5% for the first quarter of
1993 to 36.0% for the first quarter of 1994, due to the increase in the federal
income tax rate and the increase in taxable income which results in a decrease
in the impact of the Company's annual available $10 million net operating loss
carryforward on the effective rate.
LIQUIDITY AND CAPITAL RESOURCES
For the quarters ended March 31, 1994 and 1993, the Company generated
positive cash flow from operations of $24.6 million and $11.2 million,
respectively. The positive cash flow reflects fifteen consecutive quarters of
increased revenue and operating profits compared to prior year comparable
quarters.
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The positive cash flow from operations resulted in working capital of
$17.0 million at March 31, 1994 compared to a $1.4 million at December 31,
1993. The increase in working capital is largely attributable to: (a) the
increase in accounts receivable due to the increase in revenue and (b) the
increase in cash attributable to the increased cash flow.
In addition to the positive cash flow from operations, the Company's
liquidity position is further strengthened by the availability under the
Revolving Credit Facility ("Facility"). The Facility provides for borrowings
up to $40.0 million based on the level of accounts receivable and expires June
30, 1995. Under this Facility, the Company is able to minimize interest
expense by structuring the borrowings under three alternatives. The effective
rate under the Facility during 1993 approximated 5.8%. There have been no
borrowings under the Facility during 1994. As of March 31, 1994, the Company
had borrowing availability of $40.0 million and no balance outstanding.
Further evidence of the Company's strong liquidity position was the
Company's ability to finance the purchase, in April 1994, of $5.0 million of
the Company's 1993 Notes 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 totaled $4.7 million for the first quarter of
1994 and are expected to be $20 - $25 million for the year ended December 31,
1994. Capital expenditures during the first quarter of 1994 included projects
for enhanced efficiency and technical advancement in the network, information
systems and customer service. 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.
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.
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PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) 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
- - ------ ----------- -------- ------------ ------
11.1 Computation of Exhibit 11.1 to
Earnings Per Share ALC First Quarter
(ALC) 1994 10-Q
DEFINITIONS: ALC: ALC Communications Corporation
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 first quarter of 1994.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
ALLNET COMMUNICATION SERVICES, INC.
(Registrant)
By:/s/ Marvin C. Moses
---------------------------
Marvin C. Moses, Executive
Vice President and Chief
Financial Officer
By:/s/ Marilyn M. Lesnau
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Marilyn M. Lesnau, Vice
President, Controller and
Chief Accounting Officer
Dated: May 13, 1994