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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, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [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:
Title of each class
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
As of February 27, 1995, all 1,000 outstanding shares of the registrant's
common stock were held by ALC Communications Corporation.
As of February 27, 1995, 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 (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 1
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
and its wholly-owned subsidiaries; ConferTech International, Inc. and Allnet
and all of the wholly-owned subsidiaries of Allnet. The principal executive
offices of ALC are located at 30300 Telegraph Road, Bingham Farms, Michigan
48025 (810/647-6920).
In August 1994, the Company completed a series of transactions
with respect to the Company's Michigan network. These transactions included
the Company's acquisition of a 15% minority ownership position in a company
owning a Michigan-based digital fiber optic network. The Michigan network was
acquired from General Electric Capital Corporation with the majority position
(85%) being purchased by IXC Communications, Inc., an Austin, Texas based
network services provider ("IXC"), and the balance (15%) by ALC.
Shortly after the end of the 1994 fiscal year, the Company
consummated two significant agreements. The first was its January 19, 1995
announcement that ALC had signed a definitive agreement to acquire ConferTech
International, Inc. For approximately $66 million in a cash transaction. The
second involved the January 20, 1995 closing of a $105 million unsecured credit
facility with First Union National Bank of North Carolina and Bank One,
Columbus, NA as Co-Managing Agents. The new facility, which includes more
favorable terms than the prior credit facility, will provide the Company with
greater flexibility to enhance its growth through strategic investment.
(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.
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(C) NARRATIVE DESCRIPTION OF BUSINESS
ALC is the holding company of Allnet and other subsidiaries
and conducts no other business. ConferTech was acquired pursuant to a tender
offer and subsequent statutory merger. Confertech provides teleconferencing
services and audio bridge equipment.
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 providers of
long distance services and in 1994 carried in excess of 1.1 billion calls over
its network.
Allnet 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.
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. Since 1992, the impact of commercial traffic seasonal variations
has been more than offset by strong year over year traffic growth as well as
reseller growth in residential traffic. 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.
In late 1994, ALC created a subsidiary, Allnet Communications
Limited, a United Kingdom resident subsidiary ("Allnet Ltd."). Presently
inactive, Allnet Ltd. was formed in order to provide originating domestic and
international long distance telecommunications services to commercial and
consumer accounts in the United Kingdom and to provide cost-effective
termination of U.S. originating U.K. traffic. In early 1995, ALC
created another subsidiary, Allnet Local Services, Inc., a Michigan corporation
("ALS"). Also presently inactive, ALS was formed in order to provide local
telecommunications services initially within the state of New York.
The variety of products offered are categorized by the Company
based upon certain primary characteristics: pricing, value-added services,
reporting and 800 Services.
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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.
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. The Company's value-added services are aimed primarily at
the business subscriber, although the Company also offers products for
residential customers. 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.
In 1994, the Company launched Allnet Spectrum(TM), a new
calling card which marries the best attributes of Allnet Access(R) and Allnet
MultiPoint(R) 800 to allow abbreviated dialing for calling card calls. For
example, to complete a call, a customer dials his or her personal 800 number
followed by an appropriate four-digit destination PIN and the call is completed
on the Allnet network. Customer satisfaction is instilled because, after
accessing the Allnet network, the Allnet Spectrump(TM) card only requires
inputting four digits as opposed to the industry standard of fifteen digits.
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Value-added services include Allnet Call Delivery(R), a message
delivery service which enables a customer to send a prerecorded message to a
number; subscribers may also dial in to access a number of voice mail services.
With Flexible Call Routing, users can dial an 800 number and issue instructions
directing their incoming calls to any number of their choosing, including their
office, home, voice mail, pager or cellular phone. Value-added services also
include: 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 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"). This service allows customers to integrate
cellular calls on their Allnet invoice and receive additional discounts on
other Allnet services. By the end of 1994, MobileLine is offered in the
Ameritech, Bell Atlantic, NYNEX, Bell South, Air Touch and U.S. West service
regions and is being expanded in other areas of the country with non-wireline
carriers. More recently, Allnet introduced the resale of a nationwide paging
service under the name TravelReach(TM).
ConferTech designs, develops and markets advanced equipment and
services for the audio teleconferencing market, principally in North America,
through both telemarketing and its own direct sales force operating from eight
North American regional sales offices. Confertech provides operator-assisted
and automatic conferencing services, called ConferCall(R), to customers
throughout North America. ConferTech also provides automatic conferencing
services throughout the United Kingdom and European countries through its
London based conferencing service. The Company's principal equipment systems
are the Tempo(R) and Allegro(R), which are bridges that integrate customized
microprocessor-based hardware and proprietary software in a single call-linking
system in order to enhance and distribute standard telephone signals so that
numerous conferees can be connected in an audio "electronic meeting."
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.
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The Company also offers its proprietary personal computer
reporting service, Allnet Invoice Manager(R) ("AIM"), which allows customers
to design their own reports, prepare separate itemized bills, do mark-up
reporting and generate numerous other customized reports.
In 1994, the Company's reporting services continued to expand
with new offerings, which include weekly reports of non-completed 800 number
calls, quarterly reporting for financial control, and graphic reports like
Outlook(R) showing 800 number calls on maps by geographic region.
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(TM), fractional
800 service which allows residential customers to acquire 800 service utilizing
a 4 digit security Personal Identification Number ("PIN"); MultiPoint(R) 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 telephone;
and TargetLine(R) 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.
("CHA"). These customers are now also able to utilize a wide range of other
telecommunications services from the Company.
In addition, in 1994, domestic 800 number services offered
were expanded to include the ability to terminate domestic U.S. 800 numbers to
any dialable telephone number in the world.
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. The Company has several
long term contracts which have annual "mark-to-market" clauses . This
provision functions 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").
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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 reached, the Company replaces it with higher
capacity switching equipment. Common elements of the replaced unit are
re-deployed throughout the network.. 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, 1994,
the Company had 16 network switching centers which originate traffic in all
Local Access Transport Areas ("LATAs") in the United States. The Company also
maintains a separate test switch in its Southfield, Michigan switching center
that is used by Allnet engineering and operations personnel to develop and
certify software, products and services prior to introduction to the Allnet
network or customer base. International service is provided through
participation in the International Carrier Group ("ICG") with two 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 54 offices in the United
States. The Company employs 1,049 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.
The Company services more than 325,000 customers. Of these
customers, approximately 120,000 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 expanding distribution channels to increase customer
acquisition in specific target markets. Reseller revenue has continued to grow
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significantly; the revenue from one reseller growing rapidly to just
under 10% of total revenue. It is the Company's understanding that this
reseller, through a joint venture with a subsidiary of IXC, will be installing
long distance switching capacity during 1995 which as completed, would result
in over half of this traffic gradually moving to the joint venture network.
However, the joint venture has in turn entered into a three year contract with
Allnet, effective as of April 1, 1995. Allnet will terminate the joint venture
traffic which can't be terminated on the venture's own network. Allnet also
obtained provisions regarding exclusivity and minimums.
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 80% of the nation's long distance revenue of $79.3 billion,
comprise the first tier. Allnet is positioned in the second tier with three
other companies with annual revenues of $430 million to $2.2 billion each. The
third tier consists of more than 300 companies with annual revenues of less
than $430 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, 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 such carriers, including the requirement that calls be
charged on a nondiscriminatory, just and reasonable basis. Following a Court
of Appeals decision vacating an earlier FCC ruling, nondominant carriers, such
as Allnet, need to file tariffs for their interstate service offerings. The
impact of the Court of Appeals decision on Allnet was minimal and primarily
administrative in nature. Allnet is in compliance with that decision,
including maintaining an extensive set of interstate tariffs 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.
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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.
Congress is currently formulating legislation that might allow the BOCs
into the inter-LATA business in competition with long distance carriers such as
Allnet. Prior attempts at adopting such legislation during the 1994
Congressional session were unsuccessful. It cannot be determined at this time
whether any bills addressing relief from the AT&T Divestiture Decree will be
adopted or the timing of such adoption or, if adopted, whether the final
legislation will be similar to any previously 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 Interexchange Carriers , 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 Interexchange Carriers
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 plan then took effect. Based on the interim plan rates that are
in effect, Allnet does not anticipate a material impact during 1994 and 1995.
The FCC has left open the access rate structure issue for the
post 1995 period. The FCC issued a Further 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 and 1989-1990 periods. These
awards have, in all but one case, 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.
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
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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 intrastate 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 Interexchange Carriers, the general trend is
toward opening up these markets to the Company and other Interexchange
Carriers. Those states that do permit the offering of intra-LATA services by
Interexchange Carriers generally require that end users desiring to access
these services dial special access codes which place the Company and other
Interexchange Carriers 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 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, 1994, the Company employed 1,705 employees
in the United States, none of whom were subject to any collective bargaining
agreements.
ITEM 2. PROPERTIES
On December 31, 1994, 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 295,000 square feet in the aggregate for
sales and administrative offices, network switching centers and unmanned
microwave sites in 110 other locations in the continental United States.
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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.
In 1993, ConferTech acquired a 55,000 square foot building in
Westminster, Colorado to serve as its headquarters and to provide a base for a
significant portion of its operations, including sales and marketing, service
operations, engineering and administration. ConferTech's leased facilities,
comprised of call centers, sales offices and bridge locations in the United
States, Canada and United Kingdom contain approximately 46,000 square feet,
with leases expiring in June 1995 through January 2004.
ITEM 3. LEGAL PROCEEDINGS
None.
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 its Common Stock. The Company is allowed to pay dividends by the
terms of its credit facility as follows: (a) dividends may be paid in
shares of its own capital stock and (b) cash dividends may be paid and the
Company may redeem or repurchase shares of its capital stock (i) in an
aggregate amount not to exceed thirty percent (30%) of cumulative Consolidated
Net Income and (ii) if at the time of such payment, redemption or repurchase,
no Default or Event of Default shall exist or would be created (capitalized
terms not otherwise defined herein are defined in the credit agreement).
10
12
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.
11
13
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
Selected Financial Data
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
1994 1993 1992 1991 1990
(IN THOUSANDS EXCEPT PER SHARE DATA)
Income Statement Data:
Revenue $567,824 $436,432 $376,064 $346,873 $326,004
Income (loss) before extraordinary items
and Cumulative Effect of Accounting Change $64,329 $39,676 $13,826 $2,717 $(19,643)
Income (loss) per common share before extraordinary items
and Cumulative Effect of Accounting Change (1) $1.68 $1.07 $0.43 $(0.17) $(2.29)
Net income (loss) $64,329 $45,686 $20,826 $5,347 $(19,643)
Net income (loss) per common share (1) $1.68 $1.23 $0.74 $(0.02) $(2.29)
Balance Sheet Data:
Total assets $284,725 $193,541 $143,266 $140,846 $149,375
Long term obligations (2) $82,466 $87,598 $83,950 $105,355 $181,450
---------------------------
(1) 1990 has been restated to reflect the 1:5 reverse stock split.
(2) 1990 through 1992 include Class A Preferred Stock.
12
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Nineteen hundred ninety four was a year of record performance for ALC ("the
Company"). Capitalizing on a series of multi-year financial transactions
completed in 1993, which provided for the simplification and improvement of the
debt and capital structure, the Company was able to concentrate on traffic and
revenue growth and implementation of strategies for its ongoing operations.
The Company has sustained a level of financial success which includes the fact
that net income grew from a level of $3.3 million for the first quarter of
1992 to $17.3 million for the fourth quarter of 1994. Net income (excluding
extraordinary items) for the year ended 1994 increased approximately
62% over the previous year. The results of operations for 1992, 1993 and 1994
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 $64.3 million for the year ended December
31, 1994 on revenue of $567.8 million. This compares to net income of $45.7
million for the year ended December 31, 1993, which 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 the effect of these items, income for the year ended December 31,
1993 totaled $39.7 million on revenue of $436.4 million. This compares to net
income of $20.8 million on revenue of $376.1 million for the year ended
December 31, 1992.
Operating income increased from $40.7 million for the year ended December 31,
1992 to $68.9 million in 1993 and increased to $106.3 million in 1994. This
improvement is primarily the result of increased revenue from increased
billable minutes.
Year Ended December 31,
1994 1993 1992
---- ---- ----
Revenue 100.0% 100.0% 100.0%
Cost of communication services (54.5) (53.8) (57.7)
------ ------ ------
Gross Margin 45.5% 46.2% 42.3%
Sales, general & administrative (23.7) (27.5) (28.5)
Depreciation & amortization (3.1) (2.9) (3.0)
------ ------ ------
Operating Income 18.7% 15.8% 10.8%
====== ====== ======
REVENUE
Revenue increased 30.1% to $567.8 million from 1993 to 1994 resulting from year
over year traffic growth of 42.3%. Since the third quarter of 1990, billable
minutes have continued to increase when compared to the same quarter in the
prior year. Most importantly, billable minutes reached their highest level in
1994. Across the board, volume growth was led by strong performance in the
Company's reseller and Call Home America(R) customer bases which, during 1994,
have continued to grow significantly and reached approximately 22% and 6% of
revenue, respectively.
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15
The Company's revenue per minute of 17.2 cents continues to be strong,
although it decreased from the 1993 level of 18.8 cents primarily due to
changes in the sales mix. Although reseller revenue per minute is lower than
regular commercial traffic (between 11 cents and 12 cents per minute), the
increased reseller traffic has a positive impact on operating income due to the
low incremental sales, general and administrative costs.
The revenue increase for 1994 included the revenue from one reseller
which grew rapidly to just under 10% of total revenue. It is ALC's
understanding that this reseller, through a joint venture, will be installing
long distance switching capacity during 1995 which, as completed, would result
in over half of this traffic gradually moving to the joint venture network.
However, the joint venture has in turn entered into a three year contract with
Allnet, effective as of April 1, 1995. Allnet will terminate the joint venture
traffic which can't be terminated on the venture's own network. Allnet also
obtained provisions regarding exclusivity and minimums.
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. The increase in billable minutes results from traffic generated by
new customers and increased minutes per customer. Revenue per minute decreased
from 1992 to 1993 resulting from changes in the sales mix.
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 approximately 2% of revenue for the
year ended December 31, 1993. In addition, resellers contributed approximately
$18 million to revenue during 1993.
The revenue generated from customers' first full month of service in 1994 was
48.4% higher than in 1993 and 30.7% higher in 1993 than in 1992. The increased
revenue from new customers along with revenue from existing customers is
significantly outpacing revenue lost from customer attrition.
The provision for uncollectible revenue, which is deducted from gross revenue
to arrive at reported revenue, was 1.7% for the year ended December 31, 1994,
1.9% for the year ended December 31, 1993, and 3.0% for the year ended December
31, 1992. Strong controls and procedures have enabled the Company to improve
the collection process and provide earlier detection of credit risks.
COST OF COMMUNICATION SERVICES
The cost of communication services increased from $216.9 million and $234.8
million to $309.5 million for the years 1992, 1993, and 1994, respectively.
The increase in the cost of communication services is due primarily to the
42.3% and 18.9% increase in billable minutes in 1994 and 1993. The cost of
communication services as a percent of revenue was 54.5% in 1994, up slightly
from 53.8% in 1993, the lowest rate in the Company's history, and reflects a
decrease from the 1992 level of 57.7%.
Additionally, in August 1994, the Company completed a series of contracts which
will result in a reduction of the Company's Michigan network costs by over $2
million per year. The Company continues to reconfigure its network to optimize
utilization.
The Company's use of high volume, fixed price transmission facilities is
significantly more cost effective than the use of measured services. By
utilizing fixed price leased facilities to transmit long-haul 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 the Company's traffic traverses over fixed
price, "on-net" digital facilities.
14
16
OTHER EXPENSES
Sales, general and administrative expense was $107.3 million, $119.8 million
and $134.3 million for the years 1992, 1993 and 1994, respectively.
Sales, general and administrative expense for 1994 increased $14.5 million or
12.1% over 1993. The increase reflects increased salaries, commissions, new
sales channel program costs and other expenses related to greater sales
activity. Nineteen hundred ninety four results include a $1.2 million
reduction in cost resulting from the favorable settlement of a state
telecommunications excise tax dispute. As a percentage of revenue, sales,
general and administrative expense declined to 23.7% from 27.5% in 1993,
evidencing management's continued emphasis on process improvement and cost
benefit analysis.
Sales, general and administrative expense for 1993 increased $12.5 million or
11.7% compared to 1992. The increases reflect 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.
Depreciation and amortization increased 37.8% and 14.3% for the years 1994 and
1993, respectively, compared to the previous years, but remained relatively
constant as a percent of revenue. In both years, the increase is the result of
depreciation on newly acquired fixed assets and amortization of intangible
assets from the purchase of CHA.
INTEREST EXPENSE
expense has dramatically decreased from $17.2 million in 1992 and
$10.5 million in 1993 to $5.4 million in 1994. Interest expense decreased due
to improved cash flow from operations and interest income (in 1994). This
decrease also 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% 1993 Notes in May 1993. A $5.0 million redemption of the 1993 Notes was
made in April 1994. Additionally, in connection with a series of refinancing
activities, various debt agreements were paid in full in 1993 and 1992.
Interest expense was also lower in 1993 and 1994 because there have
been no borrowings outstanding under the Revolving Credit Facility from
October 1993 through 1994.
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 for financial
reporting purposes to those expected to be realized within the three year
period. The Company did not apply Statement 109 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 provision for the
year ended December 31, 1992 included an amount that would have been payable
except for the availability of NOLs. The tax benefits of the loss
carryforwards
15
17
utilized were reported as an extraordinary item for the year ended 1992. With
the adoption of Statement 109, income tax expense for 1993 and 1994 included
the benefit of utilizing net operating losses. In 1992, 1993 and 1994, the
utilization of net operating losses was limited due to an Internal Revenue Code
Section 382 "ownership change".
SECTION 382 LIMITATION
The Internal Revenue Code provides that if an ownership change occurs, the
taxable income of a corporation available for offset by NOLs will be subject to
an annual limitation ("Section 382 Limitation").
The transfer of ALC Common Stock, Class B Preferred and Class C Preferred by
CTI, the Company's former parent, to certain banks in August 1992 resulted in an
ownership change with a Section 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 which can be utilized for
federal income tax purposes in 1995 and future years are limited to an
aggregate of approximately $110 million.
Future events beyond the control of the Company could reduce or eliminate the
Company's ability to utilize the tax benefit of its NOLs. The tax benefit of
NOLs would be eliminated if the Company fails to meet the continuity of
business requirements.
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 vacation and holiday periods. Since 1992, the impact of
commercial traffic seasonal variations has been more than offset by strong year
over year traffic growth as well as reseller growth in residential traffic.
However, the effect of commercial seasonality is still evidenced by lower
sequential traffic growth in the fourth quarter.
LIQUIDITY AND CAPITAL RESOURCES
For the years ended December 31, 1994, 1993 and 1992, the Company generated
positive cash flow from operations of $86.0 million, $59.4 million and $30.4
million, respectively, reflecting the strong trend of profitability. The
positive cash flow reflects eighteen consecutive quarters of increased revenue
and operating profits versus prior year comparable quarters.
The positive cash flow from operations resulted in working capital of $41.5
million at December 31, 1994 compared to $1.4 million at December 31, 1993.
The increase in working capital includes a $62.0 million increase in cash and
accounts receivable due to the increase in revenue offset by a $18.2 million
increase in accrued network costs also related to higher traffic volume.
The Company's liquidity position was strengthened by refinancing
activities 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 was replaced by 11 7/8% Subordinated Notes of
Allnet. As part of this restructuring, 3,400,000 ALC Common Stock warrants
were issued representing 10.2% of the then fully-diluted equity of ALC. These
notes were replaced in May 1993 with 9% Senior Subordinated Notes ("1993
Notes") which do not mature until May 2003. As a result, at December 31, 1993
ALC had a single debt instrument outstanding, $85.0 million of the 1993 Notes.
Refinancing activities also included the restructuring and simplification of the
equity of ALC. In August 1992, the equity interest of Communications
Transmission, Inc. ("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
16
18
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 and a major stockholder. 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. In December 1993, the Company redeemed the remaining shares of Class
A Preferred.
Further evidence of the Company's stronger liquidity position was its ability
to fund the purchase, in April 1994, of $5.0 million of the Company's 1993
Notes, the acquisition of customer accounts from CHA of $9.0 million and fixed
assets of $22.4 million from cash flow from operations. Additionally, in
August 1994, the Company completed a series of contracts which resulted in a
reduction of the Company's Michigan network costs by over $2 million per year.
The transactions included loaning $9.2 million in exchange for notes receivable
to be repaid over 5 years and a 15% minority ownership position in a company
owning a Michigan-based, fiber optic network.
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
Company's credit agreement. As of December 31, 1994, the Company had
availability of $40.0 million under its existing Revolving Credit Facility and
no balance outstanding. During January, 1995, the Company secured a $105
million unsecured credit facility with First Union National Bank of North
Carolina and Bank One, Columbus, NA as Co-Managing Agents. Under the new
facility, which expires December 31, 1999, the Company is able to minimize
interest expense by structuring borrowings under two alternatives, each of
which has a varying interest rate. The $40.0 million Revolving Credit Facility
was simultaneously closed.
In January 1995, ALC announced plans to acquire ConferTech International, Inc.
("ConferTech"), a leading provider of teleconferencing services and audio
bridge equipment. The Company entered a definitive agreement to acquire all
the shares of ConferTech in a transaction valued at approximately $66 million.
ALC completed a cash tender offer at $8.00 per share in late February 1995.
ALC financed this acquisition through cash from operations as well as utilizing
its line of credit. As of February 28, 1995, the balance under the line was
$12.0 million. The acquisition of ConferTech will provide additional revenue
growth for the Company and enhance product offerings to the Company's
customers. ConferTech reported revenue of $44.0 million and $35.8 million for
the years ended December 31, 1994 and 1993, respectively.
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 $22.4 million in 1994. Capital
expenditures during the year ended December 31, 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. The
level of capital expenditures for 1995 is expected to be approximately $30
million.
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 as well as provide resources for further growth of
the Company.
17
19
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.
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 ALC and its subsidiary 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, 1994 and December 31, 1993
Consolidated Statements of Operations for
the years ended December 31, 1994, 1993 and 1992 F-4
Consolidated Statements of Cash Flows
for the years ended December 31, 1994, F-5
1993 and 1992
Consolidated Statements of Preferred Stock F-6
and Stockholders' Equity for the years
ended December 31, 1994, 1993 and 1992
18
20
Notes to Consolidated Financial Statements F-7
(2). Financial Statement Schedules
Page
Schedule IX Valuation and Qualifying Accounts and Reserves F-18
(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
-------- ------------ -------- -------------- ------
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
Registration No.
33-1882
10.1 Form of Note and Warrant Exhibit 4.3 to
Agrmt., 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
Program 1993 Form 10-K
10.4** Form Severance Exhibit 10.9 to
Agrmt., 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.
19
21
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 Agrmt. 1993 Form 10-K
10.6** Amendment to Exhibit 10.1 to
Amended\Restated Third Quarter
Employment Agrmt. 1994 Form 10-Q
Aug. 23, 1994
10.7** Amendment to Amended/ Exhibit 10.15 to
Restated Employment 1994 Form 10-K
Agrmt.
Oct. 21, 1994
10.8** Form of Director Exhibit 10.11
Indemnification Agrmt. to Allnet
Second Quarter
1992 Form 10-Q
10.9 Master Lease Agrmt. Exhibit 10.1 to
Meridian Leasing Corp., Second Quarter
Allnet Dec. 19, 1985 1989 Form 10-Q
10.10 Transmission Capacity Exhibit 10.14 to
Lease: Times Mirror Registration No.
Microwave Communica- 33-1578
tions Co,. Lexitel
Corp., October 8, 1985
10.11 Amended/Restated Exhibit 10.7 to
Fiber Optic Lease: Second Quarter
MSM, Allnet 1994 Form 10-Q
August 1, 1994 CONFIDENTIAL
TREATMENT GRANTED
10.12 Digital Service Exhibit 10.8 to
Agrmt. MSM, Allnet Second Quarter
August 5, 1994 1994 Form 10-Q
CONFIDENTIAL
TREATMENT GRANTED
10.13 Master Service Agrmt. Exhibit 10.2
Allnet, Western to Third Quarter
Tele-Communications, Inc. 1992 Form 10-Q
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
20
22
Incorporated Page
Exhibit Filed Herein by Number
Number Description Herewith Reference to*: Herein
------ ------------ ------------ -------------- ------
10.14 Digital Service Exhibit 10.2 to
Agrmt. CTI, Allnet, First Quarter 1993
as amended Form 10-Q
February 10, 1989 Exhibit 28.4 to
June 7, 1990
Form 8-K
Exhibit 10.6 to
Third Quarter
10.15 Digital Service Exhibit 10.5 to
Agrmt., ALC, Second Quarter 1992
CTGI June 4, 1992 Form 10-Q
10.16 Credit Agrmt. Exhibit 10.24 to
Allnet, ALC, 1994 Form 10-K
Lenders, First Union,
Bank One
January 20, 1995
10.17 Revolving Credit and Exhibit 10.3 to
Security Agrmt. Second Quarter
Bank One, Columbus, NA, 1993 Form 10-Q
Star Bank, NA, Allnet, ALC CONFIDENTIAL
June 30, 1993 TREATMENT GRANTED
10.18 Real Estate Lease: Exhibit 10.45 to
Allnet, Balcor Allnet Second Quarter
Equity Pension 1992 Form 10-Q
Investors, Ltd., Exhibit 10.6 to
as amended Second Quarter
March 26, 1987 1991 Form 10-Q
10.19 Real Estate Lease: Exhibit 10.47 to
ALC, Kirco-Oak Allnet Second Quarter
Hollow-Limited 1992 Form 10-Q
Partnership, Exhibit 10.5 to
as amended Second Quarter
Feb. 25, 1987 1991 Form 10-Q
11.1 Computation of Per X
Share Earnings
23.1 Consent of X
Ernst & Young
27.1 Financial Data Schedule X
21
23
DEFINITIONS: ALLNET: Allnet Communication Services, Inc.
ALC: ALC Communications Corporation
AMENDED AND RESTATED EMPLOYMENT AGREEMENTS:
Form of Amended and Restated Employment
Agreement with ALC, Allnet and John M. Zrno,
William H. Oberlin and Marvin C. Moses
Jan. 7, 1994
BANK ONE: Bank One, Columbus, NA
CTGI: Communications Transmission Group, Inc.
CTI: Communications Transmission, Inc.
FIRST UNION: First Union National Bank of
North Carolina
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)
GE TRUST: Trustees of General Electric Pension
Trust
GRUMMAN HILL: Grumman Hill Associates, Inc.
GRUMMAN HILL LP: Grumman Hill Investments, L.P.
LENDERS: Bank One, First Union, Comerica Bank
and Star Bank
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 by Allnet during the fourth quarter of 1994.
(c) Refer to Item 14(a)(3) above for Exhibits required by Item 601 of
Regulation S-K.
(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.
22
24
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 23rd day of March,
1995
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 23rd day
of March, 1995.
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. Price Vice President, Controller
Marilyn M. Price
(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
23
25
[ERNST & YOUNG LLP LETTERHEAD]
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, 1994 and 1993, 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, 1994. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule 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, 1994 and 1993, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material respects
the information set forth therein.
ERNST & YOUNG LLP
Detroit, Michigan
January 25, 1995
F-1
26
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, December 31,
1994 1993
------------ ------------
(In Thousands)
Current Assets:
Cash and cash equivalents $41,412 $1,819
Accounts receivable, less allowance of
$4,192,000 and $3,974,000 (Note A) 81,214 58,761
Other current assets 7,121 4,543
------------ ------------
Total Current Assets $129,747 $65,123
Fixed Assets (Note D):
Communication systems $91,140 $81,752
Other equipment and leasehold improvements 36,842 29,785
Construction in progress 8,690 6,722
------------ ------------
$136,672 $118,259
Less accumulated depreciation and amortization 77,514 69,918
------------ ------------
Total Fixed Assets $59,158 $48,341
Deferred income taxes (Note F) 10,429 10,240
Cost in excess of net assets acquired less accumulated
amortization of $13,723,000 and $12,198,000 (Note A) 47,267 48,792
Intangibles (Note A) 30,444 20,557
Other assets (Note I) 7,680 488
------------ ------------
Total Assets $284,725 $193,541
============ ============
F-2
27
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, December 31,
1994 1993
------------ ------------
(In Thousands)
Current Liabilities:
Accounts payable $2,018 $1,397
Accrued liabilities 20,864 16,855
Accrued network costs 51,672 33,482
Taxes other than income 13,425 11,592
Current portion of capitilized leases and long-term debt
(Note D) 232 392
------------ ------------
Total Current Liabilities $88,211 $63,718
Long-term Liabilities:
Capitalized leases and other long-term debt (Note D) $3,048 $3,263
Senior Subordinated Notes (Note D) 79,418 84,335
------------ ------------
Total Long-Term Liabilities $82,466 $87,598
------------ ------------
Total Liabilities $170,677 $151,316
Stockholders' Equity:
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 -- 33,712,000 and 32,948,000
shares (Note G) $337 $329
Capital in excess of par value 140,278 132,378
Paid-in capital -- Warrants (Notes G & I) 11,715 12,129
Accumulated deficit (38,282) (102,611)
------------ ------------
Total Stockholders' Equity $114,048 $42,225
------------ ------------
Total Liabilities and Stockholders' Equity $284,725 $193,541
============ ============
See notes to consolidated financial statements
F-3
28
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
--------------------------------------------------------------
1994 1993 1992
------------- ----------- -------------
(In Thousands Except Per Share Amounts)
Revenue $567,824 $436,432 $376,064
Operating Expenses:
Cost of communication services (Note I) $309,516 $234,849 $216,889
Sales, general and administrative 134,296 119,841 107,294
Depreciation and amortization 17,696 12,840 11,197
------------ ----------- -----------
Total Operating Expenses $461,508 $367,530 $335,380
------------ ----------- -----------
Operating Income $106,316 $68,902 $40,684
Interest expense 5,412 10,476 17,158
------------ ----------- -----------
Income Before Income Taxes, Extraordinary Items and
Cumulative Effect of Accounting Change $100,904 $58,426 $23,526
Income taxes (Note F) 36,575 18,750 9,700
------------ ----------- -----------
Income Before Extraordinary Items and
Cumulative Effect of Accounting Change $64,329 $39,676 $13,826
Extraordinary Items:
Loss related to early retirement of debt (net of
income tax benefit of $4,000,000) (Note D) (7,490)
Utilization of operating loss carryforward 7,000
Cumulative effect of change in method of accounting
for income taxes (Note F) 13,500
------------ ----------- -----------
Net Income $64,329 $45,686 $20,826
============ =========== ===========
Earnings per common and common equivalent share (Note G):
Income before extraordinary items and cumulative
effect of accounting change $1.68 $1.07 $0.43
Extraordinary Items:
Loss related to early retirement of debt (0.21)
Utilization of operating loss carryforward 0.31
Cumulative effect of change in method of accounting
for income taxes 0.37
------------ ----------- -----------
Net Income $1.68 $1.23 $0.74
============ =========== ===========
Weighted average common and common
equivalent shares outstanding 38,353 36,348 22,141
============ =========== ===========
See notes to consolidated financial statements
F-4
29
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------------------
1994 1993 1992
-------- ----------- ---------
(In Thousands)
Operating Activities
Net income $64,329 $45,686 $20,826
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 11,426 9,810 10,094
Amortization of intangible assets and bond discount 6,315 3,858 4,415
Provision for deferred income taxes (Note F) (674) (11,838)
Loss (gain) on retirement of debt, net of tax 7,490 (59)
Increase in accounts receivable and
other current assets (24,749) (13,680) (3,371)
Increase (decrease) in current liabilities 29,309 18,033 (1,523)
------------ ----------- -----------
Net Cash Provided by Operating Activities $85,956 $59,359 $30,382
Financing Activities
Proceeds from (payments on) Revolving Credit
Facility (Note D) ($14,802) $5,400
Proceeds from senior subordinated notes (Note D) 84,335
Payments on long-term debt $(969) (19,602) (22,818)
Proceeds from issuance of stock (Note G) 3,432 12,776 607
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 D) (947)
Retirement of senior subordinated and subordinated notes (Note D) (4,962) (72,380)
------------ ----------- -----------
Net Cash Used in Financing Activities ($2,499) ($20,149) ($19,664)
Investing Activities
Expenditures for fixed assets ($22,374) ($16,207) ($10,233)
Increase in other non-current assets (12,499) (1,686) (596)
Purchase of customer base (Note C) (8,991) (19,610)
------------ ----------- -----------
Net Cash Used in Investing Activities ($43,864) ($37,503) ($10,829)
------------ ----------- -----------
Increase (Decrease) in Cash $39,593 $1,707 ($111)
Cash at beginning of year 1,819 112 223
------------ ----------- -----------
Cash and cash equivelants at end of year $41,412 $1,819 $112
============ =========== ===========
Interest paid $11,117 $9,686 $15,572
============ =========== ===========
Income taxes paid $30,302 $7,464 $1,862
============ =========== ===========
See notes to consolidated financial statements
F-5
30
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Years Ended December 31, 1994, 1993 and 1992
(In Thousands)
Shareholders' Equity
---------------------------------------------------
Class A Preferred Stock Class B Preferred Stock Class C Preferred Stock
------------------------ ----------------------- -----------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ---------- ---------- ---------- ----------
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 (Note E) (2,144) (56,889)
Issuance of Common Stock (Note 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
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 (Note G) (1,000) (10)
Conversion of Class C Preferred to
Common Stock (Note G) (1,000) (10)
Exercise of Stock Options (Note F)
Tax benefit from exercise of stock options (Note F)
Exercise of Warrants
Redemption of Class A Preferred
Stock (Note E) (356) (7,119)
Net income for the year ended
December 31, 1993
-------- -------- -------- -------- -------- --------
Balance, December 31, 1993 0 $0 0 $0 0 $0
Exercise of Stock Options (Note F)
Tax benefit from exercise of stock options (Note F)
Exercise of Warrants
Net income for the year ended
December 31, 1994
-------- -------- -------- -------- -------- --------
Balance, December 31, 1994 0 $0 0 $0 0 $0
======== ======== ======== ======== ======== ========
Years Ended December 31, 1994, 1993 and 1992
(In Thousands)
Stockholders' Equity
-------------------------------------------------------------------------------
Paid-in
Common Stock Capital in Capital Warrants
----------------------- excess of ---------------- Accumulated
Shares Amount par value Shares Amount Deficit Total
-------- -------- --------- ------ -------- ----------- ---------
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 (Note E) 56,825 56,825
Issuance of Common Stock (Note 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)
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 (Note G) 1,898 19 (9)
Conversion of Class C Preferred to
Common Stock (Note G) 1,898 19 (9)
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 (Note E)
Net income for the year ended
December 31, 1993 45,686 45,686
--------- -------- -------- ------- ------- -------- --------
32,948 $329 $132,378 4,266 $12,129 ($102,611) $42,225
Balance, December 31, 1993
Exercise of Stock Options (Note F) 350 4 1,358 1,362
Tax benefit from exercise of stock options
(Note F) 4,062 4,062
Exercise of Warrants 414 4 2,480 (414) (414) 2,070
Net income for the year ended
December 31, 1994 64,329 64,329
--------- -------- -------- ------- ------- -------- --------
Balance, December 31, 1994 33,712 $337 $140,278 3,852 $11,715 ($38,282) $114,048
========= ======== ======== ======= ======= ======== ========
See notes to consolidated financial statements
F-6
31
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
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. Allnet
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 Allnet are digital.
Basis of Consolidation
The consolidated financial statements include the accounts of ALC and its
wholly-owned subsidiary, Allnet. Intercompany transactions have been
eliminated.
Cash Equivalents
The Company defines cash equivalents as highly liquid, short-term investments
with an original maturity of three months or less.
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.
The purchase price of the customer base and the accounts acquired under a
marketing agreement with Call Home America, Inc. ("CHA") (Note C) is being
amortized over a period from 42 months to seven years. Amortization expense
related to the acquisition and marketing agreement totaled $4.4 million in 1994
and $1.2 million in 1993.
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 $6.3
million, $3.1 million and $1.8 million for the years ended December 31, 1994,
1993 and 1992, respectively.
Accumulated amortization of intangible assets was $14.4 million and $12.6
million at December 31, 1994 and 1993, respectively.
F-7
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition
Customers are billed as of monthly cycle dates. Revenue is recognized as
service is provided and unbilled usage is accrued.
Major Customers
The Company's 1994 revenue includes the impact of a major reseller customer
whose revenue has increased substantially in the last year and comprises
approximately 9.9% of revenue for the year and 11.4% of accounts receivable at
December 31, 1994.
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.
Employee Benefit Plan
Allnet has a contributory 401(k) plan that covers substantially all employees.
The Company's contributions to the plan are made at the discretion of the Board
of Directors and totalled $655,000 and $500,000 in 1994 and 1993, respectively.
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 ---SUBSEQUENT EVENT
In January 1995, ALC announced plans to acquire ConferTech International, Inc.
("ConferTech"), a leading provider of teleconferencing services and audio
bridge equipment. The Company entered a definitive agreement to acquire all
the shares of ConferTech in a transaction valued at approximately $66 million.
ALC completed a cash tender offer at $8.00 per share in March 1995. ALC
financed this acquisition through cash from operations as well as utilizing its
line of credit. ConferTech reported revenue of $44.0 million and $35.8
F-8
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
million and net income of $1.6 million and $2.3 million for fiscal years ended
December 31, 1994 and 1993, respectively.
NOTE C --- PURCHASE OF CUSTOMER BASE
During July 1993, the Company acquired the specialized 800 customer base of CHA
for $15.5 million plus a payment of $4.2 million made in August 1994 which was
based on certain 800 customer base revenue generated by the customers in April,
May and June 1994.
The Company also acquired additional customers from CHA under a marketing
agreement from August 1993 through 1994. Under this agreement, an additional
$9.0 million and $4.1 million was paid for customers acquired during 1994 and
1993, respectively, and has been allocated to the purchase price for the
related customers acquired during the respective years.
The following unaudited proforma summary presents the Company's revenue and
income as if the transaction occurred at the beginning of the year. The
proforma financial data is not necessarily indicative of the results that
actually would have occurred had the transactions taken place on the date
presented.
Year Ended
December 31, 1993
-----------------------
(in thousands except per
share amounts)
Revenue $447,077
Income Before Extraordinary Item and
Cumulative Effect of Accounting Change $41,457
Net Income $47,467
Earnings Per Common and Common
Equivalent Share:
Income before extraordinary item and
cumulative effect of accounting change $1.12
Net Income $1.28
F-9
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D - LONG TERM DEBT AND OTHER FINANCING
Long-term debt, including amounts due within one year, consists of:
December 31,
1994 1993
-------- --------
(in Thousands)
9% Senior Subordinated Notes
due 2003 - face value of $80,000,000
and $85,000,000 less discount of
and $582,000 and $665,000 $ 79,418 $ 84,335
Capitalized lease obligations (Note H) 254 541
Other long-term debt 3,026 3,114
---------- ----------
$ 82,698 $ 87,990
Due within one year 232 392
---------- ----------
$ 82,466 $ 87,598
========== ==========
There were no outstanding balances on the Revolving Credit Facility during
1994. During 1993 the weighted average interest rates were 12.3% on Notes
Payable and 5.5% on the Revolving Credit Facility. Weighted average interest
rates during 1992 were 10.19% on Notes Payable and 12.36% on the Revolving
Credit Facility.
Revolving Credit Facilities
During 1994 and 1993, the Company had a $40.0 million Revolving Credit Facility
which was to expire on June 30, 1995. The effective rate under the Facility
during 1993 approximated 5.8%. There were no borrowings under the line during
1994. A .375% per annum charge is made on the unused portion of the line.
Availability under the Facility was based on the level of eligible accounts
receivable. As of December 31, 1994, the Company had $40 million of
availability under the line. Borrowings under the Facility were collateralized
by accounts receivable.
In January 1995, the Company entered into a $105 million unsecured credit
facility with First Union National Bank of North Carolina and Bank One,
Columbus, NA as Co-Managing Agents. The $40.0 million Revolving Credit
Facility was simultaneously terminated. Under the new credit facility, which
expires December 31, 1999, the Company is able to minimize interest expense by
structuring borrowings under two alternatives. Each alternative has a varying
interest rate associated with it. As of February 28, 1995, the average interest
rate charged was 7.3% per annum. A 0.25% per annum commitment fee is
charged on the unused portion of the line.
9% Senior Subordinated Notes
In May 1993, Allnet completed an offering of $85.0 million 9.0% Senior
Subordinated Notes ("1993 Notes"). The net proceeds of $84.3 million were used
to repay the outstanding 11 7/8% Senior Subordinated Notes of
F-10
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Allnet ("1992 Notes") 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. Interest on the 1993 Notes is
payable semi-annually commencing November 15, 1993. The 1993 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.
In April 1994, the Company acquired, on the open market, $5.0 million of its
1993 Notes at the Company's approximate book value.
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, 1994 are as follows (in
thousands):
Year Ended December 31:
1995 $ 232
1996 1,496
1997 812
1998 467
1999 193
2000 and thereafter 80,080
--------
$83,280
Less discount on 1993 Notes 582
--------
$82,698
========
NOTE E - REDEEMABLE PREFERRED STOCK
As of January 1, 1992, 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 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 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.
F-11
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 (in thousands):
Statement 109 APB 11
------------- -------
1994 1993 1992
-------- -------- --------
Federal
Income tax expense $31,180 $16,150 $8,075
Extraordinary item $6,445
State
Income tax expense $ 5,395 $ 2,600 $1,625
Extraordinary item $ 555
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 $24.7 million, $6.7 million and $1.6 million for 1994, 1993 and
1992, respectively.
The provisions for state and local income taxes reflect the effect of filing
separate company state and local income tax returns, as appropriate, for
members of the consolidated group. This amount is reduced, where applicable,
by the availability to utilize state and local portions of operating loss
carryforwards. State and local income taxes currently payable were $4.3
million, $1.2 million, and $1.1 million in 1994, 1993 and 1992, respectively.
The tax benefit realized from the exercise of stock options of $4.1 million in
1994, and $5.5 million in 1993 was added to capital in excess of par value and
is not reflected in operations.
F-12
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation between the statutory federal and the effective income tax
rates follows:
Percentage of Pre-tax Income
1994 1993 1992
------------ ------------ ------------
Income tax at statutory rate 35.0% 35.0% 34.0%
Goodwill amortization 0.5 0.9 2.2
State taxes (net of federal benefit) 3.4 2.8 4.6
Utilization of operating loss
carryforwards under Stmt. 109 (3.4) (5.9)
Other 0.8 (0.7) 0.4
---- ---- ----
Income tax expense 36.3% 32.1% 41.2%
Extraordinary item, utilization,
of operating loss carryforwards
under APB 11 (29.8)
---- ---- ----
Income tax expense, net of
extraordinary item 36.3% 32.1% 11.4%
==== ==== ====
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 are as follows (in thousands):
December 31, 1994 December 31, 1993
----------------- -----------------
Deferred tax liability:
CHA intangible assets $ (4,400) $ (1,500)
Depreciation (1,000)
--------- --------
Total deferred tax liabilities $ (5,400) $ (1,500)
Deferred tax assets:
Future tax benefit of NOL carryforward $ 42,000 $ 44,700
Bad debt expense 1,600 1,500
Compensation 1,200 900
Depreciation 500
Other 1,612 638
--------- --------
$ 46,412 $ 48,238
Valuation allowance for
deferred tax assets (28,500) (34,900)
--------- --------
Total deferred tax assets $ 17,912 $ 13,338
--------- --------
Net deferred tax assets $ 12,512 $ 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, 1992, and 1993 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,
F-13
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
coupled with the 15 year carryforward limitation, results in a maximum
cumulative NOL and ITC carryforward which may be utilized of approximately $108
million and $118 million as of December 31, 1994 and December 31, 1993,
respectively. Because it is difficult to predict the realization of the NOL
benefit beyond a period of three years, the Company has established valuation
allowances of $28.5 million and $34.9 million as of December 31, 1994 and
December 31, 1993, respectively.
NOTE G - EARNINGS PER SHARE AND STOCKHOLDERS' EQUITY
Earnings per share
Earnings per share are computed using weighted average shares outstanding and
common stock equivalents. To arrive at income available for common
stockholders for 1993 and 1992, 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, the accretion of a contract payment to certain major
holders of the Class A Preferred. Anti-dilutive securities for 1992 were
warrants and options. Earnings per share for the third and fourth quarters of
1992 and for all of 1993 and 1994 include the impact of the exercise of
outstanding stock options and warrants utilizing the Treasury Stock Method.
Equity Offerings
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 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.
Common Stock Warrants
As of December 31, 1994, warrants for the purchase of 428,090 shares of Common
Stock at $2.00 per share, 2,763,878 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 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 as well as a Non-Employee
Director Plan. The maximum number of shares for which options may be granted
under both employee 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. The maximum number of shares which
may be granted under the Non-Employee Plan is 100,000 shares.
F-14
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Shares under option are summarized below:
Option Price
Number of -----------------------------------------
Shares Per Share Total
------------------ ----------- ----------------
(in thousands)
January 1, 1992 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 (18,067) $ 3.50 - $ 5.88 (94)
Options Granted 1,630,500 $26.06 - $26.25 40,973
Options Exercised (755,265) $ 3.50 - $ 7.69 (2,803)
--------- --------
Shares under option
December 31, 1993 4,494,196 $ 3.50 - $26.25 $52,854
Options Terminated (56,822) $ 3.50 - $33.25 (970)
Options Granted 49,750 $29.63 - $33.25 1,543
Options Exercised (349,715) $ 3.50 - $25.06 (1,362)
--------- --------
Shares under option
December 31, 1994 4,137,409 $ 3.50 - $26.25 $52,065
========= ================== ========
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
========= ================== ========
Options exercisable,
December 31, 1994 2,207,216 $ 3.50 - $29.63 $12,663
========= ================== ========
NOTE H - LEASES
Future minimum rental payments under non-cancelable operating leases with
initial or remaining terms of one or more years are $32.9 million, $23.7
million, $17.1 million, $11.0 million, $4.9 million and $3.6 million for 1995,
1996, 1997, 1998, 1999 and 2000 and thereafter, respectively.
The Company's lease arrangements frequently include renewal options or fair
market value purchase options, and for leases relating to office space, rent
increases based on the Consumer Price Index or similar indices.
F-15
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Non-cancelable operating leases relate primarily to intercity transmission
facilities, building and office space, and office equipment. Rental expense
was $49.9 million, $49.9 million, and $52.3 million for the years ended
December 31, 1994, 1993 and 1992, respectively.
In August 1994, the Company completed a series of contracts which will result
in a reduction of the Company's Michigan network costs by over $2 million per
year. The transactions included loans totaling $9.2 million in exchange for
notes receivable to be repaid over 5 years and a 15% minority ownership
position in a company owning a Michigan-based digital fiber optic network.
NOTE I - TRANSACTIONS WITH RELATED PARTIES
The Company leased transmission capacity, multiplexing and various other
technical equipment under leases from an affiliate of CTI, a major shareholder
through August 1992. Amounts paid under the leases totaled $17.7 million for
the year ended December 31, 1992.
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 a $1.2 million prepayment of transmission
capacity to be utilized over a 37 month period.
As of December 31, 1994, 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. and Grumman Hill Associaties, Inc. hold options to purchase
153,163 and 14,000 shares of Common Stock, respectively. Richard Irwin holds
options to purchase 5,000 shares of Common Stock.
F-16
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
----------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1994 1994 1994 1994
------------- ------------- ------------- -------------
(in thousands except per share amounts)
Revenue $129,789 $135,908 $149,054 $153,073
Gross Margin $ 59,779 $ 61,520 $ 68,399 $ 68,610
Net Income $ 14,645 $ 14,841 $ 17,593 $ 17,250
Net income per common
and common equivalent
share $ 0.38 $ 0.39 $ 0.46 $ 0.45
Three Months Ended
----------------------------------------------------------------------
March 31, June 30, September 30, December 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
F-17
42
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY SCHEDULE IX
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 PERIOD
----------------------------------- ------------ -------------- ----------------- ---------------- --------------
Year ended December 31, 1994
Allowance for doubtful accounts $3,974,000 $14,341,000 (1) $14,123,000 (3) $4,192,000
Deferred tax asset valuation allowance $34,900,000 $6,400,000 $28,500,000
Year ended December 31, 1993
Allowance for doubtful accounts $3,334,000 $12,638,000 (1) $11,998,000 (3) $3,974,000
Deferred tax asset valuation allowance $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) $3,334,000
-------------
(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-18
43
EXHIBIT INDEX
Exhibit
No. Description Page
------- ----------- ----
11.1 Computation of Per
Share Earnings
23.1 Consent of
Ernst & Young
27.1 Financial Data Schedule