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FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period year ended: March 31, 1995
[ ] 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 48025-4510
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (810) 647-6920
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
cfiling requirements for the past 90 days.
Yes X No
----- -----
As of May 1, 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 H(1)(a)
and (b) of Form 10-Q and is therefore filing this Form with the reduced
disclosure format.
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ALC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1995 1994
----------- ------------
(Unaudited)
(In Thousands)
Current Assets:
Cash and cash equivalents $ 3,016 $ 41,412
Accounts receivable, less allowance for doubtful accounts of
$4,641,000 and $4,192,000 103,791 81,214
Other current assets 13,112 7,121
------------ -------------
Total Current Assets $ 119,919 $ 129,747
Fixed Assets:
Communication systems $ 110,247 $ 91,140
Building and other equipment 40,186 36,842
Construction in progress 3,747 8,690
------------ -------------
$ 154,180 $ 136,672
Less accumulated depreciation and amortization 81,003 77,514
------------ -------------
Total Fixed Assets $ 73,177 $ 59,158
Cost in excess of net assets acquired 89,092 47,267
Deferred income taxes 10,429 10,429
Customer bases 35,210 30,444
Other assets 13,045 7,680
------------ -------------
Total Assets $ 340,872 $ 284,725
============ ==============
See notes to consolidated financial statements
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ALC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1995 1994
---------- -------------
(Unaudited)
(In Thousands)
Current Liabilities:
Accounts payable $ 4,315 $ 2,018
Accrued liabilities 40,409 20,864
Accrued network costs 59,279 51,672
Taxes other than income 13,986 13,425
Capitalized leases and other long-term debt 237 232
------------ --------------
Total Current Liabilities $ 118,226 $ 88,211
Long-term Liabilities:
Line of Credit $ 5,000
Capitalized leases and other long-term debt 4,084 $ 3,048
Senior Subordinated Notes 79,430 79,418
------------ --------------
Total Long-Term Liabilities $ 88,514 $ 82,466
------------ --------------
Total Liabilities $ 206,740 $ 170,677
Stockholders' Equity:
Preferred Stock, par value $0.01; authorized -- 14,784,000
shares; issued and outstanding -- none
Common Stock, par value $0.01; authorized -- 200,000,000
shares; issued and outstanding -- 33,719,000
and 33,712,000 shares $ 337 $ 337
Capital in excess of par value 140,387 140,278
Paid-in capital -- Warrants 11,715 11,715
Accumulated deficit (18,307) (38,282)
------------ --------------
Total Stockholders' Equity $ 134,132 $ 114,048
------------ --------------
Total Liabilities and Stockholders' Equity $ 340,872 $ 284,725
============ ==============
See notes to consolidated financial statements
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ALC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
---------------------------------
March 31, March 31,
1995 1994
--------- ---------
(In Thousands Except Per Share Amounts)
Revenue $ 177,753 $ 129,789
Operating Expenses:
Cost of communication services and equipment sales $ 99,845 $ 70,010
Sales, general and administrative 38,812 31,231
Depreciation and amortization 5,952 4,027
----------- -----------
Total Operating Expenses $ 144,609 $ 105,268
----------- -----------
Operating Income $ 33,144 $ 24,521
Interest expense 1,294 1,626
----------- -----------
Income Before Income Taxes $ 31,850 $ 22,895
Income taxes 11,875 8,250
----------- -----------
Net Income $ 19,975 $ 14,645
=========== ===========
Net income per Common and Common equivalent share $ 0.52 $ 0.38
=========== ===========
Weighted average Common and Common equivalent shares 38,154 38,301
=========== ===========
See notes to consolidated financial statements
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ALC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31, March 31,
1995 1994
---------- ----------
(In Thousands)
Operating Activities
Net income $ 19,975 $ 14,645
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 3,486 2,667
Amortization of intangible assets and bond discount 2,467 1,372
Provision for deferred income taxes (98)
Increase in accounts receivable and
other current assets (4,170) (9,818)
Increase in current liabilities 15,786 15,817
------------ -----------
Net Cash Provided by Operating Activities $ 37,544 $ 24,585
Financing Activities
Net Proceeds from Revolving Credit Facility $ 5,000
Payments on long-term debt (226) $ (243)
Proceeds from issuance of stock 109 1,665
------------ -----------
Net Cash Provided by Financing Activities $ 4,883 $ 1,422
Investing Activities
Expenditures for fixed assets $ (2,000) $ (4,706)
Acquisition of ConferTech International, Inc. (64,054)
Proceeds from sale of fixed assets 120
Change in other non-current assets (3,590) 301
Purchase of customer bases (11,179) (2,372)
------------ -----------
Net Cash Used in Investing Activities $ (80,823) $ (6,657)
------------ -----------
Increase (Decrease) in Cash and Cash Equivalents $ (38,396) $ 19,350
Cash and cash equivalents at beginning of period 41,412 1,819
------------ -----------
Cash and cash equivalents at end of period $ 3,016 $ 21,169
============ ===========
Interest paid $ 162 $ 61
============ ===========
Income taxes paid $ 1,129 $ 1,531
============ ===========
See notes to consolidated financial statements
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ALC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three Months Ended March 31, 1995
(Unaudited)
Paid-in capital
Common Stock Capital in -- Warrants
--------------------------- excess of -----------------
Shares Amount par value Shares
------ ------ ---------- ------
(In Thousands)
Balance, December 31, 1994 33,712 $337 $140,278 3,852
Exercise of stock options 7 54
Tax benefit from exercise of stock
options 55
Net income for the three months
ended March 31, 1995
------- ----- -------- ------
Balance March 31, 1995 33,719 $337 $140,387 3,852
======= ===== ======== ======
Paid-in capital
-- Warrants
--------------- Accumulated
Amount deficit Total
------ ------------ -----
(In Thousands)
Balance, December 31, 1994 $11,715 ($38,282) $114,048
Exercise of stock options 54
Tax benefit from exercise of stock
options 55
Net income for the three months
ended March 31, 1995 19,975 19,975
-------- -------- --------
Balance March 31, 1995 $11,715 ($18,307) $134,132
======== ======== ========
See notes to consolidated financial statements
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ALC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 1995 and 1994
NOTE A -- MANAGEMENT'S REPRESENTATION
The consolidated financial statements included herein have been prepared by ALC
management, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and note disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. Certain prior year amounts have been reclassified to
conform to current year presentation. In the opinion of ALC management, all
adjustments considered necessary for a fair presentation have been included and
are of a normal recurring nature, and the accompanying consolidated financial
statements present fairly the financial position as of March 31, 1995 and
December 31, 1994, and the results of operations and cash flows for the three
month periods ended March 31, 1995 and 1994.
The balance sheet at December 31, 1994 has been derived from the audited
financial statements at that date but does not include all of the information
and accompanying footnotes required by generally accepted accounting principles
for complete financial statements. It is suggested that these consolidated
financial statements be read in conjunction with the financial statements and
notes included in the Company's Form 10-K for the fiscal year ended December
31, 1994.
NOTE B -- DEFINITIVE MERGER AGREEMENT
ALC Communications Corporation entered into a definitive agreement dated April
10, 1995, to merge with Frontier Corporation ("Frontier"). The combined
company, which will operate under the name Frontier Corporation, will become
the fifth largest long distance company in the United States. The combined
company will have total consolidated long distance, local and cellular annual
revenues approximating $2 billion. Under the terms of the merger agreement,
shareholders of ALC will receive 2.0 shares of Frontier for each share of ALC
stock for a total of approximately 78.7 million shares. The merger is intended
to qualify as a tax-free reorganization and a "pooling of interests" for
accounting purposes. The merger is subject to various conditions including
approval of the shareholders of the two companies and various regulatory
approvals. Completion of the transaction is anticipated in the third quarter
of 1995.
NOTE C -- CONFERTECH ACQUISITION
During late February 1995, ALC completed a tender offer and, by mid-March 1995,
had acquired all the shares of ConferTech International, Inc. ("ConferTech").
The financial statements reflect the transaction effective March 1, 1995. ALC
financed the purchase price, $66.4 million or $8.00 per share, through
cash from operations as well as utilizing its line of credit. ConferTech is a
leading provider of teleconferencing services and audio bridge equipment.
The purchase price has been allocated between the value of the assets acquired
and the cost in excess of net assets acquired which is being amortized over
40 years.
The following unaudited proforma summary presents the Company's revenue and
income as if the transaction occurred at the beginning of the periods presented.
The proforma financial data is not necessarily indicitive of the results that
actually would have occurred had the transaction taken place on the dates
presented and do not project the Company's results of operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three Months Ended
March 31,
---------------------------
1995 1994
---------- ----------
Revenue $ 185,100 $ 140,187
Net income $ 20,038 $ 14,507
Earnings per Common and Common
equivalent share $0.53 $0.38
NOTE D -- REVOLVING CREDIT FACILITY
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. Under the facility, which expires December
31, 1999, the Company is able to minimize interest expense by structuring
borrowings under either of two alternatives. Each alternative has a varying
interest rate associated with it. A 0.25% per annum commitment fee is charged
on the unused portion of the line. As of March 31, 1995, the Company had
borrowings of $5.0 million under the facility.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company reported net income of $20.0 million on revenue of $177.8 million
for the three month period ended March 31, 1995. This compares to net income
of $14.6 million on revenue of $129.8 million for the same period in 1994.
Gross margin as a percent of net revenue decreased slightly from 46.1% to 43.8%
for the three months ended March 31, 1995 compared to the year earlier period.
The improved operating results were due primarily to an increase in long
distance traffic and a reduction of sales, general and administrative expenses
as a percentage of revenue. The Company's continued strong performance was
reflected by the increase in operating income of $8.6 million for the three
months ended March 31, 1995 over the same period one year earlier.
OPERATING RESULTS AS A PERCENT OF REVENUE
THREE MONTHS ENDED
MARCH 31,
---------------------------
1995 1994
--------- ----------
Revenue 100.0% 100.0%
Cost of communication services and
equipment sales (56.2) (53.9)
------ ------
Gross Margin 43.8% 46.1%
Sales, general and administrative (21.8) (24.1)
Depreciation and amortization (3.4) (3.1)
------ ------
Operating Income 18.6% 18.9%
====== ======
Billable minutes have increased since the third quarter of 1990 when compared
to the same quarter in the prior year. Sequentially, billable minutes have
reached record levels for the seventh consecutive quarter. The increase
results from traffic growth generated by new customers, including strong growth
in reseller traffic, as well as increased sales productivity, the introduction
of new products and increased minutes per customer partially offset by billable
minutes lost through attrition of existing customers. The results of
operations for the three months ended March 31, 1995 reflect a continuation of
the trend of strong financial performance as indicated by a 36.4% increase in
net income from the comparable quarter of 1994.
During late February 1995, ALC completed a tender offer and, by mid-March
1995, had acquired all the shares of ConferTech International, Inc.
("ConferTech"). The financial statements reflect the transaction effective
March 1, 1995. ALC financed the purchase price, $66.4 million or $8.00 per
share, through cash from operations as well as utilizing its line of credit.
ConferTech is a leading provider of teleconferencing services and audio bridge
equipment. Operating income for 1995 relating to ConferTech totaled $0.5 million
or approximately 1.6% of total operating income.
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DEFINITIVE MERGER AGREEMENT
ALC Communications Corporation entered into a definitive agreement dated April
9, 1995, to merge with Frontier Corporation ("Frontier"). The combined
company, which will operate under the name Frontier Corporation, will become
the fifth largest long distance company in the United States. The combined
company will have total consolidated long distance, local and cellular annual
revenues approximating $2 billion. Under the terms of the merger agreement,
shareholders of ALC will receive 2.0 shares of Frontier for each share of ALC
stock for a total of approximately 78.7 million shares. The merger is intended
to qualify as a tax-free reorganization and a "pooling of interests" for
accounting purposes. The merger is subject to various conditions including
approval of the shareholders of the two companies and various regulatory
approvals. Completion of the transaction is anticipated in the third quarter
of 1995.
REVENUE
Revenue increased by 37.0% for the three months ended March 31, 1995 from the
comparable period of 1994. Billable minutes again reached the highest level in
the history of the Company, increasing by 50.5% for the three months ended
March 31, 1995 over the comparable period in 1994. The first full month
revenue from new sales in the first quarter of 1995 has increased from the same
period one year earlier. The Company's base revenue per minute of 16.0 cents
continues to be strong, though it has decreased from the prior year quarter
level primarily due to changes in the sales mix. Revenue from the ConferTech
acquisition totaled $4.6 million (one month) and represented 2.6% of the total
growth in revenue from the same quarter in the prior year.
Reseller revenue has continued to grow significantly from prior year periods
reaching over 30% of net revenue for the three months ended March 31, 1995.
Although reseller revenue per minute (between 11 cents and 12 cents) is lower
than regular commercial traffic the increased reseller traffic has a positive
impact on operating income due to low incremental sales, general and
administrative costs. Growth was also impacted positively by a major reseller
customer whose revenue has increased substantially in the last several months
and comprises approximately 16.0% of total revenue for 1995 to date. 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 cannot be terminated on the venture's own network.
Allnet also obtained provisions regarding exclusivity and minimums.
The provision for uncollectible revenue was 1.5% of gross revenue for the three
months ended March 31, 1995 and 1.8% for the same period of 1994. Strong
controls and procedures in the collection and credit risk detection processes
have enabled the Company to sustain a low bad debt rate.
OPERATING EXPENSES
The Company's primary cost is for communication services, which represents the
costs of originating and terminating calls via local exchange carriers
(primarily Bell Operating Companies). Also included in communication services
are the costs of owning and leasing long-haul transmission capacity as well as
bridges and the cost of providing conferencing services.
The cost of communication services and equipment sales increased $29.8 million
during the three month period ended March 31, 1995 compared to the same period
in 1994. This cost increased as a percent of net revenue for the comparable
periods, due in part to the significant concentration of reseller traffic which
has a lower rate per minute than regular commercial traffic. However, by the
use of high volume fixed price leased facilities to transmit traffic and lower
prevailing unit prices for such capacity, the Company has reduced its long-haul
transmission costs to less than 7% of revenue.
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Sales, general and administrative expense increased by 24.3% for the three
month period ended March 31, 1995 from the same period one year earlier (but
decreased to 21.8% of revenue). The dollar increase reflects increased
salaries and other expenses related to greater sales activity as well as the
costs incurred by ConferTech in 1995. Results for 1994 include a $1.2 million
cost reduction, recorded in the first quarter of the year, resulting from the
favorable settlement of a state telecommunications excise tax dispute.
Depreciation and amortization increased 47.8% from the first three months of
1995 compared to the same period in 1994. This increase is the result of
depreciation on newly acquired fixed assets and amortization of intangible
assets associated with the purchase of ConferTech and various customer bases.
INTEREST EXPENSE
Net interest expense decreased 20.4% for the three months ended March 31, 1995
compared to the same period in 1994 due to improved cash flow from operations
and interest income. Additionally, a $5.0 million redemption of the 1993 Notes
was made in April 1994. These positive factors were somewhat offset by
increased interest expense due to borrowings made during late February and
March under the Revolving Credit Facility ("Facility") to finance the
ConferTech acquisition.
INCOME TAXES
The effective tax rate increased from 36.0% for the first three months of 1994
to 37.3% for the first three months of 1995, due to the increase in income
(which results in a decrease in the favorable impact of the Company's annual
available $10 million net operating loss carryforward on the effective tax
rate).
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1995 and 1994, the Company generated
positive cash flow from operations of $37.5 million and $24.6 million,
respectively. The positive cash flow reflects nineteen consecutive quarters of
increased revenue and operating profits compared to prior year comparable
quarters.
The Company's working capital was $1.7 million at March 31, 1995 compared to
$41.5 million at December 31, 1994. The decrease in working capital is largely
the result of the $38.3 million decrease in the cash balance resulting from the
use of funds for the acquisition of ConferTech and the $27.2 million increase
in accrued liabilities and network costs attributable to increased volume,
offset by the $22.6 million increase in accounts receivable due to the increase
in revenue.
Evidence of the Company's strong liquidity position was its ability to finance
the purchase of ConferTech during March of 1995. ALC paid an aggregate
purchase price of $66.4 million dollars, financing the purchase through cash
from operations as well as utilizing its Revolving Credit Facility. As of
March 31, 1995, the Company had borrowings of only $5.0 million remaining under
the Facility and the balance was paid completely in early May.
In addition to the positive cash flow from operations, the Company's liquidity
position is further strengthened by the availability under the Revolving Credit
Facility. The Facility provides for borrowings up to $105.0 million and
expires December 31, 1999. Under this Facility, the Company is able to
minimize interest expense by structuring the borrowings under either of two
alternatives. Each alternative has a varying interest rate associated with it.
As of March 31, 1995, the Company had $100.0 million available under the line.
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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 $2.0 million for the first three months of 1995
and are expected to be approximately $30 million for the year ended December
31, 1995 (without factoring in the potential impact of the pending Frontier
merger). Capital expenditures year to date 1995 included projects for enhanced
efficiency and technical advancement in the network, information systems and
customer service. Future investment requirements for capital expenditures
relate directly to traffic growth which necessitates the purchase of switching
and related equipment. In addition, a major component of the capital budget
relates to technological advancements as the Company continually updates its
network capabilities to offer enhanced products and services.
Management believes that the Company's cash flow from operations will provide
adequate sources of liquidity to meet the Company's anticipated short and long
term liquidity needs.
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PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
EXHIBIT INDEX
[refer to definitions at end of Index]
Incorporated Page
Exhibit Filed Herein by Number
Number Description Herewith Reference to: Herein
- ------ ------------ ---------- ------------- ------
10.1 Short Term Incentive Exhibit 10.1 to
Program ALC First Quarter
1995 10-Q
10.2 Form Severance Exhibit 10.2 to
Agreement, amended/ ALC First Quarter
restated April 9, 1995 1995 10-Q
11.1 Computation of Per Exhibit 11.1 to
Share Earnings ALC First Quarter
1995 10-Q
27.1 Financial Data Schedule X
DEFINITIONS: ALC: ALC Communications Corporation, Inc.
The Registrant hereby agrees to furnish the Commission a copy of each of the
Indentures or other instruments defining the rights of security holders of the
long-term debt securities of the Registrant and any of its subsidiaries for
which consolidated or unconsolidated financial statements are required to be
filed.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter of 1995.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
ALLNET COMMUNICATION SERVICES, INC.
(Registrant)
By: /s/ Marvin C. Moses
------------------------------------
Marvin C. Moses, Executive
Vice President and Chief
Financial Officer
By:/s/ Marilyn M. Price
-----------------------------------
Marilyn M. Price, Vice
President, Controller and
Chief Accounting Officer
Dated: May 12, 1995
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